Factors in Managerial Accounting

Managerial Accounting: Define and discuss in detail managerial accounting. What is its purpose? How is it used? What are the primary responsibilities of a management accountant? Discuss some of the differences between financial accounting and managerial accounting. Summarize the ethical standards of management accountants.

According to Miller-Nobles, Mattison, and Matsumura (2018), managerial accounting “focuses on providing information for internal decision makers. This type of accounting concentrates on both financial and nonfinancial information for managers and other business users, such as supervisors, foremen, and directors.” Managerial accounting is the counterpart to financial accounting, which is focused on providing information to external decision makers, such as shareholders and investors. Managerial accounting is inward-facing for the organization and is used by business managers who are responsible for the planning, directing, and controlling of the business. Within the planning stage of managerial accounting is both strategic and operational planning; the former involves developing long-term strategies (3-10 years) while the latter is more short-term focused, dealing with the business’s day-to-day operations (Miller-Nobles et al., 2018). Some of the functions used within these duties include job order costing, activity-based costing, and process costing, to name a few, which help decision makers accurately cost and price their goods and services to determine revenue and profit levels. One of the main uses of managerial accounting is to understand the business’s cost/price level to gain a competitive edge over similar/rival companies.

Managerial accounting differs from financial accounting in several ways. First, as mentioned above, managerial accounting is strictly for internal use by the company’s decision makers to aid in planning, directing, and controlling, whereas financial accounting’s primary users are investors, creditors, and government for aiding in investment and credit decisions (Miller-Nobles et al., 2018). Additionally, financial accounting practices must follow GAAP (or Generally Accepted Accounting Principles) whereas managerial accounting is not required, as it is strictly for internal use. Further, financial accounting tends to look from the present to the past, such as 2019 actual performance being reported in 2020, wherein managerial accounting, it is a look from present to the future; i.e., 2020 budget estimates are being prepared in 2019.

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Since managers are often confronted with ethical dilemmas, the Institute of Management Accountants (IMA) has developed several standards that managerial accountants are expected to follow when faced with such ethical challenges (Miller-Nobles et al., 2018). These standards require managerial accountants to maintain their professional competence, preserve the confidentiality of the information they handle, and act with integrity and credibility. It may seem easy, harmless, and sometimes even tempting to adjust numbers to show better sales or performance results, but these could have devastating effects on the company in the long run if it becomes dependent on falsified figures.

Job Order Costing: Define job order costing. Compare and contrast job order costing with process costing. Trace the flow of costs through a job order costing system. Discuss manufacturing overhead and how it is applied. Why is the manufacturing overhead account adjusted at the end of the period?

According to Miller-Nobles et al. (2018), “A job order costing system accumulates costs for each unique batch or job. A job may be a single unique product or specialized service, or a batch of unique products.” In other words, the job cost system is used by companies who produce unique products or services. Conversely, “process costing systems accumulate the cost of each process needed to complete the product over a period of time instead of assigning cost to specific jobs” (Miller-Nobles et al., 2018). Companies that manufacture many, identical, units are users of this system for costing. A job order costing system tracks costs as raw materials move from the storeroom to the production floor, where they are converted into finished products. This begins with the purchase of the raw materials, their use in production, and their ultimate finished product. Throughout its production life, materials and products may be moved from raw materials, to work-in-process (WIP) inventory, to finished goods inventory, and ultimately become transactions of cost of goods sold. Manufacturing overhead is calculated from the indirect costs that are incurred during the production of the product. A predetermined rate will be calculated and used to consider these costs during production, which determines the overhead per unit. At the end of a given period, adjustments will be made for any under- or overallocated manufacturing overhead.

Process Order Costing: Define Process order costing. Trace the flow of costs through a process order costing system. Explain the concept and calculation of equivalent units of production. Discuss the production report as a decision-making tool.

According to Miller-Nobles et al. (2018), “A process costing system accumulates the costs of each process needed to complete the product over a period of time instead of assigning costs to specific jobs.” Within process costing, work-in-process inventory accounts are still used, such as with job costing systems, however, there are multiple WIP inventory accounts, one for each department/process/etc. Process costing system costs flow by way of direct materials, labor, and manufacturing overhead. Each process is a separate department, and each department has its own work-in-process inventory account. Direct materials, direct labor, and manufacturing overhead are assigned to work-in-process inventory for each process that uses them. When a particular process is complete, the unit moves out of department A and into department B. Department A’s costs are also transferred out of its department WIP inventory account and into department B’s WIP inventory account. When the manufacturing is complete, the units go into finished goods storage. The combined costs of all departments flow into finished goods inventory. When the units are sold, the costs are transferred from finished goods inventory to cost of goods sold.

Utilizing equivalent units of production allows businesses to measure the direct materials, direct labor, and manufacturing overhead incurred on a partially finished group of units during a period and to express it in terms of fully complete units of output (Miller-Nobles et al., 2018). The production process takes time, so it is possible that some companies may have products that are not completed and are still in process at the end of an accounting period. This is where the equivalent units of production are useful.

A production cost report can be useful in several ways. For example, it aids in controlling costs; perhaps direct materials costs are too high, suggesting the need for a supplier change. Also, it can help in evaluating performance; given that managers are often rewarded based on how well they meet budget limitations, this report can provide relevant data on those performance metrics. Additionally, it can help by identifying the most and least profitable products and aid in price setting decisions.

Cost Management Systems: Analyze the process of assigning and allocating costs. Discuss the development of an activity-based costing system and how activity-based costing system and how activity-based management is used in decision making. Compare and contrast Just-In-Time and Quality Management Systems.

There are three main ways that businesses can allocate costs: single plantwide rate, multiple department rates, and activity-based costing. The single plantwide rate is the traditional and easiest method for allocating manufacturing overhead costs. Using this method, “the company calculates the predetermined overhead allocation rate before the period begins by selecting one allocation base and using the base to allocate costs to all units (Miller-Nobles et al., 2018). The multiple department rates method is more complex, but is also more accurate. The allocation process is the same, except the manufacturing overhead is accumulated in multiple cost pools and allocated using multiple allocation bases.

According to Miller-Nobles et al. (2018), activity-based costing “focuses on the costs of activities as the building blocks for allocating indirect costs to products and services.” Activity-based costing systems are developed in four steps: 1. Identify activities and estimate their total indirect costs; 2. Identify the allocation base for each activity and estimate the total quantity of each allocation base; 3. Compute the predetermined overhead allocation rate for each activity; 4. Allocate indirect costs to the cost object. Activity-based management uses activity-based costs to make decisions that increase profits while meeting customer needs. Companies can use ABM to help with pricing and product mix decisions, cost management decisions, such as where to cut costs, and how to ensure that operations are running efficiently overall.

Just-In-Time (JIT) is a cost management system that is designed to reduce inventory and storage costs by producing products just in time to satisfy needs. Suppliers deliver materials just in time to begin production and finished units are completed just in time for delivery. There is far less, if any, storage of excess materials or finished products onsite. Quality Management Systems help managers improve the business’s performance by providing quality products and services. Its primary goal is continuous improvement of what the company offers. Its aim is superb quality, cost reduction, and overall increased performance. The two systems are related in that they both aim for reduced costs, but they differ in how they accomplish these goals.

Cost-Volume-Profit Analysis: Analyze cost behavior in relation to changes in volume. Define contribution margin and its use in computing operating income. Discuss cost-volume-profit (CVP) analysis and how it is used as a decision tool.

According to Miller-Nobles et al. (2018), “Some costs, such as costs of goods sold, increase as the volume of sales increases. Other costs, such as straight-line depreciation expense, are not affected by volume changes.” There are three types of costs to consider: variable, fixed, and mixed. Variable costs increase or decrease in total in direct proportion to increases or decreases in the volume of activity. Fixed costs remain the same in total, regardless of changes over wide ranges of volume of activity. Mixed costs are those with components of both variable and fixed costs.

The contribution margin is “the difference between net sales revenue and variable costs” (Miller-Nobles et al., 2018). It is the amount that contributes to covering the fixed costs and then to providing operating income. The formula is net sales revenue minus variable costs. This helps managers determine product profitability.

Cost-volume-profit (CVP) analysis is a planning tool that looks at the relationships among costs and volume and how they affect profits (or losses) (Miller-Nobles et al., 2018). Ultimately, this tool provides managers the ability to determine, or estimate, what sales levels would be needed in order to hit a breakeven point.

Variable Costing: Compare and contrast variable costing with absorption costing, highlighting the differences between operating income. Discuss the use of variable costing for decision making in a manufacturing company and a service company.

Miller-Nobles et al. (2018) write that “Absorption costing considers direct materials costs, direct labor costs, variable manufacturing overhead costs, and fixed manufacturing overhead costs as product costs.” In other words, the products absorb all of the manufacturing costs. According to Miller-Nobles et al. (2018), variable costing is “an alternative costing method that considers only variable manufacturing costs when determining product costs.” Variable costing includes direct materials costs, direct labor costs, and variable manufacturing costs as product costs. Fixed manufacturing costs are considered period costs and are expensed in the period in which they are incurred, because these costs are incurred whether or not the company manufactures any goods. In a practical example, if units produced equal units sold in a particular period, operating income will be the same, regardless of costing method used. However, if units produced are more than units sold, absorption costing will show a greater operating income than variable costing. Conversely, if units produced are less than units sold, variable costing will show a greater operating income than absorption costing. Variable costing can be used when setting sales prices on short-run initiatives. Additionally, variable costing can aid in controlling costs, planning production, and analyzing profitability.

Decision Making: Discuss how relevant information is used to make short-term decisions and how pricing affects short-term decisions. Explain the concept of capital budgeting and detail the capital budgeting techniques used to make decisions. This includes, the payback method, the accounting rate of return method, and the discounted cash flow method.

When managers make decisions, they focus on information that is relevant to their decisions. According to Miller-Nobles et al. (2018), “Relevant information is expected future data that differ among alternatives.” Relevant costs are costs that are relevant to a particular decision. A common approach to making short-term business decisions is called differential analysis, where the emphasis is on the difference in operating income between the alternative approaches. Given that product lifecycles are becoming shorter and shorter, pricing has become more short-term oriented. Companies are either price-takers (little control over price) or price-setters (more control over price) when it comes to pricing its products. Depending on how useful, unique, and/or innovative the product is determines the role the company plays in setting the price.

The process of making capital investment decisions is often referred to as capital budgeting. Capital investments are made when a capital asset is acquired, such as via purchase or construction. There are generally four steps in the capital budgeting process: 1. Develop long-term goals, 2. Identify/analyze potential capital investments, 3. Acquire and use approved capital investments, 4. Perform post-audits. Capital investments can have their potential analyzed via four methods: payback, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR). Payback is a capital investment analysis method that measures the length of time it takes to recover, in net cash inflows, the cost of the initial investment. Payback equals amount invested divided by expected annual net cash inflow. The accounting rate of return (ARR) is a capital investment analysis method that measures the profitability of an investment; ARR equals average annual operating income divided by average amount invested. Net present value (NPV) is a capital investment analysis method that measures the net difference between the present value of the investment’s net cash inflows and the investment’s initial cost. The internal rate of return (IRR) is the rate of return, based on discounted cash flows, of a capital investment.

Budgets and Standard Costing: Evaluate the different types of budgets and discuss how operating and financial budgets are prepared for a manufacturing company. Discuss the use of budgets and standard costs to control business activities. Explain how standard costs are used to determine variances.

According to Miller-Nobles et al. (2018), “A budget is a financial plan that managers use to coordinate a business’s activities with its goals and strategies.” There are several different types, or styles, of budgets, all with their own applications. Participative budgets are those budgets which are determined with the inclusion of those who will be impacted by said budget. Zero-based budgets require managers to justify all revenue and expenses for each period. Strategic budgets are long-term financial plans, whereas operational budgets are more short-term minded. A continuous budget is an operational budget in which one additional month is constantly added as each month goes by. There are static budgets, which are prepared for only one level of sales volume, as well as flexible budgets which are prepared for various levels of sales volume. Manufacturing companies prepare operating budgets by first preparing the sales budget. This budget estimates the sales revenue for the company. Then, the production budget is developed to determine the amount of goods produced during the current year to meet the sales estimates. The production budget is the basis for production costs such as direct materials, direct labor, and manufacturing overhead.

 According to Miller-Nobles et al. (2018), “A flexible budget summarizes revenues and expenses for various levels of sales volume within a relevant range. A flexible budget is simply a series of budgets at different levels of activity.” Flexible budgets help management because they show operating income at several different levels of activity. Furthermore, they help to isolate how variable costs change based on different levels of activity. Static budget variance is divided into two categories: Flexible budget variance and sales volume variance. In flexible budget variance, it’s the difference between actual results and the expected results in the flexible budget for the actual units sold. The variance arises because the company had different revenues and/or costs than expected for the actual units sold. The flexible budget variance occurs because sales price per unit, variable cost per unit, and/or total fixed costs were different than planned on in the static budget (Miller-Nobles et al., 2018). Sales volume variance is the difference between expected results in the flexible budget for the actual units sold and the static budget. This variance arises because the actual number of units sold differed from the number of units on which the static budget was based. Sales volume variance is the volume difference between actual sales and budgeted sales.

References

• Miller-Nobles, T., Mattison, B., & Matsumura, E. (2018). Horngren's Financial & Managerial Accounting, the Managerial Chapters (6th ed.). Pearson College Div.