• Course Introduction

        If you have completed Saylor Academy's BUS103: Introduction to Financial Accounting, you know that firms are required to track various forms of data to report to their investors, regulators, and business associates, including their customers and vendors.

        However, business managers use "managerial accounting" to help them make internal decisions about their future activities: they need information that is much more detailed than the data they provided in the reports they gave their external stakeholders. They may need internal data that is tailored to meet the needs of a particular business unit, which is not applicable to the firm as a whole. As you might expect, while different departmental managers have different needs, most management decisions deal with the same key issues: cost, price, and profit.

        This course examines complex financial decision-making, and identifies the tools and methods managers use to make informed decisions. We begin by introducing the terms we will reference in the later units. We will discuss the various methods and theories managers use to track costs and profits. In the final section we explore how managers report the overall performance of a firm or department for internal use.

      • Unit 1: Cost Measurement and Estimation

        We begin by examining the differences between financial and managerial accounting. The primary difference pertains to the audience:  who will read the reports? Financial accounting information is geared toward external users, while managerial accounting is for internal users. Managerial accounting is integral to making operational and strategic decisions.

        In this unit we examine the manufacturing process and related financial accounting transactions, so you can differentiate between costs assigned to products and costs assigned to a period of time. The flow of costs in accounting mirrors the physical flow of the inventory. For example, a pizza parlor buys the direct materials they put on their pizzas (cheese, tomatoes, and pepperoni). When a customer orders a pizza, the restaurant assembles the direct materials, bakes (work in process) and completes a pizza (finished goods), and delivers it to the customer.

        Completing this unit should take you approximately 5 hours.

        Upon successful completion of this unit, you will be able to:

        • compare and contrast financial accounting and managerial accounting, in terms of audience, reporting, timeframe, and use of information;
        • describe the planning and control functions managers perform;
        • describe the functions key finance and accounting personnel perform;
        • describe standards of ethical conduct used to resolve ethical conflicts facing accountants;
        • describe how accounting systems help organizations;
        • define the terms accountants use for costing purposes;
        • identify how costs flow through the three inventory accounts and cost of goods sold account; and
        • describe how to prepare an income statement for a manufacturing company.

         

      • Unit 2: Cost Management

        This unit focuses on three categories of cost management: job costing, activity-based costing, and process/production costing. For a company that produces items for a job order, it is easy to identify the direct materials and direct labor needed to complete a specific job. However, how do you determine direct materials if the company uses a continuous assembly line? It would be inefficient to track each unit of production separately.

        In this unit we also address how to allocate manufacturing overhead. Manufacturing overhead consists of costs not directly related to the product, but necessary to run the production process. This includes, but is not limited to, factory equipment, factory rent, and utilities for the factory.

        Completing this unit should take you approximately 19 hours.

        Upon successful completion of this unit, you will be able to:

        • distinguish between job costing and process costing;
        • describe how direct materials and direct labor costs are assigned to jobs;
        • explain how manufacturing overhead costs are assigned to jobs;
        • use a job costing system to track costs and evaluate profitability for each job;
        • explain why organizations allocate overhead costs to products;
        • compare and contrast allocating overhead costs using a plant-wide rate, department rates, and activity-based costing;
        • use the five steps of activity-based costing to determine product costs;
        • define activity-based management;
        • apply activity-based costing and activity-based management to service organizations;
        • compare and contrast job costing and process costing;
        • identify how product costs flow through accounts using process costing;
        • define equivalent unit;
        • use four steps to assign costs to products using the weighted average method; and
        • prepare a production cost report for a processing department.

         

      • Unit 3: Short-Term Decision Making

        This unit introduces a new way to evaluate costs and make management decisions. Rather than examining direct materials, direct labor, and manufacturing overhead, we rearrange this information as variable costs, fixed costs, and mixed costs (fixed and variable costs combined).

        For example, in the previous unit we classified a factory worker who earns a salary and annual bonus based on company performance as direct labor. In this unit, we allocate salary to fixed costs, and the bonus to variable costs. We also explore how managers make short-term decisions (what needs to occur during the next hour, day, week, or year). Fixed cost restraints, such as plant size, equipment size, and age, often define short-term decisions.

        Understanding how these three types of costs variables behave allows business managers to predict revenue, operating income, and changes in sales volume.

        Completing this unit should take you approximately 6 hours.

        Upon successful completion of this unit, you will be able to:

        • identify typical cost behavior patterns;
        • estimate costs using account analysis, the high-low method, the scattergraph method, and regression analysis;
        • prepare a contribution margin income statement;
        • describe the assumptions used to estimate costs; and
        • perform regression analysis using Excel.

         

      • Unit 4: Cost-Volume-Profit Analysis

        In this unit we explore the relationships that revolve around costs, volume, and profit (CVP), and how companies plan for profitability. We examine how business managers use costs, volume, and profit to calculate how much they need to produce to achieve the break-even point and generate future profits. For example, a chief executive officer of a company that manufactures snowboards should know how many boards they need to produce to cover their costs and earn a decent profit by end the month.

        Breakeven analysis is synonymous with CVP analysis and identifies how changes in key variables impact financial projections and profitability.

        Completing this unit should take you approximately 3 hours.

        Upon successful completion of this unit, you will be able to:

        • perform cost-volume-profit analysis for single-product companies;
        • use sensitivity analysis to determine how changes in the cost-volume-profit equation affect profit;
        • describe how cost structure affects cost-volume-profit sensitivity analysis; and
        • use an alternative form of contribution margin when faced with a resource constraint.

         

      • Unit 5: Differential Analysis

        In this unit we examine how manufacturers decide whether to outsource elements of their operation, a decision process that requires making a differential analysis to determine the revenues and costs for alternative courses of action. As you work through this unit, notice you will use the contribution margin income statement format. We will examine a relatively simple and more complex examples to establish the format used to perform differential analysis.

        Completing this unit should take you approximately 4 hours.

        Upon successful completion of this unit, you will be able to:

        • describe the purpose of differential analysis;
        • use differential analysis for make-or-buy decisions;
        • use differential analysis for product line decisions;
        • use differential analysis to decide whether to keep or drop customers;
        • use differential analysis for special order decisions;
        • define cost terms used in differential analysis;
        • describe how to use cost-plus pricing and target costing to establish prices; and
        • evaluate qualitative factors when using differential analysis.

         

      • Unit 6: Budgeting

        In this unit we explore the components for preparing a master budget and its underlying performance schedules. Business managers create budgets to plan for future operations, create benchmarks to measure progress, and maintain necessary accounting controls. The budget process involves coordination among every department that is part of the company. Once the master budget is complete, the company can measure how actual performance compares with the budget.

        Completing this unit should take you approximately 5 hours.

        Upon successful completion of this unit, you will be able to:

        • describe how budgets are used for planning and controlling operations;
        • explain the process of establishing budgets;
        • develop the components of a master budget, including multiple schedules;
        • describe operating budgets for merchandising, service, and not-for-profit organizations; and
        • analyze ethical issues in creating operating budgets.

         

      • Unit 7: Variance Analysis

        In this unit, we examine how managers analyze their budgets and actual results to make better decisions. We will explore various methods for rationalizing the master budget for actual results. When actual sales volume is higher than what was planned in the master budget, variable costs should also be higher. For example, in one thread, we follow how Jerry’s Ice Cream modifies its planned master budget during a long, hot summers. In another thread, we watch Tony Bell consider various "problems" that explain variance, and how to use accounting for variance to improve ongoing management decisions.

        Completing this unit should take you approximately 7 hours.

        Upon successful completion of this unit, you will be able to:

        • describe how flexible budgets are used to evaluate performance;
        • explain how standard costs are established;
        • calculate and analyze direct materials variances;
        • calculate and analyze direct labor variances;
        • calculate and analyze variable manufacturing overhead variances;
        • determine which variances to investigate;
        • explain how to use cost variance analysis with activity-based costing; and
        • calculate and analyze fixed manufacturing overhead variances.

         

      • Unit 8: Capital Budgeting

        Now that we understand how businesses create budgets to manage the day-to-day operations of a business, let's focus on how they use capital budgeting to evaluate long-term investments. For example, should a company replace its machinery now or wait another three years to make this major investment, when revenue may be greater and the equipment may cost less? Business managers typically prepare their capital budget process when the create their master budget. They base their decision to choose or reject various projects on the "time value of money" and "discounted cash flows."

        Completing this unit should take you approximately 5 hours.

        Upon successful completion of this unit, you will be able to:

        • apply the concept of the time value of money to management decisions;
        • define capital budgeting and capital projects;
        • evaluate investments using the net present value (NPV) approach;
        • evaluate investments using the internal rate of return (IRR) approach;
        • explain the impact of cash flows, qualitative factors, and ethical issues on long-term investment decisions;
        • evaluate investments using the payback method; and
        • explain the impact that income taxes, working capital, and investment cash outflows have on capital budgeting decisions.

         

      • Unit 9: Performance Evaluation

        This unit describes how businesses use managerial accounting to evaluate company performance—for the entire company, their organizational departments, and their individual employees. How do you evaluate the productivity of each division manager in a decentralized company? How well does each division use the company's assets to create profits? Responsibility accounting assumes someone is responsible for every cost the company incurs. They often base the compensation they give their managers on the financial performance of the divisions they manage. We will consider the issues Game Products encounters when it evaluates the performance of three divisional managers who oversee sporting goods, board games, and computer games.

        Completing this unit should take you approximately 3 hours.

        Upon successful completion of this unit, you will be able to:

        • define decentralized organization and explain advantages and disadvantages of decentralizing;
        • differentiate among the three types of responsibility centers;
        • explain responsibility accounting and why it is useful for a decentralized organization;
        • calculate and interpret segmented net income to evaluate performance;
        • calculate and interpret return on investment (ROI) to evaluate performance; and
        • calculate and interpret residual income (RI) to evaluate performance.

         

      • Unit 10: Cash Flow Preparation and Use

        Now, let's explore how companies manage cash flow. Most companies use the revenues they generated yesterday to pay today's and tomorrow's expenses. For example, some companies manage their cash and maintain enough reserves to pay their expenses when they are due. Others must obtain capital loans to pay their bills, because they have highly seasonal sales or experience rapid growth and do not have enough savings to pay for the upfront costs to fund their expansion. While the company's income statement and balance sheet help monitor performance and their current financial condition, neither statement provides information about cash activity during a given time period.

        Companies must manage their cash wisely to accommodate this lag time between revenues and expenses, so they can pay their bills in a timely manner. In this unit, we focus on how to prepare a statement of cash flows, which will provide important information about performance measures, cash-on-hand, and cash needed.

        Completing this unit should take you approximately 7 hours.

        Upon successful completion of this unit, you will be able to:

        • define the purpose of the statement of cash flows;
        • describe the three categories of cash flows;
        • describe the four steps used to prepare the statement of cash flows;
        • prepare a statement of cash flows using the indirect method;
        • analyze cash flow information; and
        • prepare a statement of cash flows using the direct method.

         

      • Unit 11: Using Managerial Accounting: Trends and Ratios

        In this unit we examine the three-pronged approach managerial accountants and potential investors typically use to analyze a company’s financial information. First, we use trend analysis and common-size analysis to examine trends the company has experienced within its own financial sphere, such as sales and earnings from one year to the next. Secondly, we compare the company's financial measures with its main competitors in the industry. Finally, we compare the company's financial ratios with industry-wide averages or standards.

        Completing this unit should take you approximately 7 hours.

        Upon successful completion of this unit, you will be able to:

        • perform trend analysis to evaluate financial statement information;
        • perform common-size analysis to evaluate financial statement information;
        • use ratio analysis to measure profitability, short-term liquidity, long-term solvency, and market valuation; and
        • develop and analyze non-financial performance measures using a balanced scorecard.

         

      • Study Guide and Review Exercises

        This study guide will help reinforce key concepts in each unit as you prepare to take the final exam. Each unit study guide aligns with the course learning outcomes and provides a summary of the core competencies and a list of vocabulary terms. Our study guides are not meant to replace the readings and videos that make up the course.

        The vocabulary lists include terms that may help you answer some of the review items, and terms you should be familiar with to successfully complete the final exam for the course.