MGT 115 – WEEK 1  Cost accounting and cost control systems

 Budgeting and forecasting

THE ROLE OF MANAGEMENT ACCOUNTING IN PLANNING  Performance measurement and evaluation
AND ORGANIZING  Investment appraisal and capital budgeting
 Risk management and internal controls
 Strategic planning and analysis

1. AN OVERVIEW OF MANAGEMENT ACCOUNTING 1.2 Relevance to Functions of Management

1.1 Definition, Objectives and Scope Management accounting directly supports the four fundamental
functions of management:
Definition: Management accounting is the process of identifying,
measuring, analyzing, interpreting, and communicating financial Planning:
and non-financial information to managers for the pursuit of an
organization's goals. It involves the preparation and presentation of  Provides historical data for trend analysis
accounting information in such a way as to assist management in  Supports budget preparation and forecasting
the formulation of policies and in the planning and control of the  Facilitates strategic planning through financial modeling
operations of the undertaking.
Organizing:
Key Objectives:
 Establishes cost centers and responsibility centers
 Planning: Providing information for strategic and  Supports organizational structure decisions through cost
operational planning decisions analysis
 Controlling: Monitoring performance against predetermined  Provides framework for resource allocation
standards and budgets
 Decision-Making: Supporting management with relevant Leading:
cost and revenue data
 Performance Evaluation: Measuring and reporting on  Provides performance metrics for team motivation
departmental and individual performance  Supports decision-making with relevant financial information
 Resource Optimization: Ensuring efficient allocation and  Enables effective communication of financial goals
utilization of organizational resources
Controlling:
Scope of Management Accounting:
 Monitors actual performance against budgets and standards
  Identifies variances and deviations from planned  Performance Measurement: Establishing benchmarks for
performance departmental performance
 Provides feedback for corrective action  Organizational Structure: Supporting decisions about
centralization vs. decentralization
 Control Systems: Designing appropriate financial controls
and reporting mechanisms
2. THE ROLE OF MANAGEMENT ACCOUNTING IN PLANNING
AND ORGANIZING 2.1.1 Understanding the Financial Statements

2.1 Relevance of Financial Statements to Planning and Primary Financial Statements:

Organizing
1. Statement of Financial Position (Balance Sheet)
Financial statements serve as the foundation for management
planning and organizing activities. They provide essential  Purpose: Shows the financial position at a specific point in
information about the organization's financial position, performance, time
and cash flows, which are critical for making informed management  Components:
decisions. o Assets: Resources controlled by the entity (Current
and Non-current)
Key Benefits for Planning: o Liabilities: Obligations of the entity (Current and
Long-term)
 Historical Performance Analysis: Understanding past o Equity: Residual interest in the assets after
trends to project future performance deducting liabilities
 Resource Requirements Assessment: Determining  Management Applications:
capital and operational needs o Liquidity analysis for short-term planning
 Goal Setting: Establishing realistic financial targets based o Leverage analysis for capital structure decisions
on historical data o Asset utilization assessment for operational
 Risk Assessment: Identifying potential financial risks and efficiency
opportunities
2. Statement of Comprehensive Income (Income Statement)
Key Benefits for Organizing:
 Purpose: Reports financial performance over a specific
 Resource Allocation: Determining how to best distribute period
financial resources among departments  Components:
o Revenue: Income generated from operations
 o Expenses: Costs incurred in generating revenue Horizontal Analysis:
o Net Income: Bottom-line profitability measure
 Management Applications:  Compares financial data over multiple periods
o Profitability analysis for performance evaluation  Identifies trends and growth patterns
o Cost structure analysis for cost control  Formula: (Current Year - Base Year) / Base Year × 100
o Trend analysis for forecasting future performance
Vertical Analysis:
3. Statement of Cash Flows
 Expresses each item as a percentage of a base amount
 Purpose: Shows cash receipts and payments during a  Facilitates comparison across different sized companies
specific period  Common-size statements for benchmarking
 Components:
o Operating Activities: Cash flows from primary Ratio Analysis:
business operations
o Investing Activities: Cash flows from investment-  Liquidity Ratios: Current ratio, quick ratio, cash ratio
related transactions  Activity Ratios: Inventory turnover, receivables turnover,
o Financing Activities: Cash flows from financing- asset turnover
related transactions  Leverage Ratios: Debt-to-equity, debt ratio, interest
 Management Applications: coverage
o Cash flow planning and management  Profitability Ratios: Gross profit margin, net profit margin,
o Investment decision analysis ROA, ROE
o Financing strategy development
2.2 The Meaning of Cost
4. Statement of Changes in Equity
Cost Definition: Cost represents the monetary value of resources
 Purpose: Shows changes in ownership equity during a consumed or sacrificed to achieve a specific objective. In
specific period management accounting, understanding different cost concepts is
 Management Applications: crucial for effective planning and decision-making.
o Dividend policy decisions
o Capital structure optimization Cost Classifications:
o Shareholder value analysis
1. By Nature:
Key Financial Statement Analysis Techniques:
  Direct Costs: Costs that can be directly traced to a specific Cost behavior analysis is fundamental to management planning and
cost object (e.g., direct materials, direct labor) control. It helps managers predict how costs will change with
 Indirect Costs: Costs that cannot be directly traced to a different levels of activity.
specific cost object (e.g., factory overhead, administrative
expenses) Fixed Costs:

2. By Behavior:  Characteristics: Remain constant in total within relevant

range
 Fixed Costs: Costs that remain constant regardless of  Per Unit Behavior: Decrease as activity increases
activity level within a relevant range  Examples: Rent, insurance, salaries, depreciation
 Variable Costs: Costs that change proportionally with  Management Implications:
activity level o High fixed costs create operating leverage
 Semi-variable (Mixed) Costs: Costs that contain both fixed o Important for break-even analysis
and variable elements o Capacity utilization decisions

3. By Function: Variable Costs:

 Manufacturing Costs: Direct materials, direct labor,  Characteristics: Change proportionally with activity level
manufacturing overhead  Per Unit Behavior: Remain constant per unit
 Non-manufacturing Costs: Selling expenses,  Examples: Direct materials, direct labor, sales commissions
administrative expenses  Management Implications:
o Directly controllable in short term
4. By Decision Relevance: o Important for pricing decisions
o Relevant for make-or-buy decisions
 Relevant Costs: Future costs that differ among alternatives
 Irrelevant Costs: Costs that do not affect the decision Semi-variable Costs:
 Sunk Costs: Historical costs that cannot be changed
 Opportunity Costs: Benefits forgone by choosing one  Characteristics: Contain both fixed and variable elements
alternative over another  Examples: Utility costs, telephone expenses, maintenance
costs
2.2.1 Understanding Cost Behavior  Analysis Methods:
o High-low method
o Scatter plot method
o Regression analysis
Step Costs: Cost Allocation Methods:

 Characteristics: Fixed over small ranges of activity but Direct Allocation:

increase in steps
 Examples: Supervisory costs, equipment rental  Assigns costs directly to cost objects when identifiable
 Management Considerations: Important for capacity  Most accurate method when feasible
planning  Examples: Direct materials, direct labor

2.2.2 Methods of Estimation and Allocation Step-down Allocation:

Cost Estimation Methods:  Allocates service department costs to other service

departments and production departments
1. High-Low Method:  Sequential allocation based on predetermined order
 More accurate than direct method for service departments
 Uses highest and lowest activity levels
 Formula: Variable cost per unit = (High cost - Low cost) / Reciprocal Allocation:
(High activity - Low activity)
 Advantages: Simple and quick  Recognizes mutual services among service departments
 Disadvantages: May not be representative if extreme points  Uses simultaneous equations
are outliers  Most accurate but complex to implement

2. Scatter Plot Method: Activity-Based Allocation:

 Plots cost data against activity levels  Allocates costs based on activities that drive costs
 Visual inspection to draw best-fit line  More accurate for complex operations
 Advantages: Identifies outliers and patterns  Requires detailed analysis of activities and cost drivers
 Disadvantages: Subjective judgment required
2.3 Cost Accumulation and Reporting Systems
3. Regression Analysis:
Cost accumulation systems are designed to collect, classify, and
 Statistical method using least squares report costs for management planning and control purposes.
 Provides correlation coefficient and statistical measures
 Advantages: Most accurate and objective 2.3.1 Job Order Costing
 Disadvantages: Requires statistical knowledge and software
Definition: Job order costing is a costing system used when  Recorded: Debit Work in Process, Credit Manufacturing
production consists of distinct, identifiable units or batches. Each Overhead
job is treated as a separate cost object.
Job Cost Sheet Components:
Characteristics:
 Job identification number
 Each job is unique and identifiable  Customer information
 Costs are accumulated by job number  Direct materials costs
 Used in custom manufacturing, construction, professional  Direct labor costs
services  Applied manufacturing overhead
 Job cost sheet serves as subsidiary ledger  Total job cost
 Cost per unit (if multiple units)
Cost Flow in Job Order Costing:
Advantages:
Direct Materials:
 Accurate cost determination for each job
 Materials requisition forms authorize material usage  Better control over costs
 Costs charged directly to specific jobs  Facilitates pricing decisions
 Recorded: Debit Work in Process, Credit Raw Materials  Useful for performance evaluation

Direct Labor: Disadvantages:

 Time tickets record labor hours by job  Higher administrative costs

 Labor costs traced directly to jobs  Complex record-keeping
 Recorded: Debit Work in Process, Credit Salaries and  Overhead allocation may be arbitrary
Wages Payable
2.3.2 Process Costing
Manufacturing Overhead:
Definition: Process costing is used when identical products are
 Applied using predetermined overhead rate produced through a continuous process. Costs are accumulated by
 Formula: Predetermined Rate = Estimated Overhead / process or department.
Estimated Activity Base
 Applied Overhead = Predetermined Rate × Actual Activity Characteristics:
  Mass production of homogeneous products  Shows equivalent units calculation
 Continuous production flow  Details cost per equivalent unit
 Costs averaged over all units produced  Presents cost assignment
 Used in industries like chemicals, food processing, textiles
Advantages:
Process Costing Steps:
 Lower administrative costs
1. Physical Flow Analysis: Determine units started,  Suitable for continuous processes
completed, and in process  Provides average cost per unit
2. Equivalent Units Calculation: Convert work in process to  Simpler record-keeping
equivalent completed units
3. Cost per Equivalent Unit: Total costs / Total equivalent Disadvantages:
units
4. Cost Assignment: Allocate costs to completed units and  Less precise cost control
ending work in process  Averaging may hide inefficiencies
 Not suitable for custom products
Equivalent Units Concepts:
2.3.3 Activity-Based Costing (ABC)
Weighted Average Method:
Definition: Activity-Based Costing is a costing methodology that
 Combines beginning inventory costs with current period identifies activities in an organization and assigns costs to products
costs based on their consumption of activities.
 Equivalent units = Units completed + (Ending WIP ×
Percentage completion) ABC Principles:

FIFO Method:  Activities consume resources

 Products consume activities
 Separates beginning inventory costs from current period  Costs should be assigned based on cause-and-effect
costs relationships
 More complex but provides better control information  Multiple cost drivers provide better accuracy

Cost of Production Report: ABC Implementation Steps:

 Summarizes physical flow of units Step 1: Identify Activities

  Material handling  Simpler to implement
 Machine setup
 Quality inspection Activity-Based Costing:
 Customer support
 Product design  Uses activity-based allocation
 Multiple cost drivers
Step 2: Determine Activity Cost Pools  More accurate product costs
 More complex and expensive
 Group related activities
 Accumulate costs for each pool Benefits of ABC:
 Identify homogeneous cost drivers
 More accurate product costing
Step 3: Identify Cost Drivers  Better understanding of cost drivers
 Improved cost control
 Unit-level: Direct labor hours, machine hours  Enhanced decision-making
 Batch-level: Number of setups, number of orders  Identification of value-added activities
 Product-level: Number of products, engineering hours
 Facility-level: Square footage, number of employees Limitations of ABC:

Step 4: Calculate Activity Rates  High implementation cost

 Complex to maintain
 Activity Rate = Total Activity Cost / Total Cost Driver Activity  Requires significant time investment
 May not be cost-effective for simple operations
Step 5: Assign Costs to Products
2.4 Responsibility Accounting
 Product Cost = Σ(Activity Rate × Activity Usage)
Definition: Responsibility accounting is a system that measures the
ABC vs. Traditional Costing: results of responsibility centers within an organization and reports
these results to managers who can influence them.
Traditional Costing:
Responsibility Centers Classification:
 Uses volume-based allocation
 Single or limited cost drivers Cost Centers:
 May distort product costs
  Responsible only for controlling costs  Clear authority and responsibility boundaries
 Manager has authority over cost incurrence  Appropriate performance measures
 Performance measured by cost control  Timely and relevant information systems
 Examples: Production departments, service departments  Alignment with organizational goals
 Adequate resources and capabilities
Revenue Centers:
Performance Measurement by Center Type:
 Responsible for generating revenues
 Manager has authority over sales activities Cost Center Metrics:
 Performance measured by revenue generation
 Examples: Sales departments, marketing divisions  Actual vs. budgeted costs
 Cost per unit of output
Profit Centers:  Cost variance analysis
 Efficiency ratios
 Responsible for both revenues and costs
 Manager controls both revenue generation and cost Revenue Center Metrics:
incurrence
 Performance measured by profitability  Actual vs. budgeted revenues
 Examples: Product divisions, geographic regions  Sales growth rates
 Market share analysis
Investment Centers:  Customer satisfaction measures

 Responsible for revenues, costs, and invested capital Profit Center Metrics:
 Manager has authority over asset investment decisions
 Performance measured by return on investment  Net income
 Examples: Autonomous divisions, subsidiaries  Gross margin
 Operating margin
2.4.1 Decision Centers  Contribution margin

Decision centers represent organizational units where specific types Investment Center Metrics:
of decisions are made and where accountability is established.
 Return on Investment (ROI) = Net Income / Average
Characteristics of Effective Decision Centers: Invested Capital
  Residual Income (RI) = Net Income - (Invested Capital ×  Transfer Price = Full Cost (Direct + Indirect)
Required Rate of Return)  Simple but may not motivate efficiency
 Economic Value Added (EVA) = After-tax Operating Income
- (Invested Capital × WACC) Cost Plus:

2.4.2 Transfer Pricing  Transfer Price = Full Cost + Markup

 Provides profit incentive to supplying division
Definition: Transfer pricing is the process of determining the price
for transactions between related organizational units within the Variable Cost:
same company.
 Transfer Price = Variable Cost
Transfer Pricing Objectives:  Optimal for short-term decisions
 May not cover fixed costs
 Goal congruence promotion
 Performance evaluation facilitation Negotiated Transfer Pricing:
 Autonomy preservation
 Optimal resource allocation  Price determined through negotiation between divisions
 Allows for flexibility and local knowledge
Transfer Pricing Methods:  May lead to disputes and dysfunctional behavior

Market-Based Transfer Pricing: Transfer Pricing Guidelines:

 Uses external market prices  Should not undermine divisional autonomy

 Most objective when competitive markets exist  Must provide adequate performance measurement
 Formula: Transfer Price = Market Price  Should promote goal congruence
 Advantages: Objective, promotes efficiency  Must be practical to implement and administer
 Disadvantages: May not always be available
2.5 Cost-Volume-Profit (CVP) Analysis
Cost-Based Transfer Pricing:
Definition: Cost-Volume-Profit analysis examines the relationship
 Based on cost of producing the product/service between costs, volume, and profit to support planning and decision-
 Various cost bases possible making.

Full Cost: CVP Analysis Assumptions:

  Costs can be classified as fixed or variable After-tax Target Profit:
 Fixed costs remain constant within relevant range
 Variable cost per unit remains constant  Before-tax Target Profit = After-tax Target Profit / (1 - Tax
 Selling price per unit remains constant Rate)
 Product mix remains constant (for multiple products)
 Efficiency and productivity remain constant 2.5.2 Contribution Margin, Margin of Safety, and Operating
Leverage
2.5.1 Breakeven Analysis
Contribution Margin:
Breakeven Point Definition: The level of activity where total
revenues equal total costs, resulting in zero profit.  Definition: The amount available to cover fixed costs and
provide profit
Breakeven Formulas:  Per Unit: Selling Price - Variable Cost per Unit
 Total: Total Sales - Total Variable Costs
Units:  Ratio: Contribution Margin / Sales

 Breakeven Units = Fixed Costs / Contribution Margin per Margin of Safety:

Unit
 Where: Contribution Margin per Unit = Selling Price -  Definition: The excess of actual or budgeted sales over
Variable Cost per Unit breakeven sales
 Formula: Margin of Safety = Actual Sales - Breakeven
Sales Dollars: Sales
 Percentage: (Margin of Safety / Actual Sales) × 100
 Breakeven Sales = Fixed Costs / Contribution Margin Ratio  Interpretation: Higher margin indicates lower risk
 Where: Contribution Margin Ratio = Contribution Margin per
Unit / Selling Price per Unit Operating Leverage:

Target Profit Analysis:  Definition: The degree to which fixed costs are used in
operations
 Units for Target Profit = (Fixed Costs + Target Profit) /  Formula: Degree of Operating Leverage = Contribution
Contribution Margin per Unit Margin / Net Income
 Sales for Target Profit = (Fixed Costs + Target Profit) /  Interpretation: Higher leverage means greater profit
Contribution Margin Ratio sensitivity to sales changes
Operating Leverage Applications: o Equals: Net Income

 Predicting profit changes from sales changes Key Differences:

 % Change in Profit = % Change in Sales × Degree of
Operating Leverage Product Cost Components:
 Risk assessment and planning
 Absorption: Direct materials + Direct labor + Variable
2.5.3 Absorption and Variable Costing overhead + Fixed overhead
 Variable: Direct materials + Direct labor + Variable
Absorption Costing (Full Costing): overhead

 Definition: All manufacturing costs (direct materials, direct Income Effects:

labor, variable overhead, fixed overhead) are assigned to
products  When Production = Sales: Both methods yield same net
 Income Statement Format: income
o Sales  When Production > Sales: Absorption costing shows
o Less: Cost of Goods Sold (includes fixed overhead) higher net income
o Equals: Gross Margin  When Production < Sales: Variable costing shows higher
o Less: Selling and Administrative Expenses net income
o Equals: Net Income
Management Applications:
Variable Costing (Direct Costing):
 Variable Costing: Better for internal decision-making, CVP
 Definition: Only variable manufacturing costs are assigned analysis, performance evaluation
to products; fixed manufacturing overhead is treated as a  Absorption Costing: Required for external reporting,
period cost inventory valuation
 Income Statement Format:
o Sales 2.6 Budgeting and the Budget Process
o Less: Variable Cost of Goods Sold
o Equals: Manufacturing Contribution Margin 2.6.1 Definition and Objectives of Budgeting
o Less: Variable Selling and Administrative
o Equals: Contribution Margin Definition: A budget is a formal written statement of management's
o Less: Fixed Manufacturing Overhead plans expressed in financial terms. It represents a quantitative plan
o Less: Fixed Selling and Administrative of action for a specific time period.
Primary Objectives:  Cover 3-10 years
 Focus on strategic initiatives
 Planning: Forces management to look ahead and plan  Less detailed, more conceptual
 Coordination: Integrates activities across departments  Examples: Capital budgets, strategic plans
 Communication: Conveys management's plans throughout
organization Short-term Budgets (Operational):
 Motivation: Provides goals and incentives for performance
 Control: Provides standards for performance evaluation  Cover one year or less
 Performance Evaluation: Enables measurement of actual  Detailed operational focus
vs. planned results  Basis for day-to-day control
 Examples: Annual operating budgets, quarterly budgets
Benefits of Budgeting:
By Flexibility:
 Compels strategic thinking
 Improves resource allocation Static (Fixed) Budgets:
 Enhances coordination among departments
 Provides performance benchmarks  Prepared for single activity level
 Facilitates communication of goals  Costs and revenues don't change with activity
 Helps identify potential problems early  Useful when activity levels are predictable
 Supports continuous improvement efforts  Limited usefulness for control purposes

Limitations of Budgeting: Flexible Budgets:

 Time-consuming to prepare  Prepared for multiple activity levels

 May become too rigid  Costs and revenues adjust with activity changes
 Can create dysfunctional behavior  Better for performance evaluation
 Based on estimates and assumptions  More useful for control purposes
 May emphasize short-term over long-term goals
By Function:
2.6.2 Types of Budget
Operating Budgets:
By Time Period:
 Focus on day-to-day operations
Long-term Budgets (Strategic):  Include sales, production, expense budgets
  Result in budgeted income statement  Expected unit sales by product/service
 Expected selling price per unit
Financial Budgets:  Total expected sales revenue
 Sales by time period (monthly, quarterly)
 Focus on financial position and cash flows  Sales by territory or division (if applicable)
 Include cash budget, capital budget
 Result in budgeted balance sheet and cash flow statement Factors Influencing Sales Budget:

2.6.3 The Components of a Master Budget  Historical sales patterns and trends
 Market research and economic forecasts
Definition: A master budget is a comprehensive financial planning  Competitive analysis
document that includes all individual budgets related to sales, costs,  Pricing strategies
expenses, and financial position.  Marketing and promotional plans
 Capacity constraints
Master Budget Structure:  Seasonal variations

1. Sales Budget (starting point) Sales Budget Format:

2. Production Budget
3. Direct Materials Budget Product A:
4. Direct Labor Budget Expected unit sales: X units
5. Manufacturing Overhead Budget Selling price per unit: $Y
6. Selling and Administrative Budget Total sales revenue: $XY
7. Budgeted Income Statement
8. Cash Budget Product B:
9. Budgeted Balance Sheet Expected unit sales: Z units
Selling price per unit: $W
2.6.3.1 Sales or Revenue Budget Total sales revenue: $ZW

Definition: The sales budget is the cornerstone of the master Total budgeted sales: $XY + $ZW
budget, showing expected sales in units and dollars for the budget
period. Sales Budget Preparation Methods:

Components:  Top-down: Senior management sets sales targets

 Bottom-up: Sales staff provides estimates
 Combination: Blends both approaches
2.6.3.2 Production Budget Definition: The selling and administrative expense budget lists the
operating expenses involved in selling products and managing the
Definition: The production budget shows the number of units that business.
must be produced to meet sales demands and desired inventory
levels. Selling Expenses:

Production Budget Formula:  Sales salaries and commissions

 Advertising and promotion
Units to be produced =  Travel and entertainment
Budgeted unit sales  Shipping and delivery
+ Desired ending inventory  Sales office expenses
- Beginning inventory  Bad debt expense

Key Considerations: Administrative Expenses:

 Sales forecast accuracy  Executive salaries

 Inventory management policies  Office salaries
 Production capacity constraints  Professional services (legal, accounting)
 Seasonal demand patterns  Office supplies and utilities
 Lead times for materials and production  Insurance
 Depreciation on administrative assets
Production Budget Format:
Budget Preparation Approaches:
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Expected unit sales XXX XXX XXX XXX XXX  Incremental: Based on previous year plus adjustments
Add: Desired ending inventory XXX XXX XXX XXX  Zero-based: Justifies all expenses from zero
XXX  Activity-based: Links expenses to activities and drivers
Total needs XXX XXX XXX XXX XXX
Less: Beginning inventory XXX XXX XXX XXX XXX 2.6.3.4 Forecasted Financial Statements
Units to be produced XXX XXX XXX XXX XXX
Budgeted Income Statement:
2.6.3.3 Marketing and Administrative Budget
 Combines all revenue and expense budgets
 Shows expected profitability
  Provides basis for performance evaluation 2. Alexander, F. (2018). Financial Planning & Analysis and
 Format follows standard income statement structure Performance Management. Reading 2: Fundamentals of
Finance. New York: Business Expert Press.
Budgeted Balance Sheet: 3. Sudana, I. P. (2015). Sustainable Development and
Reconceptualization of Financial Statements. Procedia -
 Shows expected financial position at period end Social and Behavioral Sciences, 211, 157-165.
 Includes projected assets, liabilities, and equity https://doi.org/10.1016/j.sbspro.2015.11.023
 Must balance and be consistent with other budgets 4. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018).
 Useful for financial planning and analysis Financial and Managerial Accounting (3rd Edition). Reading
4: Accounting in Action: The Financial Statements.
Budgeted Cash Flow Statement: Hoboken, NJ: John Wiley & Sons.
5. Bench Accounting. (2021, March 15). How To Read and
 Shows expected cash receipts and payments Understand Financial Statements As A Small Business
 Critical for cash management [Video]. YouTube. https://www.youtube.com/watch?
 Identifies potential cash shortages or surpluses v=DLRF-eeFj1g
 Supports financing decisions

Key Relationships:
MGT 115 – WEEK 2
 Sales budget drives most other budgets
 Production budget affects material, labor, and overhead Management Accounting Study Notes
budgets
 All expense budgets feed into income statement
The Role of Management Accounting in Planning and
 Cash collections and payments flow to cash budget
Organizing
 All budgets must be mathematically consistent
Sub-Topic: Relevance of Financial Statements to Planning and
Organizing
REFERENCES

1. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012).

Table of Contents
Financial and Managerial Accounting. Reading 1:
Accounting in Action: Financial Statements (page 22).
Hoboken, NJ: John Wiley & Sons. 1. Introduction to Management Accounting
2. Financial Statements Overview
 3. Role of Financial Statements in Planning 2. Financial Statements Overview
4. Role of Financial Statements in Organizing
5. Types of Financial Statements and Their Applications Financial statements are formal records that communicate the
6. Management Decision-Making Framework financial position, performance, and cash flows of an organization.
7. Sustainable Development and Financial Reporting According to Weygandt, Kimmel, and Kieso (2012, 2018), these
8. Practical Applications for Small Businesses statements form the foundation of accounting information systems.
9. Key Takeaways
10. Study Questions Primary Financial Statements:

A. Balance Sheet (Statement of Financial Position)

1. Introduction to Management Accounting  Purpose: Shows financial position at a specific point in time
 Components: Assets = Liabilities + Stockholders' Equity
Management accounting serves as a critical bridge between  Planning Relevance: Reveals resource availability and
financial data and strategic business decisions. Unlike financial capital structure
accounting, which focuses on external reporting, management  Organizing Relevance: Indicates how resources are
accounting provides internal stakeholders with relevant, timely allocated across business activities
information for planning, organizing, directing, and controlling
organizational activities. B. Income Statement (Statement of Operations)

Key Functions of Management Accounting:  Purpose: Reports revenues and expenses over a period of
time
 Planning: Setting objectives and determining strategies to  Key Metrics: Gross profit, operating income, net income
achieve them  Planning Relevance: Shows profit-generating capability
 Organizing: Structuring resources and activities to and cost structures
implement plans  Organizing Relevance: Reveals efficiency of resource
 Decision-Making: Providing relevant information for utilization
strategic choices
 Performance Evaluation: Measuring actual results against C. Statement of Cash Flows
planned outcomes
 Control: Monitoring and adjusting activities to stay on track  Purpose: Reports cash receipts and payments during a
period
 Categories: Operating, investing, and financing activities
  Planning Relevance: Essential for liquidity planning and B. Financial Forecasting
capital allocation
 Organizing Relevance: Shows how organizational activities  Revenue Projections: Based on historical sales trends and
generate and use cash market analysis
 Expense Planning: Using cost behavior patterns from
D. Statement of Stockholders' Equity income statements
 Cash Flow Forecasting: Critical for liquidity management
 Purpose: Shows changes in ownership equity over time and capital planning
 Planning Relevance: Indicates financing strategies and  Capital Requirements: Determine future financing needs
dividend policies
 Organizing Relevance: Reflects management's C. Budget Development
stewardship of shareholder resources
 Operating Budgets: Use income statement structure for
planning revenues and expenses
 Capital Budgets: Based on asset requirements from
3. Role of Financial Statements in Planning balance sheet analysis
 Cash Budgets: Derived from cash flow statement patterns
Financial statements serve as foundational tools for organizational  Flexible Budgeting: Adjust plans based on different activity
planning by providing historical data, current position analysis, and levels
inputs for future projections.
D. Performance Targets
Strategic Planning Applications:
 Profitability Goals: Set target profit margins and return
A. Trend Analysis ratios
 Efficiency Metrics: Establish productivity and cost control
 Historical Performance: Multi-year comparison reveals objectives
patterns and trends  Growth Targets: Plan expansion based on financial
 Growth Rates: Calculate revenue, profit, and asset growth capacity
trajectories  Risk Management: Identify financial risks and develop
 Seasonal Patterns: Identify cyclical business mitigation strategies
characteristics
 Application: Use historical data to project future
performance scenarios
4. Role of Financial Statements in Organizing {#organizing-  Performance Measurement: Establish metrics aligned with
role} financial objectives
 Reporting Structure: Design information flows for decision-
Financial statements guide organizational structure and resource making
allocation decisions by revealing how efficiently resources are  Authorization Levels: Set spending and decision-making
deployed and managed. authorities

Organizational Applications: D. Coordination Mechanisms

A. Resource Allocation  Interdepartmental Transfer Pricing: Based on cost and

profitability data
 Asset Deployment: Analyze asset utilization and  Shared Services: Organize common functions for efficiency
productivity  Resource Sharing: Optimize utilization across
 Capital Structure: Optimize debt-to-equity ratios organizational units
 Working Capital Management: Organize current assets  Communication Systems: Ensure financial information
and liabilities efficiently flows effectively
 Cost Center Analysis: Evaluate departmental performance
and resource needs

B. Operational Structure 5. Types of Financial Statements and Their Applications

 Activity-Based Organization: Align structure with profitable Traditional Financial Statements

activities
 Centralization vs. Decentralization: Based on cost and Income Statement Applications:
control considerations
 Process Optimization: Identify inefficient operations  Revenue Analysis: Identify primary and secondary revenue
through financial analysis sources
 Outsourcing Decisions: Compare internal costs with  Cost Structure Analysis: Understand fixed vs. variable
external alternatives cost relationships
 Profitability Assessment: Evaluate profit margins at
C. Management Control Systems different levels
 Benchmarking: Compare performance with industry
 Responsibility Centers: Organize units based on standards
controllable factors
Balance Sheet Applications:  Dashboard Reporting: Real-time financial and operational
metrics
 Liquidity Analysis: Current ratio, quick ratio assessments
 Leverage Analysis: Debt ratios and financial risk evaluation
 Asset Efficiency: Turnover ratios and utilization metrics
 Financial Stability: Assess long-term viability and 6. Management Decision-Making Framework
sustainability
Financial statements provide the data foundation for systematic
Cash Flow Statement Applications: management decision-making through established frameworks.

 Operating Cash Flow: Evaluate cash-generating ability Decision-Making Process:

from core operations
 Investment Analysis: Assess capital expenditure patterns Step 1: Problem Identification
and returns
 Financing Decisions: Analyze funding sources and debt  Use financial statement analysis to identify performance
service capability gaps
 Free Cash Flow: Determine available cash for growth and  Compare actual results with planned objectives
distributions  Benchmark against industry standards and competitors
Enhanced Financial Reporting Step 2: Alternative Generation
According to Alexander (2018), modern financial planning and  Develop multiple solutions based on financial constraints
analysis requires enhanced financial reporting that goes beyond and opportunities
traditional statements to include:  Consider resource requirements and financial implications
 Evaluate feasibility based on current financial position
Management Reports:
Step 3: Alternative Evaluation
 Variance Analysis: Compare actual vs. budgeted
performance  Financial Analysis: Calculate expected returns, costs, and
 Segment Reporting: Analyze performance by division, risks
product, or geography  Sensitivity Analysis: Test scenarios under different
 Key Performance Indicators (KPIs): Non-financial metrics assumptions
linked to financial outcomes  Break-even Analysis: Determine minimum performance
requirements
  Risk Assessment: Evaluate potential downside outcomes  Focus: Multi-stakeholder value creation
 Time Horizon: Long-term sustainable performance
Step 4: Implementation Planning  Metrics: Triple bottom line (profit, people, planet)
 Stakeholders: Investors, employees, customers,
 Allocate resources based on financial capacity communities, environment
 Establish timeline considering cash flow implications
 Set monitoring mechanisms using financial metrics Integration in Planning and Organizing:
 Prepare contingency plans for various scenarios
Sustainable Planning:
Step 5: Performance Monitoring
 Environmental Impact Assessment: Include
 Compare actual results with financial projections environmental costs in financial analysis
 Analyze variances and their causes  Social Responsibility: Consider community and employee
 Adjust plans based on new financial information welfare in decision-making
 Document lessons learned for future decisions  Long-term Value Creation: Balance short-term profits with
long-term sustainability
 Stakeholder Engagement: Include broader stakeholder
perspectives in planning
7. Sustainable Development and Financial Reporting
Sustainable Organizing:
According to Sudana (2015), sustainable development requires
reconceptualizing financial statements to include broader  ESG Integration: Organize activities around Environmental,
stakeholder impacts and long-term value creation. Social, and Governance principles
 Circular Economy: Structure operations for resource
Traditional vs. Sustainable Financial Reporting: efficiency and waste reduction
 Stakeholder Governance: Include diverse perspectives in
organizational structure
Traditional Approach:
 Impact Measurement: Organize systems to measure and
report broader impacts
 Focus: Shareholder value maximization
 Time Horizon: Short to medium-term financial performance
Implementation Considerations:
 Metrics: Financial returns, profit margins, asset efficiency
 Stakeholders: Primarily investors and creditors
 Integrated Reporting: Combine financial and non-financial
information
Sustainable Approach:
  Sustainability Accounting: Develop metrics for C. Growth Planning
environmental and social performance
 Stakeholder Communication: Organize reporting for  Revenue Forecasting: Project growth based on historical
different stakeholder needs trends
 Performance Management: Include sustainability metrics  Capacity Planning: Assess resource needs for expansion
in management evaluation  Financing Requirements: Determine funding needs for
growth
 Risk Management: Identify and prepare for potential
challenges
8. Practical Applications for Small Businesses
D. Performance Monitoring
Based on Bench Accounting (2021) guidance, small businesses
can leverage financial statements effectively despite resource  Key Metrics: Focus on most important financial indicators
constraints.  Trend Analysis: Monitor changes in financial performance
 Benchmarking: Compare with industry standards
Key Areas for Small Business Focus:  Variance Analysis: Understand differences between
planned and actual results
A. Cash Flow Management
Small Business Financial Statement Best Practices:
 Daily Cash Monitoring: Track cash position regularly
 Accounts Receivable: Monitor collection periods and aging Monthly Financial Reviews:
 Accounts Payable: Optimize payment timing for cash flow
 Seasonal Planning: Prepare for cash flow fluctuations  Prepare monthly income statements and balance sheets
 Analyze cash flow patterns and projections
B. Profitability Analysis  Review key performance indicators
 Compare actual vs. budgeted performance
 Gross Margin Tracking: Monitor product/service
profitability Annual Strategic Planning:
 Cost Control: Identify and manage major expense
categories  Use year-end statements for strategic assessment
 Pricing Decisions: Use cost data to set appropriate prices  Develop annual budgets and forecasts
 Break-even Analysis: Understand minimum performance  Set performance targets and goals
requirements  Plan major investments and initiatives
Technology Integration:  Regular Analysis: Consistent review and analysis of
financial statements
 Use accounting software for automated reporting  Integration: Connect financial data with operational
 Implement dashboard reporting for real-time monitoring decisions
 Integrate financial and operational data  Stakeholder Focus: Consider diverse stakeholder needs in
 Ensure data accuracy and consistency financial planning
 Technology Utilization: Leverage tools for efficient
financial analysis
 Continuous Improvement: Regularly update and enhance
9. Key Takeaways financial management practices

Critical Concepts:

1. Financial Statements as Management Tools: Beyond 10. Study Questions

compliance, financial statements serve as essential
management tools for planning and organizing business Study Questions Answers
activities.
2. Planning Integration: Financial statements provide Management Accounting and Financial Statements in Planning
historical context, current position analysis, and foundational and Organizing
data for forecasting and budgeting.
3. Organizational Design: Financial analysis guides resource
allocation, structural decisions, and performance
management systems. Conceptual Questions
4. Decision-Making Framework: Systematic use of financial
information improves decision quality and organizational 1. Explain how each primary financial statement contributes to
performance. organizational planning and organizing functions.
5. Sustainability Integration: Modern organizations must
consider broader stakeholder impacts in financial planning
The Balance Sheet provides the foundation for resource planning
and reporting.
by showing available assets, capital structure, and liquidity position,
6. Small Business Applications: Even resource-constrained
enabling managers to plan capital investments and organize asset
organizations can effectively use financial statements for
allocation across business units. The Income Statement reveals
improved management.
revenue patterns, cost structures, and profitability trends essential
for forecasting future performance, budgeting operations, and
Success Factors: organizing activities around profit centers. The Cash Flow
Statement is critical for liquidity planning and organizing financing footprints, employee welfare costs, and community impact
activities, as it shows the company's ability to generate cash from investments that may not appear in conventional statements but
operations, invest in growth, and service debt obligations. The affect long-term organizational viability. Sustainable analysis also
Statement of Stockholders' Equity supports long-term financial extends the time horizon for financial evaluation, emphasizing long-
planning by indicating the company's financing strategies and term value creation over short-term gains, and requires organizing
dividend policies, helping organize ownership structure and capital reporting systems to capture and communicate broader stakeholder
relationships with stakeholders. impacts alongside financial performance.

2. Compare and contrast the role of financial statements in 4. Analyze the relationship between financial statement
strategic planning versus operational planning. information and management decision-making quality.

Strategic planning uses financial statements to analyze long-term High-quality financial statement information directly enhances
trends, assess competitive position, and make major resource management decision-making by providing accurate, timely, and
allocation decisions such as market expansion, acquisitions, or relevant data that reduces uncertainty and enables evidence-
capital structure optimization, focusing on multi-year patterns and based choices rather than intuitive decisions. The completeness
industry benchmarking. Operational planning, in contrast, utilizes and reliability of financial information determine the quality of trend
financial statements for short-term decision-making, including analysis, forecasting accuracy, and risk assessment capabilities,
monthly and quarterly budgeting, cost control, working capital which are fundamental to effective planning and organizing
management, and immediate performance monitoring against functions. However, the relationship is bidirectional—management's
targets. While strategic planning emphasizes ratio analysis, trend ability to interpret and contextualize financial data with market
identification, and scenario modeling from financial statements, intelligence, operational knowledge, and strategic vision ultimately
operational planning focuses on variance analysis, cash flow determines whether sound financial information translates into
management, and detailed expense control to achieve immediate superior organizational outcomes.
organizational objectives.

3. Discuss how sustainable development principles change the

traditional approach to financial statement analysis. Application Questions

Sustainable development principles expand financial statement 1. Using a hypothetical company's financial statements,
analysis beyond traditional profit maximization to include triple develop a comprehensive planning framework including
bottom line considerations (profit, people, planet), requiring forecasting, budgeting, and goal setting.
managers to evaluate environmental costs, social impacts, and
long-term stakeholder value in their planning processes. This For "TechGrow Solutions," a software company showing $5M
approach necessitates integrating non-financial metrics with revenue, 15% net margin, and 25% annual growth, the planning
traditional financial data, considering externalities like carbon
framework would begin with forecasting using trend analysis to The dashboard would feature real-time financial health indicators
project 20% revenue growth ($6M target), maintaining current including current ratio and days cash on hand for immediate
margins while scaling operations. Budgeting would allocate liquidity planning, gross profit margin and monthly recurring revenue
resources based on historical cost structures—60% for trends for operational organizing, and accounts receivable aging
development, 25% for sales/marketing, 15% for operations—while and inventory turnover for working capital management. Planning
planning for increased headcount and infrastructure investments metrics would include rolling 12-month revenue forecasts, budget
shown in prior cash flow patterns. Goal setting would establish variance analysis, and cash flow projections, while organizing
specific targets including achieving $6M revenue, maintaining 15% metrics would cover cost per employee by department, revenue per
net margins, improving cash conversion cycle from 45 to 35 days customer segment, and operational efficiency ratios. The
based on working capital analysis, and reducing customer dashboard would integrate these financial metrics with operational
acquisition costs by 10% through operational efficiency KPIs like customer acquisition costs and employee productivity to
improvements identified in the expense analysis. provide a comprehensive view supporting both strategic planning
decisions and day-to-day organizational management.
2. Design an organizational structure for a growing company
based on financial statement analysis and performance 4. Develop a sustainable financial reporting framework that
requirements. integrates traditional financial metrics with ESG
considerations.
Based on financial analysis showing 40% of costs in R&D, 30% in
sales/marketing, and strong gross margins but declining operational The framework would establish integrated performance
efficiency, the organizational structure would feature decentralized measurement combining traditional financial statements with
profit centers for each product line to improve accountability and sustainability metrics such as carbon intensity per dollar of revenue,
cost control. The structure would include a centralized finance and employee satisfaction scores linked to productivity and retention
operations function to manage shared services efficiently, regional costs, and community investment as a percentage of net income.
sales divisions organized around the highest-performing Reporting would include a sustainability-adjusted income statement
geographical segments identified in revenue analysis, and a matrix showing environmental externalities as cost line items, and a
structure for R&D to balance innovation with cost management. stakeholder value statement quantifying benefits delivered to
Performance management would be organized around financial employees, customers, communities, and environment alongside
metrics derived from statement analysis, with each division shareholder returns. The planning process would incorporate ESG
responsible for specific revenue, margin, and cash flow targets that risk assessments into financial forecasting, while organizing
aggregate to company-wide financial objectives. functions would be structured around sustainability performance
centers with dual accountability for financial results and ESG
3. Create a dashboard of key financial metrics that would outcomes, ensuring sustainable development principles are
support both planning and organizing functions for a small embedded in management decision-making processes.
business.
Critical Thinking Questions advisors who interpret sophisticated analyses, design performance
measurement systems, and provide insights for organizational
1. Evaluate the limitations of using historical financial design and resource allocation decisions in increasingly complex
statement data for future planning and suggest methods to and fast-paced business environments.
address these limitations.

Historical financial statements have inherent limitations including

backward-looking perspective, inability to capture market References
disruptions, exclusion of intangible assets like brand value or
intellectual property, and potential obsolescence due to changing  Alexander, D. (2018). Fundamentals of Finance in Financial
business models or economic conditions. These limitations can be Planning & Analysis and Performance Management.
addressed through supplementing historical analysis with forward-  Bench Accounting. (2021). How To Read and Understand
looking indicators such as market research data, competitive Financial Statements As A Small Business [Video].
intelligence, and scenario planning models that stress-test financial YouTube. https://www.youtube.com/watch?v=DLRF-eeFj1g
projections under various assumptions. Additionally, incorporating  Sudana, I. M. (2015). Sustainable Development and
leading indicators like customer satisfaction scores, employee Reconceptualization of Financial Statements. Procedia -
engagement metrics, and innovation pipeline strength can provide Social and Behavioral Sciences, 211, 157-162.
early warning signals for future performance changes not visible in https://doi.org/10.1016/j.sbspro.2015.11.023
historical financial data alone.  Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012).
Financial and Managerial Accounting. John Wiley & Sons.
2. Assess how technological advances in financial reporting  Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018).
and analysis are changing the role of management accounting Financial and Managerial Accounting (3rd ed.). John Wiley
in planning and organizing. & Sons.

Technological advances are transforming management accounting

from a periodic reporting function to a continuous, real-time
decision support system through automated data collection, artificial
intelligence-driven analysis, and predictive modeling capabilities MGT 121 - WEEK2
that enable more accurate forecasting and dynamic planning
adjustments. Advanced analytics and machine learning algorithms 📚 Study Notes on HR Trends
can identify patterns and correlations in financial data that human
analyst might miss, while cloud-based systems enable real-time I. Introduction to HR Trends
collaboration and instant access to financial information across
organizational levels. This technological evolution is shifting
management accountants from data processors to strategic
  Definition of HR Trends: Emerging patterns, practices, and 2. Technology and HR Digitalization
approaches in Human Resource Management (HRM)
shaped by changes in technology, workforce demographics,  HR Information Systems (HRIS): Automates recruitment,
globalization, and organizational needs. payroll, performance management.
 Importance: Helps HR remain relevant, innovative, and  Artificial Intelligence (AI) & Automation: Used for
aligned with organizational goals. screening resumes, chatbots for employee queries.
 Key Source References:  E-HRM (Electronic HRM): Online platforms for training,
o Dessler (2013) – emphasized globalization, onboarding, and remote work management.
technology, diversity.  Key Terms:
o Mathis & Jackson (2011) – focus on strategic HR o HR Analytics – data-driven decision-making.
and talent management. o Cloud HR – flexible, online HR services.
o Noe et al. (2017) – HR as a competitive advantage.  Impact: Increases efficiency but requires digital skills among
o Martires (1991) – principles and practices relevant to HR professionals.
Philippine HRM.

3. Strategic Human Resource Management (SHRM)

II. Major HR Trends
 Definition: Aligning HR practices with organizational goals
1. Globalization and Workforce Diversity to gain competitive advantage.
 Key Practices: Workforce planning, succession planning,
 Globalization: Increased mobility of talent and cross-border competency mapping.
operations.  Reference (Noe et al., 2017): HR as a driver of sustainable
 Workforce Diversity: Managing employees across different competitive advantage.
cultures, ages, genders, and backgrounds.  Impact: HR is no longer just administrative but a strategic
 Key Concepts: partner.
o Cultural Intelligence – ability to adapt to diverse
environments.
o Inclusive Workplaces – promoting equality and
respect. 4. Talent Management and Retention
 Impact: Requires HR to design diversity training, fair
policies, and global staffing strategies.  Definition: Attracting, developing, and retaining top talent.
 Key Elements:
o Employer branding.
 o Employee engagement programs.  Modern Focus: Mental health, stress management, work-
o Career development and succession planning. life integration.
 Reference (Mathis & Jackson, 2011): Importance of  Key Term: Well-being programs – counseling, fitness,
maintaining skilled workforce in competitive markets. wellness benefits.

5. Changing Demographics and Generational Shifts 8. Ethics, Corporate Social Responsibility (CSR), and
Sustainability
 Aging Workforce: More retirement planning, healthcare
benefits.  Ethical HR: Fair hiring, equal opportunity, transparent
 Millennials & Gen Z: Expect flexibility, technology practices.
integration, and purpose-driven work.  CSR in HR: Encouraging volunteerism, green workplace
 Impact: HR must adapt policies for multi-generational initiatives.
workforce.  Sustainability: HR supporting long-term ecological and
social responsibility.

6. Workplace Flexibility and Remote Work

9. Continuous Learning and Development (L&D)
 Flexible Work Arrangements (FWA): Remote work, hybrid
models, flexible schedules.  Shift from Training to Learning Culture: Ongoing
 Impact of COVID-19: Accelerated digital transformation and reskilling and upskilling.
remote work policies.  Key Concepts:
 Key Term: Work-Life Balance. o E-learning and MOOCs (Massive Open Online
 Reference (Dessler, 2013): Flexible HR policies as a Courses).
motivator. o Microlearning.
o Leadership development.
 Reference (Martires, 1991): HR as educator of workforce
competencies.
7. Employee Health, Safety, and Well-being

 Traditional Focus: Physical safety and compliance.

10. Leadership and People-Centered Management
  Video Reference: “A leader must be a people person” V. Summary of Key Terms
o Leaders must build relationships, empathy, and
communication.  Globalization – worldwide integration of markets and labor.
o HR supports leadership development through  Workforce Diversity – differences in culture, gender, age,
training, mentoring, and coaching. background.
 Key Term: Servant Leadership – focusing on employees’  HRIS – Human Resource Information System.
needs first.  E-HRM – electronic HR management.
 Impact: Improves trust, morale, and engagement.  HR Analytics – data-driven HR practices.
 Strategic HRM (SHRM) – HR aligned with organizational
goals.
 Talent Management – attracting, developing, retaining
III. Challenges Facing HR in Today’s Trends employees.
 Work-Life Balance – managing professional and personal
 Balancing automation with human touch. life.
 Managing workforce diversity and inclusion.  CSR (Corporate Social Responsibility) – ethical and
 Navigating ethical dilemmas and legal compliance. social contributions of businesses.
 Retaining top talent in competitive markets.  Servant Leadership – leadership focused on serving
 Preparing workforce for future jobs (reskilling, adaptability). employees.

IV. Key Takeaways

 HR has shifted from administrative role → strategic

partner.
 Technology, globalization, and workforce diversity are
the biggest drivers of HR change.
 HR trends emphasize employee well-being, flexibility,
and continuous development.
 Leaders and HR managers must be people-oriented to
succeed.