BA 117 - LE1 REVIEWER
 Handouts
Elements of a Control System:
1. Clear target – you know where you are going
2. Measuring device – you know that you are going
where you want to go
3. Information system – you know when you are
veering away
4. Trigger for intervention or corrective action – when
you veer away, mechanisms are triggered that enable
you to correct your course
Why Organizations Need a Control System?
1. Execution relies on individuals
2. Existence of principal-agent relationships - where
interests are expected to diverge, and where agents
have more information than their principals and may
not become fully transparent
Management Accounting vs. Financial Accounting
MCS, Strategy, and Performance
Strategy vs. Strategic Plan
Strategy: “where to play”, “how to win”; what markets
to enter or business to play
Strategic plan: “what to do”
Strategy and MCS
Cost Terms
Cost: a resource sacrificed or foregone to achieve a
specific objective; the monetary amount that must be
paid to acquire goods or services
Cost objects: anything for which a measurement of
costs is desired
Cost accumulation: collection of cost data in some
organized way by means of an accounting system; the
way by which costs are measured and recorded
i. Classification of cost based on cost assignment (factor
is technology)
Cost assignment: umbrella term for cost tracing and
cost allocation
Direct Cost: related to a particular cost object and can
be traced to in an economically feasible way
Cost tracing: assignment of direct costs to a particular
cost object
Indirect Cost: related to a particular cost object and
cannot be traced to in an economically feasible way
Cost allocation: assignment of indirect costs to a
particular cost object
ii. Classification of cost based on cost behavior
Cost drivers: variable, such as the level of activity or
volume, that causally affects costs over a given time
span
Relevant range: the band of normal activity level or
volume in which there is a specific relationship between
the level of activity or volume and the cost in question
Fixed Cost: remains unchanged in total for a given time
period despite changes in the related level of total
activity or volume
Variable Cost: changes in total in proportion to changes
in the related level of total activity or volume
Mixed Cost: combination of fixed cost and variable cost
Prime Cost: direct materials and direct labor
Conversion Cost: direct labor and overhead measurement analysis
Engineered Cost: input-output relationship; the right or
proper amount of costs that should be incurred can be
estimated with a reasonable degree of reliability
Discretionary Cost: no input-output relationship; cost
that may be eliminated; the amount of costs incurred Non-Value Adding Activities
depends on management’s judgment about the amount
that is appropriate under the circumstances
Committed cost: not easily changed or reversed such as
lease
Product (inventoriable) Cost: capitalized when incurred
and expensed when sold
Period Cost: expensed right away when incurred

Activity Based Costing

The Push for ABC

1. Significant level of indirect costs
2. Multi-product/multi-service entities
3. Distorted product/service costs using volume as cost
allocation basis for indirect costs

Hierarchy of Costs

Relevant Cost Analysis

Relevant costs (and revenues): possess two
characteristics – (1) they are future items, and (2) they
differ across alternatives
-All pending decision relate to the future. Only future
costs and future revenues can be relevant to decisions.
Opportunity cost: the benefit sacrificed or foregone
when one alternative is chosen over another. It is
relevant because it is both a future cost, and one that
ABC Approach differs across alternatives. It is NEVER an accounting
1. Determine type cost cost, because accountants do not record the cost of
2. Identify activity that causes the cost to change (e.g., what might happen in the future (i.e., they do not
setup for a batch-type of cost) appear in the FSs)
3. Identify the activity driver and calculate activity rates

ABC Applications
1. Product profitability
2. Customer profitability – “Whale Curve of Customer
Profitability”
3. Supplier costing

Process Improvements with

Process-Value Analysis Model: concerned with driver
analysis, activity analysis, and performance
Example 1. Make or Buy

*Increase in 18,000 as long as other sales are not

affected

Example 3. Dropping a Product Line

DM, DL, VOH, 4.75 – relevant

FOH – irrelevant
Make = 38,000 (*82,000) vs. Buy = 47,500 (*91,500)
NOTE: Decision not yet final. Consider both quantitative
and qualitative factors.

No. If Gamma goes out, income will decrease by 12,000

DM, DL, VOH, 4.75, 10,000 FOH – relevant
34,000 FOH – irrelevant
Make = 48,000 (*82,000) vs. Buy = 47,500 (*81,500)
Example 2. Special Order
Management Accounting Tool Kit
1. Understanding Cost Terms and Behavior
2. ABC Costing
3. CVP Analysis
4. Relevant Cost Analysis
NOTE: Variable costs are not always relevant (may not
differ across alternatives). Fixed costs are not always
irrelevant (may differ across alternatives, and can be
changed in the short run). Not all sunk costs are
irrelevant as it can be an opportunity cost which is
relevant.
More Tools in the Management Accounting Toolkit
 Lecture Notes
01/15/19 (Tuesday)
-when determining the cost of a thing, the cause or
reason for its determination (i.e., purpose or usage) is
the primary consideration
-purpose of Management Accounting is Management
Cost and Control
manager: hired, acting on behalf of the owners or agent
of owners to run the business, looks at the work of
other people, does resource allocation decisions
within control: within the track, going as expected vs.
out of control: deviating
01/22/19 (Tuesday)
-manager is an internal user (higher degree of
information), an ordinary employee is an external user
(less degree of information)
Management Accounting: branch of accounting that
generates information for internal users
Purpose of Management Accounting – for making
business decisions on planning and control
Management Accounting: providing information for
management decision-making (e.g., resource allocation
decisions)
Management Control: making sure that you are moving
towards a target by influencing behavior, providing and
reporting correct information across the organization,
and receiving feedback
Benefits of Debt over Equity
1. No change in ownership
2. Cheaper (but not in all cases) because of tax shield
-cost of debt is interest; cost of equity is not clear (NOT
dividends)
-higher risk = higher return no reservations
-equity is risky being the last on the line = higher return;
so cost of equity > cost of debt
Disadvantages of Debt over Equity
1. Fixed cost (if high, may affect companies with volatile
revenues and cash flow problems) = risky even if
cheaper
Bankruptcy: not enough assets to cover liabilities;
negative equity
01/24/19 (Thursday)
controller: top reporting position in the company;
includes both financial and managerial accounting and
reporting
-cost object is decided upon based on the accounting
system or management discretion
Higher Fixed cost = Higher Leverage
-Higher fixed cost in the operating structure results in
higher risks (as seen in HIGHER break-even point) but
also helps in increasing profit AS LONG AS the level of
revenue is already above the level of expenses
*Financial leverage refers to debt
*Operating and financial leverage have the same set of
benefits and risks
Contribution Margin = Selling Price per unit – Variable
Cost per unit (e.g., manufacturing, marketing;
contributes in increasing profit ad recovery of fixed
costs
cost but not an accounting cost
NOTE: FOH is irrelevant. Always consider both
qualitative and quantitative factors.
02/12/19 (Tuesday)
-The problem of absorption costing is that it combines
variable and fixed cost. Variable costs are interpreted as
if it is changing for every unit of production, while fixed
costs are deemed to not change in total
-The one responsible for the Management Control
System is the Controller or the Chief Management
Accountant

NOTE: Always qualify your answer (Examples: unless

expecting sales growth and equipment can produce
more or is currently under-utilized, as long as you
maintain expectations or level of sales demand, if there
is uncertainty, do not incur FC)

01/29/19 (Tuesday)
Margin of Safety: buffer before hitting the break-even
point

01/31/19 (Thursday)

Overhead – pool of indirect costs with different drivers

or allocation bases

The Push for ABC

1. Significant level of indirect costs
2. Multi-product/Multi-service entities
3. Distorted product or service costs using volume as
cost allocation basis for indirect costs
Hierarchy of Costs
1. Unit-level costs
2. Batch-level costs
3. Product-sustaining costs
4. Facility-sustaining costs

Relevant Costs (and Revenues)

1. They are future items
2. They differ across alternatives
-all pending decisions relate to the future
-only future costs and future revenues can be relevant
to decisions
Opportunity Cost: the benefit sacrificed or foregone
when the alternative is chosen over another; a relevant