Question 1.
Managerial accounting is a business function conducted internally to manage the financial information of an organization. It involves identifying, interpreting, analyzing, and communicating financial data to leaders to achieve organizational goals (Nielsen & Roslender, 2015). Managerial accounting intends to help internal stakeholders to make well-informed choices with regards to the business.
Managerial accountants utilize information about sales and cost revenues of products and services acquired by the organization. The managers primarily use the cost accounting technique to focus specifically on getting the total production cost (Nielsen & Roslender, 2015). They, therefore, assess the varying costs of each production step and the fixed costs. By assessing these costs, managerial accountants can maximize on the profits, while reducing unnecessary expenses.
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Managerial and financial accounting primarily differs based on the target audience of financial information. The information generated from managerial accounting aims to help managerial, organizational managers make informed decisions about the business (Nielsen & Roslender, 2015, p. 5) . On the other hand, the information generated from financial accounting intends to provide financial data to external stakeholders of the organization, such as external shareholders and other investors. Additionally, financial accounting has to adhere to specific standards stipulated by the code s of the Generally Accepted Accounting Principles (GAAP) ( Vishny & Zingales, 2017, p. 1805 ) . However, managerial accounting is only applied internally within the company, and it, therefore, can take any format depending on the needs of specific users. For instance, production managers may require to see the department’s financial information recorded as percentages of produced units within a specific period. The sales manager may want to have their financial data presented in the form of graphs. Managerial accounting can thus meet the needs of both managers by documenting financial information in a way that will be beneficial for both departments.
Ethics is a vital component of managerial accounting. Companies usually have special codes of conduct or ethics for setting the expected ethical conduct of accountants. Majorly, managerial accounting follows the code of conduct formulated by the Institute of Management Accountants (IMA). IMA principles require managerial accountants to be responsible, objective, honest, and fair. Managerial accountants also need to be competent, credible, exercise confidentiality and have professional integrity ( Melé, Rosanas, & Fontrodona, 2017, p. 611) .
Question 2.
Managerial accountants employ the Job Costing Order technique to assign and accumulate costs of manufacturing individual units of production. This system is applied when various high-cost products contain significant differences. Because of the variations in products, each item is accorded a separate job costing record (Syaifullah, 2015). The JOC reports each product’s direct labor and materials that were utilized and will report the amount of the manufacturing overhead.
Distinct variations exist between job and process order costing. The process of job costing comprises the production of insignificant quantities of unique or distinct products that are heterogeneous. These products are manufactured per customer preferences, and the direct labor and materials are traced to specific tasks ( Kucherenko, Melnyk, & Ratushna, 2019) . Contrary to this, process costing involves the manufacture of large amounts of items that are similar or homogeneous. In this process, specific items cannot be related to specific costs in the manufacturing process.
The flow of cost in a job order technique begins with recording the prices of raw materials, labor, and overhead (Syaifullah, 2015). The authors further say that managers then debit t he direct costs of labor and raw material to the work-in-process inventory. They should then debit indirect labor or materials, if any, in the manufacturing overhead account. This account is then applied to the work-in-progress through a rate that is predetermined. They then apply the off-setting credit to the overhead account (Syaifullah, 2015). Syaifullah (2015) note that t he managers should then credit the completed items to the work-in-process and debit it in the inventory account of the finished goods. The prices of sold items are credited in the account for completed items and debited in the account that records the cost of sold goods.
The manufacturing overhead involves all the indirect expenses sustained during the process of production. The manufacturing overhead is applied to the produced items within a specific reporting period. Costs included in the manufacturing overhead are equipment depreciation, property taxes, rent, salaries of personnel, managers' salaries, management staff salaries, cost of indirect supplies, utilities, and wages of subordinate staff ( Kucherenko, Melnyk, & Ratushna, 2019) . Generally, manufacturing overhead is the total of all indirect costs.
This overhead is adjusted during project completion to establish whether or not overheads are over-applied or underapplied ( Kucherenko, Melnyk, & Ratushna, 2019) . It is adjusted at the end of the given time since, at this time, all expenses have been realized, and so they can be included in the total costs to realize the costs incurred on indirect items ( Kucherenko, Melnyk, & Ratushna, 2019) .
Question 3.
Process costing is a process used to collect and assign the cost of manufacturing to the produced items ( Vishny & Zingales, 2017, p. 1809) . This system is applied when companies produce large quantities of products with similar characteristics. The process order cost flow requires managers to credit direct labor, direct materials, and the overhead for manufacture to the account documenting the work-in-process. After completion of the work-in-process, managers then credit them in the account, recording the finished goods ( Vishny & Zingales, 2017) . After-sale of the finished goods, the managers then credit the costs in the goods sold account.
Managerial accountants apply equivalent units of production to the inventory containing the work-in-process costs following an accounting period (Syaifullah, 2015) . It is the number of finished items that a business has produced theoretically, given that the costs of direct labor, materials, and production overhead expenses are sustained in the cause of the accounting time for items that are not yet finished (Syaifullah, 2015) . The formula for calculating this unit not only applies to unfinished items but also labor and overhead costs.
Number of unfinished items multiplied by the completion percentage= equivalent units of production
For example, 300 units are only 50% completed. The formulae will be:
300 x(50 ÷100)
300x0.5=150
These units are then added to the number of items that have already been completed. So if the number of completed units is 600
The formula will be 600+150=750
Therefore the equivalent units of production are equal to 750.
A Production Cost Report (PCR) documents the total production costs, including operating and raw materials costs (Syaifullah, 2015) . It offers a detailed breakdown of all costs associated with the production of an item. PCRs are essential for managers because they allow them to effectively decide on currently produced products and future product development (Syaifullah, 2015). They give managers excellent comprehension of factors affecting the cost of production, thus allowing them to formulate strategic decisions regarding suppliers, products, sales, and development of future products.
Question 4.
Cost allocation involves identifying, estimating, and assigning prices to cost items ( Kucherenko, Melnyk, & Ratushna, 2019) . Sometimes managerial accountants may want to measure the cost of different items separately. The items whose costs are being measured are, therefore, referred to as cost items. Examples of cost items include manufactured products, organizational projects, business clients, regions, and organizational departments. Cost allocations are used for spreading and reporting costs among different inventory or department items. For example, an electricity supplying company runs its own powerhouse in New York and allocates power costs to its five operational departments depending on their staff and usage of electricity ( Kucherenko, Melnyk, & Ratushna, 2019 . In cost allocation, according to Kucherenko, Melnyk, and Ratushna (2019), there is no specific procedure for allocating resources for cost items, so managers use an approximation to allocate costs. Allocations can be made based on the cost of employed assets, headcount, or usage. Cost allocation ensures that any method used is fair to and is effective for running business processes.
Activity-based costing enables managers to apportion costs to indirect expenses for cost items, and activity management depends on this allocation to decide on matters regarding manufacturing and costs (Syaifullah, 2015) . For example, a manager knows how much it costs to make a certain number of units and how to price individual units to adequately cover all costs and achieve desired margins of profits (Syaifullah, 2015). Management of activity allows leaders to analyze the merits and demerits in labor, material, and overhead costs to adjust prices. When managers discover that their labor costs are decreasing, they can reduce the costs of items to maintain or increase profits while still maintaining a competitive advantage.
Just-in-time management systems produce items to satisfy customers' needs to keep manufacturing and inventory costs at a minimum ( Cumming et al., 2017) . They also ensure that extra materials are not kept in store and that overheads are only needed to produce the needed items. This system tracks work-in-process and raw materials in a single account and also tracks the labor and overhead costs in an account for cost conversion ( Cumming et al., 2017) . The system compiles journal entries after completing product manufacturing. On the other hand, quality management systems categorize costs into four different groups; internal failure, external failure, appraisal, and prevention. The system requires much initial investment to reduce or eliminate mistakes or errors that can be costly in the future.
Question 5.
Cost behavior indicates how product costs will change if there is a change in certain activities. Sometimes, costs increase with sales volume. Other times, volume changes do not affect costs. Three types of cost behaviours exist as follows. Variable costs decrease and increase proportionally with decreases and increases in volume ( Cumming et al., 2017) . When volume increases more, the prices also increase. However, changes in the activity do not affect cost when calculated through per unit cost. Contrary to this, fixed costs show no changes with volume changes. Fixed costs may include taxes, salaries, and rent (Syaifullah, 2015) . The rent of a premise does not change whether or the business sells ten units or 100 units. Mixed costs comprise of fixed and variable cost components. This means they can be or not be affected by volume changes. For example, a car for hire is charged $2000 a month. This charge is the fixed cost. If in the agreement, the company charges the car $2.0 per mile over 2000 miles traveled in a month, mileage charges then become the variable cost (Syaifullah, 2015) . Therefore, the price of renting the truck together with the mileage price is termed as mixed costs.
The difference between sales revenues and variables cost is known as the Contributing Margin ( Kucherenko, Melnyk, & Ratushna, 2019) . It covers operating incomes and fixed costs. Generally, a contributing margin is the value generated after the variable costs have been subtracted ( Kucherenko, Melnyk, & Ratushna, 2019) . This income statement groups costs as being either variable or fixed and show profits in contribution margins.
The cost volume profit (CVP) analysis examines how different volumes and cost levels impact profits. The analysis also determines the break-even level for various structures of cost and sales volumes that are essential to the manager for making financial decisions ( Cumming et al., 2017) . The formula for calculating CVP is:
The volume of break-even sales = FC/CM
Where: FC is the fixed cost and CM is the contribution margin which equals the cost of sales subtract the variable costs
This analysis helps managers to make informed decisions about cost approximation and the level at which the business will break even.
Question 6.
Absorption costing considers all costs that relate to production ( Cumming et al., 2017) . Variable costing, however, only includes costs that are incurred directly during the process of production. Organizations that apply variable costing keep separate accounts of fixed and production costs ( Cumming et al., 2017) . Fixed costs that differentiate absorption and variable costs are not affected by production changes. These include leases and salaries.
Income statements for variable and absorption costing vary in numerous ways. Absorption costing utilizes the traditional format to document its statements, whereas variable costing utilizes a format that calculates the margin of contribution ( Kucherenko, Melnyk, & Ratushna, 2019) . In absorption costing, sales revenues are deducted from the cost of sold goods to obtain gross profit ( Kucherenko, Melnyk, & Ratushna, 2019) . It then subtracts the administrative and selling costs to calculate the operating income. In variable costing, sales revenues are subtracted from variable costing to obtain the contribution margin. It then subtracts fixed expenses to obtain the operating income ( Kucherenko, Melnyk, & Ratushna, 2019) .
Variable costing is applied in manufacturing companies to make short term decisions ( Cumming et al., 2017) . When companies have excess goods after some tie, they can set short term prices using variable costing to sell the excess stock ( Cumming et al., 2017) . Since they lack the cost of goods sold or inventory, service-based firms can apply contribution margins to analyze the fixed and variable costs attached to the services they offer Cumming et al., 2017) .
Question 7.
Relevant information is future data affecting different perceptions and opinions of different individuals. Relevant costs have a big impact on decisions, while irrelevant costs do not affect either situation. Irrelevant costs include fixed costs and previous costs. Sunk costs cannot be recouped and cannot be changed even with future activities ( Kucherenko, Melnyk, & Ratushna, 2019) . If the Red Duv Aviation company was to enter the passenger aircraft market, theoretically, the key data to guide this decision would be in terms of cost of aircraft, insurance premiums, and taxes. These costs can be incurred in the future, thus this is relevant information. Pricing can affect short term decisions of the Red Duv company ( Kucherenko, Melnyk, & Ratushna, 2019) . For example, fuel prices or aircraft prices can remain constant for a short period. Therefore, the company can decide to purchase aircraft when prices are lower.
Capital budgeting is an assessment protocol used to assess how viable a long-term investment is in the purchase and replacement of old equipment and new products. Many capital budget techniques focus on cash in-flows and out-flow but differ in how they are executed ( Cumming et al., 2017) . The payback capital budgeting quantifies the duration it will take for a project to return the investment capital ( Cumming et al., 2017) . This method prefers the payback period and does not discount cash flows. On the other hand, the discounted cash flow technique emphasizes on money’s time value. This method discounts cash flows. The accounting rate of return capital budgeting technique is the calculation of a project’s profitability achieved by dividing the total projected net income by the initial investment ( Cumming et al., 2017) . This technique does not discount net income.
Question 8.
Budgeting strategies are different depending on the company's needs, but they remain the same for some businesses. Traditional budgeting only demands justification for pending against the last annual expenditure. In zero budgeting, the justification for spending must be justified for every trading period ( Cumming et al., 2017) . This technique fosters efficiency by increasing accountability and revenues while reducing cost inflations. Strategic budgeting is used to make long-term plans to manage goals. These budgets can be projected for over ten years. Operational budgets, on the other hand, include the budget of a whole fiscal year and are the most comprehensive and detailed ( Vishny & Zingales, 2017 p. 1807) . The operating budget comprises of different budgets that estimate administrative costs, cost of goods sold, sales revenues, and cash. These are projected into the cash budgets for financial statements.
References
Cumming, D., Filatotchev, I., Knill, A., Reeb, D. M., & Senbet, L. (2017). Law, finance, and the international mobility of corporate governance. Journal of International Business Studies, 48 (2). https://dx.doi.org/10.1057/s41267-016-0063-7
Kucherenko, T., Melnyk, L., & Ratushna, O. (2019). Accounting for Financing of the Enterprise's Innovation Activities. Accounting and Finance , (1), 35-43.
Melé, D., Rosanas, J. M., & Fontrodona, J. (2017). Ethics in finance and accounting: Editorial introduction. Journal of Business Ethics , 140 (4), 609-613.
Nielsen, C., & Roslender, R. (2015). Enhancing financial reporting: the contribution of business models. The British Accounting Review , 47 (3), 262-274.
Syaifullah, M. (2015). Influence Business Process on the Quality of Accounting Information System. International Journal of Scientific & Technology Research , 4 (1), 323-328.
Vishny, R., & Zingales, L. (2017). Corporate Finance. Journal of Political Economy , 125 (6), 1805-1812.
