managerial accounting 16th edition epub

managerial accounting 16th edition epub

The Comprehensive Guide to Managerial Accounting: 16th Edition

1. Introduction to Managerial Accounting

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To the student. As with the other volumes of Managerial Accounting, the 16th edition is directed at students who are not just preparing for a position in management accounting, but who will later assume financial responsibility for the activities in organizations. We view accounting primarily as a communications process, providing economic information to organizations for the purpose of maintaining accountability, making good decisions, and assisting with planning for the future. Viewing accounting as a communications process is critical when selecting issues and valuation parameters to report. That is why we emphasize in particular internal financial performance; it ranks as the most significant reason for the information which accounting produces. More details on our focus are provided in the final section.

2. Cost Concepts and Behavior

Types of Costs: The key word in cost behavior is variability. Although companies identify and monitor a wide variety of costs, people often find that they see differences in costs, not merely variety. It is helpful to see fewer similarities, which can lead to frustration and poor decision making. Companies separate costs into categories based on some logical grouping.

Understanding the behavior of costs enables the firm to plan operational changes that keep costs in line with the organization’s strategic objectives. In this chapter, we will look at the behavior of costs and at some useful techniques for estimating future costs.

Cost behavior: Because businesses operate in a dynamic environment where things are constantly changing, knowing how costs behave is an essential aspect of managerial accounting. Changes in demand, production, labor contracts, government laws and regulations, and many other variables can significantly impact a company’s ability to achieve its goals. There are a variety of tools available to support cost behavior analyses such as the high-low method, scatter graph, and least-squares regression analysis.

Costs are the expenses arising from the use of resources for the production of goods or the rendering of services. Resources are anything used to produce goods and services including utilities, human resources, materials, etc. Cost behavior refers to how different types of costs change when there is a change in the level of production or sales. Understanding how different types of costs behave is critical for managerial accounting.

3. Cost-Volume-Profit Analysis

Use of the Cost-Volume-Profit Chart: The cost-volume-profit (CVP) chart graphically illustrates cost behavior, contribution margin relationships, and operating income for various levels of sales volume. The contribution margin ratio is calculated by dividing the total contribution margin by the total sales volume. In the special case where the firm’s cost structure contains no fixed costs, the contribution margin ratio is equal to the net profit margin, or the ratio of net profit to sales. Use of the CVP chart complements inquiries described previously by better defining the relationship between sales volume and profit. Managers can use the information provided on the CVP analysis chart to answer questions related to losses, risk, and returns.

Cost-volume-profit (CVP) analysis helps managers identify the levels of operating activity needed to avoid losses and achieve profits. Management accountants can use CVP analysis to examine economies of scale, evaluate the effects of changes in selling prices, costs, and profitability, and evaluate sales, cost, and profit levels under various operating environments. CVP analysis relies on the following concepts: (1) fixed and variable cost behavior, (2) contribution margin, and (3) comparison of contribution margin and fixed costs. As a result, cost estimation skills are critical to effective managerial decision making. Methods to estimate fixed and variable costs include scatter diagrams, the high-low method, and regression analysis.

4. Budgeting and Performance Evaluation

The budget is a detailed version of a company’s plan with a pre-determined time-span. It is the primary basis for planning and the point of departure from where the control process starts. It operates as a feedback control mechanism. A successful feedback control needs a pre-determined standard or plan. The budgeting process should be tailored towards the company and should also be continuous. Among the different kinds of budgets are: Capital Expenditure, Cash, Sales, Production, Direct Materials, Labor, and Overhead, Selling and Administrative Expense, and finally the master budget which is the summary of all the company’s operating and financial budgets and is valuable for designing the annual report. Budgeting is an important concept to the company. Even without a budget, managers must still plan. In contrast, using a budget helps increase employee productivity. The budget is the primary tool for managerial planning and control which increases all employees’ performance, leading to a raise in productivity.

Budgeting is the process of formulating plans for a future to achieve specific goals. Each manager is responsible for planning and control activities in their department. Since there are often conflicts among departments in an organization, top management sets the goals consistent with the organization’s goals. Each manager’s performance can be evaluated by their support for top management goals. In return, employees’ goals must be bought in with rewards which are based on their performance so they can reach their individual goals.

5. Decision Making and Relevant Information

The variable from which alternatives are generated is the factor. The decision computed is the amount by which the performance of the selected alternative exceeds the performance of the rejected alternatives. The focus of differential analysis is on the differences or changes among the alternatives. Decision-making models that are based on differential analysis are a vital part of management accounting. Management accounting encompasses techniques and concepts that are directed towards assisting management in operating the business in the most effective manner. When present and future labor skills are inadequate, the management accountant can assist with identifying the key learning curves in setting wage and salary levels. Both financial and nonfinancial data are processed by management accounting systems on a continuing basis. Different types of materials are used according to the job being performed. Control can be lost and the performance results may be worthless if management does not hold employees accountable for errors in the data process. Quality of a product is a factor that can influence the selling price and therefore the profitability of the product. The establishment, enforcement, and effective operation of this control system and procedure are vital to the success of the cost accounting system.

Different costs are relevant for different courses of action. Management may be facing a decision with respect to the situation or possible action that you will choose. Relevant costs are the expected future costs that differ among the alternative choices. Since relevant costs are always future costs, they must be estimated. Some examples of relevant costs that you may have to consider in your decisions are the purchase cost, delivery costs, and capital costs for investment in new equipment. Here are some points to remember when it comes to contemplating relevant costs, which are the costs that will change as the result of the alternative chosen. The term opportunity cost refers to what is given up when a choice is made. The opportunity cost recognizes the concept that the return on a limited resource declines as more of the resource is consumed.