Most MC questions are from theory of chapter 1 Management accountants are committed to helping their organisation achieve its

strategic goals by providing decision support, planning, and control for business operations with a high level of ethics and professional competence.

Chapter 1 Accounting and decision making: - the basic purpose of accounting information is to help decision makers, company presidents, product managers, hospital or school administrators, investor, and others. Decision making: choice from among a set of alternative courses of action designed to achieve some objective, drives the need for accounting information. Management accounting: produces information for managers within an organization. (process of: identifying, measuring, accumulation, analyzing, preparing, interpreting, and communicating information that helps manager fulfill organizational objectives. Financial accounting: produces information for external parties, such as stockholders, suppliers, banks and governments. Scorekeeping attention direction problem solving Scorekeeping: is the classification, accumulation, and reporting of data that helps users understand and evaluate performance (E.g. is the company doing well or poorly??). Scorekeeping must be accurate and reliable to be useful. Attention direction: usually involves routine reports that compare actual results to before-the-fact expectations (E.g. which areas require additional investigation??). It will look for explanations when expected profit is 150.000 and result is 120.000.attention direction helps managers focus on operating problems, imperfections, inefficiencies and opportunities. Problem solving: the problem solving aspect of account ting often involves an analysis of the impact of each alternative to identify the best course to follow (E.g. of the alternatives being considered, which is the best??). When Starbucks wants to add new products to its product line an analysis can show the affect revenues and costs. The management can than decide which product to add or delete. Scorekeeping/card and attention-direction: Companies produce most information on a routine basis; every day, month, quarter or year. Problem solving: sometimes relies on routine information used for scorekeeping and attention direction. When organizations make long-range plans or nonrecurring decisions specially-prepared information is often required. Accounting system: a formal mechanism for gathering, organising, and communication information about an organizations activity.

Cost benefit and behavioural considerations Managers should keep two important ideas in mind when designing accounting systems: The cost benefit balance: weighting costs against probable benefits. While comparison of costs and benefits is conceptually simple, it is often difficult to estimate both costs and benefits. Behavioural implications: the systems effect on the behaviour and specifically the decisions of managers. If a report is to unfairly attributes excessive costs to the managers operations, the manager may lose confidence in the system and not let it influence future decisions. The management process and accounting Planning: setting objectives for an organisation and outlining how it will attain them. - What objectives does the organization want to achieve?? - When and how will the organization achieve this objectives?? Control: implementing plans and using feedback to evaluate the attainment of objectives. - Planning determines action, action generates feedback, and the control phase uses this feedback to influence further planning and action. Performance evaluation results will in turn be used for further planning and implementation. Budget: is a quantitative expression of a plan of action. A budget helps to coordinate and implement plans. Performance reports: - provides feedback by comparing results with plans and by highlighting variances (variances are deviations/afwijkingen from plans). - Organizations use reports to judge managers decisions and the productivity of organizational units. - Compare actual results to budgets, thereby to motivate the managers to achieve the companies objectives. - After agreeing on a budget this budget becomes the managers target. - Budget actual (real) = variance U = unfavourable (so -) F = favourable (so +) Process of management by exception: Performance reports spur investigation of exceptions, items for which actual result differ significantly from budgeted amounts. Managers then revise operations to conform with the plans or revise the plans. Planning and control for product life cycles and value chain Product life cycle: is the various stages trough which a product passes: 1. Conception and product development (no sales) 2. Introduction into the market (sales growth) 3. Maturation of the market (stable sales level) 4. Withdrawal from the market (low sales no sales) At each stage managers face differing costs and potential returns Product life cycles range from a few months (for fashion clothing or faddish toys/trends) to many years (for automobiles or refrigerators)

Accountings position in the organization These are four work activities of management accountants: 1. Collecting and compiling information (spend less time) 2. Preparing standardized reports (spend less time) 3. Interpreting and analysing information (spend more time) 4. Being involved in decision making (spend more time) Line managers: are directly involved with making and selling the organizations product or services. Their decisions lead directly to meeting (or not meeting) the organizations objectives. Staff managers: are advisory, they support the line managers. They have no authority over line managers, but they help the line managers by providing information and advice. Europe IFRS (International Finance Reporting Standards) Internal controls: controlling internal processes. E.g. buying equipment/machines. CEO & CFO work together CEO = responsible of signing all reports that leave the company. CFO (chief financial officer) = a top executive who deals with all finance and accounting issues, oversees the accounting functions in most organization. The treasurer = concerned mainly with the companys financial matters such as raising and managing cash The controller (also called comptroller)= in many government organizations concerned with operating matters such as aiding management decision-making. Objective 5 Accounting is important in a variety of career paths: - How information can improve decisions in purchasing, manufacturing, wholesaling, retailing, marketing and many other functional areas - By studying accounting, you begin to learn more about the interrelationships among different aspects of an organization, such as production and marketing - A thorough understanding of management accounting can be an important qualification for the highest level executive positions in an organization Adapting to change Four major business trends are influencing management accounting today: 1. Shifts from manufacturing-based to a service-based economy in the US 2. Increased global competition 3. Advances in technology 4. Changes in business process management Service organizations = are organizations that do not make or sell tangible goods. For example; Public accounting firms, law firms, management consultants, real estate firms, transportations companies, banks, insurance companies and hotels.

Making managerial decisions A managers ethical choice becomes more complex when there are no legal guideline or clear-cut ethical standards. Ethical dilemmas exist when managers must choose an alternative and there are: 1. Significant value conflicts among differing interests 2. Several alternatives are justifiable 3. And there are significant consequences for stakeholders in the situation Members of IMA shall behave ethically. A commitment to ethical professional practice includes overarching principles that express our values and standards that guide our conduct: IMA Statement of Ethical Professional Practice: 1. Principles: I. honesty, fairness, objectivity, responsibility II. members shall act in accordance with these principles and shall encourage others within their organization to adhere to them 2. Standards: a members failure to comply with the following standards may result in disciplinary action: I. Competence: i. level of knowledge, perform professional, ii. decision support information and recommendations that are accurate, clear, concise and timely. II. Confidentiality: i. Keep information confidential except when legally required ii. Inform relevant parties regarding appropriate use of confidential information iii. Refrain from using confidential information for unethical or illegal advantage III. Integrity: i. Make sure not to bring out information that could harm the company ii. Mitigate actual conflict or interest iii. Refrain from engaging in any conduct that would prejudice carrying out duties ethically IV. Credibility: i. Communicate information fairly and objectively (true and valid info) ii. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organizational policy and/or applicable law 3. Resolution of ethical conflict: When faced with ethical issue, you should fallow your organizations established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, you should consider the following courses of action: I. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved II. Clarify relevant ethical issues by having a confidential discussion with an IMA Ethics Counsellor or other impartial advisor to obtain a better understanding of possible courses of action III. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

To maintain high ethical standards, accountants and others need to recognize situations that create pressures for unethical behaviour. Four such temptations, summarized in financial executive are as follows: 1. Emphasis on short-term results: if making numbers is goal nr. 1, accountants may do whatever necessary to produce the expected profit number 2. Ignoring the small stuff: the first step may seem insignificant, but large misdeed are often the result of many small steps. Toleration of even small lapses can lead to large problems 3. Economic cycles: companies need to be especially vigilant to prevent ethical lapses in good times when such lapses are more easily concealed, and thereby avoid revelation of lapse in bad times when their effects are especially damaging 4. Accounting rules: accounting rules have become more complex and less intuitive, making abuse of the rules harder to identify. Ethical accountants do not just meet the letter of the law. They seek full and fair disclosure, conveying to users the real economic performance and financial position of the company. Ethical dilemmas also arise when you only observe, rather than commit, unethical behaviour.

Chapter 2 Identifying resources, activities, costs and cost drivers Financial results: are based on revenues and costs To predict costs and manage them on a day-to-day basis a manager from a company identify: Key activities performs Resources used in performing these activities Costs of the resources used Cost drivers measures of activities that require the use of resources and thereby cause costs Variable and fixed cost behaviour A variable cost changes in direct proportion to changes in the cost driver. In contrast, changes in the cost driver do not immediately affect fixed costs. E.g. units of production is the cost driver of interest A 10% increase in the units of production would produce a 10% increase in variable costs. However the fixed cost would remain the same. 2 rules of thumb: 1. Think of fixed costs on a total-cost basis. Total fixed costs remain the same regardless of changes in the cost driver. 2. Think of variable costs on a per-unit basis. The per unit variable cost remains the same regardless of changes in the cost driver. As a result, the total variable cost varies proportionately with the level of the cost driver. Relevant range: specifies the limits of cost-driver activity within which a specific relationship between a cost and its cost driver will be valid. Managers usually define the relevant range based on their previous experience operating the organization at different levels of activity. Cost-volume-profit analysis (CVP)= to managers or profit seeking organizations usually study the effects of output volume on revenue (sales) expenses (costs) and net income (net profit), Break-even point = the level of sales at which revenue is equal to expenses and net income is zero. There are two basic methods for computing a break-even point: 1. Contribution margin method Unit sales variable costs per unit = Unit contribution margin / marginal income Unit sales price 1.50 Unit variable costs 1.20 Unit contribution margin 0.30 when do we reach the break even point? When we sell enough units to generate a total contribution margin. Total units sold x unit contribution margin = 18.000 (units sold) x 0.30 = 60.000 units 60.000 is the amount of times the unit have to be sold to break-even 60.000 (units) x 1.50 (per unit) = 90.000

total variable costs : total sales = Variable-cost % total contribution margin : total sales = 100% - variable costs % = Contribution margin % 2. Equation method The equation method is the most general form of analysis, one you can adapt to any conceivable cost-volume-profit situation. Sales variable expenses fixed expenses = net income Unit sales price x Number of units Unit variable cost x Number of units

- Fixed expenses = Net income

Sales variable expenses fixed expenses = 0 (zero) 1.50 N 1.20 N 18.000 = 0 0.30 N = 18.000 N = 18.000 : 0.30 N = 60.000 Relation between the two methods: the contribution margin method is a shortcut version of the equation method.

Chapter 3 Cost driver and cost behaviour Measurement of cost behaviour: understanding and quantifying how activities of an organization affect its costs Understanding relationships between costs and their cost drivers allows manager in all types of organizations (e.g. profit-seeking, non-profit, and government) to do the following: Evaluate strategic plans and operational improvements Make proper short-run pricing decisions Make short-run operating decisions Plan or budget the effect of future activities Design effective management control systems Make proper long-run decisions Design accurate and useful product costing systems Linear-cost behaviour: we can graph it with a straight line because we assume each cost to be either fixed or variable. Many organizations use a linear relationship with a single cost driver to describe each cost, even though many costs have multiple causes. This approach is easier and less expensive than using nonlinear relationships or multiple cost drivers. Cost: is a payment of cash or its equivalent for the purpose of generating revenues. Cost driver: is any activity that causes a change in costs over a given period of time. These activities are also called activity bases or activity drivers. (E.g. of volume driven costs: printing labour (paper, ink, binding to produce the copies) Variable costs: change in direct proportion to changes in the level of activity (i.e., cost driver). Examples of variable costs: Type of Business Cost Manufacturing Restaurant Taxi Hotel Printing company Hospital Direct Materials Payroll Fuel Paper Food cost Cost Driver Number of units produced Number of hours worked Number of miles driven Number of pages printed Number of patients served

Housekeeping costs Number of rooms occupied

Fixed costs: remain constant within a relevant range of time or activity. Examples of fixed costs Type of Business Manufacturing Restaurant Taxi Hotel Printing company Hospital Cost Rent cost Insurance Property tax Advertising costs Property Insurance Cost Driver Number of clients Number of miles driven Number of rooms occupied Number of printed out pages Number of patients Equipment depreciation Number of units produced

Cost behaviour: is the manner in which a cost changes in relation to changes in the related activity. Step-cost and mixed-cost behaviour patterns

Within a relevant range, purely variable costs changes in proportion to changes in its cost drivers activity, while changes in the cost-drover level do not immediately change a fixed-cost. Step-costs: Change abruptly at different intervals of activity because of the resources and their costs are only available in indivisible chunks. If the individual chunks of cost are relatively large and apply to a specific, broad range of activity, we consider the costs a fixed cost over that range of activity. Mixed-costs: contain components of both variable and fixed cost behavior patterns. Mixed costs are sometimes called semivariable or semifixed costs. The following formula can be used: fixed costs + variable costs = mixed costs Examples of mixed costs: Type of Business Manufacturing Hotel Printing company Cost Equipment rental Maid wages Photocopier rental Cost Driver Number of machine hours Number of rooms cleaned Number of pages printed

Management influence on cost behaviour Managers can influence cost behaviour trough decisions about such factors as product or service attributes, capacity, technology, policies to create incentives to control costs Product and service decisions and the value chain Capacity costs: are the fixed costs of being able to achieve a desired level of production or to provide a desired level of service while maintaining product or service attributes, such as quality. (most companies make a capacity decision infrequently) Companies in industries with long-term variations in demand must be careful when making capacity decisions. Companies may not be able to fully recover fixed capacity costs when demand falls during an economic downturn

Costs Q + or Q -

Yes

Yes & No Mixed Costs

No

Variabble costs

fixed costs

committed fixed costs

Committed fixed costs: Long term

discredtionary fixed costs

Usually arise from the possession of facilities, equipment and a basic organizational structure Mortgage or lease payments, interest payments on long-term debt, property taxes, insurance and salaries of key personnel. Discretionary fixed costs: Short term No obvious relationship to levels of capacity or output activity Periodic planning process Advertising, promotion, public relations, research and development, charity donations, employee training program, purchased management consulting service. Technology decisions: choice of technology positions the organization to meet its current goals and to respond to changes in the environment. The use of high-technology methods rather than labour usually means a much greater fixed-cost component to the total costs This type of cost behaviour creates greater risk for companies with wide variations in demand. Cost-control incentives The first step in estimating or prediction costs is cost measurements. Measuring cost behaviour as a function of appropriate cost drivers. The second step is to use these cost measures to estimate future costs at expected levels of cost-driver activity

To describe the relationship between cost and its cost driver(s), managers often use an algebraic equation called cost function. Cost Function Equation (CFE): Y = Total cost F = Fixed cost V = Variable cost per unit X = Cost-driver activity in number of units We can rewrite the mixed-cost function as: Y = F + VX The mixed-cost function has the familiar form of a straight line (it is called a linear-cost function) Developing cost functions Plausibility: The cost function must be plausible or believable. Reliability: in addition to being plausible, a cost functions estimates of costs at actual levels of activity must reliably conform to actually observed costs. If the fit is good and conditions do not change in the future, the cost function should be a reliable predictor of future costs. Activity analysis: a way to identify appropriate cost drivers and their effect on the costs of making a product or providing a service