ADM Summary
Table of Contents
CHAPTER 1: THE MANAGER AND MANAGEMENT ACCOUNTING .........................................................................2
CHAPTER 2: COST TERMS....................................................................................................................................4
CHAPTER 3: COST-VOLUME-PROFIT ANALYSIS....................................................................................................6
CHAPTER 4: JOB COSTING...................................................................................................................................8
CHAPTER 5: ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT.................................................10
CHAPTER 6: MASTER BUDGET AND RESPONSIBILITY ACCOUNTING ..................................................................12
CHAPTER 7: FLEXIBLE BUDGETS, DIRECT-COST VARIANCES AND MANAGEMENT CONTROL ..............................14
CHAPTER 8: FLEXIBLE BUDGETS, OVERHEAD COST VARIANCE, AND MANAGEMENT CONTR .............................19
CHAPTER 10(9): DETERMINING HOW COSTS BEHAVE.......................................................................................21
CHAPTER 11(10): DECISION MAKING AND RELEVANT INFO...............................................................................22
CHAPTER 13(11): PRICING DECISIONS AND COST MANAGEMENT.....................................................................25
CHAPTER 14(12): COST ALLOCATION.................................................................................................................28
CHAPTER 15(13): ALLOCATION OF SUPPORT DEPARTMEN COST, DIRECT AND SEPT-DOWN .............................32
1
,CHAPTER 1: THE MANAGER AND MANAGEMENT ACCOUNTING
Management accounting is the process of measuring, analyzing, and reporting financial and nonfinancial information that
helps managers make decisions to fulfill the goals of an organization. Managers use management accounting information
to:
1. develop, communicate, and implement strategies,
2. coordinate product design, production, and marketing decisions and evaluate a company’s performance.
Cost accounting is the process of measuring, analyzing, and reporting financial and nonfinancial information related to the
costs of acquiring or using resources in an organization. For example, calculating the cost of a product.
cost management describes the activities managers undertake to use resources in a way that increases a product’s value to
customers and achieves an organization’s goals
Major differences between management and
financial accounting
Value-chain Analysis
1. Research and development (R&D)—generating and experimenting with ideas related to new products, services, or
processes. At Sony, this function includes research on alternative television signal transmission and on the picture quality of
different shapes and thicknesses of television screens.
2. Design of products and processes—detailed planning, engineering, and testing of products and processes. Design at Sony
includes deciding on the component parts in a television set and determining the effect alternative product designs will
have on the set’s quality and manufacturing costs. Some representations of the value chain collectively refer
2
,3. Production—procuring, transporting, and storing (“inbound logistics”) and coordinating and assembling (“operations”)
resources to produce a product or deliver a service. The production of a Sony television set includes the procurement and
assembly of the electronic parts, the screen and the packaging used for shipping.
4. Marketing (including sales)—promoting and selling products or services to customers or prospective customers. Sony
markets its televisions at tradeshows, via advertisements in newspapers and magazines, on the Internet, and through its
sales force.
5. Distribution—processing orders and shipping products or services to customers (“out- bound logistics”). Distribution for
Sony includes shipping to retail outlets, catalog vendors, direct sales via the Internet, and other channels through which
customers purchase new televisions.
6. Customer service—providing after-sales service to customers. Sony provides customer service on its televisions in the
form of customer-help telephone lines, support on the Internet, and warranty repair work.
Budget is the quantitative expression of a proposed plan of action by management and is an aid to coordinating what needs
to be done to execute that plan. (most important planning tool)
Control comprises of taking actions that implement the planning decisions, evaluating past performance, and providing
feedback and learning to help future decision making.
Three management accounting guidelines that help provide the most value to the strategic and operational decision making
of their companies:
1. The Cost-benefit approach compares the benefits of an action/purchase to the costs. Generally, of course, the benefits
should exceed the costs.
2. Behavioral and technical considerations recognize, among other things, that management is primarily a human activity
that should focus on encouraging individuals to do their jobs better.
3. Managers use alternative ways to compare costs in different decision-making situations because there are different costs
for different purposes.
3
, CHAPTER 2: COST TERMS
Actual cost – a cost that has occurred
Budgeted cost – a predicted cost
Cost objects - anything for which a cost measurement is desired
Cost Accumulation/Recording – the collection of cost data in an organized way by means of recording an accounting
system
Cost Assignment – a general term that encompasses the gathering of accumulated costs to a cost object in two ways:
– Tracing costs with a direct relationship to the cost object
– Allocating indirect costs to a cost object
Managers want to assign costs accurately to cost objects because inaccurate product costs will mislead managers about the
profitability of different products.
The term cost tracing is used to describe the assignment of direct costs to a particular cost object.
The term cost allocation is used to describe the assignment of indirect costs to a particular cost object.
Direct costs of a cost object are related to the particular cost object and can be traced to it in an economically feasible
(cost-effective) way.
Indirect costs of a cost object are related to the particular cost object, but cannot be traced to it in an economically feasible
(cost-effective) way.
NOTE: a specific cost may be both a direct cost of one cost object and an indirect cost of another cost object. The
direct/indirect classification depends on the choice of the cost object.
A variable cost changes in total in proportion to changes in the
related level of total activity or volume of output produced.
A fixed cost remains unchanged in total for a given time period,
despite wide changes in the related level of total activity or volume
of output produced.
Cost driver = a variable, such as the level of activity or volume, that
causally affects costs of a certain area in a certain time.
activity an event, task, or unit of work with a specified
purpose—for example, designing products, setting up
machines, or testing products.
Relevant range is the band or range 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 costs are considered fixed only within the relevant
range.
Inventorial costs = all costs of a product that are considered assets in a company’s balance sheet when the costs are
incurred and that are expensed as cost of goods sold only when the product is sold. For manufacturing-sector companies,
all manufacturing costs are inventoriable costs.
4
Table of Contents
CHAPTER 1: THE MANAGER AND MANAGEMENT ACCOUNTING .........................................................................2
CHAPTER 2: COST TERMS....................................................................................................................................4
CHAPTER 3: COST-VOLUME-PROFIT ANALYSIS....................................................................................................6
CHAPTER 4: JOB COSTING...................................................................................................................................8
CHAPTER 5: ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT.................................................10
CHAPTER 6: MASTER BUDGET AND RESPONSIBILITY ACCOUNTING ..................................................................12
CHAPTER 7: FLEXIBLE BUDGETS, DIRECT-COST VARIANCES AND MANAGEMENT CONTROL ..............................14
CHAPTER 8: FLEXIBLE BUDGETS, OVERHEAD COST VARIANCE, AND MANAGEMENT CONTR .............................19
CHAPTER 10(9): DETERMINING HOW COSTS BEHAVE.......................................................................................21
CHAPTER 11(10): DECISION MAKING AND RELEVANT INFO...............................................................................22
CHAPTER 13(11): PRICING DECISIONS AND COST MANAGEMENT.....................................................................25
CHAPTER 14(12): COST ALLOCATION.................................................................................................................28
CHAPTER 15(13): ALLOCATION OF SUPPORT DEPARTMEN COST, DIRECT AND SEPT-DOWN .............................32
1
,CHAPTER 1: THE MANAGER AND MANAGEMENT ACCOUNTING
Management accounting is the process of measuring, analyzing, and reporting financial and nonfinancial information that
helps managers make decisions to fulfill the goals of an organization. Managers use management accounting information
to:
1. develop, communicate, and implement strategies,
2. coordinate product design, production, and marketing decisions and evaluate a company’s performance.
Cost accounting is the process of measuring, analyzing, and reporting financial and nonfinancial information related to the
costs of acquiring or using resources in an organization. For example, calculating the cost of a product.
cost management describes the activities managers undertake to use resources in a way that increases a product’s value to
customers and achieves an organization’s goals
Major differences between management and
financial accounting
Value-chain Analysis
1. Research and development (R&D)—generating and experimenting with ideas related to new products, services, or
processes. At Sony, this function includes research on alternative television signal transmission and on the picture quality of
different shapes and thicknesses of television screens.
2. Design of products and processes—detailed planning, engineering, and testing of products and processes. Design at Sony
includes deciding on the component parts in a television set and determining the effect alternative product designs will
have on the set’s quality and manufacturing costs. Some representations of the value chain collectively refer
2
,3. Production—procuring, transporting, and storing (“inbound logistics”) and coordinating and assembling (“operations”)
resources to produce a product or deliver a service. The production of a Sony television set includes the procurement and
assembly of the electronic parts, the screen and the packaging used for shipping.
4. Marketing (including sales)—promoting and selling products or services to customers or prospective customers. Sony
markets its televisions at tradeshows, via advertisements in newspapers and magazines, on the Internet, and through its
sales force.
5. Distribution—processing orders and shipping products or services to customers (“out- bound logistics”). Distribution for
Sony includes shipping to retail outlets, catalog vendors, direct sales via the Internet, and other channels through which
customers purchase new televisions.
6. Customer service—providing after-sales service to customers. Sony provides customer service on its televisions in the
form of customer-help telephone lines, support on the Internet, and warranty repair work.
Budget is the quantitative expression of a proposed plan of action by management and is an aid to coordinating what needs
to be done to execute that plan. (most important planning tool)
Control comprises of taking actions that implement the planning decisions, evaluating past performance, and providing
feedback and learning to help future decision making.
Three management accounting guidelines that help provide the most value to the strategic and operational decision making
of their companies:
1. The Cost-benefit approach compares the benefits of an action/purchase to the costs. Generally, of course, the benefits
should exceed the costs.
2. Behavioral and technical considerations recognize, among other things, that management is primarily a human activity
that should focus on encouraging individuals to do their jobs better.
3. Managers use alternative ways to compare costs in different decision-making situations because there are different costs
for different purposes.
3
, CHAPTER 2: COST TERMS
Actual cost – a cost that has occurred
Budgeted cost – a predicted cost
Cost objects - anything for which a cost measurement is desired
Cost Accumulation/Recording – the collection of cost data in an organized way by means of recording an accounting
system
Cost Assignment – a general term that encompasses the gathering of accumulated costs to a cost object in two ways:
– Tracing costs with a direct relationship to the cost object
– Allocating indirect costs to a cost object
Managers want to assign costs accurately to cost objects because inaccurate product costs will mislead managers about the
profitability of different products.
The term cost tracing is used to describe the assignment of direct costs to a particular cost object.
The term cost allocation is used to describe the assignment of indirect costs to a particular cost object.
Direct costs of a cost object are related to the particular cost object and can be traced to it in an economically feasible
(cost-effective) way.
Indirect costs of a cost object are related to the particular cost object, but cannot be traced to it in an economically feasible
(cost-effective) way.
NOTE: a specific cost may be both a direct cost of one cost object and an indirect cost of another cost object. The
direct/indirect classification depends on the choice of the cost object.
A variable cost changes in total in proportion to changes in the
related level of total activity or volume of output produced.
A fixed cost remains unchanged in total for a given time period,
despite wide changes in the related level of total activity or volume
of output produced.
Cost driver = a variable, such as the level of activity or volume, that
causally affects costs of a certain area in a certain time.
activity an event, task, or unit of work with a specified
purpose—for example, designing products, setting up
machines, or testing products.
Relevant range is the band or range 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 costs are considered fixed only within the relevant
range.
Inventorial costs = all costs of a product that are considered assets in a company’s balance sheet when the costs are
incurred and that are expensed as cost of goods sold only when the product is sold. For manufacturing-sector companies,
all manufacturing costs are inventoriable costs.
4
