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STUDY GUIDE BMAC5203 Accounting for Business Decision Making

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CENTRE FOR GRADUATE STUDIES
STUDY GUIDE
BMAC5203
Accounting for Business
Decision Making
Writer: Assoc Prof Dr Indra Devi Kandasamy

Developed by: Centre for Instructional Design and Technology
Open University Malaysia







First Edition, September 2011
Second Edition, August 2012
Third Edition, J anuary 2014
Fourth Edition, December 2013
Copyright Open University Malaysia (OUM), December 2013, BMAC5203
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia.
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Contents
Course Introduction ................................................................................. 56
Course Synopsis ................................................................................ 5
Course Aims ....................................................................................... 5
Course Outcomes .............................................................................. 6
Course Load ....................................................................................... 6

Course Requirements .................................................................................. 7
Prerequisites or Co-requisites ............................................................ 7
Feedback and Course Evaluation ...................................................... 7

Course Resources ....................................................................................... 7
Set Textbook(s) .................................................................................. 7
Additional References ........................................................................ 7
Extra Recommended Reading ........................................................... 7
my Virtual Learning Environment (myVLE) ........................................ 7
OUM Digital Library Resources .......................................................... 8

Assessment .................................................................................................. 8
Assessment Format ........................................................................... 8
Assignment Question(s) ..................................................................... 8
Final Examination ............................................................................... 8
Late Submission of Assignment(s) ..................................................... 8
Important Dates .................................................................................. 8

Weekly Study Guide ............................................................................ 1047
Week 1 ............................................................................................. 10
Week 2 ............................................................................................. 14
Week 3 ............................................................................................. 19
Week 4 ............................................................................................. 23
Week 5 ............................................................................................. 27
Week 6 ............................................................................................. 32
Week 7 ............................................................................................. 38
Week 8 ............................................................................................. 40
Week 9 ............................................................................................. 43
Week 10 ........................................................................................... 46

Appendix A ................................................................................................. 49
Responsibilities of Learners ............................................................. 49
Ethical Behaviour ............................................................................. 49
Plagiarism, Cheating & Collusion ..................................................... 49


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COURSE INTRODUCTION
Course Synopsis
The BMAC5203 course is designed for business students without previous
in-depth exposure to managerial accounting. Internal or managerial
accounting system provides exclusive business information that assists
managers in handling the tasks of planning, control and decision-making.

Todays management accountants focus on the advisory and consulting
services related to strategic planning, organisational control and business
decisions. Their roles are not only revolved around product costing, pricing,
asset/liability management, investment analysis and performance evaluation
but also extends to contemporary issues such as financial and business
reengineering.

The type and nature of information supplied by the internal accounting
system is flexible and is customised to the needs of managers. It is also a
dynamic function that evolves consistently as organisational changes occur.
Parallel to the current trend in business, issues of global significance are
widely discussed and explored in this course.
Course Aims
The broad aims of this course are to:

1. Introduce learners to the basic framework of Management Accounting
(Managerial) Information Systems which are relevant for business
planning, control and decisions;

2. Assist learners in understanding the importance of business ethics and
explain the importance of ethical behaviour for managers and
accountants; and

3. Provide learners with an understanding of the costing and pricing
principles and their relationship to profit planning and business problem
solving.
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Course Outcomes
At the completion of this course, it is expected that learners will be able to:

1. Explain the basic aims (viz stock valuation, profit determination,
decision making, planning and control) of management accounting
(managerial) information systems in an organisation;

2. Explain the role of ethics in the managerial decision making process;
and

3. Apply management accounting concepts, principles and techniques
that are fundamental to effective planning and control and efficient
business decisions.
Course Load
It is a standard OUM practice that learners accumulate 40 study hours for
every credit hour. As such, for a three-credit hour course, you are expected
to spend at least 120 hours of learning. Table 1 gives an estimation of how
the 120 hours could be accumulated.
Table 1: Allocation of Study Hours
Activities No of Hours
Reading the module and completing the exercises 60
Attending 5 seminars (3 hours for each session) 15
Engage in online discussion 10
Completing assignment 20
Revision 15
Total 120

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COURSE REQUIREMENTS
Prerequisites or Co-requisites
None.
Feedback and Course Evaluation
Please refer to myVLE.
COURSE RESOURCES
Set Textbook(s)
Textbook (supplied in course-pack)
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Additional References
Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2009). Cornerstones of
managerial accounting (3rd ed.). South-Western Cengage Learning.

Brandon, C. H., & Drtina, R. E. (1997). Management accounting strategy and
control. Mc Graw-Hill Companies, Inc.

Weygant, J . J , Kieso, D. E., & Kimmel, P. D. (1999). Managerial accounting:
Tools for business decision-making. J ohn Wiley.
Extra Recommended Reading
Zimmerman, J . L. (2000). Accounting for decision making and control
(3rd ed.). McGraw Hill Companies, Inc.
my Virtual Learning Environment (myVLE)
Please refer to myVLE.
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OUM Digital Library Resources
Download past examination questions:
Click Exam Papers
ASSESSMENT
Assessment Format
Please refer to myVLE.
Assignment Question(s)
Please refer to myVLE.
Final Examination
Please refer to myVLE.
Late Submission of Assignment(s)
Failure to submit an assignment by the due date without the granting of an
official extension of time by your course tutor will incur a penalty.
Important Dates
Please refer to myVLE.

Note: This study guide is an excerpt from various sources. The author has
made all attempts to cite the original sources.
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Weekly Study Guide

Week 1
Topic 1: Introduction to Managerial Accounting and
Ethics
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.

Chapter 1 (Page 128)
e-Content
(a) Download PowerPoint slides (Chapter 1) from myVLE (Group Tool)
and read the study guide before attending the face to face seminar.

(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:

1. Describe accounting information and explain the differences
between managerial accounting and financial accounting.

(a) The American Accounting Association describes accounting as
the process of identifying, collecting, measuring, analysing,
preparing, interpreting and communicating economic information
to permit informed judgment to be made by users of accounting
information.

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(b) There are two different accounting information systems, serving
different category of users:

(i) Managerial accounting system which meets the information
needs of internal management, and

(ii) Financial accounting system which meets the needs of
external users such as bankers, creditors, government,
trade unions, potential investors, etc.

Table 1 shows the differences between managerial accounting
information and financial accounting information:

Types of accounting
information system:
Managerial accounting
information systems
Financial accounting
information systems
Targeted user: Internal users and managers External users as well as
stockholders and creditors
Restrictions: No mandatory rules for
preparing reports
Must follow GAAP when
preparing financial
statements
Types of information: Financial and non-financial
information
Financial information
Time orientation: Emphasises the future
(planning and decision
making)
Historical orientation (reports
what has already occurred)
Aggregation: Detailed information about
product line, departments,
etc.
Information about overall firm
performance

2. Using managerial accounting system (MAS), the focus of this
course, provides information for managers to fulfil three basic
objectives/aims:

(a) For stock valuation (costing products and services) and for profit
determination;

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(b) For planning, controlling, evaluation and continuous improvement;
and

(c) For decision making.

The subsequent topics in this course will require learners to learn and
understand how MAS is used by managers to achieve each of the
basic objectives listed above.

3. Explain the importance of ethical behaviour for managers and
management accountants.

The objective of maximising profits should be constrained by the
requirement that profits be achieved through legal and ethical means.
The Institute of Management Accountants (IMA) overarching ethical
principles include:

(a) Competence Maintain an appropriate level of professional
expertise by continually developing knowledge and skills;

(b) Confidentiality Refrain from using confidential information for
unethical or illegal advantage;

(c) Integrity Abstain from engaging in or supporting any activity that
might discredit the profession; and

(d) Credibility Communicate information fairly and objectively.
Study Questions
(a) How do managerial accounting and financial accounting differ? Who
are the different users of accounting information?

(b) What are the three broad objectives of managerial accounting?

(c) What is ethical behaviour? Explain the underlying code of ethics of the
IMA.

(d) Should MAS provide both financial and non-financial information?
Explain.

Now attempt the past examination questions to reinforce your
understanding of this topic.
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Frequently Asked Questions
1. Question: Do you need to learn accounting double entries (debits and
credits)?

Answer: No. Accounting double entries are mostly confined to financial
accounting. The focus of your course is on managerial accounting.

2. Question: Will you be asked to prepare profit and loss and balance
sheet statements during exams?

Answer: A full set of accounts (balance sheet and profit and loss
statement) is not required in this course. You may however, be asked
to prepare a simple profit summary.
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to pages 28 to 29.

If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 2
Topic 2: Basic Cost Concepts and Cost Classifications
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.

Chapters 2 (pages 35-66)

Chapters 3 (pages 101129)
e-Content
(a) Download PowerPoint slides (chapters 2 and 3) from myVLE (Group
Tool) and read the study guide before attending the face to face
seminar.

(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:

1. Explain the meaning of cost and how costs are assigned to
products and services.

(a) Cost is the amount of cash or cash equivalent incurred for
producing goods and/or services.

(b) A cost unit/cost object is any item such as products, departments,
customers and activities for which costs are measured and
assigned.

(c) Cost are assigned to cost objects either directly or indirectly.

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(d) Direct cost such as direct material, direct labour and direct
expenses are traced to cost units directly.

(e) Indirect costs referred to as production overheads cannot be
directly identified to the cost objects. Therefore, they are allocated
by using a more complex approach. (This approach will be
discussed later).

2. Define how costs are classified (cost classification).

Costs can be classified using the three broad managerial accounting
objectives discussed in Week 1. Figures 2.1 to 2.3 show these
classifications.

Figure 2.1: Cost classification for external product costing

Objective 1: For external product costing (stock valuation purposes) costs
are classified by the function they serve, as summarised below:


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Figure 2.2: Cost classification for planning and control

Objective 2: For planning and control purposes, costs are classified by
controls as summarised below:



Figure 2.3: Cost classification for decision making

Objective 3: For decision making purposes costs are classified by behaviour,
as summarised below:



3. Apply cost estimation methods to separate semi-variable costs
into fixed and variable elements.

(a) For decision making purposes it is important to separate the
semi-variable costs into its fixed and variable components.

(b) Cost estimation techniques are used to separate semi-variable
costs into its fixed and variable costs components.

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(c) There are a number of cost estimation methods available.
However, the method relevant for this course is the High-Low
method.

4. Define the various costs of manufacturing products and the
various costs of behaviour. For instance, prime cost consists of:

(a) Direct materials costs Materials directly traceable to the
product/service;

(b) Direct labour costs Labour directly traceable to the product/
service; and

(c) Direct expenses Directly traceable to the product/service.

Learners can refer to the main text, for the definition.

5. Calculate the cost of goods manufactured, the cost of goods sold
and a simple income statement.

Learners can refer to the main text, pages 3941, for the calculation
formats.
Study Questions
Refer to your main text and attempt the following exercises:
(a) Exercise 2-2 on page 71
(b) Exercise 2-3 on page 71
(c) Problem 2-16 on pages 77-78
(d) Problems 2-20, 2-22 and 2-24 on pages 8082
(e) Exercise 3-1 on page 132
(f) Problem 3-13 on page 137

Now attempt the past examination questions to reinforce your
understanding of this topic.
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Frequently Asked Question
Question: How to calculate an income statement for a service organisation?
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to pages 68 to 70 and 131 to 132.

If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 3
Topic 3: Traditional Overhead and Activity Based
Costing, Job Order Costing and Process
Costing
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.

Chapter 7 (pages 275313)

Chapter 8 (pages 347373)

Chapter 9 (pages 401-422)
e-Content
(a) Download PowerPoint slides (chapter 7,8 and 9) from myVLE (Group
Tool) and read the study guide before attending the face to face
seminar.

(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:

1. Explain and calculate how a traditional overhead costing
approach is used for product costing.
Traditional approach overhead involves a two-stage approach,
whereby overhead are first assigned to cost centres and then assigned
to cost objects:

(a) Overhead absorption rate (OAR) is a predetermined rate
calculated using the following formula:

(i)
Budgeted production Overhead
OAR
Budgeted unit of base

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(ii) The above formula can be used to calculate a single or
plant-wide rate.

(iii) For the budgeted unit of base there are different methods of
calculation. However the most common methods are labour
rate, machine hour rate and output rate.

(iv) Refer to page 299-300 of your text for an illustration on the
traditional overhead costing approach.

2. Explain and calculate how an ABC system is used for product/job
costing.

(a) An ABC system traces costs to activities and then to cost objects.

(b) The steps involved in ABC are:
(i) Identify the activities;
(ii) Determine the cost pool by assigning costs to activities;
(iii) Determine the cost drivers for each activity;
(iv) Determine the total amount each driver consumed;
(v) Calculate cost per driver (Step 2 divided by Step 4); and
(vi) Using the calculated cost driver rates charge the overhead
to each product according to its consumption.

(c) The ABC hierarchy consists of different types of costs for different
levels:
(i) Unit level activities arise each time a product is
manufactured;
(ii) Batch level activities vary with the number of batches
produced;
(iii) Product sustaining activities vary with the number of product
lines; and
(iv) Facility sustaining activities are necessary to operate plant
facility

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3. Explain the difference between traditional approach and the ABC
system.
(a) Traditional overhead is volume related, hence it tends to
understate overhead cost of a low volume complex product and
overstate the overhead costs of a high volume product.
(b) ABC tends to allocate overheads to products which consume
activities and these activities cause the overheads to rise.

4. Explain the advantages of ABC.
(a) ABC recognises the reality in advanced manufacturing
environments that overheads are not related to direct labour.
Instead, activities influence overheads. Hence, it provides more
accurate product costs.
(b) Since ABC provides more accurate product costs, decisions
taken by management such as pricing decisions are better
informed.
(c) More accurate product profitability analysis can be produced.
(d) ABC recognises the various activities that take place in an
organisation, hence enabling management to target non-value
adding activities for cost reductions exercises.

5. Describe the differences between job order costing and process
costing and identify the types of firms that would use each
method.
(a) J ob order costing is for companies who produce unique products
which are tailor-made for individual customers needs.
(b) Meanwhile, process costing involves producing similar or identical
products or services.
(c) Go through Review Problem from pages 373 to 375 of the main
text to understand job order costing.

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6. Define equivalent units and explain their role in process costing.
(a) In process costing, at the end of a period, there will be a number
of unfinished production units. These units are referred to as
work-in-process (WIP) units.
(b) In order to determine the cost per unit produced, the output of the
period must be ascertained.
(c) The output of the period consists of fully completed product units
(products started and ended during the same period) and
equivalents units, calculated from the opening and closing WIP.
Study Questions
Refer to your main text and attempt the following exercises:
(a) Exercise 7B-2 on page 342
(b) Exercise 8-3 on page 377
(c) Exercise 8-5 on page 378
(d) Exercise 8-20 on pages 383-384
(e) Exercise 9-2 on page 426

Now attempt the past examination questions to reinforce your
understanding of this topic.
Frequently Asked Question
Question: Do you need to learn both traditional and ABC methods for the
examinations?
Answer: Both methods are examinable!!
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to pages 315, 376 and 425.

If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 4
Topic 4: Cost-Volume-Profit (CVP) Analysis
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Chapter 4 (page 151-182)
e-Content
(a) Download PowerPoint slides (chapter 4) from myVLE (Group Tool) and
read the study guide before attending the face to face seminar.
(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:

1. Understand the underlying assumptions and limitations of the
CVP analysis tool.
Assumptions:
(a) All other variables remain constant (e.g. productivity);
(b) Total revenue is a linear function of output;
(c) Total cost is a linear function of output;
(d) A single product or a constant sales mix; and
(e) No closing stock at the end of the period.
The underlying assumptions are the limitations of the CVP analysis
tool. This is because the above assumptions are not applicable in
practice.

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2. Determine the break-even point in sales units and sales value, the
amount of revenue required for a target profit and the margin of
safety.
(a) For CVP analysis, a contribution margin approach used that
classifies costs by behaviour as:
(i) Variable costs Both variable manufacturing and variable
selling and administrative; and
(ii) Fixed costs Both fixed manufacturing and fixed selling
and administrative.

(b) Contribution margin is calculated as follows:

Sales less ALL variable cost = Contribution.

(c) Contribution/sales =C/S ratio

(d) The break-even point (BEP) is the point where total revenue
equals total cost, the point of zero profit.

(e) BEP can be determined using:
(i) Equation method
(ii) Formula approach
(iii) Graphical approach (refer to text pages 156158)

(f) Equation method:

Operating income =(Price Units sold) (Variable cost per unit
Units sold) Total fixed expenses

At breakeven, this can also be expressed as:

Total revenue Total variable cost Total fixed cost = $0

or

Total revenue = Total variable cost + Total fixed cost

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(g) Formula approach:

Fixed costs
Break-even sales (units)
Contribution per unit

Fixed costs
Break-even sales (RM)
C/S ratio


(h) Graphical approaches:
(i) Traditional break-even chart
(ii) Profit volume chart

(i) Other calculations:

Fixed costs Required profit


Target profit (RM)
C/S ratio


Margin of safety Sales Break-even sales

Total contribution margin


Degree of operating leverage
Operating income

Study Questions
Refer to your main text and attempt the following exercises:
(a) Exercise 4-1 on page 186
(b) Exercise 4-5 on page 186
(c) Exercise 4-15 on page 189
(d) Problem 4-19 on page 191
(e) Problem 4-22 on page 193

Now attempt the past examination questions to reinforce your
understanding of this topic.
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Frequently Asked Questions
(a) Question: Do you need to plot a graph during the examination?
Answer: Although it has not been tested previously, you are expected
to know how to plot a CVP analysis graph.
(b) Question: Will the formulas be given in the examination?
Answer: No. You are expected to remember the formulas and their
applications.
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to page 185.

If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 5
Topic 5: Short-term Decision Making
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Chapter 14 (pages 689718)
e-Content
(a) Download PowerPoint slides (chapter 14 and chapter14_add) from
myVLE (group tool) and read the study guide before attending the face
to face seminar.
(b) Download past examination questions from (OUMs digital library) and
do the questions relevant to this topic.
Study Notes
The learning outcomes:

1. Describe the short-run decision making model and explain how
cost behaviour affects the information used to make decisions.
(a) Read and understand the six steps decision making model.
(b) Generally, the short-term decision making model uses two broad
principles:
(i) The relevant costing principle
(ii) The contribution approach principle
(c) The above principles can be used for various short-term
decisions.
(d) Figure 5.1 shows the types of decisions commonly undertaken
under each principle.
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Figure 5.1: Types of Decision



2. Identify and apply relevant costs and revenue, in a variety of
business decisions.
(a) Relevant costs are future costs that affect future decisions which
differ across alternatives.
(b) If a future costs is the same for more than one alternative, then it
has no effect on decisions. Such a cost is irrelevant.
(c) Examples of relevant costs are:
(i) Variable costs: Costs that vary with output
(ii) Opportunity costs: Costs of the next best alternative
foregone
(iii) Specific fixed costs: Costs that are incurred for a specific
purpose and can be avoided
(iv) Out-of-pocket costs: Cash spending/expenses
(v) Replacement costs: Costs incurred to replace materials that
have been used
(vi) Incremental costs: Additional cost incurred
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(d) Examples of irrelevant costs:
(i) Sunk costs
(ii) General fixed costs
(iii) Depreciation and other notional costs which are non-cash
items
(iv) Overhead absorbed
(e) As shown in Figure 5.1 earlier, relevant costing principle can be
used:
(i) Pricing decisions: Minimum price that should be charged for
a job or project offered.
(ii) Make-or-buy decisions: Compare the relevant cost of
making and outside price. If cost of making is less than
outside price, then make it internally.
(iii) Shutdown decisions: Estimate the relevant cost and benefits
for a shutdown decision. If benefits are more than costs,
then the decision should be to shut down.
3. Understand and apply contribution approach for decision making.
(a) Contribution =Sales Variable costs
(b) Contribution is the amount available to pay off fixed costs. Any
excess represents profit.
(c) Using the contribution approach, only the variable costs are
relevant for decision making. All general fixed costs are assumed
to be constant in the short term.
(d) As shown in Figure 5.1, contribution approach can be used for
the following decisions:
(i) Choosing the optimal production plan;
(ii) Make-or-buy decisions (Outsourcing); and
(iii) Acceptance of special orders decisions.
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(e) For an optimal production plan decision:
(i) Production is limited due to a limiting factor or a resource
constraint existing within the organisation.
(ii) The limiting factor can be internal, such as materials, labour
hours or machine hours; or external, such as sales demand.
(iii) Management has to decide the best way to allocate the
internal scarce resources.
(iv) The decision process involves a number of steps:
Step 1: Calculate contribution per unit of each product
Step 2: Identify the limiting factor and determine how
much each unit of a product consumes that limited
resource
Step 3: Calculate the contribution per limiting factor
Step 4: Rank the products according to their profitability
Step 5: Plan you production schedule based on the
ranking and availability of the resources
Step 6: Calculate the optimal profit from the optimal mix
4. For make-or-buy decisions two rules apply:
(a) Rule 1: Spare capacity is available.
If spare capacity is available, then the decision to make or buy is
solely based on comparing the internal variable cost of
making against the price quoted by the outside supplier. If
variable cost of making is less than outside price, make the
component internally.
(b) Rule 2: There is a resource constraint (No spare capacity exists).
If there is no spare capacity, then the decision to make or buy
depends on internal relevant costs made up of variable costs and
opportunity costs. This internal relevant costs is then
compared with the price quoted by the outside supplier. If
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the internal relevant costs is less than outside price, make
the component internally.
5. For acceptance of special order, learners should understand that
the decision is undertaken based on the following assumptions:
(a) Spare capacity is available;
(b) The special order price is higher than the variable cost or relevant
costs of producing the product;
(c) General fixed costs are assumed to be constant;
(d) Acceptance of the special order will not affect the normal sales
demand; and
(e) The special order is a one-off order only.
Study Questions
Refer to your main text and attempt the following exercises:
(a) Exercises 14-1, 14-2, 14-3, 14-4 and 14-6 on pages 720-723 of the
main text.
(b) Problems 14-19, 14-20 and 14-21 on pages 729-731 of the main text.

Also attempt the past examination questions to reinforce your
understanding
Frequently Asked Question
Question: How to structure the answer for each of the decision rule?
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to pages 719 to 720.
If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 6
Topic 6: Planning and Control: Budgetary Control
Systems
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Chapter 10 (pages 459491)
e-Content
(a) Download PowerPoint slides (chapter 10) from myVLE (Group Tool)
and read the study guide before attending the face-to face seminar.
(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:
1. Define budgeting and discuss its role in planning, control and
decision making.
(a) There are three levels of planning: corporate long-term planning,
medium-term planning and annual budgeting.
(b) Budgets are financial plans for the future and are closely linked to
the long-term plan of the organisation.
(c) Budgets are part of the planning and control process.
(d) Budgets assist an organisation:
(i) To plan and control profitability;
(ii) To plan and control production resources; and
(iii) To plan and control finance and capital expenditure.
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(e) A budgetary system gives an organisation several advantages:
(i) Provides information that can be used to improve decision
making;
(ii) Provides greater coordination of the different functional
areas;
(iii) Provides a standard for performance evaluation; and
(iv) Improves communication and provides motivation to staff.
2. Explain the master budget, define and prepare operational/
functional budgets and financial budgets.
(a) A master budget is a comprehensive financial plan for the whole
organisation.
(b) A budget committee reviews the budget, provides policy
guidelines, resolves conflicts and approves the final budget.
(c) A budget officer or director directs and coordinates the
organisations overall budgeting process.
(d) A master budget can be divided into operating/functional budgets
and financial budgets.
(e) Operating/functional budgets describe the income generating
activities.
(f) Financial budget shows the inflows and outflows of cash and the
firms financial position.
(g) The functional budgets consist of:
(i) Sales budget: Describes expected sales in units and dollars.
Sales quantity budget is often referred to as the kingpin of
budgeting.
(ii) Production budget: Estimates how many units must be
produced to meet sales demand and also satisfy inventory
requirements.

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(iii) Direct material usage budget: Shows the amount of raw
material needed to meet the production quantity budget.
(iv) Direct materials purchases budget: Calculates the amount
and cost of materials to be purchased in each time period.
(v) Direct labour costs budget: Shows the total direct labour
hours and costs needed to meet the number of units in the
production budget.
(vi) Overhead budget: Shows the expected overhead costs
needed for the production quantity budget.
(vii) Selling and administrative budget: Outlines planned
expenditure for non-manufacturing activities.
(viii) Finished good inventory budget: Provides information
needed to prepare balance sheet.
(h) The financial budget are:
(i) Budgeted income statement: Prepared using the functional/
operational budget information;
(ii) Cash budget: Planning timing of inflows and outflows; and
(iii) Budgeted balance sheet.
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Figure 6.1: Master budget and its interrelationships



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3. Describe the behavioural dimensions of budgeting.
(a) Budgets are often used to judge the performance of managers.
(b) Positive behaviour occurs when the goals of each manager are
aligned with company goals and the managers are motivated to
achieve them.
(c) The alignment and coordination of individual goals with that of the
company is referred to as goal congruence.
(d) Dysfunctional behaviour is when individual behaviour is in conflict
with organisational goals.
(e) Monetary and non-monetary incentives are used to control and
reward managers performance.
(f) Participative budgeting allows subordinate managers to have a
say in the establishment of budget targets.
(g) Participative budgeting motivates staff and communicates a
sense of responsibility to subordinate managers.
(h) However, participative budgeting has three potential problems:
(i) Setting standards that are either too high or too low
managers tend to set too loose or too tight budgets.
(ii) Budgetary slack may be built into the budgets Budgetary
slack exists when managers deliberately underestimate
revenues and overestimate costs in an effort to avoid
adverse responsibility.
(iii) Pseudo-participation This is where top management
assumes total control on the budgeting process, seeking
only superficial participation from lower level managers.
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Study Questions
Refer to your main text and attempt the following exercises:
(a) Exercises 10-1, 10-2 and 10-3 on pages 495-496
(b) Exercises 10-7, 10-8 and 10-9 on page 497
(c) Problems 10-15 and 10-17 on pages 499-500
(d) Problems 10-20 on pages 502-503

Now attempt the past examination questions to reinforce your
understanding of this topic.
Frequently Asked Questions
None
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to pages 493 to 494.
If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 7
Topic 7: Planning and Control: Flexible Budget
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Chapter 11 (pages 515-530)
e-Content
(a) Download PowerPoint slides (chapter 11) from myVLE (Group Tool)
and read the study guide before attending the face to face seminar.
(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcome:
Prepare a flexible budget and use it for performance reporting
(a) A static budget is a budget for a particular level of activity.
(b) A flexible budget enables a firm to compute expected costs for a range
of activity or enables to flex the original budget to actual activity level.
(c) When preparing the flexible budget, all variable costs are flexed to the
actual activity level, whilst fixed costs remain the same.
(d) The difference between flexible budget and actual costs is referred to
as variances.
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Study Questions
Refer to your main text and try the following exercises:

Problems 11-19 and 11-20 on pages 540-541.

Now attempt the past examination questions to reinforce your
understanding of this topic.
Frequently Asked Questions
None
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to pages 531 to 532.
If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 8
Topic 8: Planning and Control: Standard Costing
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Chapter 12 (pages 549581)
e-Content
(a) Download PowerPoint slides (chapter 12) from myVLE (Group Tool)
and read the study guide before attending the face to face seminar.
(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:
1. Explain how standard costs are prepared.
(a) Standards are developed from work studies, historical experience
and input from personnel.
(b) Types of standards:
(i) Ideal standards can only operate under perfect working
conditions
(ii) Currently attainable standards are achieved under efficient
operating conditions.
(c) Standard costing is a management control system which is found
mostly in the manufacturing industry.
(d) Variances represent the difference between standard costs and
actual costs.
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(e) Variances are classified as favourable if the actual costs is less
than standard costs and vice versa.
(f) Advantages of standard costing:
(i) It provides a means of ensuring that production resources
are used efficiently
(ii) It provides management with a consistent method of
comparing actual performance with planned performance
(iii) It helps to motivate staff to set realistic standards.
2. Compute the material and labour costs variance and explain how
they are used for control.
The diagram below shows the types of variances and the way to
compute the variances:
(a) AQ =Actual quantity; AO =Actual production output
(b) AP =Actual price of materials; SP =Standard price of material
(c) AR =Actual rate of labour; AH =Actual labour hours
(d) SC =Standard materials/labour cost per unit
(e) AC =Actual material/labour cost per unit
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Study notes Figure 8.1: Production Costs Variances


Study Questions
Refer to your main text and attempt the following exercises:
(a) Exercises 12-8 and 12-11 10.35 on pages 587 to 588
(b) Problem 12-12 on pages 588-589

Now attempt the past examination questions to reinforce your
understanding of this topic.
Frequently Asked Question
Question: Will the relevant formulas for computing variances be given in the
exam question paper?
Answer: No, learners are required to understand, remember and apply the
formulas.
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to page 584.
If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 9
Topic 9: Divisional Performance and Performance
Report
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Chapter 13 (pages 617652)
e-Content
(a) Download PowerPoint slides (chapter 13) from myVLE (group tool) and
read the study guide before attending the face to face seminar.
(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:

1. Explain why firms choose to decentralise.

(a) Decentralisation is the practice of delegating responsibilities.

(b) Firms decide to decentralise for several reasons:
(i) Ease of gathering and using local information;
(ii) Focusing of central management; and
(iii) Training and motivating of segment managers.

(c) Responsibility accounting involves measuring the performance of
decentralised units in terms of accounting results.

(d) Responsibility accounting involves measuring the performance of
decentralised units in terms of accounting results.

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2. Identify and explain the different types of responsibility centres.

(a) There are four major types of responsibility centres:
(i) Cost centre: Manager is responsible only for costs.
(ii) Revenue centre: Manager is responsible only for revenue.
(iii) Profit centre: Manager is responsible for both revenue and
costs.
(iv) Investment centre: Manager is responsible for revenue,
costs and investments.

(b) It is important to measure and monitor the performance of
investment centres.

3. Explain the different types of divisional performance measures.

There are three basis used to measure the performance of investment
centres:

(a)
Operating income
Return on investment (ROI)
Average operating assets


(i) The ROI can be further analysed into:


Operating income
Net Profit margin
Sales



Sales
Asset turnover
Average operating assets


(ii) Advantages of ROI
It encourages managers to focus on cost efficiency;
It encourages managers to focus on operating asset
efficiency; and
It deals with profits and net assets, which are concepts
well understood in business.

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(iii) Limitations
Can lead to sub-optimal decision making.
There can be manipulation of the ratio.
(b) Residual Income (RI): is the difference between operating
income and the minimum dollar return required on a
companys operating assets.
RI = Operating Income (Minimum rate of return Average
operating assets)

(c) Economic value added (EVA) is net income after tax minus
the total annual cost of capital.
Study Questions
Refer to your main text and attempt the following exercises:
(a) Exercises 13-2 and 13-3 on page 656
(b) Problems 13-17 and 13-20 on pages 662-665
Now attempt the past examination questions to reinforce your
understanding of this topic.
Frequently Asked Question
Question: Is the topic on transfer pricing included in this topic?
Answer: No, transfer pricing is not included in this topic.
Glossary of Important Terms
A list of important terms and brief explanations can be found in the Glossary
section of your main text. Please refer to page 655.
If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.
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Week 10
Topic 10: Other Contemporary Issues
Readings
Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K.
(2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc
Graw-Hill Companies, Inc.
Google www. for on-line resources.
e-Content
(a) Download and read the relevant articles before attending the seminars.
(b) Download past examination questions from OUMs digital library and
do the questions relevant to this topic.
Study Notes
The learning outcomes:
Explain contemporary management accounting issues:
(a) Total quality management, on-line resources;
(b) Benchmarking, on-line resources;
(c) Balanced scorecard, refer to pages 643-651 and on-line resources;
(d) Target costing, refer to pages 818-819 and on-line resources;
(e) Life cycle costing, on-line resources; and
(f) Corporate Social Responsibility and Sustainability Reporting, refer to
pages 24-27 and on-line resources.

Learners are expected to read and understand the above issues on
their own.
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Study Questions
(a) What are the four categories of quality costs?
(b) What are the advantages and disadvantages of benchmarking?
(c) Explain the benchmarking process.
(d) Explain Kaplans balanced scorecard principle.
(e) What is target costing? Explain.
(f) What is life cycle costing? Explain how organisations use life cycle
costing.

Now attempt the past examination questions to reinforce your
understanding of this topic.
Frequently Asked Question
Question: Are these topics important for the examinations?
Answer: These topics can be examined as course assignments or briefly in
the examinations.
Glossary of Important Terms
A list of important terms can be found in the index section of your main text.
Please refer to pages 843 to 854.

If the explanations are unclear, learners are advised to refer to an English-
Malay Accounting dictionary.

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Appendix A

Responsibilities of Learners Ethical Behaviour

Plagiarism, Cheating &
Collusion

Learners MUST read the
Postgraduate Student Handbook for
the universitys rules and warnings
on Plagiarism, Cheating &
Collusion.
Learners MUST read and conform to
the universitys Code of Ethics as
stated in the Postgraduate Students
Handbook.
1. Learners are required to use this
study guide as a support material.
For in-depth subject matter details,
learners are advised to refer to the
main course text provided with this
course.
2. Face-to-face learners are required to
attend the five seminars held during
the semester.
3. On-line learners are required to
discuss their doubts with their on-
line facilitators using myVLE.
4. Learners should download and
practise the past examination
questions to have a better
understanding of the subject matter.
5. Learners are advised to read the
Postgraduate Students Handbook
for further clarification.