managerial accounting formulas

managerial accounting formulas

Comprehensive Guide to Managerial Accounting Formulas

1. Introduction to Managerial Accounting

This is important, because the nature of managerial accounting is such that it can potentially lead to a pretty steep learning curve, particularly for new students. This is because the concept of managerial accounting is generally not taught as part of other accounting programs in colleges, so students have to grasp this as they are learning something totally new. However, while it may be tough, you shouldn’t have to turn it into a large mountain (or small hill) to climb. The reality is that there are several formulas and calculations, as well as procedures or methods, that students will come across in managerial accounting. This article will attempt to provide an in-depth guide to these formulas to help ensure students are able to excel in both their managerial accounting class and subsequent accounting career.

Managerial accounting is concerned with providing information to business managers, who are responsible for directing the operations of a business. Managers need information in order to manage effectively. The crucial distinguishing characteristic of managerial accounting is the level of detail involved in the information. Unlike financial accounting, information provided by managerial accounting treatments often lacks precision and may even be based on approximate data. Such information requires the use of more detailed procedures to determine costs and evaluate elements of decision making. This is intentional, because the focus of managerial accounting is generally to provide more accurate details for decision making at lower levels within an enterprise. In contrast, the focus of financial accounting is primarily to provide information to parties who are outside the enterprise.

Managerial accounting (also known as cost accounting or management accounting) is a branch of accounting that is used to not only maintain a company’s financial records, but also to help its management in critical decision-making. In other words, managerial accountants help the management understand the impact of fiscal policies on the company’s bottom line. With managerial accounting, it’s not just about reporting what has happened in the past (historical data), but also about planning for the future (future costs and expenditures) and forecasting the organization’s financial performance. These forecasts explain the financial impact of a company’s decisions and hypothetical situations to help management become better equipped to make decisions that will further the company’s financial well-being.

2. Key Concepts in Managerial Accounting

The term management accounting, on the other hand, represents a broad and encompassing component of the business discipline. Management accounting encompasses financial accounting, plus a whole host of other activities, including cost accounting, capital budgeting, and production costing. In most organizations, someone is in charge of management accounting. This person should have the job of measuring manager performance, a task that is important to ensure that managers receive proper rewards. This individual would certainly know the kinds of data managers will need, and how better to measure those data. Although it would be difficult or impossible to have such a manager in place at every organization, it’s not beyond the realm of possibility for the largest and most successful enterprises.

Managerial accounting, also known as cost accounting, is the process of identifying, measuring, analyzing, interpreting, and communicating information to managers for the pursuit of an organization’s goals. This introduction to managerial accounting outlines responsibilities and practices related to both external financial reporting and internal performance measurement. Chapter 1 features the chapter introduction and key concepts. Chapter 2 features an introduction to managerial accounting. Chapter 3 focuses on cost behavior, cost analysis, cost estimation, and cost prediction. Chapter 4 focuses on job order cost accounting. Chapter 5 focuses on ABC, the balanced scorecard, and business value. Chapter 6 focuses on cost estimation. Chapter 7 focuses on how organizations identify and use relevant costs considering various business decisions. Chapter 8 focuses on break-even and cost-volume profit analysis. Chapter 9 focuses on budget preparation. Chapter 10 focuses on the analysis of variances. Chapter 11 focuses on capital budgeting.

3. Common Managerial Accounting Formulas

The predetermined manufacturing overhead rate is established at the beginning of an accounting period based on budgeted data. It allows businesses to apply manufacturing overhead to the job being worked on during an accounting period using direct labor hours, machine hours, or similar cost drivers. Although actual overhead costs that have been incurred are lower, the job is subjected to a higher than forecasted predetermined overhead rate. The term for the difference caused between actual and applied manufacturing overhead is underallocated (overallocated) overhead.

Predetermined Overhead Rate

To apply manufacturing overhead to the jobs worked on during a period, a predetermined overhead rate is established at the beginning of the period. The rate is determined by estimating the total manufacturing overhead cost and total units in the cost allocation base for the period. The rate isn’t expected to actually apply the overhead to production activities as it involves an allocation of indirect and/or fixed manufacturing overhead costs to jobs or processes.

Budgeted Manufacturing Overhead Rate

The essentially nomadic nature of unit product cost is of key importance to manufacturers and wholesalers. Because costs move, prices can be based on cost. The migration of costs is especially significant for plants that have been in operation for any appreciable length of time. The changing characteristics of costs that go into each element of an item’s unit product cost make it difficult to maintain the records reflecting these values. Although these values do not change with the same regularity as the numbers used to calculate financial ratios, it is still very important to periodically check the plausibility of these values and the calculations.

Unit Product Cost

Identification of varying levels of activity is crucial to use cost behavior analysis properly. Both total costs and unit costs can differ dramatically based on the level of activity achieved. Higher levels of activity usually result in lower unit costs because lower unit costs occur when fixed costs are spread over a greater number of units.

Activity Level

Managerial accounting applies to both for-profit and not-for-profit organizations. Financial and nonfinancial information is needed by all types of organizations to make decisions and manage operations. Although the sophistication of the methods used in practice varies from one organization to the next, everyone has some accounting information needs. This list of managerial accounting formulas will help aid in the decision-making processes of organizations.

4. Application of Formulas in Decision-Making

Managerial accounting formulas guide managers to determine product pricing and strategies. A formula-based tool used for this decision is the transfer price. Transfer pricing happens when each level of management (manager, divisional manager, and so on) lists or values the products or services given out to other levels of management or to external customers or services. Essentially, it is a price set by a company for transferring the goods or services of division A to division B. Instead of selling the products or services to an external vendor, the company maintains better control over the different divisions to ensure the products or services are used most efficiently and effectively. Division A benefits because it does not have any selling expenses; therefore, its net income is higher. Division B benefits because it does not have to pay storage costs and has the exact inventory required. Managerial accounting formulas help determine whether to make or buy a product or service, which can then determine divisional transfer pricing.

Transfer prices

5. Advanced Topics and Formulas in Managerial Accounting

The economic order quantity is the number of goods that must be sold at a given time in order to reach an optimum inventory level. If a company orders too many, it may have to pay storage costs. If a company orders too few, it might run out before the next order can be procured.

The cost-volume profit formula is a formula that shows how costs, volume, and profit margin are interrelated. A company’s gross profit margin is the amount of money it makes from the sale of goods. The contribution margin is determined by subtracting total fixed costs from total gross margins.

Contribution margin is the excess of company gross margins over its total fixed costs; what is leftover to pay for general operating costs. Contribution margin can help determine the breakeven point, the amount of money required to pay for a general cost, and other financial information.

Capital budgeting is the process of estimating costs and potential income from long-term investments. These investments are expected to provide a contribution to the enterprise for a period of years. Capital budgeting can refer to all enterprise costs – not just tangible goods, but also personnel, space, equipment, and supplies.

Activity-based costing is a method of product costing that focuses on manufacturing processes, activities, and materials. Rather than calculating the cost of producing a single unit, it determines the cost of everything that goes into putting a product together. Companies that use activity-based costing attempt to examine how production line processes and materials contribute to cost, measure differences in materials usages for similar activities, and other factors.