BMAC5203 Full Version Study Guide

STUDY GUIDE
BMAC5203
ACCOUNTING FOR DECISION MAKING
CENTRE FOR GRADUATE STUDIES
STUDY GUIDE
BMAC5203
Accounting for Decision Making
First Edition (September 2011)
Prepared by:
Assoc. Prof. Dr Indra Devi Kandasamy
Published by:
Centre for Instructional Design and Technology

Open University Malaysia
First Published:
September 2011
Copyright Open University Malaysia (OUM), September 2011, 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.
STUDY GUIDE
BMAC5203
STUDY GUIDE
BMAC5203
Contents
Course Introduction................................................................................. 58
Course Synopsis ................................................................................ 5
Course Aims....................................................................................... 5
Course Outcomes .............................................................................. 6
Course Load....................................................................................... 6
Course Timetable............................................................................... 6
Course Requirements.................................................................................. 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 ............................................................................ 1046
Week 1 ............................................................................................. 10
Week 2 ............................................................................................. 14
Week 3 ............................................................................................. 18
Week 4 ............................................................................................. 22
Week 5 ............................................................................................. 26
Week 6 ............................................................................................. 31
Week 7 ............................................................................................. 37
Week 8 ............................................................................................. 39
Week 9 ............................................................................................. 42
Week 10 ........................................................................................... 45
Appendix A ................................................................................................. 47
Responsibilities of students.............................................................. 47
Plagiarism, cheating & collusion ...................................................... 47
STUDY GUIDE
BMAC5203
STUDY GUIDE
BMAC5203
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.
STUDY GUIDE
BMAC5203
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 tutorial sessions (2 hours for each session)
15
Engage in online discussion
10
Completing assignment
20
Revision
15
Total
120
STUDY GUIDE
BMAC5203
COURSE REQUIREMENTS
Prerequisites or Co-requisite
None.
Feedback and Course Evaluation

Please refer to myVLE.
COURSE RESOURCES
Set Textbook(s)
Textbook (supplied in course-pack)
Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2009). Cornerstones of
managerial accounting (3rd ed.). South-Western Cengage Learning.
Additional References
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. John 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)

STUDY GUIDE
BMAC5203
OUM Digital Library Resources

Download past examination questions:
Click Exam Papers
ASSESSMENT
Assessment Format
Assignment Question(s)
Final Examination
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
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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BMAC5203
STUDY GUIDE
BMAC5203
Weekly Study Guide

Week 1
Topic 1: Introduction to Managerial Accounting and
Ethics
Readings
Chapter 1 (Page 221)
e-Content
(a)
Download PowerPoint slides (lecture 1) from myVLE (Group Tool) and

read through the notes before your first class.
(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)
BMAC5203
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 difference 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, provide 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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BMAC5203
(b)
For planning, controlling,

improvement; and
(c)
For decision making.
evaluation,
and
continuous
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 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 a 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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BMAC5203
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 731 to 738.
If the explanations are unclear, learners are advised to refer to an English/
Bahasa Malaysia Accounting dictionary.
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BMAC5203
Week 2
Topic 2: Basic Cost Concepts and Cost Classifications
Readings
Chapters 2 and 3 (page 2898)
e-Content
(a)

(b)

Study Notes
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.
(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).
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2.
BMAC5203
Define how costs are classified (cost classification).

Costs can be classified using the three broad managerial accounting
objectives discussed in Week 1. Figures 1 to 3 show these
classifications.
Figure 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:
Figure 2: Cost classification for planning and control

Objective 2: For planning and control purposes costs are classified by
controls as summarised below:
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BMAC5203
Study notes Figure 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.
(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. Eg. 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;
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STUDY GUIDE
5.
BMAC5203
(c)
Direct expenses directly traceable to the product/service; and
(d)
Learners can refer to the main text, for the definition.
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)
Exercises 2.21 and 2.24 on page 51
(b)
Exercises 2.29, 2.30 and 2.31 on page 53
(c)
Problem 2.44 on page 57
(d)
Problems 2.47, 2.48 and 2.49 on pages 5960
(e)

Question: How to calculate an income statement for a service organisation?
Answer: Refer to page 43 of your text, for the format and calculations of
income statement for a service organisation.
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BMAC5203
Week 3
Topic 3: Traditional Overhead and Activity Based Costing, Job
Order Costing and Process Costing
Readings
Chapter 5 (page 164203)
e-Content
(a)

read through the notes before your next seminar.
(b)

Study Notes
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:
Budgeted production Overhead

Budgeted unit of base
(i)
OAR
(ii)
The above formula can be used to calculate a single or

plant-wide rate
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STUDY GUIDE
2.
(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 300 of your text for an illustration on the

traditional overhead costing approach.
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:
(c)
(d)
3.
BMAC5203
(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.
The ABC hierarchy consists of different types of costs for different

levels:
(i)
Unit level activities

manufactured;
arise
each
time
product
is
(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 the

plant facility
Refer to text illustrations on pages 301302.
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.
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STUDY GUIDE
(b)
4.
5.
6.
BMAC5203
ABC tends to allocate overheads to products which consume

activities and these activities cause the overheads to rise.
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 are better informed, eg pricing decisions.
(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.
Describe the differences between job order costing and process

costing and identify the types of firms that would use each
method.
(a)
Job order costing is for companies who produce unique products

which are tailor-made for individual customers needs.
(b)
Process costing involves producing similar or identical products or

services.
(c)
Go through Review Problem 1 on page 195 of the main text to

understand overheads and job costing.
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.
(d)
For calculation of equivalent units refer to Illustration 6.2, page

227 of the main text.
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STUDY GUIDE
BMAC5203
Study Questions

(a)
Exercise 7.39 on pages 310311
(b)
Exercise 7.49 on pages 314315
(c)
Exercise 7.51 on page 316
(d)
(e)

Question: Do you need to learn both the traditional and ABC methods for
the examinations?
Answer: Both methods are examinable!!
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STUDY GUIDE
BMAC5203
Week 4
Topic 4: Cost-Volume-Profit (CVP) Analysis
Readings

e-Content
(a)

(b)

Study Notes
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.
BMAC5203
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)
(b)
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.
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

equal total cost, the point of zero profit.
(e)
BEP can be determined using:
(f)
(i)
Equation method
(ii)
Formula approach
(iii)
Graphical approach (refer to text pages 123128)
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)
BMAC5203
Formula approach:
Break-even sales (units)
Break-even sales (RM)
(h)
(i)
Fixed costs
Contribution per unit
Fixed costs
C/S ratio
Graphical approaches:
(i)
Traditional break-even chart (refer to page 128)
(ii)
Profit volume chart (refer to page 127)
Other calculations:
Target profit (RM)
Fixed costs Required profit

C/S ratio
Margin of safety Sales Break-even sales

Degree of operating leverage
Total contribution margin

Operating income
Study Questions

(a)
(b)
Exercises 4.27, 4.28 and 4.29 on page 151
(c)
Problems 4.39 and 4.40 on page 155
(d)
Problems 4.42 and 4.44 on page 156
(e)

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STUDY GUIDE
BMAC5203
(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
application.
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STUDY GUIDE
BMAC5203
Week 5
Topic 5: Short-term Decision Making
Readings

e-Content
(a)
Download PowerPoint slides (lecture 5) from myVLE (group tool) and

read the notes for your next seminar.
(b)
Download past examination questions from (OUMs digital library) and

Study Notes
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

explained on pages 556560 of the main text.
(b)
Generally, the short-term decision making model uses to 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 4 shows the types of decisions commonly undertaken

under each principle.
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BMAC5203
Figure 4: 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:
(d)
(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
Examples of irrelevant costs:

(i)
Sunk costs
(ii)
General fixed costs
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(e)
3.
BMAC5203
(iii)
Depreciation and other notional costs which are non-cash

items
(iv)
Overhead absorbed
As shown in Figure 4 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.
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 4, contribution approach can be used for the

following decisions:
(e)
(i)
Choosing the optimal production plan;
(ii)
Make-or-buy decisions (Outsourcing); and
(iii)
Acceptance of special orders decisions.
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.
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(iv)
BMAC5203
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
Refer to Illustration 2 on 579580 in main text.
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 variable costs and
opportunity costs. This internal relevant costs is then
compared with the price quoted by the outside supplier. If
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 is assumed to be constant;
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STUDY GUIDE
BMAC5203
(d)
Acceptance of the special order will not affect the normal sales
demand; and
(e)
The special order is a one-off order only.
Learners are advised to refer to Illustration 13.2 on page 567 of the

main text.
Study Questions

(a)
Exercises 13.13, 13.14.13.19, 13.24, 13.25 and 13.26 on pages 582587 of the main text.
(b)
Problems 13.39, 13.40 and 13.42 on pages 591-592 of the main text.
(c)
Case 13.51 on page 597 of the main text.
Also attempt the past examination questions to reinforce your

understanding
Question: How to structure the answer for each of the decision rule?
Answer: For each decision rule follow the formats given on Chapter 13 of
main text. Alternatively, follow the approach given by your facilitator.
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BMAC5203
Week 6
Topic 6: Planning and Control: Budgetary Control
Systems
Readings

e-Content
(a)
Download PowerPoint slides (chapter 6) from myVLE (Group Tool) and

read the study guide before attending the face-to face seminar.
(b)

Study Notes
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.
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(d)
(e)
2.
BMAC5203
Budgets assists 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.
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.
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

organization.
(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 budgets shows the inflows and outflows of cash and the
firms financial position.
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(g)
BMAC5203
The functional budgets consist of:

(i)
Sales budget: describes expected sales in units and RM.

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.
(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: outline

expenditure for non-manufacturing activities.
planned
(viii) Finished good inventory budget: Provides information

needed to prepare the 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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STUDY GUIDE
BMAC5203
Figure 5: Master budget and its interrelationships Refer to Review

Problem I and II on page 393
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.
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STUDY GUIDE
BMAC5203
(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 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.
Study Questions

(a)
Exercises 9.21 to 9.29 on pages 398400
(b)
(c)
(d)
Problems 9.46 and 9.47 on pages 407408

None
35
STUDY GUIDE
BMAC5203
36
STUDY GUIDE
BMAC5203
Week 7
Topic 7: Planning and Control: Flexible Budget
Readings

e-Content
(a)

read through the notes before you attend the next seminar.
(b)

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
actual activity level, whilst fixed cost remain the same.
(d)
The difference between flexible budget and actual costs are referred to
as variances.
Refer to Illustrations 11.2 and 11.3 on page 465 and 466 respectively.
37
STUDY GUIDE
BMAC5203
Study Questions

Problems 11.46 to 11.49 on pages 494 to 497.
None
38
STUDY GUIDE
BMAC5203
Week 8
Topic 8: Planning and Control: Standard Costing
Readings

e-Content
(a)

read the notes before attending the seminar.
(b)

Study Notes
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

in mostly in the manufacturing industry.
(d)
Variances represent the difference between standard costs and

actual costs.
(e)
Variances are classified as favourable if the actual costs is less

than standard costs and vice versa.
39
STUDY GUIDE
(f)
2.
BMAC5203
Advantages of standard costing:

(i)
It provides a means of ensuring that production resources

are used efficiently
(ii)
Provides management with a consistent method of

comparing actual performance with planned performance
(iii)
It helps to motivate staff to set realistic standards.
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
For illustration, refer to Review Problem 1 on page 439.

Study notes Figure 6: Production Costs Variances
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STUDY GUIDE
BMAC5203
Study Questions

(a)
Exercises 10.27 to 10.35 on pages 444 to 446
(b)
Problems 10.41 and 10.43 on pages 448 and 450

Question: Will the relevant formulas be given in the exam question paper?
Answer: No, learners are required to understand, remember and apply the
formulas.
41
STUDY GUIDE
BMAC5203
Week 9
Topic 9: Divisional Performance and Performance
Report
Readings

e-Content
(a)
Download PowerPoint slides from myVLE (group tool) and go through

the slides before attending the seminar.
(b)

Study Notes
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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STUDY GUIDE
2.
Identify and explain the different types of responsibility centres.
(a)
(b)
3.
BMAC5203
Four major types of responsibility centres:

(i)
Cost centre: Manager is responsible only for costs.
(ii)
Revenue centre: Manager is responsible for only revenue.
(iii)
Profit centre: Manager is responsible for both revenue and

costs.
(iv)
Investment centre: Manager is responsible for revenue,

costs and investments.
It is important to measure and monitor the performance of

investment centres.
Explain the different types of divisional performance measures.
There are three basis used to measure the performance of investment

centres:
(a)
Return on investment (ROI)
(i)
(ii)
(iii)
Operating income
Average operating assets
The ROI can be further analysed into:
Net Profit margin
Asset turnover
Operating income
Sales
Sales
Average operating assets
Advantages of ROI
It encourages managers to focus on cost efficiency;
It encourages mangers to focus on operating asset

efficiency; and
It deals with profits and net assets, which are concepts

well understood in business.
Limitations
Can lead to sub-optimal decision making.
There can be manipulation of the ratio.
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STUDY GUIDE
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(b)
Residual Income (RI): is the difference between operating

income and the minimum ringgit 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.
Refer to Review Problems I and II on pages 537 and 538 to understand

the calculations.
Study Questions

(a)
Exercises 12.1 to 12.3 on page 342
(b)
Problems 12.3412.37 on pages 547549

Question: Is transfer pricing included in this course?
Answer: No, transfer pricing is not included in your course syllabus.
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STUDY GUIDE
BMAC5203
Week 10
Topic 10: Other Contemporary Issues
Readings

Google www. for on-line resources.
e-Content
(a)
Download PowerPoint slides from myVLE (Group Tool) and read

relevant articles before attending the seminars.
(b)

Study Notes
Explain contemporary management accounting issues:
(a)
Total quality management; refer to pages 1011 and on-line resources;
(b)
Benchmarking, on-line resources;
(c)
Balanced scorecard, refer to pages 526536 and on-line resources;
(d)
Target costing, refer to pages 434, 576577 and on-line resources; and
(e)
Life cycle costing, on-line resources.
Learners are expected to read and understand the above issues on

their own.
45
STUDY GUIDE
BMAC5203
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.

Question: Are these topics important for the examinations?
Answer: These topics can be examined as course assignments or briefly in
the examinations.
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STUDY GUIDE
BMAC5203
Appendix A
Responsibilities of Students
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 online facilitators using the myVLE.
4.
Learners should download and

practice 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.
Ethical Behaviour
Learners MUST read and conform to
the universitys Code of Ethics as
stated in the Postgraduate Students
Handbook.
Plagiarism, Cheating &

Collusion
Learners
MUST
read
the
Postgraduate Student Handbook for
the universitys rules and warnings
on
Plagiarism,
Cheating
&
Collusion.
47

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STUDY GUIDE

ACCOUNTING FOR DECISION MAKING

CENTRE FOR GRADUATE STUDIES

Assoc. Prof. Dr Indra Devi Kandasamy

Centre for Instructional Design and Technology

Copyright Open University Malaysia (OUM), September 2011, BMAC5203

ACCOUNTING FOR DECISION MAKING

ACCOUNTING FOR DECISION MAKING

ACCOUNTING FOR DECISION MAKING

ACCOUNTING FOR DECISION MAKING

Introduce learners to the basic framework of Management Accounting

Assist learners in understanding the importance of business ethics and

Provide learners with an understanding of the costing and pricing

ACCOUNTING FOR DECISION MAKING

Explain the basic aims (viz stock valuation, profit determination,

Explain the role of ethics in the managerial decision making process;

Apply management accounting concepts, principles and techniques

Reading the module and completing the exercises

Attending 5 tutorial sessions (2 hours for each session)

Engage in online discussion

ACCOUNTING FOR DECISION MAKING

Feedback and Course Evaluation

Extra Recommended Reading

my Virtual Learning Environment (myVLE)

ACCOUNTING FOR DECISION MAKING

OUM Digital Library Resources

Late Submission of Assignment(s)

ACCOUNTING FOR DECISION MAKING

ACCOUNTING FOR DECISION MAKING

Weekly Study Guide

Download PowerPoint slides (lecture 1) from myVLE (Group Tool) and

Download past examination questions from OUMs digital library and

Describe accounting information and explain the differences

The American Accounting Association describes accounting as

ACCOUNTING FOR DECISION MAKING

There are two different accounting information systems, serving

Managerial accounting system which meets the information

Financial accounting system which meets the needs of

Table 1 shows the difference between managerial accounting

internal users and managers

external users as well as

no mandatory rules for

must follow GAAP when

financial and non-financial

emphasises the future

historical orientation (reports

detailed information about

information about overall firm

Using managerial accounting system (MAS), the focus of this

For planning, controlling,

For decision making.

ACCOUNTING FOR DECISION MAKING

Explain the importance of ethical behaviour for managers and

Competence maintain an appropriate level of professional

Confidentiality refrain using confidential information for unethical

Integrity abstain from engaging in or supporting any activity that

Credibility communicate information fairly and objectively.

How do managerial accounting and financial accounting differ? Who

What are the three broad objectives of managerial accounting?

What is ethical behaviour? Explain the underlying code of ethics of the

Should a MAS provide both financial and non-financial information?

Now attempt the past examination questions to reinforce your

ACCOUNTING FOR DECISION MAKING

Frequently Asked Questions