Principles of MANAGEMENT

ACCOUNTING

Prof. Dr. Xavier Gabriëls

(Xavier.Gabriels@uantwerpen.be)

1
Introduction
 Financial accounting & analysis provides
information on the financial situation of the
company

 Cost accounting is concerned with providing

adequate information (based on calculations) for
efficient decision making and management
control
2
 Introduction (2)
Accounting System
(accumulates financial and
managerial accounting data)

Cost accounting Financial reporting

Information for decision Published financial
making, and control statements and other
of an organization’s financial reports.
operations.
Internal External
Users Users
3
 Introduction (3)

An organization . . . Directing

Acquires Resources Decision

Organized set Making
of activities

Controlling Planning
Hires People
4
Introduction (4)
 However, resources are not inexhaustibly
available
 Therefore, necessary to make cost savings
as much as possible

=> Cost calculation and analysis !

5
 Suggested reading & Exam

 Managerial Accounting: Creating Value in a

Dynamic Business Environment, International
edition, R.W. Hilton, McGraw-Hill, 13th edition,
2022.
 Management Accounting for Business, C. Drury,
Thomson Learning

 Exam : Written, closed book, 2h, exercises with

multiple choice theory
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 1. Costs : What is a ‘cost’ ?

A ‘Cost’
is the measure of
resources given
up to achieve a
particular purpose.

Example : make a product or provide a service

7
1. Costs : Cost classification

 Direct vs Indirect
 Variable vs Fixed
 Semi-variable vs Semi-fixed
 Opportunity cost
 Sunk cost
 Production vs non-production costs

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 1. Direct vs Indirect Costs

Direct costs Indirect costs

 Costs that can be  Costs that must be
easily and conveniently allocated in order to be
traced to a product or assigned to a product or
department.
department.
 Example: cost of
 Example: cost of strings national advertising for
for the production of an airline is indirect to a
tennis rackets particular flight.

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 1. Variable vs Fixed Costs

Variable costs Fixed costs

 Costs that vary with the  Costs that stay the same
activity level when changes occur to
 Example: cost of meals the activity level (in
for a certain flight between certain
boundaries).
 Example: cost of
airplane, pilot, … for a
certain flight
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 1. Variable Costs
Total variable costs Variable costs per unit

Activity level Activity level

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 1. Fixed costs
Total fixed costs Fixed costs per unit

Activity level Activity level

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 1. Variable vs Fixed Costs

Summary of Variable and Fixed Cost Behavior

Cost In Total Per Unit

Total variable cost changes Variable cost per unit

Variable as activity level changes. remains the same over
wide ranges of activity.
Total fixed cost remains Fixed cost per unit
Fixed the same even when the goes down as activity
activity level changes. level goes up.

Note : In the long term, all costs are variable

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 1. Semi-variable vs Semi-fixed costs
Semi-variable costs Semi-fixed costs
 include both a fixed and  Costs are fixed within
a variable component specified activity levels,
but change ‘stepwise’
 Example: Telephone bill
- subscription : fixed outside this range
- call charges : variable  Examples: Wages, nurses
in hospitals, rent, …

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 1. Semi-fixed vs semi-variable costs (2)
Semi-variable costs Semi-fixed costs

Activity level Activity level

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 Standard vs. Actual costs
Standard Actual
The real cost incurred for producing a product or performing
an activity. This is the amount the company actually spends
on materials, labor, and overhead.

A predetermined or estimated cost of

cost
performing an operation or producing a
product under normal conditions. It serves
as a benchmark for measuring actual
cost
performance.

Comparison between
standard and actual
performance
level

Cost
variance
The difference between the standard cost and the actual cost.

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 Standard Costs and Product
Costing
Standard material and labour costs
are entered into Work-in-Process
inventory instead of actual costs.

Standard cost variances

are closed directly to
Cost of Goods Sold.

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 Advantages of Standard Costing

Sensible Cost Management by

Comparisons Exception

Performance Employee
Evaluation Motivation
Advantages

Stable Product Less

Costs Expensive
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 Criticisms of Standard Costing
Too aggregate, Not specific
too late

Too much focus Disadvantages Stable production

on direct-labour required

Shorter life Narrow

cycles definition

Focus on cost Consistency due to

minimization automation
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 1. Costs : Opportunity Cost

The potential benefit that is

given up when one
alternative is selected over
another.
 Example: If a student were not
attending college, he could be
earning f.in. 20.000 € per year.
His opportunity cost of
attending college for one year is
20.000 €
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 1. Costs : Sunk Costs

All costs incurred in the past that cannot be changed

by any decision made now or in the future.

Sunk costs should not be considered in decisions.

 Example: You bought an automobile that cost
$12,000 two years ago. The $12,000 cost is sunk
because whether you drive it, park it, trade it, or sell
it, you cannot change the $12,000 cost.

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1. Production vs non-production costs
 Production or manufacturing costs are costs that
are made in order to produce a product or
deliver a service : raw material, labor, indirect
 Non-production costs relate to general
administrative expenses as well as pre- (R&D)
and post-production (distribution, …) costs
=> are treated as period costs and are not
included in inventory valuation
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1. Production or manufacturing costs
Production overhead, also known as manufacturing
overhead or factory overhead, refers to all the indirect
costs involved in the production process that are not
directly tied to specific products

Direct Direct Production

Labor Material Overhead

The
Product
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1. Production costs : Direct Material

Cost of raw material that is used to

make, and can be conveniently
traced, to the finished product.
Example:
Steel used to
manufacture
the automobile.

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1. Production costs : Direct Labor

Cost of salaries, wages, and fringe

benefits for personnel who work
directly on manufactured products.

Example:
Wages paid to an
automobile assembly
worker.

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 1. Production costs : Production overhead
All other production costs
Indirect Indirect Other
Material Labor Costs

Materials used to support the

production process.
Examples: lubricants and
cleaning supplies used in an
automobile assembly plant.
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 1. Production costs : Production overhead (2)
All other production costs
Indirect Indirect Other
Material Labor Costs

Cost of personnel who do

not work directly on the
product. Examples:
maintenance workers,
janitors and security
guards. 27
 1. Production costs : Production overhead (3)
All other production costs
Indirect Indirect Other
Material Labor Costs

Examples: depreciation on
plant and equipment,
property taxes, insurance,
utilities, overtime premium,
and unavoidable idle time.
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 1. (Production) overhead
One of the most
difficult tasks in Assigning
overhead is
computing accurate sure difficult.
(unit) costs lies in I agree!

determining the
proper amount of
indirect costs to
assign to each cost
object.
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1. Production overhead (2)

Direct
costs
COST
OBJECT
Indirect
costs Cost allocations


Difficult
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 1. Production overhead (3)

Volume-based overhead allocation is a

Examples : method used in traditional cost accounting to

distribute overhead costs (indirect costs) to
products or services based on a single,
volume-related cost driver. This method
assumes that overhead costs are incurred in
proportion to the level of production or

 Direct labor activity.

Overhead Allocation Rate=

 # units
Total Overhead Costs/
Total Volume of Cost Driver (e.g., labo
r hours or machine hours)

…

Traditionally companies tend to use

volume-based overhead allocation..
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 1. (Production) overhead (4)
 Changing environment entails however changing
information needs
 One single allocation base may have become outdated
for your company
 Think about WHAT actually DRIVES COSTS
(# inspections, m², time spent, …)
 Only then you will gain insight in the actual cost of a
cost object
 Incorrect cost allocation leads to suboptimal decisions !!!
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 1. (Production) overhead : cost drivers

Cost Driver Examples

Activity Cost Driver
Machining operations Machine hours
Setup Setup hours
Production scheduling Manufacturing orders
Inspection Pieces inspected
Purchasing Purchase orders
Shop order handling Shop orders

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 2. Break-even analysis (2)

How many units to become “break-even” ?

Income Income Income

300 units ?? units 500 units
Sales $ 150.000 $ ?? $ 250.000
Less: variable expenses 90.000 ?? 150.000
Contribution margin $ 60.000 ?? $ 100.000
Less: fixed expenses 80.000 80.000 80.000
Net income (loss) $ (20.000) $ - $ 20.000

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 2. BE-analysis : The Break-Even Point
The break-even point is the point in the volume of
activity where the organization’s revenues and
expenses are equal.

Sales $ 250,000
Less: variable expenses 150,000
Contribution margin 100,000
Less: fixed expenses 100,000
Net income $ -

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 2. Break-even analysis (3)

Example :

Total Per Unit Percent

Sales (500 handsets) $ 250.000 $ 500 100%
Less: variable expenses 150.000 300 60%
Contribution margin $ 100.000 $ 200 40%
Less: fixed expenses 80.000
Net income $ 20.000

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 12. Break-even analysis (4)

For each additional handset sold, $200 in

contribution margin is gained.
Total Per Unit Percent
Sales (500 handsets) $ 250.000 $ 500 100%
Less: variable expenses 150.000 300 60%
Contribution margin $ 100.000 $ 200 40%
Less: fixed expenses 80.000
Net income $ 20.000

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 2. Break-even analysis (5)
Fixed expenses Break-even point
=
Unit contribution margin (in units)

Total Per Unit Percent

Sales (500 handsets) $ 250.000 $ 500 100%
Less: variable expenses 150.000 300 60%
Contribution margin $ 100.000 $ 200 40%
Less: fixed expenses 80.000
Net income $ 20.000

$80,000
= 400 handsets
$200 38
 2. Break-even analysis (6)
Sales revenue – Variable expenses – Fixed expenses = 0

Unit Sales Unit Sales

sales × volume variable × volume
price in units expense in units

($500 × X) – ($300 × X) – $80,000 = $0

($200X) – $80,000 = $0
X = 400 handsets 39
 2. Break-even analysis (7)
Here is the proof!
Total Per Unit Percent
Sales (400 handsets) $ 200.000 $ 500 100%
Less: variable expenses 120.000 300 60%
Contribution margin $ 80.000 $ 200 40%
Less: fixed expenses 80.000
Net income $ -

400 × $500 = $200,000 400 × $300 = $120,000

OR Break-even point (in units) x unit price = Break-even point in sales
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 2. Break-even analysis (8)
Summary overview :
When sales level > BE-level : PROFIT
When sales level < BE-level : LOSS
Income Income Income
300 units 400 units 500 units
Sales $ 150.000 $ 200.000 $ 250.000
Less: variable expenses 90.000 120.000 150.000
Contribution margin $ 60.000 $ 80.000 $ 100.000
Less: fixed expenses 80.000 80.000 80.000
Net income (loss) $ (20.000) $ - $ 20.000

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 2. Break-even analysis (9)
450.000

400.000 Break-even Total sales

350.000
point

300.000

250.000 Total expenses

200.000

150.000
Fixed expenses
100.000

50.000

-
- 100 200 300 400 500 600 700 800

Units Sold 42
 2. Break-even analysis (10)
Some managers like the profit-volume
$100.000
graph because it focuses on profits and volume.
$80.000

$60.000

$40.000

$20.000

$-
$- $50 $100 $150 $200 $250 $300 $350 $400
$(20.000)

$(40.000)

$(60.000) Break-even
$(80.000)
point
$(100.000) 1 2 3 4 5 6 7 8
Units sold (00s) 43
 2. BE-analysis : Target Net Profit
We can determine the number of handsets
that we must sell to earn a profit of
$100,000.
Fixed expenses + Target profit Units sold to earn
=
Unit contribution margin the target profit

$80,000 + $100,000
= 900 handsets
$200

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2. Break-even analysis : Assumptions
 Selling price is constant
throughout the entire relevant
range.
 Costs are linear over the
relevant range.
 Fixed costs are known
 In manufacturing firms,
inventories do not change
(units produced = units sold)
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2. Break-even analysis (11)
 Break-even analysis allows to make various
simulations with regard to :

 Pricing decisions
 Investment policies

 Actions affecting variable costs

 Launch or suspend new products or services

 Marketing campaigns

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