Module 1

Managerial Accounting: Concepts and

Decision Making
Support
Management accounting should not be primarily concerned with making
computations. Students should aim to understand the organization’s business issues
that created a need for implementing such concepts as activity-based costing and the
balanced scorecard. And students should view the success or failure of these methods
and concepts in the context of the organization’s operating and business environment.
We know many examples in which thoughtful practitioners developed complex activity
based costing, balanced scorecard, and other management accounting methods only to
have them fail in implementation. These methods did not fail because of errors in
computations; they failed because their developers did not sufficiently understand the
problems that the organization needed to solve. Or they failed because these
practitioners could not gain agreement on goals and strategies from both top
management and the people who would later implement the methods. In other words,
understanding business concepts and real incentives for decisions is more valuable
than mere proficiency with accounting tools (Maher, Stickney, and
Weil, 2008).

The

lessons to discuss in this module are;

Lesson 1: Introduction and Review of Basic

Management Accounting Concepts
Lesson 2: Basic Cost Concept

Lesson 3: Managing Costs

At the end of this module, you should able to;

1. Define financial and management accounting;

 2. Identify the key financial players in organization;
3. Discuss the scope, limitations and objectives of management accounting;
4. Understand the ethical
issues in management

accounting;
5. Explain what is cost and its different kinds; and
6. Understand and appreciate managing costs;

Now, let’s get started!

Management Accounting| 1

Module 1
Lesson 1

Introduction and Review of Basic

Management Accounting
Concepts
Managers must equip themselves with the tools and insights to act strategically about
business opportunities. Organizational success typically requires intelligent use of information.
About 80 percent of new businesses fail within five years after opening their doors, often
because management does not use information to make good decisions, plan for growth, and
forecast cash needs. For example, the Managerial Application ‘‘Why Managers Need Cost
Information’’ tells of the early days of Domino’s Pizza, when the company nearly went bankrupt
because of poor information. Organizations with poor information systems also have difficulty
obtaining financing from banks, venture capitalists, and shareholders (Maher, Stickney, and
Weil, 2008).
 ctivity 1
Discussion
Instruction: Discuss your answer to the question briefly
and concise. Adopted: Managerial Accounting (An Introduction to
Concepts, Methods and Uses (Maher, Stickney, and Weil, 2008)

Managers Need Cost Information for Survival

In its early years, Domino’s Pizza (http://www. dominos.com) nearly went bankrupt before the owner
discovered that the company was losing money on six-inch pizzas. The company dropped the product line and went
on to become a multibillion-dollar company. Many hospitals that thrived when insurers fully reimbursed health care
costs now face large deficits. Many airlines, successful under prior stringent regulations, have gone bankrupt since
regulations have eased. What do these stories all have in common?
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Management Accounting| 2
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Even if you are not planning a career in finance or accounting, you will be using managerial
accounting information. Here are just a few examples.
• Marketing managers use financial information to help price products and assess their
profitability. Using product cost information, marketing managers ascertain how low they
can drop prices and still be profitable.
• Production managers use financial and nonfinancial information to manage quality and
costs and to assure on-time delivery.
• General managers use financial information to measure employee performance and create
incentives.

Learning Objective 1
 Define financial and management
accounting;

Financial accounting deals with reporting to people outside an organization. The users of
financial accounting reports include shareholders (owners) of a corporation, creditors (those who
lend money to a business), financial analysts, labor unions, and government regulators.

Managerial accounting deals with activities inside the organization. (Most companies call
this finance or corporate finance.) Managerial accounting has no rules and regulations, such as
generally accepted accounting principles. Unlike financial accounting, which must use historical
data, managerial accounting can and does use projections about the future. After all, managers
make decisions for the future, not the past.

A good managerial accounting system takes into account the economics of the industries in
which the organization operates and the organization’s strategy. For example, suppose
managers of a company called e-whatever.com realize that their industry has low barriers to
entry; and the organization has competitors, both in ‘‘bricks’’ and in ‘‘clicks.’’ Furthermore, the
company’s product is essentially a commodity (a product that is difficult to differentiate from
those of competitors), despite the managers having spent millions of dollars to build brand
equity. To compete effectively, the organization must excel at order fulfillment and manage
costs both to keep prices competitive and to make a reasonable return on shareholders’
investment.

Management Accounting| 3

Learning Objective 2

Identify
the key financial players in the
Key Financial Players in the Organization
organization;

Financial Vice-President - The top financial

person is usually a senior vice-president in the
company, the financial vice president (often
called chief financial officer—CFO). This
person is in charge of the entire accounting and finance function and is typically one of the three
most influential people in the company. (The other two are the chief executive officer and the
president.)
Controller- The controller manages cost and managerial accounting in most organizations. The
name controller sounds like someone who ‘‘controls things.’’ In fact, the controller’s staff works in
planning, decision making, designing information systems, designing incentive systems, and
helping managers make operating decisions, among other things. If you have a career in
marketing, production, or general management, you will have frequent interactions with
controllers.

Treasurer- The corporate treasurer manages cash flows and raises cash for operations. The
treasurer normally handles relations with banks and other lending or financing sources, including
public issues of shares or bonds.

Cost Accountants/Managers- Cost accountants and cost managers analyze and manage costs.
They also work on cross functional teams, including marketing-oriented teams, to decide
whether to keep or drop products because of product profitability. They also work on operations-
oriented teams, to find ways to redesign products to save costs.

Internal Audit- The internal audit department provides a variety of auditing and consulting
services. Internal auditors often help managers in that they provide an independent perspective
on managers’ problems. Internal auditors frequently act as watchdogs who find internal fraud.
For example, the internal auditors at WorldCom ‘‘blew the whistle’’ on top executives by
uncovering a substantial accounting misstatement of several billion dollars. Internal auditors
who focus on operations as well as finance are particularly helpful to managers. Such auditors
are called operational auditors.

Decision making of the managers may be

categorized into the three inter-related business processes:
PLANNING, CONTROLLING and DECISION MAKING.

Learning Objective 3

Discuss the scope, limitations, and objectives

of management accounting;
Scope of Management Accounting
1. Financial Accounting
2. Cost Accounting
3. Financial Management
4. Financial Statement Analysis

Management Accounting| 4
5. Interpretation of Data
6. Management Reporting
7. Quantitative Techniques
8. Inflation Accounting

Limitations of Management Accounting

1. Weakness on decisions are the historical data
 2. Tools for decision makers only
3. Tools and techniques used in making business decisions serves as supplementary in
support of a decision only
4. Decision maker makes his own judgment. Skills developed through experience so it
cannot guarantee success but only a chance of success

What is the purpose, uses and emerging trend of managerial accounting? To generate
information that helps managers and other internal users take action that create value
for the organization.

Objectives of Managerial Accounting

1. Performance measurement
2. Risk management
3. Right allocation of business resources
4. Timely presentation of financial statements to the
management of the business

Learning Objective 4
Understand the ethical issues in management

accounting;
Ethical Issues
Ethical Behavior – choosing actions that are…
“Right”, “Proper”, “Just”

During your career, you will face ethical issues related to appropriate marketing tactics,
environmental standards, labor relations and conditions, and financial reporting. Companies that
do not meet high ethical standards not only create social messes for others to clean up but are
also frequently in dire straits in the long run.
Ethical issues arise in many places in the managerial accounting domain. Some have to
do with costs. For example, a manager might ask the following questions: • What are the
differential costs of bringing an existing site in Thailand up to international labor and
environmental standards?
• How do we budget for unforeseen environmental cleanup?
• How do we design performance evaluation systems that motivate managers to behave
ethically?
Managers who receive compensation based on their business unit’s profits may wish to
record sales that have not yet occurred in order to boost the bottom line and their own pay. This
premature revenue recognition usually occurs just before the end of the reporting period, say, in
late December for a company using a December 31 fiscal year-end. Management may have
rationalized the early revenue recognition because the firm would probably make the sale in
January anyway; this practice just moves next year’s sale (and profit) into this year. This
practice,

Management Accounting| 5
which is the most common type of financial fraud, is unethical and illegal in a company that is
registered with the Securities and Exchange Commission. Managers who commit such acts
expose themselves to fines and prison time.
 Module 1
Less
on 2
Basic Cost Concept

We now turn to the nuts

and bolts concepts important in managerial
accounting. This section defines and discusses
basic cost concepts.

Learning Objective 5

Explain what is cost and its

different kinds;
WHAT IS A COST?
and
In principle, a cost is a sacrifice of resources. For example, if you purchased an
automobile for a cash payment of $12,000, the cost to purchase the automobile would be
$12,000. Although this concept is simple, it can be difficult to apply. For example, what are the
costs for an individual to obtain a college education? A student sacrifices cash to pay for tuition
and books, clearly a cost. What about cash paid for living costs? If the student would have to
pay these costs even if she or he did not attend college, one should not count them as costs of
getting a college education.
Students sacrifice not only cash. They also sacrifice their time. Should one count the
earnings a student forgoes by attending college? Yes, but placing a value on that time is difficult;
it depends on the best forgone alternative use of the time. For students who sacrifice high-
paying jobs to attend college, the total cost of college is greater than for students who do not
sacrifice high paying jobs.
The word cost has meaning only in context. To say ‘‘the cost of this building is $1 million’’
has the following meanings at various places in accounting and economics: • the original price
the current owner paid, or
• the price that the owner would pay to replace it new, or
• the price to replace it today in its current condition, or
• the annual rental fee paid to occupy the building, or
• the cash forgone from not selling it, or
• the original price paid minus accumulated depreciation. You need to know the
context for the word cost to know its meaning.

Management Accounting| 6
Opportunity Cost
The definition of a cost as a ‘‘sacrifice’’ leads directly to the opportunity cost concept.
An opportunity cost is the forgone income from using an asset in its best alternative. If a firm
uses an asset for one purpose, the opportunity cost of using it for that purpose is the return
forgone from its best alternative use.
The opportunity cost of a college education includes forgone earnings during the time in
school. Some other illustrations of the meaning of opportunity cost follow: • The opportunity cost
of funds invested in a government bond is the interest that an investor could earn on a bank
certificate of deposit (adjusted for differences in risk). • Proprietors of small businesses often
take a salary. But the opportunity cost of their time may exceed the nominal salary recorded on
the books. A proprietor can work for someone else and earn a wage. The highest such wage
(adjusting for differences in risk and nonpecuniary costs or benefits of being a proprietor) is the
opportunity cost of being a proprietor. Entrepreneurs such as Bill Gates at Microsoft and Phil
Knight at Nike have become wealthy by developing their enterprises. They might also have
become wealthy as executives in established companies.

Costs versus Expenses

We distinguish cost, as used in managerial accounting, from expense, as used in
financial accounting. A cost is a sacrifice of resources. Period. Sometimes the sacrifice of cash
leads to another resource taking its place. When a firm buys inventory for $1,000, we say the
inventory has a cost of $1,000 because the firm sacrificed $1,000 cash. Inventory took the place
of cash on the balance sheet. When we spend $1,000 on salary for the corporate accountant,
that, too, is a sacrifice, but it is also an expense, a gone asset. The definition of expense relates
to its use in financial accounting. An expense measures the outflow of assets, not merely of
cash, or the increase in liabilities, such as accounts payable.
Managerial accounting deals primarily with costs, not expenses. We reserve the term
expense to refer to expenses for external financial reporting as defined by generally accepted
accounting principles.
Cost - Amount of cash or cash equivalent sacrificed for goods and/or services.
-Expected to bring a current or future benefit to the organization.
Expenses - Expired costs
* As costs are used up in the production of revenues, they are said to
expire.

Cost versus Price

Cost - What we pay for something
Price - Amount we charge our customers for our products or services

Variable versus Fixed Costs

Variable costs are those costs that change in total as the level of activity changes. By
contrast, fixed costs do not change in total with changes in the level of activity. Suppose you
pay a monthly lease for an automobile. If the lease amount is fixed regardless of the number of
miles driven, then the lease is a fixed cost during the term of the lease. If the lease requires you
to pay an amount per mile, then the lease would be a variable cost because the more miles you
drive, the more you pay.
Examples of variable costs include materials to make products and energy to run machines. Examples of
fixed costs include rent on building space (assuming the tenant pays for an agreed term on a time basis, not

Management Accounting| 7
a volume-of-activity basis) and salaries of top company officials. Many costs do not fit neatly into fixed and
variable categories. We try to be clear in our examples as to whether you should assume a cost is fixed or
variable.

Product (Manufacturing) Cost

Are those cost both direct and indirect of producing a product in a manufacturing firm.

Product Costs include:

1. direct materials - Materials that can be directly traced top the product. Ex. Fruit Jam
manufacturing fruits, jars, label
2. direct labor – Labor that can be directly traced to the product. Ex. Factory Worker 3.
manufacturing overhead- All product cost other than direct materials and direct labor.
They cannot be traced to the product. Ex. Supervision, depreciation, utilities, taxes
 A cost object is any item for which the manager wishes to measure cost.
1. direct costs -Costs that relate directly to a cost object are its.
2. indirect costs- Those that do not are its

Example Starbucks Coffee produces and sells coffee products and other goodies. It buys ingredients from
outside suppliers, produces coffee products, and sells the products. Assume that a particular Starbucks
restaurant leases its building space. If the cost object is a cup of coffee, the ingredients and labor that the
firm traces directly to the production of each cup of coffee are direct costs of the cup of coffee. Starbucks
cannot, however, directly trace the costs of leasing the building to a particular cup of coffee, so building-
lease costs are indirect costs of producing and selling cups of coffee.

TOTAL PRODUCT COST = Direct Materials+ Direct Labor+ Manufacturing

Overhead UNIT PRODUCT COST = Total Product Cost / Number of Units Produced

COST BEHAVIOR
Is a general term for describing whether a cost changes when the level of output
changes. Understanding cost behavior is important in making decisions.

Dependent and Independent Variable

Dependent variable
• The total of a mixed cost that will change as the result of several factors. •
Represents activities- usually volume based such as units of production, number of
labor hours, etc.
• Usually expressed as y or y’ (the estimated amount of y)
• Referenced on a graph’s y-axis
Independent variable
• A factor causes the change in the total cost
• Is expressed as x
• Is referenced on a graph’s x-axis
• Sometimes referred as cost drivers
Cost driver- a factor that causes or leads to a change in cost or activity
Relevant range- is a range of output over which the assumed cost
relationship is valid

Management Accounting| 8
Types of Cost Behavior Patters
1. Fixed Costs
• Do not vary with the production level
• Total fixed costs remain the same, within the relevant range
• The fixed cost per unit decreases as production increases, because the same fixed
costs are spread over more units.
2. Variable Costs
• Vary in linear fashion with the production level
• As on per unit basis, variable costs remain constant across all production levels within
the relevant range.
3. Mixed Costs
• Consist of a fixed component and a variable component
• Example: Electricity used in a Manufacturing Company. Fixed amount of electricity
is required to run the plant’s air conditioning, computers and lights. Variable cost
component related to running the machines on the factory floor.
4. Step Costs
• A cost that does not change steadily with changes in activity volume, but rather at
discrete points.
 • Fixed over one range of activity and shift abruptly to a different level where they are
fixed over adjacent range of activity.
• Vary with the level of output but not directly
• Sometimes referred to as semi-fixed costs
• The concept is used when making investment decisions and deciding whether to
accept additional customer orders.

Cost Structure- Refers to the types and relative proportions of fixed and variable costs that a
business incurs or the mixture of variable as proportion of the organization’s total cost. It is used
as a tool to determine prices, if you are using a cost-based pricing strategy, as well as to
highlight areas in which costs might potentially be reduced or at least subjected to better
control.

Thus, the cost structure concept is a management accounting concept; it has no

applicability to financial accounting.

Unit Cost- It is the cost of single unit of product or service. Basis for determining market price
Calculated by dividing the sum of total variable and fixed cost by number of units produced.

UNIT COST = Total Variable Cost + Total Fixed Cost

Number of Units Produced

Management Accounting| 9
Understanding what
causes cost

Managing
Module 1
Costs
Lesson 3
 Learning Objective 6

Under
stand and appreciate managing costs.

Effective cost control requires managers to understand how producing a product requires
activities and how activities, in turn, generate costs. Activity-based management (ABM) studies
the need for activities and whether they are operating efficiently. Cost control requires activity
based management.
Consider the activities of a company facing a financial crisis. In an ineffective system, top
management tells each department to reduce costs. Department heads usually respond by
reducing the number of people and supplies, as these are the only cost items that they can
control in the short run. Then they ask everyone to work harder. This produces only temporary
gains, however, as the workers cannot sustain the pace in the long run. If they could sustain it,
departmental managers would already have reduced the size of the workforce and the amount of
supplies used. Under activity-based management, the company reduces costs by studying the
activities it conducts and develops plans to eliminate non-value-added activities and to improve
the efficiency of value-added activities. Eliminating activities that do not create customer value
cuts costs effectively. For example, spending $100 to train an employee to avoid common
mistakes will pay off many times over by reducing customer ill will caused by those mistakes.

Value-added and Non-value-added Activities

A value-added activity is an activity that increases the product’s service to the
customer. For instance, purchasing the raw materials to make a product is a value-added
activity. Without the purchase of raw materials, the organization would be unable to make the
product. Sanding and varnishing a wooden chair are value-added activities because customers
don’t want splinters. Management evaluates value-added activities by how they contribute to the
final product’s service, quality, and cost.
Good management involves finding and, if possible, eliminating non-value-added
activities. Non-value-added activities are activities that when eliminated reduce costs without
reducing the product’s service potential to the customer. In many organizations poor facility
layout requires labor to move around the work in process or to store it temporarily during
production. For example, a Midwestern steel company that we studied had more than 100 miles
of railroad track to move things back and forth in a poorly designed facility. Moving work around
a factory, an office, or a store does not add value for the customer.

Management Accounting| 10
Value Chain
The value chain describes the linked set of activities that increase the usefulness (or
value) of the products or services of an organization (value-added activities). Management
evaluates activities by how they contribute to the final product’s service, quality, and cost. In
general, the business functions include the following:
1. Research and development: the creation and development of ideas related to new
products, services, or processes
2. Design: the detailed development and engineering of products, services, or processes
3. Production: the collection and assembly of resources to produce a product or deliver a
service
4. Marketing: the process that informs potential customers about the attributes of
products or services, and leads to the purchase of those products or services
5. Distribution: the process established to deliver products or services to customers
6. Customer service: product- or service-support activities provided to customers

Several administrative functions span all the business activities described. Human
resource management, for example, potentially affects every step of the value chain.

Strategic Cost Analysis

There are methods used to improve cost management and the use of costs in decision
making. Those methods can be used for both strategic and tactical purposes. If used for
strategic purposes, then management uses the cost information to choose among alternative
ways to produce. Economists characterize strategic cost management as choosing among
alternative production functions. By contrast, economists would characterize tactical cost
management activities as those that provide greater efficiency on a particular production
function. Managers make strategic choices of production functions, then employees take tactical
activities to keep the firm efficient. Choosing the right strategy means ‘‘doing the right thing.’’
Choosing the right tactical activities means ‘‘doing the thing right.’’
Amazon.com made a strategic decision to sell products online instead of in stores. Tower
Records made a poor strategic decision to focus on in-store sales. Southwest Airlines made a
strategic decision to fly point-to-point while United decided to use a hub-and-spoke system.
Southwest Airlines also chose to be a low-cost carrier, which it achieves by managing costs
carefully. The choice of point-to-point flying is strategic; managing costs to stay efficient is
tactical.
Here is an example of how cost management feeds into both tactical and strategic
decisions. Some companies use outsourcing as a tactical way to reduce costs, generally on a
short-term basis. Others use outsourcing as a long-term strategy to rely on business partners
that do particular things well.

Economic depreciation measures the decline in the value of assets during a period using
either the sales value of assets or their replacement costs as the measure of value, whichever
analysts think is appropriate for the business and for the use of the information. In general, if
there is a ready market for the assets, as in the case of vineyards, aircraft, trucks, and most
building space, then analysts generally compute economic depreciation as the decrease in the
market or sales values of assets during the period. Economic depreciation better measures the
decline in asset value than book depreciation, which actually only allocates the original cost of
some assets over their estimated lives. Land, for example, can suffer economic loss without
book depreciation.

The cost-of-capital is a real one—the amount a firm could earn on its assets by putting them to
their best alternative use—even if the financial accounting statements do not include the cost of
equity capital. The rate should be the weighted-average cost-of-capital appropriate for the

Management Accounting| 11
vineyard, measured from the weighted average of the costs of the firm’s sources of funds. The
weighted-average cost-of-capital takes into account both debt and equity sources of capital.
Managerial Accounting in Modern Production Environment

Integrated Information Systems

Integrated information systems, such as the Enterprise Resource Planning Systems
(ERPS) produced by Oracle (http://www.oracle.com) and SAP (http://www.sap.com), provide
integrated information systems that tie together managerial accounting, financial reporting,
customer databases, supply chain management, and other databases. Conventional accounting
systems were stand-alone information systems. With ERPS, accounting and other databases
are integrated with numerous applications such as managing the supply chain, making general
ledger entries, and reporting to top management.

Web Hosting
Many companies outsource substantial portions of their information systems by using
Web hosting. Web hosting enables a company to focus on its core competencies while taking
advantage of the host’s server and bandwidth capabilities. For example, Wells Fargo Bank
(http:// www.wellsfargo.com) provides a Web site to handle payment processing for small
businesses. Web hosting reduces the need for in-house information technology people as well
as for transaction and systems managers. (They still require smart people who understand
managerial accounting and who make good decisions.)

Just – in -Time and Lean Production

Just-in-time (JIT) production is part of a ‘‘lean production’’ philosophy that has been
credited for the success of many Japanese companies and such U.S. companies as General
Electric, Lincoln Electric, and Harley-Davidson. Lean production eliminates inventory between
production departments, making the quality and efficiency of production the highest priority. Lean
production requires the flexibility to change quickly from one product to another. It emphasizes
employee training and participation in decision making. The development of just-in-time
production and purchasing methods also affects cost-accounting systems. Firms using just-in
time methods keep inventories to a minimum. If inventories are low, accountants can spend less
time on inventory valuation for external reporting.

Total Quality Management

One successful recent managerial innovation is total quality management. Total quality
management (TQM) means the organization focuses on excelling in all dimensions. Customers
ultimately define quality. Customers determine the company’s performance standards by their
own wishes and needs (not necessarily by the wishes of product engineers, accountants, or
marketing people). This exciting and sensible idea affects accounting performance measures.
Under TQM, performance measures likely include product reliability and service delivery, as well
as such traditional measures as profitability.

Theory of Constraints
Every profit-making enterprise must have at least one constraint. Without constraints, the
enterprise could produce an infinite amount of its goal (for example, profits). The theory of
constraints (TOC) views a business as a linked sequence of processes that transforms inputs
into saleable outputs, like a chain. To strengthen the chain, a TOC company identifies the
weakest link, the constraint. That link limits the scope of the rest of the process, so the company
concentrates improvement efforts on that weakest link. When the efforts succeed so that link is

Management Accounting| 12
no longer the weakest, the company changes focus to the new weakest link. TOC improves
operations and has much potential for helping certain kinds of companies.

Benchmarking and Continuous Improvement

The themes of benchmarking and continuous improvement recur in modern
management. Benchmarking is the continuous process of measuring one’s own products,
services, and activities against the best levels of performance. One might find these best levels
 of performance, the benchmarks, either inside one’s own organization or in other organizations.
Toyota Motor Company gets much of the credit for applying the concept of benchmarking
and continuous improvement, but many other companies have used these themes successfully.

CASE ANALYSIS

Instruction: Discuss each item brief and concise. Adopted:

Entrepreneurship and Small Business Management Medina, 2000

Case 1. Shoes for All: Concentration Baby

Application 1
Mr. Abraham Alvarez started his shoe store in downtown Bacolod in 1981. He named the store
“Shoes for All”. Sales increased slowly but steadily for the first ten years of operations. In the stores’ shelves
are shoes of different sizes and shapes and are meant for all ages, sex, and cultural inclinations.
There were only five shoe stores of note when Mr. Alvarez opened his business. by 1985, three
more shoe stores opened along the city’s main street where his store is located.
Mr. Alvarez is getting his supply of hoes from several factories in Marikina. Some of his stocks
come from various importers of shoes. The factories in Marikina, where the bulk of his stocks come from,
were starting to specialize. The effect was that some of the product items were dropped in favor of
increasing volume for the items that were retained. This would mean that if Mr. Alvarez would like to
continue carrying all sorts of shoes, he will have to deal with more factories.
As the years pass, he feels that competition in his business is getting fierce and suppliers are
becoming less accommodating. He now begins to consider limiting his assortment of products to fewer but
more selections. This, he thought, will provide him with enough efforts to concentrate on the fewer items.
He is now thinking of preparing a list the different items he is carrying in his store for an objective
delisting of some items. When he placed the first item under close scrutiny, he could not make up his mind
on whether to drop the item or not. He could not find a basis for making a decision. With this, he dropped
what he was doing and started pondering on how he can make the exercise more scientific.

.
1. Background of the Case
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Management Accounting| 13
______________________________________________________________________________________
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2. Statement of the Problem
2.1 __________________________________________________________________________________
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2.2 __________________________________________________________________________________
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2.3 __________________________________________________________________________________
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2.4 __________________________________________________________________________________
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3. Analysis of the key Issues facing the business

3.1 __________________________________________________________________________________
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3.2 __________________________________________________________________________________
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3.3 __________________________________________________________________________________
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3.4 __________________________________________________________________________________
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4. Alternative Action
4.1 __________________________________________________________________________________
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4.2 __________________________________________________________________________________
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4.3 __________________________________________________________________________________
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Management Accounting| 14
4.4 __________________________________________________________________________________
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5. Recommendation
5.1 __________________________________________________________________________________
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 5.2 __________________________________________________________________________________
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5.3 __________________________________________________________________________________
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5.4 __________________________________________________________________________________
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6. Conclusion
6.1 __________________________________________________________________________________
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__________________________________________________________________________________
6.2 __________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________
6.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
6.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

Management Accounting| 15

CASE ANALYSIS

Instruction: Discuss each item brief and concise. Adopted:

Entrepreneurship and Small Business Management Medina, 2000

Case 2. Paragas farm Machineries: Almost There

 Application 2

After five years of operating his company, Mr. Rudy Paragas is assessing his position. His factory,
located in Malolos, Bulacan, is engaged in manufacturing farm machineries such as: the mini-thresher, the
mini-cono and the hand tractor. His income statements for the past five years indicate moderate success.
He thinks his average net income after tax of 17% annually could be improved if he sets his proprieties
right.
He prepared a list of his past activities with the purpose of relating them his goal of improving
profits. The list shows the following:
Activity Percent of business time engaged

Overseeing operations 40%

Attending social activities 10%

Attending religious activities 10%

Part-time teaching 5%

Conferring with subordinates 10%

Business planning 10%

Other activities 15%

TOTAL 100%

Mr. Paraguas, an agricultural engineer, keeps office from 9:00 AM to 5:00PM. His business office is
also where he receives personal and social calls. His work force consists of 157 persons manning the
factory including the supervisors plus eleven employees in the office.
Because he finds the preparation of a business plan a waste of his time, he is considering deleting
the said activity form his list and assigning the task to his assistant.

1. Background of the Case

______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
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______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

Management Accounting| 16
2. Statement of the Problem
 2.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
2.2 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
2.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
2.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

3. Analysis of the key Issues facing the business

3.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
3.2 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
3.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
3.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

4. Alternative Action
4.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
4.2 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
4.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
4.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

5. Recommendation

Management Accounting| 17
5.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
5.2 __________________________________________________________________________________
__________________________________________________________________________________
 __________________________________________________________________________________
5.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
5.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

6. Conclusion
6.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
6.2 __________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________
6.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
6.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

CASE ANALYSIS

Instruction: Discuss each item brief and concise. Adopted:

Entrepreneurship and Small Business Management Medina, 2000

Case 3. Perlie Sales: All Alone Am I

Application 3

It was in January 1993 when Ms. Perla Adina, a business management graduate, opened her store
“Perlie Sales” in downtown Dagupan City as exclusive dealer of meat products of a canning factory in Metro
Manila. After a few days, she hired a 16 year -old boy to help her in the various manual tasks in the store.

Management Accounting| 18
The five percent profit margin she attached to the cost of sales on items she is handling provided
enough reason for consumers to patronize her store. The increasing volume of sales justified her hiring a
sales assistant after three months of operation. By July 1995, her store was attended by 8 sales ladies plus
the sales assistant and the teenage help.
 Presently, Ms. Adina is performing the following functions:
1. Purchasing merchandise stocks,
2. Bookkeeping,
3. Supervising sales,
4. Cashiering, and
5. Supervising inventory
By August 1995, her store’s sales reached an average of P1 million per month on a P3 million net
worth. Her customers come form Dagupan and the nearby towns of Lingayen, Calasiao, San Carlos City,
Sta. Barbara, and others.
She realized that her sales is limited only by her ability to serve more customers. she feels that if she
could only expand her network, she could be more successful. She is considering putting up a branch in
San Carlos City and another one in Lingayen.
Her biggest problem now is how to set an organization structure that will match her expansion plans.

1. Background of the Case

______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

2. Statement of the Problem

2.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
2.2 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
2.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
2.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

Management Accounting| 19
3. Analysis of the key Issues facing the business
3.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
3.2 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
 3.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
3.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

4. Alternative Action
4.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
4.2 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
4.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
4.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

5. Recommendation
5.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
5.2 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
5.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
5.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

Management Accounting| 20
6. Conclusion
6.1 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
6.2 __________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________
6.3 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
6.4 __________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

GREAT! You did it. We are now

done with the Preliminary Term

coverage.

Management Accounting| 21