AbstractDuringthis training I was able to learn many valuable concept that are used in theworld of managerial accounting. Below eight different topics that were coveredduring training will be summarized. The eight topics covered are managerialaccounting, job order costing, process order costing, cost management systems,cost-volume-profit analysis, variable costing, decision making and budgetstandards. Managerial Accounting The IMA defines ManagerialAccounting as “a profession that involves partnering in management decisionmaking, devising planning and performance management systems, and providingexpertise in financial reporting and control to assist management in theformulation and implementation of an organizations strategy” (IMA, 2009). Thepurpose of managerial accounting is to assist management and other internal employeeswith the decision-making processes of the company. Management accounting mainlyconsists of “controlling costs and the planning and controlling of operations”(referenceforbusiness.
com, 2018). Management accounting focuses on internalfuture forecasting for a company. Management accountants create reports thatgive the information needed for management to accurately form tactful businessstrategies in regards to the company’s financial moves. Reports generated bymanagerial accountants consist of planning and controlling the companiesoperations.
Planning is performed by creating budgets, identifying profit goalsand cash flow. The controlling portion of managerial accounting involvesanalyzing the company’s performance and rectifying any budgetary shortfalls ifneeded. Managerial accounting is used forinternal future forecasting decision-making. In contrast financial accountingis used for analyzing past financial history which is used in externaldecision-making.
One of the biggest differences between managerial accountingand financial accounting is in the reports that are created by each department.Financial accounting reports must adhere to the General Accepted AccountingPrinciples standards. Government agencies such as the Internal Revenue Service,Financial Accounting Standards Board and the Securities and Exchange Commissionall have access to financial accounting reports and standardization in thereports is important when analyzing a company’s history.
Another differencebetween management accounting and financial accounting is the time at whichreports are created. Management accounting reports are created in real time,while financial accounting reports are created on a routing schedule throughoutthe year. Managerial accounting reports are also much more concentrated tosmaller portions of a company.
Financial accounting reports involve thebreakdown of an entire company. The Institute of ManagerialAccounting dictates the ethical standards for management accountants. There arefour principles that IMA members need to follow, they are honesty, fairness,objectivity and responsibility. The standards set out by the IMA arecompetence, confidentiality, integrity and credibility. IMA also requiresmembers to attempt to resolve or anonymously report it.
Job Order Costing Job Order Costing is defined as the “systemfor assigning manufacturing costs to an individual product or service”(AccountingCoachLLC.com, 2018). Job order costing is used to set prices forcompanies with different types of products or services within the company. Joborder costing is different than process costing in many ways. Process costingis used when a company has to produce identical products in mass quantities. Joborder costing is developed differently than process costing.
Job order costing for a product begins bygenerating a job cost sheet. The job cost sheet includes a direct material,direct labor, and manufacturing overhead sections. In Job order costing themanufacturing overhead is readjusted at the end of the accounting period due tothe differing products being created. Manufacturing overhead are “indirectcosts associated with manufacturing a product”(AccountingCoachLLC.com, 2018).
Overhead cost may include electricity used in the manufacturing factory,supplies, equipment, property taxes on the factory, and any personnel needed toupkeep the factory. There are different methods for allocating manufacturingoverhead costs; one example is through direct labor. The activity of directlabor is assigned a cost and used as the cost driver for calculating thepredetermined overhead.
The predetermined manufacturing overhead is just anestimate and may need to be adjusted at the end of the period in order toreflect actual manufacturing overhead costs. Once all cost have been determinedthey will be entered into the job order cost sheet.Process Order Costing Process Order Costing is used tocreate identical products in mass quantities. This process begins byidentifying the steps needed to produce the product and assigning direct labor,raw material and overhead costs. Once costs are assigned a work in processaccount is created, and the costs in the work in process account is moved fromaccount to account as the product moves through to the finished goods portionof the process.Process Order Costing Process Order Costing is used tocreate identical products in mass quantities. This process begins byidentifying the steps needed to produce the product and assigning direct labor,raw material and overhead costs.
Once costs are assigned a work in processaccount is created, and the costs in the work in process account is moved fromaccount to account as the product moves through to the finished goods portionof the process.Equivalent Units Completed(weighted method) Equivalent units completed are theamount of partially completed units at the end of a period expressed ascompleted units. (AccountingCoachLLC.com, 2018). It is much easier to deal withcompleted units versus partially completed units when calculating cost.Equivalent units of product is calculated by multiplying the percent completedof a unit to the total amount of units attempted, then adding that total to thenumber of units actually completed. To the get the cost of equivalent unitsproduced the company will take the direct labor cost and divide it by theamount of equivalent units. Production Report The production report contains theinformation on cost acquired by each department.
The report compiles thenumbers on material, labor and overhead for each department. It is an importanttool that is helpful in making educated decisions as it allows a manager to getan overview of the departmental costs.Cost Management System Costmanagement system is defined as “a set of formal methods developed for planningand controlling an organizations cost-generating activities relative to itsshort term objectives and long term strategies” (coops.northseattle.edu, 2018).Cost allocation is the process of identifying specific costs within aproduction or department. Cost allocation helps a company keep track of wherecosts are being incurred in the company. Proper costs calculations are requiredin order to correctly price items and manage company resources.
In order toallocate costs the cost object must be known, once the cost object isidentified, the amount of money spent on that cost object must be totaled upand assigned to the cost object. Activitybased costing is used to assign overhead costs to products that requirespecific activities in order to complete the production. During activity basedcosting, similar process activities are put into a cost pool that relate tocost drivers. Once cost pools are analyzed they are assigned as pre-determinedoverhead. Activity based costing is a more precise way of assigning indirectcosts. Just in Time management is verysimilar to quality management systems.
Just in time management is a methodof keeping costs low by maintaining low inventory. A company will only put inorders for inventory when needed and forecasted by producers. This type ofmanagement requires producers to run very efficient processes.
Supply chainsare at risk of disruption if one link in the chain has a malfunction. Qualitymanagement systems focused on quality by incorporating every person involvedinto the process. They focus on improving the production process and theproduct itself. The customer is the number one concern since they are the oneswho dictate quality in a product.Cost-Volume-Profit Analysis Cost Volume Profit analysis estimates howvariations in cost affect profit within a company (thebalance.com, 2018). Cost volume profit analysis takes intoaccount three variables: fixed and variable cost, sales volume and price andhow they affect profit. Some costs are affected directly by the level ofproduction within a company.
The way costs behave when volume is changed can beanalyzed in order to make better decisions. Cost volume profit analysis is avery popular tools used by all companies at some point or another. Contribution margin is the productsprice minus all variable costs. The formula for calculating contribution marginis (Net product revenue-Product variable)/ Product revenue). Contributionmargin is used to determine price for products during certain situations suchas special pricing events.
It is also used to identify which product shouldcontinue to be sold based on the contribution margin associated with it and theestimated profit. Contribution margin can be used with single products,customer sales, product lines as well as whole businesses.(accountingtools.com, 2018).
Variable Costing VariableCosting and absorption costing are two techniques used when applying productioncosts to products. (strategiccfo.com, 2018) Variable costing assigns all directand variable manufacturing overhead costs to the end product. The fixedmanufacturing overhead costs are expensed at the time they are incurred. Theassigned costs stay with the product until the item is sold, then expensed inthe costs of goods sold statement.
(strategiccfo.com, 2018) Absorptioncosting assigns directs costs and both fixed and variable manufacturing coststo the end product. Like in Variable Costing, assigned costs stay with theproduct until it is sold and expensed through the income cost of goods soldstatement. (strategiccfo.com, 2018) Whenit comes to making decisions about the business variable costing is much moretelling of the companies situation. Variable costing only looks at the variablelabor, materials and overhead costs for a specific product. This way ofanalyzing a companies costs paints a much more precise picture of the actualcosts associated with the product being produced.
Decision Making Thedecision making process for managers involves analyzing relevant informationand relevant cost. Relevant information is “expected future data that differsamong alternatives, and relevant costs are costs that are relevant to aparticular decision” (Nobles & Mattison & Matsumura, 2018). There aredifferent situations that may require a manager to make a short-term decisionsuch as regular and special pricing, removing products that have not made anyprofit, and outsourcing.
A popular technique for making short-term decisions isby analyzing how each decisions outcome would affect the operating income ofthe company. Capitalbudgeting is the process of planning long-term asset investments so that theyreturn the most profit to the company. There are four steps to the capitalbudget process: Developing a strategy, plan, act, and control. Some stages ofcapital budgeting involve screening potential capital investments and further analyzingpotential investments by using the net present value or the internal rate ofreturn methods. Thepayback method is an analysis method used to evaluate shorter capitalinvestments. Payback method involves the calculations that indicate the amountof time it will take to make back the cost of the initial investment. Thepayback method formula is amount invented/expected annual net cash flow.
Inorder to invest under the payback method a company should invest only if thepayback period is equal to or less than the investment useful life. TheAccount rate of return measures the profitability of an investment. The ARRformula is Average annual operating income/Average amount invested. In order toinvest the ARR should meet or exceed the rate of return. The discounted cashflow method is another analysis tool. It involves using cash flow projectionsand discounting them so they are at set to the present value. The present valueis used to assess the potential of the future investment.
Budget and Standard Costing Budgetsare financial plans used to create future business activities. There are manytypes of budgets; two examples would include strategic and operational budgets.A strategic budget is associated with long-term goals.
It is a long-term financialplan that is used to create the activities needed to complete the long-termgoal set out by the company. Strategic budgets last about 3-10 years and aresometimes a little vague. Operational budgets are used for short-term goalsthat could be completed in a smaller window of about one week to a month.Operational budgets require more details because of how quickly they must befulfilled. Operationalbudgets are prepared by including the sales budget, production budget, directmaterial purchases, direct labor budget, overhead budget, selling andadministrative expense budget, and cost of goods manufactured budget. Thefinancial budget includes the schedule of expected cash receipts fromcustomers, schedule of expected cash payments, cash budget, budgeted incomestatement, and budgeted balance sheet. Budgetsand standard costs are used to control business activities through pricingdecisions and expected cost forecasting.
If current costs become greater thanthe standard forecasted costs the company knows that it will make less profitthan originally planned. “When actual costs are greater than the standard costthe variance is unfavorable. If actual costs are less than the standard costthen variance is favorable.” (AccountinCoachLLC.com, 2018)Reference ReferenceWhat is an equivalent unit ofproduction? | AccountingCoach. (n.d.).
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unf.edu/~dtanner/dtch/dt_ch1.htmTraditionalMethods of Allocating Manufacturing Overhead | Accounting Coach. (n.d.).Retrieved from https://www.accountingcoach.com/manufacturing-overhead/explanation/2