I would like to thank those that were involved in my training here at Red Duv Aviation and my integration into the managerial accounting field. Over the last nine weeks many topics have been covered, including defining managerial accounting, process costing, ABD costing, traditional costing, variable costing, Cost volume profit, contribution margin, Variable and absorption costing, as well as capital budgeting. My familiarization and training and positive experience in these multiple areas by the staff at Red Duv Aviation has led me to seek a permanent position on the staff of Red Duv Aviation in the managerial accounting division. Here is a summary of what I have learned.Managerial accounting is a method of classifying, calculating, examining, understanding and connecting data for the quest of our company’s strategic goals.
Managerial accounting is a subdivision of accounting that closely identifies with cost accounting. The main distinction between managerial accounting and financial accounting is the information collected in managerial accounting is designed to assist line managers inside of the company’s production system make informed accurate decisions affecting their teams. While financial accounting is intended to provide data to groups beyond the internal structure of the company.Process costing is well-defined as a costing system which establishes the cost of a manufactured goods along the various phases of the production progression process. Process costing a manufactured good converts one process step for the involvement of next step in the process.
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Process costing includes the following :
1. Production process costing is completed through a constant movement of manufactured goods which are equal or the same.
2. Process order costing is a cost accounting system of identifying and allocating the cost of producing each unit of production at different levels of production. This is usually an attempt to gather information on the average cost of producing an individual unit of production ( Forrester, 2016 ).
Production report provides a detailed information on the total expenses incurred in producing a specific product. This information is useful to managers since having the knowledge of all factors involved in producing a certain product will enable them to make critical long-term decisions on the marketing strategies, price indices, product mix and the allocation of resources in various production activities.
Importance of Managerial Accounting
Management accountants play an essential role in the organization. According to Brewer, Garrison, and Noreen, (2015), managerial accountants analyses accounts and prepare reports used for control. Some of the activities carried out by managerial accountants include responsibility accounting, budgets, standard costs, and liquidity management and prepare reports that managers use to control organizational operations. Managerial accounting provides information to managers that are key in the decision-making process. Management accountants play a role in planning for both long and short term purposes. The planning process includes forecasting economic events and future business. Examples of plans include strategic management accounting, long-term organization plans, and developing corporate strategy. Management accountants play a crucial role in the management process in that they perform staff function and line authority over accountants’ employees. Management accountants assist in steward accounting to design a framework of financial and cost accounting.
Despite the close links and relations between financial and management accounting, the two fields depict vital variations. Managerial accounting information is used by managers who are in charge of planning and controlling an organization ( Brewer, Garrison, & Noreen, 2015) . Financial accounting information is essential for external parties who make business decisions. Managerial accounting focuses on the future. Financial accounting focuses on the historical perspective. Organizations are under no mandate to prepare management accounts and are only required by the management while the law involves preparation of financial accounts. Managerial accounting is not bound by outside rules ( Walther & Skousen, 2009) while the rules guide financial accounting under the GAAP/IFRS. There is no precision managerial accounting but focuses on timeliness as it emphasizes on providing managers with information when needed. Financial management focuses on precision rather than timeliness as it aims at giving regular reports of financial position.
There are four major ethical standards of managerial accounting as identified by the Institute of Management Accounting (IMA). The four ethical standards include integrity, confidentiality, competence, and credibility. In managerial accounting, accountants must adhere to these ethics standards as they aid in providing credible information and one that is easy to validate ( Walther & Skousen, 2009) .
Integrity refers to the discipline that managerial accountants must maintain to avoid engaging in unethical activities. Confidentiality refers to the ability to be discrete with information obtained in the accounting process. Thus privacy requires accountants only to disclose the information to authorized persons. Competence refers to the ability of an accountant to use professional expertise in accounting. Credibility refers to the ability to communicate accounting information objectively and fairly to the users ( Brewer, Garrison, & Noreen, 2015) .
Systems of Cost Management
Activity based costing, (ABC), a concept developed between 1970s and 1980s in America, is a process whereby cost is estimated, by breaking down a project into discrete, measurable activities or a work unit. The concept is based on the notion that, instead of being absolutely wrong, it is preferably better to be approximately right. Through establishment of the association between cost and activity, a direct relationship can be created between sources of activity demand and associated costs. Activity based costing is not only used as a performance indicator, but also in identification, description, assigning of costs and reporting to operations.
ABC provides a more effective system of cost management than the old cost accounting. According to Chellasamy (2019), it identifies opportunities to increase the effectiveness and efficiency of business by finding out the true cost of products or services. In addition, it points out, accurately, the sources of business profits and losses. This makes it more useful in production industries, due to improvement of reliability of price findings and in turn gives almost true costs. Some of the areas that this approach is mostly used are, target costing, product line profitability analysis, customer profitability analysis and service pricing.
ABC and activity based management (ABM) are used by organizations to come up with products and services that will impress their clients, and produce profits. They are also used to help workers in upgrading of products activities. Besides that, these systems are also useful in price negotiation with customers and by also ensuring that they acquire the quality they desire.
Managers use ABC and ABM to determine how their companies can be put at an advantage to acquiring market for their products. Apart from that, they use the systems to determine how they can improve their companies’ capability, while lowering the costs. ABM improves the business by giving information that helps make long term strategies about issues such as products mixing and sourcing. The system helps in creating designs of products to internalize the effectiveness of different designs to costs, and therefore is able to choose the best for the company. Besides that, the systems enable the companies to continuously better their products and services, by giving new concepts, through focusing on sources of demand for activities and by enabling the management to create motivation for conduct that makes the business better .
Just-in-time (JIT) is a management approach that regulates unfinished products requests from distributors directly with production schedules. It is used in improving the efficiency and reduces the waste by ensuring that goods are only received when required for manufacturing course, thereby minimizing backlog costs. Companies use the system to strive to get things done the right way, at the first trial. Quality management system (TQM) is described as a method used by companies to increase their internal processes, and clients’ satisfaction. It can help decrease costs, when used in the right manner, improve the performance and improve customer satisfaction. To achieve great quality in manufacturing, companies require both JIT and TQM.
Cost-Volume-Profit Analysis
Cost behaviour can be described as the indicator of how costs will adjust in whole when there is a variation in some activity. Several costs are incurred during production, including the variable and fixed expenses. A variety of cost behaviours are observed concerning changes in volume. To begin with, total fixed costs remain constant to changes in production activity. Moreover, fixed costs per unit change inversely to changes in volume; when volume increases, the price per unit decreases, and when the former decreases, the latter grows. In contrast, variable costs per unit remain constant to changes in size. Furthermore, the total variable costs change proportionately to changes in volume; when the volume rises, they increase, and when the amount decreases, they reduce.
Contribution margin (CM) denotes the incremental change created for each unit or product sold after subtracting the variable share of the company’s costs. It, thus, calculated as the selling price of a product minus all variable costs that cause the incremental profit earned for each unit sold. Primarily, the total contribution margin created by an organization signifies the total incomes available to pay for fixed expenses and to produce a profit. The CM concept is, therefore, useful for determining whether to permit a lower value in special pricing conditions. Moreover, If the CM at a specific price is disproportionately negative or low, it would be risky to continue marketing a commodity at that price (Miller, 2017). CM is also beneficial for defining the profits that will ascend from several sales levels. Furthermore, the model can be utilized to select which of various products to trade if they use a common pool resource. Consequently, the item with the highest CM value is given more preference. Additionally, the CM concept is applied in various sectors of business, including product lines, individual products, distribution channels, and in profit centres. CM makes it easier to calculate the operating income of the company. After calculating the CM, one can calculate the operating income by deducting the fixed costs from the contribution margin.
Cost-Volume-Profit-Analysis, also referred to as break-even analysis, is used as a technique in cost accounting. Predominantly, it is used to aid managers in knowing how fluctuating levels of costs and volume have an effect on the value of a business. Prices have different behaviours when there is a variation in the number of sales. The primary assumptions utilized in this model include that the price is constant to changes in volume, costs are only classified as fixed, variable or mixed, volume affects total costs, inventory levels remain static, and fixed expenses are constant (Miller, 2017). Moreover, it is imperative and necessary to isolate diverse values to fixed and variable expenses so that managers in planning and decision control can use the information.
References
Miller-Nobles, T. L., Norwood, P. R., Matsumura, E. M., Johnston, J.-A. L., Mattison, B., & Meissner, C. A. (2017). Horngren's accounting .
Forrester, D. A. (2016). European Congresses of Accounting: A review of their history. European Accounting Review , 5 (1), 91-104.
Schwan, E. (2014). Process costing via reaction accounting. Management Accounting, September , 45-50.
Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2015). Introduction to managerial accounting . McGraw-Hill Education.
Walther, L. M., & Skousen, C. J. (2009). Managerial and cost accounting . Bookboon.
