MANAGERIAL ACCOUNTING

COST BEHAVIORS, SYSTEMS, AND ANALYSIS

with Gary Hecht

Introduction to Managerial Accounting

and Costing Concepts

Course Introduction and

Concept Overview

LESSON 1-1 OBJECTIVES

You will understand:
What managerial accounting is
Why managerial accounting is
important
Contemporary issues

WHAT IS MANAGERIAL
ACCOUNTING?

The process of obtaining, creating,

and analyzing relevant information to
help achieve organizational goals.

COMMON CONCEPTIONS

Tax returns

Financial statements

FINANCIAL STATEMENT USERS

Creditors and
potential
creditors

Investors and
potential
investors
Suppliers,
customers,
other partners
Tax
authorities

Organization

Competitors

Regulatory
agencies

WHATS THE DIFFERENCE?

Financial accounting

Managerial accounting

Internal and external users

Internal users

General, aggregated financial

statements

Detailed, specialized for a specific

decision, setting, etc.

Reporting of the past; historical

Designed for future decisions

Guided by principles, standards, and

rules (generally accepted accounting
principles)

Case-specific; best practices

WHY IS MANAGERIAL
ACCOUNTING IMPORTANT?
Facilitates decisions
Creates, organizes, and shares the
right information to allow for the best
decision

Guides/Influences decisions
Helps align managers and
employees decisions with what is
best for the firm

BY THE WAY . . .
What types of organizations?
Information?
Focus on measurement
Quantitative
Currency-based
Alternatives?

CONTEMPORARY ISSUES
Global organizations
Value chain and strategic alliances
Social considerations
Ethics

WHAT WEVE LEARNED

IN LESSON 1-1
Definition and distinction of
managerial accounting
Purpose of managerial
accounting within organizations
Contemporary issues

Costing Concepts

LESSON 1-2 OBJECTIVES

You will understand:

Basic terminology
How to organize costs
according to type
Cost behavior basics

TERMINOLOGY
Cost
Just money?
Usage of resources

Cost Object
Product
Can be anything

COST FRAMEWORK 1
OBJECTS
Organization of costs by
relation to cost object
Direct costs
Materials
Labor

Indirect costs
Necessary, but difficult/infeasible
to trace to the cost object
Catch-all category

INDIRECT COSTS
Example scenario
Overhead
In multiple-product scenarios,
how overhead is allocated to
products influences the perceived
cost of the product
If arbitrary or inaccurate, may lead
to poor decisions

COST FRAMEWORK 2
BEHAVIOR

For decision making, well often

find it useful to classify costs
based on cost behavior
That is, how costs are associated
with some activity of interest

ROLE OF COST BEHAVIOR

Determine product profitability
(i.e., choose among potential
products to produce)
Determine whether to change
product price
Determine whether to add/drop a
product line
Determine whether to outsource

BASIC IDEA

Total Cost = Fixed Costs + Variable Costs

Variable Costs Per Activity x Volume of Activity

EXAMPLE SCENARIO

Variable cost per unit = $1

Fixed costs are $100,000
Production volume = 1 to 100,000

COST

COST BEHAVIOR
TOTAL VARIABLE COSTS

Total variable costs

increase with production volume
PRODUCTION VOLUME

UNIT COST

COST BEHAVIOR
UNIT VARIABLE COSTS

Unit variable costs do not

change with production volume

PRODUCTION VOLUME

TOTAL COST

COST BEHAVIOR
TOTAL FIXED COSTS

Total fixed costs do not

change with production volume

PRODUCTION VOLUME

COST

COST BEHAVIOR
UNIT FIXED COSTS

Unit fixed costs vary

with production volume
PRODUCTION VOLUME

EVERYTHINGS LINEAR?

UNIT COST

COST BEHAVIOR
UNIT VARIABLE COSTS

Unit variable costs do not

change with production volume

PRODUCTION VOLUME

TOTAL COST

COST BEHAVIOR
TOTAL FIXED COSTS

Total fixed costs do not

change with production volume

PRODUCTION VOLUME

TOTAL COSTS

EVERYTHINGS LINEAR?

Relevant range for

which linear
patterns are valid

Normal
activity
range
UNITS PRODUCED

WHAT WEVE LEARNED

IN LESSON 1-2
Terminology
Even the most basic concepts
such as costs are not that simple

Different ways to organize cost

information
Relationship with cost object (direct vs.
indirect)
Relationship with activity of interest
(behavior)

WHAT WEVE LEARNED

IN MODULE 1
Definition, purpose, and distinction
of managerial accounting
Contemporary issues
Basic concepts
How to organize cost
information according to
multiple cost frameworks