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Managerial accounting system provides the management of a company with economic and financial data that is used in making decisions. A management accountant is used to provide this information efficiently and effectively.
Managerial accounting entails the process of identifying, measuring, analyzing and interpreting information that is used by the management in pursuit of the organization's needs. Managerial accounting provides information that is used internally by the managers to make decisions. Management accounting has great importance in the organization as it is used in the planning, organizing, controlling and decision-making functions of the business. It helps managers in planning for the business resources through the preparation of budgets that indicate how the company will acquire and utilize its resources. Controlling is also a function of managers and managerial accounting information helps provide reports and feedback that shows the reasons for any variances in the processes of the business (Hilton& Platt 2013).
The information helps in decision-making processes regarding new projects to be undertaken and the management of costs to make high returns. Management accounting is used by the managers to help run the internal affairs of the business and make decisions. The primary responsibilities of the management accountant is to plan the accounting function to ensure that all the accounting records are well analyzed to provide reports to the management for decision making. The accountant must report and interpret accounting information to the management for them to understand the needs of the company. There are many differences between financial accounting and management accounting. Financial accounting provides information that is used by internal and external users while management accounting offers information that is used internally by the business.
Financial accounting relies on historical data to prepare the financial statements while management accounting uses both historical and forecast data to provide information to the management. Finally, the preparation of financial accounts is a statutory requirement for all companies while there is no statutory requirement for the management accounting as it is done when the management needs it. The management accountants are bound by ethical standards that they should follow as they perform their duties in the company (Hilton &Platt 2013). Some of these ethical standards include competence, confidentiality, integrity and credibility. These standards ensure that the accountants maintain a high level of professional expertise and keep information confidential unless the law requires disclosure. The ethical standards help them avoid actual conflict of interest and communicate information to the management fairly and objectively.
Job order costing
Job order costing involves assigning production costs to individual products when the products produced by the company are different from each other. This helps in the management of costs and pricing of the products to prevent underpricing of some products which would lead to great loses. There are several similarities and differences between job order costing and process costing. The two systems have the same goal of determining the costs of products. Both job order costing and process costing use predetermined overhead rates to apply the overhead costs. The main differences are; job costing is used when a business produces different products that have different production requirements while process costing is used where there is a production of a single product. Job order costing accumulates the costs of each job while process costing accumulates all the costs of a product by process of a department. Job order costing is used in small production sizes while process costing is used when there are significant production runs.
The job costing systems cost flow involves the accumulation of manufacturing costs which are then assigned to the work in progress. The next step entails assigning costs of completed tasks to the finished goods and finally assigning costs of units sold to costs of goods sold. Manufacturing overheads are the costs that a manufacturing plant incurs apart from variable costs required to make products (Drury, 2013. These are the indirect cost that is incurred and cannot be traced directly to a product. The manufacturing overhead is applied to the units produced at the end of the reporting period through a predetermined overhead rate. The manufacturing overhead account is adjusted at the end of the period to dispose of the balance because the company uses a predetermined overhead rate to allocate these costs to the various products which can be more or less than the actual overhead costs incurred.
Process order costing
Process costing is the accumulation of costs for long production runs according to processes for products that are similar. The flow of costs in process costing move through various stages which involve the costs incurred in the purchase of raw materials. The next stage is the allocation of costs in work in process inventory for the production of goods. The following steps are the costs allocated to the finished products which include storage fees, and finally, the costs move to the costs of goods sold. The equivalent unit of production is used to explain how costs are divided between items that are still in production and those that have been completed at the end of the accounting period. This is calculated by finding the product of the partially completed and the percentage of completion. Production reports are essential decision-making tools as they provide information on the actual and expected production units of the business. It helps the management identify areas that need more efficiency in production.
Cost management systems
The process of cost allocation involves identifying the item to which the costs are to be assigned in the production process. The second step is the accumulation of the costs in different pools and finally identifying the most appropriate method to allocate the costs. It helps in the identification of the items that make money and those that lose money in a business. According to Drury (2013), activity-based costing is used to identify and allocate costs to overhead activities and products. It was developed to determine the relationship between costs overhead activities and the products. It helps in the allocation of indirect costs. It was established to expand the number of cost pools that were used to assemble overhead costs. This is done through pooling costs by activity and not volume. It was developed to help in the allocation of indirect costs such as depreciation to the individual products.
Activity-based costing is used in the projection of product costs and help in the pricing decisions by the management. The costs system also supports the management in controlling costs and determines which products make high profits and areas in production that need to be improved. Just in time system is used by the management to align the material orders with the production schedules. The raw materials are ordered when needed for production to reduce waste while the quality management systems aim at customer satisfaction through the creation of quality goods at a competitive cost. The two methods aimed at improving the quality of the products while reducing costs.
Cost behavior indicates how the costs change when the level of production changes. Variable costs vary with the level of production of the business. The fixed costs of a company do not change with the difference in the level of activity that is undertaken hence they are constant within the relevant range. Semi-variable costs have the properties of both variable and fixed costs. Contribution margin measures the ability of a company to cover the variable cost with revenue and is given by the selling price minus the variable cost per unit. The contribution margin is used in the calculation of operating income by covering the fixed costs of operations(Drury,2013). Cost volume profit analysis is used to determine how the changes in costs and volume affect the profits of the business. It is used as a decision tool by the management to assess the level of production that the company requires to attain a level of profit.
Variable costing recognizes the fixed manufacturing overheads when they are incurred while absorption costing recognizes fixed manufacturing overheads when the products are sold. The two costing methods result in different operating income because of the difference in treatment of fixed costs. The two methods use the accrual basis of accounting and recognize expenses when incurred. Variable costing is used by manufacturing companies to make decisions on whether to buy or make specific products. It also helps in making decisions regarding special orders from customers by analyzing the costs and profit. It helps in making decisions such as outsourcing services by the service companies.
Relevant information includes the future costs and revenues that are different from the available choices. Relevant information is essential in decision making as it helps managers in choosing the most appropriate course of action by the business for it to operate efficiently. Pricing affects the short-term decisions of the management as it determines whether the firm will be a price maker or price taker. When the firm is a price taker, the management has to find ways of controlling the costs. Pricing also affects decisions as it determines the production capacity of the firm to maximize profit.
Capital budgeting helps a company determine the viability of a long-term project on the purchase of property, replacement or introduction of a new product. Various techniques are used by the managers to make decisions on which investment to undertake based on the cash inflows. These techniques include the; payback period is the amount of time taken for the investment to pay back the initial investment. The shorter the period the project is said to be viable. The accounting rate of return shows a rate of return that the asset can generate over its lifespan. It is given by net income divided by the average investment. The discounted cash flow method entails the net present value which discounts the future cash flows to the present values which are compared to the initial investment (Garrison et a.2010). A positive net present value makes the project to be viable. The internal rate of return is the discount rate at which the NPV of the project is zero, and a high IRR is preferred. The final technique is the profitability index which is given as the ratio of the present value as the project to the initial outlay.
Budgets and standard costing
Various types of budgets are used by managers to help in running the business operations. One of the main budgets is the master budget that indicates comprehensive projections of all the plans to be conducted in all business processes over the fiscal year. The operation budget contains the day to day revenues and expenses of the company operations. The cash flow budget analyses the day to day cash inflows and outflows of the business. The financial budget of the company indicates the sources of revenues and the capital expenditures of the business. The other budget is the static budget which shows the expected capacity level and is used by stable companies. The flexible budget is prepared at the actual capacity of the business.
The program budget is prepared for a specific project that the company should undertake. Finally, the capital expenditure budget is used for expected investments in long-term projects (Garrison et al. 2010). The preparation of an operational budget involves the identification of the expenses, the inventory turnover and the value of goods produced. The financial budget is prepared through identifying the receipts and payments of the company. The budget and standard costs used by the company control the level of business activity because the level of activity that is estimated to control costs is what the business aims to achieve. Standard costs are used to determine the variance of the expenses as the company compares its actual costs with the standard costs to determine the difference.
Management accounting is essential to businesses as it helps them make the right decisions, controls costs and operating efficiently.
Drury, C. M. (2013). Management and cost accounting. Springer.
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
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