introduction to managerial accounting epub

introduction to managerial accounting epub

Introduction to Managerial Accounting: A Comprehensive Guide

1. Chapter 1: The Role and Importance of Managerial Accounting

However, in the recent past, the demand for graduates with a financial accounting background has decreased. On the other hand, the interest and demand for graduates with a grounding in management accounting and computer applications has increased. As the trend continues, the use of more sophisticated technology and the decision-making process is guided by the study and analysis of senior company officials and their findings. It only follows that graduates will also be technical, possessing evaluation and analytical skills. They should be able to perform calculations, deal with ‘what if’ type questions, and report on their results to the decision-makers involved.

For decades, there have been accounting programs focused on traditional accounting theory and practices, with a history of external uses. As a result, graduates have a solid foundation in financial accounting, which helps them succeed in public accounting and a few other accounting career options.

Managerial accounting, seen as applied accounting, is becoming increasingly important within our competitive business world. The primary task of managerial accountants is to provide necessary tools in order for managers to make intelligent business decisions. But why is managerial accounting, instead of many other specializations, the key to the business so often? This book is designed to explain the answer.

2. Chapter 2: Cost Concepts and Behavior

A cost that changes as the number of units produced changes is a variable cost. The change in variable costs is directly associated with the change in the number of units produced. Examples of variable costs are the cost of raw materials, direct labor wages, shipping, and sales commissions. Variable factory overhead refers to costs typically incurred within the factory that vary directly with the number of units produced. Such costs include electrical power for machinery, parts such as bearings, screws, or other components necessary for the final product to be manufactured, or even items needed for packaging the product for shipment. Some installed machinery may operate at a speed or volume of output that increases the variable costs as the number of items manufactured decreases. Fixed costs, on the other hand, do not change as the number of units produced changes. However, for the competent manager, as the information in this book demonstrates, there are usually ways to alter the company’s fixed costs. The company’s cost structure, the combination of variable and fixed costs, is very important in determining its profitability. Knowing how to control these elements of the cost structure is essential to the success of a company.

Behaviors of Total Costs, Fixed Costs, and Variable Costs

Manufacturing a product is a dynamic process. Many types of costs are incurred. The sum of all costs necessary for the production of a product is the cost of manufacturing. Total costs can be broken down into three categories: direct materials, direct labor, and factory overhead. Direct materials are part of the product. They can be seen and felt in the product’s tangible parts. Direct labor costs are the wages paid to workers whose skills are directly related to the production of the product. Factory overhead is the combination of costs other than direct materials and direct labor—such as wages of supervisors and maintenance workers, building costs, utility expenses, and property taxes. These costs are all related to the production process but cannot be traced to an individual job or process with any great degree of accuracy.

Cost Concepts

Next, we will explore cost concepts and behavior as they are found throughout the production process. We will address the challenge of measuring the costs of direct materials, direct labor, and factory overhead to manufacturing firms and explain the behaviors of total costs, fixed costs, and variable costs as the number of units manufactured increases and decreases.

Section 2: Cost Concepts and Behavior

3. Chapter 3: Cost-Volume-Profit Analysis

From the perspective of the company, managers will mainly observe these costs to create the product (cost of goods sold) on the income statement. However, cost structure is not only tied to the fact of managing and producing the product but also the controllable variable costs and the variable selling expenses that make up the contribution margin, and the actual production overhead. The contribution margin is an important accounting measure used in CVP analysis to calculate a company’s breakeven point. Frequent concerns of managers include the following: what level of sales must be achieved for the company to stop incurring losses? How do changes in the level of sales impact profitability? How does the existing cost structure influence the pricing decisions related to the product? How many units must be produced and sold as a means of achieving a desired level of profit and the company’s profit? Thus, CVP analysis emphasizes the connection of the cost structure for an organization in relation to the company’s income statement.

3. General and administrative expenses, which are the costs associated with general business administration, such as accounting and enterprise resource planning (ERP) system expenses, and the costs of operating a company.

2. Selling expenses, which are the costs incurred to promote, sell and deliver the organization’s goods and services.

1. The cost of goods sold, which is the costs that create a product; namely the direct materials, direct labor, and manufacturing overhead.

When managers review an organization’s income statement, they would typically observe several costs that consist of different purposes within the company. Each of these costs is generally grouped into one of the following three categories:

The Relationship between CVP Analysis with Income Statements and Contribution Margins

Cost-Volume-Profit (CVP) analysis is a management accounting technique that focuses on the relationships between the costs of a company and the volume of units it produces, as well as its selling price, sales mix, and sales value. Through this analysis, we can calculate the impact on the organization’s profits when changing volume, price, or one of its costs. CVP analysis is crucial for managers in setting various business aspects, such as pricing a product, budgeting, forecasting production, designing cost structure, evaluating the potential projects and performances, and determining the disciplines in sales and profit. This analysis aids in determining the number of units that need to be produced and sold for a company to achieve its target profit, cash breakeven point, and sales breakeven point. In addition, CVP analysis is used to aid in decision making for make or buy, shuttle, course, and sell or process products further before selling.

What is Cost-Volume-Profit (CVP) Analysis?

4. Chapter 4: Budgeting and Variance Analysis

The variance report is only the first step in analyzing the performance of the organization. Performance inquiry has to take this initial variance report, examine the causes of the variances, and proactively make decisions affecting the future direction of the organization. This chapter explores the methods and procedures involved in the variance analysis. It also explains how standard costs may enhance the accuracy and reliability of variance analysis.

The budgeting process takes the organization’s strategic objectives and develops a comprehensive plan to achieve these objectives. The performance report, traditionally prepared at the end of the period, compares actual results against the budget. An analysis of performance begins with determining and investigating variances. A variance signifies that the actual costs or revenues differed from the budgeted costs and revenues. Variance reports provide the first clues of potential problems or opportunities.

5. Chapter 5: Decision Making and Relevant Information

Providing relevant accounting information is what this book is all about. At the end of this course, you should be able to provide relevant information toward improving the quality of business decisions. Like the shell game, business operations have a lot of distractions designed to seduce you. This book helps provide a focus for your time and energy.

A key concept in management accounting is recognizing the difference between relevant and non-relevant information because only relevant information impacts business decisions. Once you fully understand the importance of relevance of information, you will realize the need to focus on the future and march your accounting reports toward the inclusion of relevant information. As a director of cost accounting, your role is to see that all necessary information accompanies reliable financial data as a part of the annual report.

Relevant and Non-Relevant Information

Since you are aware that your accounting profession provides internal reporting for decision-making purposes, you are anxious to read your new textbook to understand what situations require management accounting services, what information is necessary for efficient decision making, and how to use that information. Upon reading decision guidelines, you recognize the importance of a defined business strategy and obtain a copy of the current strategic plan of your organization. Furthermore, you understand that key performance metrics must be in place to monitor progress and that the current business environment may necessitate changes from current operations.

Decision Making and the Role of Managerial Accounting

Knowing that your firm has a significant need for improved decision making, you are particularly pleased that the course will help you with that responsibility. Since all accounting courses you have had to date have dealt with historical data, cost accumulation, and reports to outsiders such as government agencies, stockholders, and creditors, you are anxious to participate in a course designed to provide information for planning and controlling current business activities.

– Decision Making and Relevant Information – Cost Behavior – Allocations of Joint Costs and Accounting for By-Product – Job Order and Process Costing Systems – Budgeting – Standard Costs and the Balanced Scorecard – Short-Term Business Decisions – Capital Investment Decisions – Using Differential Analysis

Your boss has suggested that you participate in a training program for managerial accounting, a suggestion that flatters and energizes you at the same time. Eager to see what the course will cover, you take a detailed look at the table of contents. The following schedule of topics catches your attention:

Decision Making and Relevant Information