Chapter-1

1. Directing and Motivating

Directing and motivating involves managing day-to-day activities to keep the organization running
smoothly.
 Employee work assignments.
 Routine problem solving.
 Conflict resolution.
 Effective communications.

2. Controlling
The control function ensures that plans are being followed.
Feedback in the form of performance reports that compare actual results with the budget are an essential part
of the control function.

3. Planning and Control Cycle

4. Comparison of Financial and Managerial Accounting

Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
5. Organizational Structure
Decentralization is the delegation of decision-making authority throughout an organization.

Corporate Organization Chart

B oa rd of D irectors

P resident

P urcha sing P ersonnel V ice P resident C hief Fina ncia l

O pera tions O fficer

T rea surer C ontroller

6. Line and Staff Relationships

Line positions are directly related to achievement of the basic objectives of an organization.
Example: Production supervisors in a manufacturing plant.
Staff positions support and assist line positions.
Example: Cost accountants in the manufacturing plant.

7. The Chief Financial Officer (CFO)

A member of the top management team responsible for:
 Providing timely and relevant data to support planning and control activities.
 Preparing financial statements for external users.

8. The Changing Business Environment

 Just-in-time production
 Total quality management
 Process reengineering
 Theory of constraints
 International competition
 E-commerce

9. Just-in-Time (JIT) Systems

JIT Consequences

JIT purchasing
Fewer, but more ultra-reliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier
deliveries.

Benefits of a JIT System

10. Total Quality Management (TQM)

TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly
implemented, avoids counter-productive organizational infighting.

11. Process Reengineering

12. Process Reengineering versus TQM

Process Reengineering
 Radically overhauls existing processes.
 Likely to be imposed from above and to use outside consultants.
Total Quality Management
  Tweaks existing processes to realize gradual improvements.
 Uses a team approach involving people who work directly in the process.
13. Theory of Constraints
A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want.
The constraint in a system is determined by the step that has the smallest capacity.

International Competition

14. E-Commerce
In recent years, many dot.com businesses failed that might have benefited from the application of
managerial accounting tools:
 Cost concepts
 Cost estimation
 Cost-volume-profit
 Activity-based costing
 Budgeting
 Decision-making
 Capital budgeting

15. Code of Conduct for Management Accountants.

The Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitioners
of Management Accounting and Financial Management have two major parts offering guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.
IMA Guidelines for Ethical Behavior
Confidentiality:
1. Do not disclose confidential information unless legally obligated to do so.
2. Do not use confidential for personal advantage.
3. Ensure that subordinates do not disclose confidential information.
Competence:
1. Follow applicable laws, regulations and standards.
2. Maintain professional competence.
3. Prepare complete and clear reports after appropriate analysis.

Integrity:
1. Avoid conflicts of interest and advise others of potential conflicts.
2. Do not subvert organization’s legitimate objectives.
3. Recognize and communicate personal and professional limitations.
4. Avoid activities that could affect your ability to perform duties.
5. Refrain from activities that could discredit the profession.
6. Communicate unfavorable as well as favorable information.
7. Refuse gifts or favors that might influence behavior.

Objectivity:
1. Communicate information fairly and objectively.
2. Disclose all information that might be useful to management.

IMA Guidelines for Resolution of an Ethical Conflict

• Follow established policies.
• For unresolved ethical conflicts:
 Discuss the conflict with immediate superior or next highest uninvolved manager.
 Make reference to the Sarbanes-Oxley Act passed by Congress in 2002 in part to give legal protection
to those reporting corporate misconduct.
 If immediate superior is the CEO, consider the board of directors or
the audit committee.
 Except where legally prescribed, maintain confidentiality.
 Clarify issues in a confidential discussion with an objective advisor.
 Consult an attorney as to legal obligations.
 The last resort is to resign.

16. Why Have Ethical Standards?

1. Ethical standards in business are essential for a smooth functioning advanced market economy.
2. Without ethical standards in business, the economy, and all of us who depend on it for jobs, goods, and
services, would suffer.
3. Abandoning ethical standards in business would lead to a lower quality of life with less desirable goods and
services at higher prices.
17. Codes of Conduct on the International Level
The Guidelines on Ethics for Professional Accountants, issued by the International Federation of Accountants (IFAC),
govern the activities of professional accountants worldwide.
In addition to competence, objectivity, independence, and confidentiality, the IFAC’s code deals with the accountant’s
ethical responsibilities in:
1. Taxes
2. Fees and commissions
3. Advertising and solicitation
4. Handling of monies
5. Cross-border activities.

18. Certified Management Accountant

A management accountant who has the necessary qualifications and who passes a rigorous professional exam earns
the right to be known as a Certified Management Accountant (CMA).
 Chapter- 2
1. Types of Costs
1. Differential costs- (benefits) – costs or benefits that change between/among alternatives
2. Irrelevant costs -Costs that don’t change are irrelevant to the decision
3. Choose the alternatives where differential benefits exceed differential costs
4. Opportunity costs
5. Sunk costs
6. Controllable /avoidable costs/discretionary

2. Problems in Identifying and Measuring Benefits.

How do I measure the benefit of employee training?
How do I measure the benefit of improved quality?
What is the monetary benefit of an improved working environment?
What is the monetary benefit of a happy customer?

3. Problems in Identifying and Measuring Costs

How do I measure the cost of poor quality?
What is the cost of postponing this year’s training program?
What is the cost of a dissatisfied customer?
How do I measure the cost of setting my price too high?

4. Classifications of Costs
 Behavior – how costs react to changes in underlying cost driver
Variable or Fixed
 Function – related to production or sales
Product or Period
Product costs –
Direct Material
Direct Labor
Factory Overhead
 Traceability (cost of tracing cost to a cost driver directly should be lower than the benefits.

5. Non-manufacturing Costs
 Marketing or Selling Costs
Costs necessary to get the order and deliver the product.
 Administrative Costs
All executive, organizational, and clerical costs.

6. Manufacturing Cost Flows

7. Graphical Analysis of Activity Costs and Rate of Output

8. The Linearity Assumption and the Relevant Range

9. Cost Classifications for Predicting Cost Behavior

By reaction to changes in the level of activity within the relevant range.
 Total variable costs change when activity changes.
 Total fixed costs remain unchanged when activity changes.

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

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

10. Extent of Variable Costs

The proportion of variable costs differs across organizations. For example . . .
1. A public utility with large investments in equipment will tend to have fewer variable costs.
2. A manufacturing company will often have many variable costs.
3. A service company will normally have a high proportion of variable costs.
4. A merchandising company usually will have a high proportion of variable costs like cost of sales
Examples of Variable Costs
 Merchandising companies – cost of goods sold.
 Manufacturing companies – direct materials, direct labor, and variable overhead.
 Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such
as invoicing.
 Service companies – supplies, travel, and clerical
Types of Fixed Costs
1. Committed
Long-term, cannot be significantly reduced in the short term.
Examples: Depreciation on Equipment and Real Estate Taxes
2. Discretionary
May be altered in the short-term by current managerial decisions
Examples: Advertising and Research and Development

11. Mixed Costs

12. Assigning Costs to Cost Objects

Direct costs
Costs that can be easily and conveniently traced to a unit of product or other cost object.
Examples: direct material and direct labor
Indirect costs
Costs that cannot be easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead

13. Cost Classifications for Decision Making

 Every decision involves a choice between at least two alternatives.
 Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and
benefits can and should be ignored.
Differential Costs and Revenues
Costs and revenues that differ among alternatives.
Example: You have a job paying TL 1,500 per month in your hometown. You have a job offer in a neighboring city
that pays TL 2,000 per month. The commuting cost to the city is TL 300 per month.
Differential revenue is:
TL2,000 – TL1,500 = TL500
Differential cost is:
TL 300

Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you were not attending this program, you could save TL 10,000 per year. Your opportunity cost?

Sunk Costs
Sunk costs have already been incurred and cannot be changed now or in the future. They should be ignored when
making decisions.
Example: You bought an automobile that cost TL10,000 two years ago. The TL10,000 cost is sunk because whether
you drive it, park it, trade it, or sell it, you cannot change the TL10,000 cost.

Summary of the Types of Cost Classifications

 Financial reporting
 Predicting cost behavior
 Assigning costs to cost objects- products- determining unit costs
 Decision making
14. Advantages of ABC
Activity-based costing is very useful in firms . . .
 With multiple products and services.
 That have products and services that use indirect activities in different ways.
 That have a high percentage of indirect product costs.
Problems With ABC
 Proper identification of cost drivers is difficult.
 ABC ignores the difference between the fixed and variable costs of an activity.
 ABC is more costly because additional measurements and observations must be made.

Quality of Conformance
When the overwhelming majority of products produced conform to design specifications and are free from defects.

Prevention and Appraisal Costs

Prevention Costs- Support activities whose purpose is to reduce the number of defects
Appraisal Costs- Incurred to identify defective products before the products are shipped

Internal and External Failure Costs

Internal Failure Costs - Incurred as a result of identifying defects before they are shipped
External Failure Costs - Incurred as a result of defective products being delivered to customers

Examples of Quality Costs

Prevention Costs
 Quality training
 Quality circles
 Statistical process
 control activities
Appraisal Costs
 Testing & inspecting incoming materials
 Final product testing
 Depreciation of testing equipment
Internal Failure Costs
 Scrap
 Spoilage
 Rework
Cost of field servicing & External Failure Costs
 Handling complaints
 Warranty repairs
 Lost sales

Distribution of Quality Costs

When quality of conformance is low, total quality cost is high and consists mostly of internal and external failure.
Companies can reduce their total quality cost by focusing on prevention and appraisal. The cost savings from reduced
defects usually swamps the costs of the additional prevention and appraisal efforts.

Uses of Quality Cost Information

 Help managers see the financial significance of defects.
 Help managers identify the relative importance of the quality problems.
 Help managers see whether their quality costs are poorly distributed.

15. ISO 9000 Standards

ISO 9000 standards have become an international measure of quality. To become ISO 9000 certified, a company must
demonstrate:
 A quality control system is in use, and the system clearly defines an expected level of quality.
 The system is fully operational and is backed up with detailed documentation of quality control procedures.
 The intended level of quality is being achieved on a sustained basis.
16. Product Life Cycle

Chapter- 5

1. Types of Cost Behavior Patterns

In total
Total variable cost is proportional to the activity level within the relevant range.
True Variable Cost Example
A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. Your
total long distance telephone bill is based on how many minutes you talk.

Per unit
Variable cost per unit remains the same over wide ranges of activity.
Variable Cost Per Unit Example
A variable cost remains constant if expressed on a per unit basis. The cost per minute talked is constant. For example,
10 cents per minute.

Extent of Variable Costs

The proportion of variable costs differs across organizations. For example . . .
 A public utility with large investments in equipment will tend to have fewer variable costs.
 A manufacturing company will often have many variable costs.
 A service company will normally have a high proportion of variable costs.
 A merchandising company usually will have a high proportion of variable costs like cost of sales.
Examples of Variable Costs
 Merchandising companies – cost of goods sold.
 Manufacturing companies – direct materials, direct labor, and variable overhead.
 Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as
invoicing.
 Service companies – supplies, travel, and clerical.

2. True Variable Cost

Direct materials is a true or proportionately variable cost because the amount used during a period will vary in direct
proportion to the level of production activity.

Step-Variable Costs
A resource that is obtainable only in large chunks (such as maintenance workers) and whose costs increase or decrease
only in response to fairly wide changes in activity is known as a step-variable cost.

The Linearity Assumption and the Relevant Range

3. Fixed
In total
Total fixed cost remains the same even when the activity level changes within the relevant range.
Total Fixed Cost Example
A fixed cost is a cost whose total dollar amount remains constant as the activity level changes. Your monthly basic
telephone bill is probably fixed and does not change when you make more local calls.
Per unit
Fixed cost per unit goes down as activity level goes up.
Average fixed costs per unit decrease as the activity level increases. The fixed cost per local call decreases as more
local calls are made.

Types of Fixed Costs

Committed
Long-term, cannot be significantly reduced in the short term.
Examples
Depreciation on Equipment and Real Estate Taxes
Discretionary
May be altered in the short-term by current managerial decisions
Examples
Advertising and Research and Development

4. The Trend Toward Fixed Costs

The trend in many industries is toward greater fixed costs relative to variable costs.
As machines take over many mundane tasks previously performed by humans, “knowledge workers” are demanded
for their minds rather than their muscles.
Knowledge workers tend to be salaried, highly-trained and difficult to replace. The cost to compensate these valued
employees is relatively fixed rather than variable.

5. Is Labor a Variable or a Fixed Cost?

The behavior of wage and salary costs can differ across countries, depending on labor regulations, labor contracts, and
custom.
In France, Germany, China, and Japan management has little flexibility in adjusting the size of the labor force. Labor
costs are more fixed in nature.
In the United States and the United Kingdom management has greater latitude. Labor costs are more variable in
nature.

6. Mixed Costs
A mixed cost has both fixed and variable components. Consider the example of utility cost.

Mixed Costs Example

If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity
level is 2,000 kilowatt hours, what is the amount of your utility bill?
Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100.
7. The high low method
Assume the following hours of maintenance work and the total maintenance costs for six months.

The variable cost per hour of maintenance is equal to the change in cost divided by the change in hours

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($8/hour × 800 hours)
Total Fixed Cost = $9,800 – $6,400
Total Fixed Cost = $3,400

8. Least-Squares Regression Method

A method used to analyze mixed costs if a scattergraph plot reveals an approximately linear relationship between the
X and Y variables.
This method uses all of the data points to estimate the fixed and variable cost components of a mixed cost.
The goal of this method is to fit a straight line to the data that minimizes the sum of the squared errors.
 Software can be used to fit a regression line through the data points.
 The cost analysis objective is the same: Y = a + bX
Least-squares regression also provides a statistic, called the R2 that is a measure of the goodness of fit of the
regression line to the data points.
 Mid-Term Question
1. Define Management accounting. How does management accounting differ from financial accounting?
Management accounting also known as managerial account is a branch of accounting that focuses on providing
financial and non-financial information to interest users within an organization. Its primary purposes is to assist
managers in making informed decision related to planning controlling and optimizing the use of resources and
achieving the organizations goals.

2. Managers often assume a strictly linear relationship between cost and volume. How can this practice be
defended in light of the fact that many cost are curvilinear?
One possible reason why managers often assume a strictly linear relationship between cost and volume is that it
simplifies the analysis and decision making process. A linear cost function is easier to estimate and use than a
curvilinear cost function, which may require more data and mathematical techniques. A linear cost function also
allows managers to apply the concepts of marginal and average costs more easily, as they are constant and
proportional to the output level.
Another possible reason is that a linear cost function may be a reasonable approximation of the actual cost behavior
over a relevant range of output. A relevant range is the range of output over which the cost function is valid for the
purpose of prediction and planning. If the actual cost function is curvilinear, but not too steep or flat within the
relevant range, then a linear cost function may capture the main trend and variation of the cost with respect to the
output. A linear cost function may also be more flexible and adaptable to changes in the business environment than a
curvilinear cost function, which may become obsolete or inaccurate over time.
However, assuming a linear cost function also has some drawbacks and limitations. A linear cost function may not
reflect the true nature and complexity of the cost behavior, especially when there are multiple factors affecting the
cost, such as economies or diseconomies of scale, learning effects, capacity constraints, or price fluctuations. A linear
cost function may also lead to errors or biases in estimating or forecasting costs, especially when the output level is
outside the relevant range or when there are significant changes in the cost structure or technology. A linear cost
function may also ignore some important aspects of the cost behavior, such as fixed costs, step costs, or mixed costs,
which may have different implications for profitability and efficiency.
Therefore, managers should be aware of the advantages and disadvantages of assuming a linear cost function between
cost and volume, and use it with caution and judgment. They should also periodically review and update their cost
estimates and assumptions, and use other methods or tools to complement their analysis and decision making. For
example, they can use a curvilinear cost function when they have sufficient data and skills to estimate it accurately and
reliably, or when they need more precision and detail in their cost information. They can also use graphical methods
or statistical techniques to visualize and analyze the cost behavior and identify any patterns or anomalies.

3. What is the difference between a contribution format income statement and a traditional format income
statement?
A traditional format income statement organizes costs into two categories: cost of goods sold and
selling/administrative expenses. It is very useful for external reporting purposes but has limitations when used for
internal purposes. It does not distinguish between fixed and variable costs. Internally, managers need cost data
organized by cost behavior to aid in planning, controlling and decision making which created the contribution format
income statement.
This statement provides managers with an income statement that clearly distinguishes between fixed and variable
costs. This statement separates costs in two fixed and variable categories, first deducting all variable expenses form
sales to obtain the contribution margin. Which then contributes towards covering the fixed expenses and towards
profits for the period. This income statement helps managers organize data pertinent to numerous decisions such as
product-line analysis or pricing.

4. The following cost function is a mixed cost. Explain why it is a mixed cost and not a fixed, variable, or step
cost.
Total cost = tk. 8000 + tk. 52 X units produced.

a) Variable cost: varies, in total, in direct proportion to changes in the level of activity. Some examples include cost
of goods sold for a merchandising company, direct labor and direct materials. Must be variable with respect to its
activity base or cost driver.
b) Fixed cost: a cost that remains constant, in total, regardless of changes in the level of activity. They are not affected
by changes in activity, they remain constant unless influenced by some outside source.
c) Mixed cost: contains both variable and fixed cost elements, also known as “semi variable costs”. You utilize the
equation Y=a + bX to find the total mixed cost

5. The lakeshore Hotel’s guest-day of occupancy and custodial supplies expenses over the last seven months were:
Month Guest-day of occupancy Custodial supplies expenses
(taka)
March 4000 7500
April 6500 8250
May 8000 10500
June 10500 12000
July 12000 13500
August 9000 10750
Septembe 7500 9750
r
Guest day is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is
counted as three guest days.
Required:
a) Using the high-low method, estimate a cost formula for custodial supplies expense.
b) Express the variable and fixed costs in the form Y= a+bx.
c) Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be
incurred at an occupancy level of 11000 guest days?
Solution:
212 page question