ManagementAccounting 1-2 C1 PDF

Managerial Accounting
prof. ir. Jan Vanherck

UIBS
Spring 2018
ACC3002
Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 1
(c) prof. ir. Jan Vanherck, April 2018  1

Before we start
 Chapter 0: Some practical information

Part 1: Focus on Decision

Making
 Chapter 1: Managerial Accounting, the Business
Organization and Professional Ethics
 Chapter 2: Introduction to Cost Behavior and

Cost-Volume Relationships
 Chapter 3: Measurement of Cost Behavior
 Chapter 4: Cost Management Systems and Activity-

Based Costing
 Chapter 5: Relevant Information for Decision Making

with a Focus on Pricing Decisions
 Chapter 6: Relevant Information for Decision Making

with a Focus on Operational Decisions

Part 2: Accounting for Planning

and Control
 Chapter 7: Introduction to Budgets and
Preparing the Master Budget
 Chapter 8: Flexible Budgets and Variance Analysis
 Chapter 9: Management Control Systems and

Responsibility Accounting
 Chapter 10: Management Control in Decentralized

Organizations

Part 3: Capital Budgeting

 Chapter 11: Capital Budgeting

0 1.
2.
3.
Before we start:
Some practical information
About the course level
The textbook
Your exercises
4. Your homework
5. Your exams
6. Policy during class
7. Grading policy
8. About you
9. Honesty and plagiarism
10. Hotel “Happy Stay”

About the course level and the prerequisites
 Course level is bachelor, level 300.

■ Focus is not only on the theoretical part
■ Being able to solve business problems in a structured way is the
goal
■ If a slide is showing INFO it is additional;
the information is not part of the theory exam
 Prerequisites
■ Basic knowledge of financial reporting and accounting
■ Basic knowledge of and practical experience with a spreadsheet
program (Excel or Calc)

About the course level and the prerequisites (2)
 If you experience any problem, contact me ASAP

■ Office hours: please make an appointment
jan.vanherck@gledco.org
■ In urgent cases, my cell phone: +32 475 411966 (please text me
first)

The textbook
 “Introduction to Management
Accounting”,
Chapters 1-17,
Horngren et al., Pearson
Prentice Hall, 15th Edition
ISBN-13: 978-0-273-79001-3
 We use only chapters 1-11

 Edition 15, or later
 https://www.lix.com/inspection-copy/d8dd717a-dcd9-
4c0f-8ed3-c45a0f5b6138

The textbooks for Excel (optional)
 “Excel 2016 in depth”,

Que, Bill Jelen
ISBN-13: 978-0789755841
 Advanced studying:
 “Statistical Analysis:
Microsoft Excel 2010”,
Que, Conrad Carlberg
ISBN-13: 987-0-7897-4720-4
 “VBA and Macros: Microsoft
Excel 2010”,
Bill Jelen and Tracy Syrstad
ISBN 13: 978-0-7897-4314-5

Exercises
 Make as much exercises as possible

 When solving exercises
■ Be accurate, complete, to the point
■ Bring structure into your work
■ Use a spreadsheet program as often as possible
(Excel, Calc)

Your homework
 You will get some homework

■ Individual or group work (same groups as for the project)
Topics and individual/group will be communicated during class
 Please respect the deadlines
■ Late deliveries are penalized

Sending in your work
 When you turn in your exercises, projects or homework:

■ Make sure that printing settings are for A4 page layout.
■ Put your full name in the footer
■ Always start filenames with your family name (for archiving purposes)
■ Supply spreadsheet AND pdf version (if necessary)
■ All work (homework, free exercises and projects) should be made using
Word (or equivalent) for text, Excel (or equivalent) for calculations and
PowerPoint (or equivalent) for presentations; do not send in handwritten
documents.
■ If you have worked in a group send in only one copy, carrying the names of
all group members.
■ The only way to submit your work is to send it to jan.vanherck@gledco.org.
■ Always keep a copy of your e-mail as a proof just in case something goes
wrong during the transmission. If, for one reason or another, I have not
received your work, I will ask you to forward me the original mail: this
procedure confirms your original sending date.

Your presentations
 About group work presentations:

■ If the presentation is short (<10 slides): only one person is doing
the talking, by turns
■ Sometimes, I will select the person who has to present
■ Feel free to add comments on the group work process
■ After the presentation the class can ask questions, remarks,
suggestions for improvement

Your exams
 Mid-term covers chapters 1-7

 Final exam is comprehensive
 Both exams have
■ +/- 50% theory (closed book)
■ +/- 50% exercises (open book)

Policy during class
 Prepare for class

■ At least read the chapter from the textbook
 During class
■ Take notes, be attentive, co-operate, don’t talk
■ If something is not clear, stop me to put a question
■ Never use your laptop for purposes different from this course (Skype, MSN,
Facebook, ...); if you can not live without these tools for 1 hour, please do
not come to class!
■ Leave your iPods at home
■ Save your snacks for the breaks; we have regular breaks
■ Do not use your cell phone. Do not send messages.
■ If you are late, wait until the break to join the class.
 After class
■ Study on a regular basis
■ If something is not clear, make an appointment for personal assistance

Grading policy
 Participation 10%
 Individual homework 20%
 Group homework 20%
 Mid-term exam 20%
 Final exam 30%

First homework: About you
 Please send me (before next class) a one page pdf with:

■ Your name
■ Your e-mail
■ A photograph
■ Review of your background (optional)
■ Anything else I should know about you (optional)

Honesty and plagiarism
 If you include data from a third party, you must mention the
complete reference
■ Not doing so will be considered as plagiarism
 If we indicate “individual work” we mean “individual work”
■ No sharing of resources
■ No communication of results and/or templates
 During the exam
■ Cell phones switched off and outside your reach
■ If you are allowed to use a laptop: mobile connections (e.g.
Internet) switched off.

Hotel “Happy Stay”
 Early December 20xx, I got a phone call from the owner of a

hotel: “I’m in big trouble!”
 Start up November 20xx

 8 rooms hotel, restaurant, party/reception room, shop
 Real estate is rented
 Investment according to budget: 1.000 k€
 Financing: bank: 800 k€, owner’s money: 200 k€
 Cost renovation: +250 k€, mainly heating and electricity
 The budget did not take into account any starting-up slope; time
scope was 5 years, per year
 No crash-proof company structure

Hotel “Happy Stay”
 What is the actual problem?

 What is the overall time frame?
 What is a good calculation interval? Why?
 What kind of calculation do we need
(P/L, depreciation, ...)?
 Is there an influence of the start up?
 Is there some kind of seasonality?
 How to handle time dependent variations?
 If you want to talk to a banker, what is the main issue?
 How to set up a “crash-proof” organization?
 How to avoid problems like this in the future?

1
Managerial Accounting, the
Business Organization, and
Professional Ethics
1. Learning objectives
2. Accounting and decision making
3. Importance of ethics
4. Management accounting in service and nonprofit
organizations
5. Cost-benefit and behavioral considerations
6. The management process and accounting
7. Product life cycles and the value chain
8. Accounting’s position in the organization
9. Career opportunities in management accounting
10. Adaptation to change
11. Changes in business processes
12. Ethical conduct for professional accountants
13. Highlights to remember

1 2.
Learning objectives
1. Describe the major users and uses of accounting
information.
Explain why ethics are important to management
accountants.
3. Describe the cost-benefit and behavioral issues
involved in designing and accounting system.
4. Explain the role of budgets and performance reports in
planning and control.
5. Discuss the role accountants play in the company’s
value chain functions.
6. Contrast the functions of controllers and treasurers.
7. Explain why accounting is important in a variety of
career paths.
8. Identify current trends in management accounting.
9. Appreciate the importance of ethical conduct to
professional accountants.

Accounting and decision making
 The basic purpose of accounting information is to help you

make decisions
 Users:
■ Internal managers:
day-to-day ... long-range strategy
■ External parties:
decisions about the company
 Management vs. financial accounting

Management vs. financial accounting
Financial accounting Management accounting

 ... + External parties  Organization managers
 GAAP  No constraints
 Past orientation  Future orientation
 Not so flexible: year, quarter  Flexible: hours ... years
 Summary reports  Detailed reports
 Stand alone  Big influence of other
functional areas

Types of management accounting

information
 Scorekeeping
■ Accumulation and classification of data
■ Used for evaluating organizational performance
■ Internal and external users
■ Input for the company’s accounting system
 Attention directing
■ Reporting and interpreting information: management focus on
imperfections, opportunities, ...
■ Actual results vs. before-the-fact expectations
■ Frequently uses the data from scorekeeping
 Problem solving
■ Which is the best alternative?
■ Nonrecurring decisions
■ On request

Influences on the accounting system
 Accounting system:
A formal mechanism for gathering, organizing and
communicating information about an organization’s activities
and performance.
 Management accounting uses (amongst others) data from the
general purpose accounting system
 Influences on the accounting system:
■ GAAP (Generally accepted accounting principles)
■ Laws forbidding bribery and other corrupt practices
■ Governmental regulations
■ Obligation to have an internal control system (internal auditors;
management audits)
■ Increased awareness of management’s responsibility!

The importance of ethics
 Regulations of accounting systems seek to ensure the reliability

of the information, but ...
 ... no regulation is as effective as holding accounts to high
ethical standards.
 You cannot “see” the quality level of accounting information
 Information from an unreliable source is worthless
 Misleading / faulty / fraud
 Integrity is hard to establish, but easy to lose:
■ So the right word is?
■ “NEVER” take the risk!!

Service and nonprofit organizations
 Service organizations:
Organizations that do not make or sell tangible goods.
■ Law firms, consultants, banks, ...
 Nonprofit organizations:
Organizations that do not intent to make profit.
■ Hospitals, schools, museums, ...
■ Most nonprofit organizations are service organizations
 Basic ideas of management accounting were developed in
manufacturing organizations, but can be applied to service and
nonprofit organizations

Service and nonprofit organizations (2)
 Characteristics of service organizations:

■ Labor intensive
■ Output is difficult to measure
■ Cannot store their inputs and outputs

KISS
 Drive for simplicity: KISS

■ Keep it super simple
■ Keep it simple, stupid
■ Keep it simple for success

Cost–benefit and behavioral considerations
 Accounting systems are economical goods, available at various

costs
■ Investment, maintenance, exploitation
■ If the value is greater than the cost, then it is a good buy
 Introducing an accounting system has behavioral implications
■ An accounting system should provide accurate, timely reports
■ The reports (as for all performance indicators) should focus on the
real issues
■ If these are not used by the management, the system cannot
improve decision making
■ Accounting systems also influence the feelings and behavior of
employees
 Management accountants must understand related disciplines:
economics, the added value chain, decision taking, behavioral
sciences, people management, ...

Planning and control
 The management process:

A series of activities in a cycle of planning and control.
 Decision making:
The purposeful choice amongst a set of alternative courses of
action designed to achieve some objective.
■ Planning decisions
■ Control decisions
 Planning
■ Setting objectives for an organization
■ Outlining how these will be attained
 Control
■ Implementing plans
■ Using feedback to evaluate the attainment of the objectives

Group work
 Study and discuss following chart (next slide)

 Make short presentation
 About group work presentations:
■ If the presentation is short (<10 slides): only one person is doing
the talking, by turns
■ Sometimes, I will select the person who has to present
■ Feel free to add comments on the group work process
■ After the presentation the class can ask questions, remarks,
suggestions for improvement


Planning and control (2)
 The (management) accountant:

■ Sets up the budgets, based on the inputs of the management
■ Defines the special reports
■ Collects the data
■ Makes the reports
■ Reliable, useful information for the management
 The manager
■ Sets the goals (initiates the planning process)
■ Approves the improvement plan
■ Assigns resources to implement that plan
■ Implements the actions
■ Defines corrections and revisions of plans and actions
■ Decision taking

Management by exception
 A budget:
Is a quantitative expression of a plan of action.
 Performance reports:
Feedback provided by comparing results with plans and
highlighting variances.
 Variances:
Deviations from plans.
 Management by exception:
Concentrating on areas that deviate from the plan and ignoring
areas that are presumed to be running smoothly.

Management by exception (2)
 Study the results of a pizza “take-away-restaurant”

Product Life Cycle
 The product life cycle:

The various stages through which a product passes, from
conception and development to introduction into the market to
maturation and, finally, withdrawal from the market.

Product Life Cycle (2)

 Market introduction stage

■ Costs high, sales volume low
■ No/little competition
■ Competitive manufacturers watch for acceptance/segment growth
■ Demand has to be created, customers have to be prompted to try
the product
 Growth stage
■ Costs reduced due to economies of scale and sales volume:
profitability increases significantly
■ Public awareness
■ Competition begins to increase with a few new players in the
establishing market
■ Prices decrease to maximize market share

 Mature stage
■ Costs are very low as you are well established in the market & no
need for publicity.
■ Sales volume peaks, increase in competitive offerings
■ Prices tend to drop due to the proliferation of competing products
■ Brand differentiation, feature diversification, as each player seeks
to differentiate from competition with "how much product" is offered
■ Industrial profits go down
 Saturation and decline stage
■ Costs become counter-optimal
■ Sales volume declines or stabilizes
■ Prices and profitability diminishes
■ Profit becomes more a challenge of production/distribution
efficiency than increased sales

 Product life cycles vary

■ From a few months (fashion, movies, ...)
■ ... to several years (cars, building materials, airplanes...)
 In the planning phase, managers predict revenues and costs
over the entire life cycle
 Accounting systems track annual costs and revenues
 Strategic thinking
 Go/nogo decisions

Value Chain
 Value Chain:
Set of business functions or activities that add value to the
products or services of an organization.
 These functions are:
■ Basic research and development
■ Design of products, services and/or processes
■ Production (including materials management)
■ Marketing (the manner by which potential customers learn about
the value and features)
■ Sales
■ Distribution
■ Customer service, maintenance
■ End of life service

Customers first
INFO

Accounting’s position in the organization
 Accounting activities:
■ Collecting and compiling information ()
■ Preparing (standard) reports ()
■ Interpreting and analyzing information ()
■ Being involved in decision making ()
 Line managers:
Managers who are directly involved with making and selling the
organization’s products or services.
 Staff managers:
Managers who are advisory to the line managers. They have no
authority over line managers, but they help the line managers by
providing information and advice.

Accounting’s position in the organization (2)

Controller and treasurer functions
 Chief financial officer (CFO):

The top executive who deals with all finance and accounting
issues in an organization.
 Treasurer:
A manager who is concerned mainly with the company’s
financial matters, such as raising and managing cash.
 Controller:
The top accounting officer of an organization who deals mainly
with operation matters, such as aiding management decision
making.
■ Prepares also financial statements for external users

Controller and treasurer functions (2)
Controller: Treasurer
 Planning for control  Provision of capital
 Reporting and interpreting  Investor relations
 Evaluating and consulting  Short-term financing,
 Tax administration banking
 Government reporting  Credit management
 Economic appraisal  Financing investments
 Risk management

Career opportunities
 Managers find that management accounting skills enhance their

understanding of key determinants and help them to be better
executives
 In all countries programs for certification of Management
Accountants are available
 Working as a (management) accountant gives you exposure to
many parts of an organization
■ Interaction with management
■ Involved in strategic decision making
INFO

Adaptation to change
 21st century differs from 20th century

■ More competitive markets
■ Access to information
■ Product life cycle shorter
■ Globalization
 5 major trends:
■ Shift from a manufacturing-based to a service-based economy in
USA and EU
■ Increased global competition
■ Advances in technology (increasing speed)
■ Changes in business processes
■ Information technology (cloud)

Adaptation to change (2)
 Global competition has increased

■ Lowered international barriers to trade
■ Worldwide trend towards deregulation
 Advances in technology
■ Electronic commerce, internet, ...
■ Nano technology, environmental issues, ...
 Advances in technology helps management accounting
■ Cheap computer power reduces cost of management accounting
■ Enterprise resource planning (ERP) systems
■ The Internet of Things

Changes in business processes
 JIT (just in time) philosophy

■ Flow production
■ Became also the drive to eliminate waste
 Lean manufacturing
■ Is a production practice that considers the expenditure of resources
for any goal other than the creation of value for the end customer to
be wasteful
■ Process management philosophy derived mostly from the Toyota
Production System
 Computer integrated manufacturing (CIM)
■ CAD/CAM, robots
 Total quality management (TQM)
■ Business management strategy aimed at embedding awareness of
quality in all organizational processes
■ Customer orientation

Ethical conduct for professional accountants
 Ethics:
The field that deals with human conduct in relation to what is
morally good and bad, right and wrong. It is the application of
values to decision making. These values include honesty,
fairness, responsibility, respect and compassion.
■ “Simply doing what is right”
 CFO is often the ethical gatekeeper and the company’s
conscience
 There should be no difference between business and personal
ethics: it is a way of life
■ Top management sets the tone

Temptations
 Emphasis on short-term results

■ Largest issue in ethical breakdowns
■ If “making the numbers” is goal number 1, accounts may do
whatever is necessary to produce the expected figures
 Ignoring the small stuff
■ Most ethical compromises start small
■ Be a person of principle
 Economic cycles
■ A down market reveals what an up market conceals
■ To prevent ethical problems in bad times, companies need to be
vigilant to prevent ethical lapses in good times

Temptations (2)
 Accounting rules
■ As accounting rules became more complex, making abuse of the
rules is harder to identify (sometimes it looks like a game)
■ Use higher standards than the “letter of the law”
■ Focus on transparency

Ethical dilemmas
 The ethical choice is often complex

■ When there are no legal guidelines or ...
■ ... when there are even no clear-cut ethical standards
 Example:
■ Planned introduction of a new product
■ The product can only be introduced after a loan
■ You have to write a report for the bank
■ Calculated profit if the introduction is:
■ Successful: 500 k€
■ Modest: 100 k€
■ Fails: -600 k€ (loss)
■ There is no easy answer to this dilemma
■ Neither action is without risk
■ In most cases it is better to be conservative than to push the boundary
too far

Guidelines to solve ethical conflicts
 First of all, follow the company’s guidelines if they exist. If these

guidelines do not resolve the ethical conflict, consider following
courses of action
 Discuss the issue with your immediate supervisor
■ Contacts with the management levels above should be initiated
with your superior’s knowledge
■ When he/she is involved, present the issue to the next level
■ When he/she is CEO, present it to the appropriate board
 Communication of such problems to authorities or individuals
(outside the company) is not appropriate, unless there is a clear
violation of the law
 Clarify the issue by initiating a confidential discussion with an
impartial advisor or consult your own attorney
 It is desirable that such a procedure is part of the total quality
management plan of the company (TQM)

Highlights to remember (1)
Describe the major users and uses of accounting information.
In general, users of accounting information fall into three categories:

(1) internal managers who use the information for short-term planning and
controlling routine operations;
(2) internal managers who use the information for making non-routine decisions
and formulating overall policies and long range plans; and
(3) external parties, such as investors and government authorities, who use the
information for making decisions about the company.
Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 skip 59

Explain why ethics is important to management accountants.
Most regulation of accounting systems seeks to ensure the reliability of the

information that accountants provide. However, no regulation can be as
effective in ensuring reliability as holding accountants to high ethical standards.
A person cannot see the quality in accounting information, as one can see it in a
home or car. If we cannot trust the accountant, then the information is nearly
worthless. Ethical habits that students develop will carry over into their life as a
manager and/or accountant. Integrity is hard to establish, but easy to lose.

Describe the cost-benefit and behavioral issues involved in

designing an accounting system.
The cost benefit balance, weighing known costs against probable benefits, is the
primary consideration in choosing among accounting systems. The system's
value must exceed its cost. In addition, the system's effects on the behavior of
managers should also be considered. The system must provide accurate, timely
budgets and performance reports in a form useful to managers.

Explain the role of budgets and performance reports in planning

and control.
A budget is a quantitative expression of a plan of action using estimated

amounts (e.g. dollars, number of customer complaints, number of product
returns). Budgets help to coordinate and implement plans. They are the main
devices for disciplining management planning. Budgets are compared to actual
results and significant variances should be explained to provide feedback.

Discuss the role accountants play in the company’s value-chain

functions.
In the production stage, accountants measure the costs of production and help
track the effects of continuous improvement programs. They facilitate cost
planning and control with budgets and performance reporting. Accountants also
provide estimated revenue and cost data during the research and development
stage, and especially during the design stage. Accountants may analyze the
trade-off between the increased costs of a promotional program in marketing
with the increased revenue. Accounting information can influence decisions
about distributing products directly to a chain of retail stores or to a wholesaler,
or what method of transportation should be used. Finally, accountants provide
cost data for customer service activities, such as warranty and repair costs. The
customer is always the primary focus.

Contrast the functions of controllers and treasurers.
The treasurer is concerned mainly with the company's financial matters such as
investor relations, provision of capital, short-term financing, credits and
collections, investments, risk management and banking.
The controller is concerned with operating matters such as reporting and
interpreting, evaluating and consulting, tax administration, government reporting
and protection of assets.

Distinguish between line and staff roles in an organization and

give and example of each.
Line authority is authority exerted downward over subordinates. Staff authority

is authority to advise but not to command. It may be exerted downward,
laterally, or upward. Line departments are directly responsible for conducting
the basic mission of the organization, and that is producing and selling a product
or service.
Staff departments are indirectly related to these basic activities through servicing
and supporting the line departments. An example of a line role would be the
sales executive, whereas a staff role would include the top accounting executive.

Discuss the four major business trends causing changes in

management accounting.
The first major trend is the shift from a manufacturing-based to a service-based

economy. The service sector accounts for almost 80% of the employment in the
Western world. Service industries are becoming increasingly competitive.
The second major trend is increased global competition due to the lowering of
international barriers to trade such as tariffs and duties. There also has been a
worldwide trend toward deregulation. To regain its competitive edge, many
Western companies have redesigned their accounting systems to provide more
accurate and timely information about the cost of activities, products or services.

Highlights to remember (8 continued)
Discuss the four major business trends causing changes in

management accounting.
The third major trend, which has been the most dominant influence over the past
decade, is technological change. The increasing capabilities and decreasing
costs of computers have changed how accountants gather, store, manipulate
and report data.
The fourth major trend is the changing of business processes. Some of the
more popular changes in operations include business process reengineering,
just-in-time philosophy, computer-integrated manufacturing systems, total quality
management, and Six Sigma. All of these have a direct effect on costs, and
accountants often measure the actual cost savings, predict anticipated cost
savings, and develop costs for products or services that differ for different
production environments.

Appreciate the importance of standards of ethical conduct to

professional accountants.
Users of accounting information expect both external and internal accountants to

adhere to high standards of ethical conduct.
Many ethical dilemmas, however, require value judgments, not the simple
application of standard procedures. Often this is a gray zone where your
personal commitment is most important.
An unethical act is one that violates the ethical standards of the profession.
Management accountants have an obligation to the organizations they serve,
their profession, the public, and themselves to maintain the highest standards of
ethical conduct.

2 1.
2.
3.
Introduction to cost behavior and
cost-volume relationships
Learning objectives
Identifying resources, activities, costs and cost drivers
Variable- and fixed-cost behavior
4. Cost-volume-profit analysis
5. Additional uses of cost-volume analysis
6. Sales-mix analysis; impact of income taxes
7. Highlights to remember

2 1.
2.
3.
Learning objectives
Explain how cost drivers affect cost behavior.
Show how changes in cost-drivers levels affect variable
and fixed costs.
Calculate break-even sales volume in total money and
fixed costs.
4. Create a cost-volume-profit graph and understand the
assumption behind it.
5. Calculate sales volume in total money and total units to
reach a target profit.
6. Differentiate between contribution margin and gross
margin.
7. Explain the effects of sales mix on profits.
8. Compute cost-volume-profit relationships on an after-
tax basis.

Cost behavior and cost drivers
 Companies have usually more influence on their costs than on

their revenues
■ One of the main goals of management is to control/reduce costs
■ To do so, management must know as accurate as possible the real
cost of a product or service
■ To do so, management has to understand cost behavior
 Cost behavior:
How the activities of an organization affect its costs.
 Cost driver:
Any output measure that causes costs (that is, causes the use
of costly resources).
■ To allocate costs in a differentiated way

Cost behavior and cost drivers (2)
 Examples of cost drivers

■ R&D, salaries of product and process engineers
■ Complexity of the proposed products
■ Number of new products
■ Production, labor wages
■ Labor hours
■ Production, maintenance wages
■ Number of machine hours
■ Number of machine hours per machine group
■ Marketing, salaries of personnel, travel costs, ...
■ Sales

Traditional vs. Activity-Based
 Traditional cost behavior

■ Only resources are taken into account
■ For the indirect costs, the cost driver is “Units of final product or
service” or equivalent
 Activity-Based cost behavior
■ Resources are taken into account
■ Indirect costs are related to the activities that drives them
■ Cost driver is no longer only “Units of final product or service”, but
can vary depending on the nature of the activity
■ Example:
Repair and maintenance of a certain production machine is an indirect
cost; the cost driver could be: “number of machine hours”
■ Only for products that use that production machine, the cost of the
R&M will be calculated in the product cost price (by means of the time a
product needs for processing on that machine)

Traditional vs. Activity-Based (2)

Traditional vs. Activity-Based (3)
 Example:
R&M cost = 100 000 €/year
Output of the factory:
■ 7 500 products type A + 2 500 products type B
■ Only B needs machining, 2 h/#
■ 3 shifts: uptime m/c is 5 000 h/yr
 Traditional:
■ (100 000 €/yr) / (10 000 #/yr) = 10 €/#
■ “All products contribute, even those who do not need the m/c”
 ABC:
■ Type B: (100 000 € /yr) / (5 000 h/yr) * (2h/#) = 40 €/#
■ Type A: (100 000 € /yr) / (5 000 h/yr) * (0h/#) = 0 €/#
■ “Only products type B pay the R&M”
 ABC is more in detail, more accurate, but requires a more powerful
accounting system
■  Make a cost-benefit analysis

Variable vs. fixed costs
 Variable cost:
A cost that changes in direct proportion to changes in the cost-
driver level.
■ Example:
cost of fuel consumption of a car
cost-driver: amount of km per year
cost goes up and down in function of mileage
 Fixed cost:
A cost that is not immediately affected by changes in the cost-
driver level.
■ Example:
rent of a factory
cost is independent of the quantity of products produced

Variable vs. fixed costs (2)
Materials handling department; 3 shift operation, 1 forklift

Variable vs. fixed costs (3)
Type of cost Total cost Cost per unit

Decrease
Fixed costs No change or
increase
Increase
Variable costs or No change
decrease
Example: Car; fixed cost = financial leasing of the car; variable cost = fuel; cost-driver = # km
What happens when the level of the cost-drive changes?

Relevant range
 We have said that fixed costs are unchanging regardless of

changes in the given cost driver, but this is only true within
reasonable limits
■ Example:
Rent of a forklift is fixed cost, but if the volume increases above
capacity of 1 m/c, we need to rent a second one
 Relevant range:
The limit of cost driver level within which a specific relation
between costs and the cost driver is valid.

Relevant range (2)
Max capacity of forklift in 3 shifts is 20k pcs per year

Non linear costs
Due to modular SW design, a web building company can avoid costs

Cost-volume-profit analysis
 Managers will study the influence of changes in volume on the

performance of their business
 CVP analysis:
The study of the effects of output on revenue (sales), expenses
(costs) and net income (net profit).

Cost-volume-profit analysis (2)
Example: Snack vending machines

See: Exercise_060_SnackVendingMachines {ContributionMargin}

Cost-volume-profit analysis (3)
 Contribution margin:
Sales price per unit minus the variable cost per unit.
 Total contribution margin:
The number of units sold times the unit contribution margin.
 Contribution margin percentage:
Total contribution margin divided by sales.
 An important question:
“At which sales volume is the net income zero?”
 Break-even point:
The level of sales at which revenue equals expenses and net
income is zero.

Break-even point calculation: method 1
 Contribution margin method:
 Contribution margin per unit: 0.30 €/snack

 Total fixed costs to be recovered by sales: 18 000 €
 Number of snacks needed:
18 000€ / (0.30€/snack) = 60 000 snacks
 What happens if CM varies?
■ CM = 0.20€/snack  BEP = 90 000 snacks
■ CM = 0.50€/snack  BEP = 36 000 snacks
 What happens when fixed costs vary?
■ FC = 30 000€  BEP = 100 000 snacks
■ FC = 6 000€  BEP = 20 000 snacks

 Equation method:
 NetIncome
= UnitSalesPrice * NumberOfUnits
- UnitVariableCost * NumberOfUnits
- FixedCosts
= 1.5€ * N – 1.2€ * N – 18 000€
 Break-even:
1.5€ * N – 1.2€ * N -18 000€ = 0
0.3N = 18 000
N = 60 000

 Graphing:
profit
loss

Multiple changes in key factors
Example: Snack vending machines, no sales from 6PM-6AM

See: Exercise_060_SnackVendingMachines {NoNightSales}

Target net profit
 Equation method:
 NetIncome UnitSalesPrice * NumberOfUnits

‐ UnitVariableCost * NumberOfUnits
‐ FixedCosts
 Example: Snack vending machines

Calculate net income as a function of N
and the quantity to reach a net income of 5 000€
■ NetIncome = 1.5€ * N – 1.2€ * N – 18 000€
■ Target net income:
1.5€ * N – 1.2€ * N -18 000€ = 5 000€
0.3N = 23 000
N = 76 667

Homework
 A company is selling snacks using vending machines. Sales price is 1.5€/piece.
Variable cost price of the snacks is 1.2€/piece. Monthly other costs are:
■ Rent of the vending machines: 3000€
■ Wages of personnel that refill the machines: 13500€
■ Miscellaneous fixed costs (insurance, advertising, …): 1500€
 Calculate (using Excel):
■ The BEP
■ The BEP if the selling price becomes 1.4 or 1.7 €/piece
■ The quantity sold to reach a target profit of 5000€
■ The CVP graph
 Current working point is 62000 pieces sold per month. Management is
investigating if it is profitable to skip the night service: sales becomes 52000
pieces, and the cost of wages is reduced to 11040€. Should they implement this
new policy? Why?
 Exercise_060_SnackVendingMachines

Operating leverage
 Operating leverage:
A firm’s ratio of fixed to variable costs.
 Margin of safety:
The planned unit sales less the break-even unit sales.
■ It shows how far sales can fall below the planned level before
losses occur

Operating leverage (2)

Gross margin / contribution margin
 Gross margin:
The excess of sales over the total cost of goods sold.
 Cost of goods sold:
The cost of the merchandise that a company acquires or
produces and then sells.
The excess of sales over the total of variable costs.

Gross margin / contribution margin (2)
 Gross margin:
Can we pay the selling and administrative costs?
Can we pay all the fixed costs?

Sales-mix analysis; taxes
 Most companies sell more than one product

■ The different products have different contribution margins, sales
prices, ....
■ If the mix changes, net income will change too
 Companies have to pay taxes

Sales-mix analysis; taxes (2)
 Exercise:
■ A company is selling 2 products A and B; quantities 4:1
■ Total sales is 375 000 units
■ A: sales price = 8€, variable expenses = 7€
■ B: sales price = 5€, variable expenses = 3€
■ Fixed expenses are 180 000€
■ Tax rate is 40%
■ Calculate turn over, contribution margin, net income after tax
■ Calculate the ratio of the quantities of A and B so that the net
income becomes 200k€
■ See: Exercise_061_SalesMixAnalysis
Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 solution 96

Homework
 Homework 1:
■ Procter & Gamble Company is a Cincinnati-based company that produces household
products under brand names such as Gillette, Bounty, Crest, Folgers and Tide. The
company's 2006 income statement showed the following (in millions):
■ Net sales $ 68 222
■ Costs of products sold $ 33 125
■ Selling, general, and administrative expense $ 21 848
■ Operating income $ 13 249
■ Suppose that the cost of products sold is the only variable cost; selling, general and
administrative expenses are fixed with respect to sales. Assume that Procter & Gamble
had a 10% increase in sales in 2007 and that there was no change in costs except for
increases associated with the higher volume of sales. Compute the predicted 2007
operating income for Procter & Gamble and its percentage increase. Explain why the
percentage increase in income differs from the percentage increase in sales. Calculate
also the percentage increase in contribution margin.
 See: Exercise_062_Proctor&Gamble
Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 solution 97

Explain how cost drivers affect cost behavior.
A cost driver is an output measure that causes the use of costly resources.
When the level of an activity changes, the level of the cost driver or output
measure will change also, causing changes in costs.

Show how changes in cost driver levels affect variable and

fixed costs.
Different types of costs behave in different ways. If the cost of the resource used
changes in proportion to changes in the cost driver level, the resource is a
variable-cost resource (its costs are variable).
If the cost of the resource used does not change because of cost drive changes,
the resource is a fixed-cost resource (its costs are fixed).

Calculate break-even sales volume in total euros and total units
We can approach CVP analysis (sometimes called break-even analysis)

graphically or with equations. To calculate the break-even point in total units,
divide the fixed costs by the unit contribution margin. To calculate the break-
even point in total euros (sales euros), divide the fixed costs by the contribution-
margin ratio.

Create a cost-volume-profit graph and understand the

assumptions behind it.
We can create a cost-volume-profit graph by drawing revenue and total cost

lines as functions of the cost driver level. Be sure to recognize the limitations of
CVP analysis and that it assumes constant efficiency, sales mix, and inventory
levels.

Calculate sales volume in total euros and total units to reach a

target profit.
Managers use CVP analysis to compute the sales needed to achieve a target
profit or to examine the effects on profit of changes in factors such as fixed
costs, variable costs, or cost driver volume.

Differentiate between contribution margin and gross margin.
The contribution margin is the difference between sales and variable costs.
The gross margin is the difference between the sales and the costs of the goods
sold.

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Managerial Accounting

prof. ir. Jan Vanherck

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 1

(c) prof. ir. Jan Vanherck, April 2018  1

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 2

(c) prof. ir. Jan Vanherck, April 2018  2

Part 1: Focus on Decision

 Chapter 2: Introduction to Cost Behavior and

 Chapter 3: Measurement of Cost Behavior

 Chapter 4: Cost Management Systems and Activity-

 Chapter 5: Relevant Information for Decision Making

 Chapter 6: Relevant Information for Decision Making

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 3

(c) prof. ir. Jan Vanherck, April 2018  3

Part 2: Accounting for Planning

 Chapter 8: Flexible Budgets and Variance Analysis

 Chapter 9: Management Control Systems and

 Chapter 10: Management Control in Decentralized

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(c) prof. ir. Jan Vanherck, April 2018  4

Part 3: Capital Budgeting

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 5

(c) prof. ir. Jan Vanherck, April 2018  5

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 6

(c) prof. ir. Jan Vanherck, April 2018  6

About the course level and the prerequisites

 Course level is bachelor, level 300.

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(c) prof. ir. Jan Vanherck, April 2018  7

About the course level and the prerequisites (2)

 If you experience any problem, contact me ASAP

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(c) prof. ir. Jan Vanherck, April 2018  8

 We use only chapters 1-11

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(c) prof. ir. Jan Vanherck, April 2018  9

The textbooks for Excel (optional)

 “Excel 2016 in depth”,

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 10

(c) prof. ir. Jan Vanherck, April 2018  10

 Make as much exercises as possible

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(c) prof. ir. Jan Vanherck, April 2018  11

 You will get some homework

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 12

(c) prof. ir. Jan Vanherck, April 2018  12

Sending in your work

 When you turn in your exercises, projects or homework:

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(c) prof. ir. Jan Vanherck, April 2018  13

 About group work presentations:

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 Mid-term covers chapters 1-7

Managerial Accounting -- Jan Vanherck -- Spring 2017-2018 15

(c) prof. ir. Jan Vanherck, April 2018  15

Policy during class

 Prepare for class

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(c) prof. ir. Jan Vanherck, April 2018  16

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First homework: About you