Managerial Accounting: What You Need to Know

Problem 1-1 : Budgets in Managerial Accounting [LO 1, 2] 

Labor cost is a variable cost that must change with a change in the number of salsa jars produced. Variable costs change based on the number of units produced. Examples of such costs include direct labor, cost of ingredients, and costs of raw materials that increase or decline based on the proportion of units produced. To accurately account for variable costs, variable cost per unit should be calculated by dividing the costs by the number of units. For example, the ingredient cost per unit is $20,000/$25,000 = $0.8. Contrary, fixed costs remain constant regardless of the number of units produced. Examples of such costs include rent/lease, depreciation cost of machine/equipment, and indirect labor costs such as administrators. Based on the variable cost per unit, the labor cost will increase from $12,000 in April to $14,400 in May. The projected increase in variable costs is therefore $14,400 - $ 12,000 = $2,400. If the cost of labor is $20 per hour, the additional labor hours therefore equal to additional labor costs divided by the cost of labor per hour ($2,400/$20= 120 labor hours) 

Actual costs per unit and the budgeted costs per unit are estimated as the total costs (fixed and variable costs) divided by the number of units. 

Actual cost per unit = Total costs in April/ 25,000 = $ 44,000/ 25,000 units = $1.76 

Budgeted cost per unit = Total costs in May/ 30,000 = $ 50,400/30,000 units= $1.68 

The budgeted cost per unit is lower relative to the actual cost per unit in April, in that the extra 5,000 salsa jars in May were produced at the same fixed costs of rent, depreciation, and other costs. 

Question B 

One objective of chapter one is to distinguish between managerial and financial accounting. While financial accounting entails preparing organization reports such as balance sheet, statement of retained earnings, income statement, and cash flow statement, the managerial accounting involves internal recording keeping to project, plan, and control future operations (Jiambalvo, 2016). Financial accounting produces reports for external stakeholders such as investors and shareholders. The financial accounting process of publicly owned companies are often mainly overseen by a market regulator such as Security Exchange Commission in the US. Contrary, managerial accounting involves recording, evaluating, interpreting, and communicating the analysis to managers to advance the organizational goals (Jiambalvo, 2016). Managerial accounting provides information for making managerial decisions such as production capacity, demand, and product costs. 

Managerial accounting mainly aids budgeting for purposes of future planning. For example, the number of units produced may be projected and the variable costs calculated based on the unit variable costs per product while maintaining fixed costs constant. Management may, for example, prepare in advance to pay extra production costs or earn lower profit due to deteriorating demand. Managerial accounting also seeks to understand the performance of employees before informed decision-making (Jiambalvo, 2016). For example, an organization may choose to subject employees to training due to underperformance or pay a bonus to well-performing employees. Managerial accounting, therefore, provides additional non-monetary information relative to financial accounting and does not need to follow any accepted accounting principles such as GAAP (Jiambalvo, 2016). Notably, both managerial and financial accounting processes are useful to the management but serve different purposes. 

Question C 

One of the objectives in chapter 2 is to distinguish between manufacturing and non-manufacturing costs and between products and period costs. Breaking down costs is a key organizational role that facilitates the calculation of product prices, profits and analyzing the appropriateness of costs. Minimizing costs while maximizing profits is an essential role that the management has to grapple with to achieve cost leadership and the accompanying competitive advantage (Jiambalvo, 2016). Mainly, organizational costs are broadly categorized as manufacturing and non-manufacturing costs. Manufacturing costs consist of all expenses related to production, such as costs of direct labor, raw materials and manufacturing overhead costs such as factory supplies, factory utilities, depreciation of factory equipment, indirect labor, and factory equipment (Jiambalvo, 2016). Non-manufacturing costs are not directly linked to production operations and mainly consist of administrative and general costs such as advertisement, depreciation of company equipment, costs of shipping and storing finished products, and salaries of personnel in administrative roles (Jiambalvo, 2016). The broad classifications help to assign costs to the units of production. 

Costs may also be categorized as product or period costs, product costs. Product costs consist of all manufacturing costs in that they can be directly assigned to the units produced (Jiambalvo, 2016). An organization understands the proportion spent on production and costs considered asset inventory and is only earned after-sales. On the other hand, period costs consist of non-manufacturing costs and cannot be allocated to the units produced instead of time (Jiambalvo, 2016). Examples of such costs are depreciation of office equipment, advertisement, administrative salaries, and office supplies that can only be considered as spent within the accounting period, such as a month, quarterly, semi-annually, or annually. The main difference is that the period costs are expended at the end of a period while the product costs are expended after selling a product. 

Question D 

Problem 2-1. Cost of Goods Manufactured, Cost of Goods Sold, and Income [LO 2] 

References 

Jiambalvo, J. (2016). Managerial Accounting . Wiley Global Education.