Why Managerial Accounting Matters in the Career - Essay Example

Managerial Accounting Name Date Course Managerial accounting: An overview Managerial accounting Management accounting involves the process of preparing management reports and accounts that provides accurate and timely financial and statistical information that is required by the managers on a daily basis for the purposes of making decisions. Nestle is one of the popular manufacturing companies that utilizes the managerial accounting concept. The Chief financial officer at the company is Wang Ling Martello (Nestle, 2015). The Chief financial officer of the company can be contacted through +41 21 924 1111. The management accountant of the company in UK is Joanne Beattie; the senior management account in Poland is Zarzecka Agnieszka and the head of financial reporting Andre Besson. The management accounting is responsible for the production of weekly or monthly weekly accounting reports for the internal audience within an organization. At Apple Inc, the managerial accountant is supposed to produce reports that will aid the internal manager in their daily operations which also include the production within the organization. The internal audience in an organization includes the Chief Executive officers and the department managers. Management accounting reports usually indicates aspects such as sales revenue generated, amount of available cash, accounts receivables, raw materials and inventory (Weygandt, et al, 2015). The availability of such information is useful during the decision making process by the managers on a daily basis. The management accountants are responsible for handling the accounting issues. The concepts of management accounting are useful in terms of ensuring the organization is able to manage its daily financial operations. At Apple, the chief financial officer is responsible for the production of the yearly financial statements that can be used by the external stakeholders. However other matter that involves the internal managers and stakeholders is developed by the managerial accountant. Why managerial accounting matters in the career The concepts of management accounting is important to my career as it will be useful during the decision making process. Management accounting concepts are useful in terms of supporting the decision making process within an organization. Understanding the concepts of management accounting will be important in developing a good working relationship with the management accountants. The accounting information is at times complicated and it may prove difficult to interpret. Learning the concepts of management accounting will therefore provide the knowledge that is required for the purposes of effectively using the accounting information for the benefits of the organization. It is also important to note that the knowledge of management accounting will be important in promoting ease of work when working with the management accountant. The development of the human resource management concepts is at times complex as it may require the accounting calculation (Needles & Crosson, 2013). The knowledge of management accounting will therefore provide important information that can be used during the planning and development of the human resource management concepts. Managing the financial resources that has been allocated to the company is also a difficult process when the professional does not understand the concepts of accounting. Skills needed by managers to succeed The managers require good communication skills for the purposes of ensuring that they are able to communicate effectively to the management and the team members about the accounting issues. This is considering that some of the Management accounting data are numeric and requires some calculations. An understanding of the calculations is of importance to the members. The management accountants are also required to have good interaction skills. This is because most of their activities will be carried out in teams. The managers within the organization usually require daily accounting information for the purposes of making decisions (Weygandt, et al, 2015). Problem solving and decision making skills are also quite important for the managers. This is considering that most of the issues are usually complex and they require solutions within a short period of time. Failure to make proper decisions may have negative effects on the operations of the entire organization. The manager is also required to have good managerial skills. This is considering that the managers will be in charge of a number of employees. The managers are also required to be ethical at all times. This is due to the sensitive nature of the information that they have to deal with on a daily basis. Managerial accounting and cost concepts General cost classification The general classification of cost involves grouping the costs according to their common characteristics. The classification of cost by elements includes three elements of costing which are materials, labour and expenses. In terms of the nature of traceability, the costs can be classified according to direct and indirect costs. The costs may also be classified according to functions and this includes production, administration, selling and distribution research and development. The production costs are the costs that are incurred during the production activities with the organization. The administration costs are costs that are incurred when carrying out administrative duties with the organization (Needles, et al, 2012). The marketing costs involve the selling and distribution costs. Costs can also be classified according to behavior and it includes fixed, variable and semi-variable costs. The fixed costs remains irrespective of the changes in production, variable costs changes with production and semi-variable costs are partly fixed and partly variable. Control ability is also a way of classifying the costs. This involves the controllable and the uncontrollable costs. The controllable costs can be controlled or influenced by the actions of the management. On the other hand, the uncontrollable costs cannot be influenced by a conscious management decision. In terms of normality, the costs can be classified according to normal and abnormal costs. The normal costs arise from the daily operations while the abnormal costs are as a result of any abnormal activities like flooding or accidents (Agoglia, et al, 2011). Cost can also be classified according to time and this involves the historical and predetermined costs. The historical costs are the costs incurred in the past while the predetermined costs are costs that are computed in advance. In terms of decisions making, the costs can be classified in terms of the costs incurred. Product cost versus periodic cost The product costs are the costs incurred as a result of purchasing the material, direct labour and manufacturing overhead when making the product (Needles & Crosson, 2013). This therefore means that the product cost involves all the costs that are involved in the production of a single product. The product cost varies from one organization to the other depending on the nature of the product that is being produced. This is due to the diverse nature of each of the products being produced by an organization. The product costs increases when the product is of complex nature or it requires expensive raw materials. The periodic cost on the other hand is the cost that is associated with the selling of the products and the general administrative expenses. Selling the product may require a lot of logistics before it reaches the customers and this may increase the period costs. It is also important to note that during the process of selling a product, marketing costs may end up being incurred when creating an awareness of the product among the customers in the market. The following formula can be used for carrying out calculations. Product cost=Total manufacturing costs ÷ units production output. Calculation: In 2014, Toyota was the largest production unit with 10.1 million cars. The total cost of manufacturing was 1,855.9 billion yen. Production cost =1,855,900,000÷10,100,000 =183,752.5 yen Analysis of mixed cost The mixed cost is a cost that has the components of the fixed as well as the variable components (Needles, et al, 2012). The information regarding the mixed cost is important in terms of determining how the costs may change with different levels of activities. The fixed costs do not change while the variable costs change from time to time depending on the prevailing conditions. An organization has to incur fixed costs regardless of whether it carries out the production or not. This is unlike the variable cost that may not be incurred in case the company does not produce anything. The variable cost may increase when the organization producers more. The following formula can be used for the purposes of calculating the mixed cost. Y= a +bx Where y is the total cost, a is the fixed cost per period, b is the variable rate per unit of activity and x is the number of units of activity. In 2014, the total cost for Toyota was 1, 855.9 billion yen, the fixed cost for the period was 6,851,239 and the number of units is 10.1 million. Y= a+bx 1,855,900,000=6,851,239+10,100,000b 1,855,900,000-6,851,239=10,100,000b b=184,904, 876.1/10,100,000 =183,074, 135 Cost volumes profit relationships The basics of cost volume profit (CVP) analysis The cost volume profit analysis involves the use of information that is provided by the break-even analysis. The point where the total revenue equals the total cost is considered a critical part of CVP analysis (Agoglia, et al, 2011). The CVP analysis is important for the company as it is at the break-even analysis point that an organization will experience loss or income. During the CVP analysis, it is assumed that both costs and revenue is linear throughout the relevant range of activity. The changes in activity are not only the factors that affect the costs. The main components of CVP include level of volume of activity, unit selling prices, variable cost per unit and total fixed costs. The following formula can be used during the CVP analysis: TC= TFC+VxX TR=PxX Where: TC= Total costs TFC=Total fixed costs V= Unit Variable Cost X=Number of units TR= Total Revenue P=Unit sales price When the value of TR-TC is positive, the organization has made profits. However, when the value is negative, the company has made a loss. Calculation: At Lenovo one of the most successful electronic company for the year ending 31st March 2014, the number of units produced were 55 million, the total revenue of the company was USD $ 38,707 million and the total fixed costs was USD$ 15,332 million and the variable cost is USD $15 million. V=Variable cost/ total units =15,000,000/55,000,000 =$ 0.3 per unit TC=TFC+VxX =15,332+ (0.3X55, 000,000) =$ 30,332 million TR=PxX 38,707,000=P x 55,000,000 P=38,707,000/55,000,000 P=0.7 TR-TC=38,707,000-30,332,000 =$ 8,375 million. This is an indication that the company is profitable. Target profit break analysis Target profit break analysis is usually used for the purposes of estimating the necessary sales volume for the purposes of making a certain level of profit. The target profit break analysis is important to the managers in terms of figuring out the levels of sales needed in order to meet the profit goal for a particular period (Cheng, 2015). The following formula can be used for the purposes of calculating the target profit break analysis, Sales= Variable expenses+ Fixed expenses+ Profit Calculation: PNG Electric is a company that manufactures rechargeable light. The product sells at $ 180 per unit, Total fixed expenses is $ 27,000 per month, variable expenses is $ 126 per unit, sales per unit is $ 162 and profit $ 72,000. Target profit analysis: Sales= Variable expenses+ Fixed expenses+ Profit 162x=126x+27,000+72,000 36x=342,000 X=342,000/36 =9, 500 units. CVP Considerations in choosing cost structure Cost structure is the relative proportion of the variable costs within an organization. The relationship between the fixed and variable costs play an essential role in determining the profitability of the organization (Du, 2011). This means that cost structure is an important aspects for an organization. The factors that should be considered when choosing a cost structure involves variable costs and fixed cost. The high variable cost may impact negatively on the cost structure of the organization as it reduces its profitability. Contribution margin ratio is an important aspect that should also be considered by an organization. Variable costing: tools for management Overview for variable and absorption costing The variable costing information is mainly used by the internal management for the purposes of making decisions. The management accountant plays an important role in terms of developing the variable costing information. Absorption costing on the other hand involves the information that is used by the internal management and external stakeholders like the government, auditors or creditors (Agoglia, et al, 2011). The financial manager is mainly involved in the development of absorption cost information. The successful companies usually use the concepts of both variable and absorption costing. The variable costing is also known as the marginal cost while absorption costing is also known as traditional costing. The variable costing includes only the variable production cost in the cost of the product. Examples of variable costing involve direct materials, direct labour and variable manufacturing overhead costs. The absorption costs on the other hand include all the production costs regardless of whether they are variable or fixed. Reconciliation of variable costing with absorption costing income Total variable cost= Total quantity of output x variable cost per unit of output Absorption cost= (Amount of overhead/material cost) X 100 At Michelin for the year ending December 31 2014, the company produced 171 million tyres while the variable cost per unit is 0.3, the amount of overhead cost was € 142 million and the material cost was € 400 million. Total variable cost= 171,000,000 x 0.3 =€51, 300,000 Absorption cost= 142/400 x 100 =35.5% Advantages of variable costing and contribution approach When using the variable cost, fixed manufacturing overhead costing are incurred which increases on the capacity to produce. On the other hand, variable costing considers the fact that fixed manufacturing overheads cost will be incurred regardless of the what is produced (Du, 2011). The fixed manufacturing overhead cost is also expensed in the current period. Using the contribution approach also has some advantages that are beneficial to an organization. The contribution approach is useful for CVP analysis as it provides the data that can be used immediately. The income cannot be affected by the changes in the production volume when using the contribution approach. When using the contribution approach, the misunderstandings concerning unit product cost is eliminated. The impacts that the fixed costs has on the profits is emphasized since the fixed costs are more visible. The use of contribution approach is also important in ensuring that the managers can easily understand the reports. The contribution approach plays an essential role in ensuring that control is facilitated. The variable costs correspond to current out-of-pocket expenditure making the incremental analysis more straight forward. The use of the contribution approach can play an important role in the companies that have cash flow problems. Differential analysis: the key decision making Cost concept for decision making The managers require a knowledge of costs in order to make decisions. This is considering that there are different types of costs and each of the cots has its own different characteristics. Reviewing the business case in order to determine the direction that needs to be taken requires an understanding of the cost concept. The decisions to alter certain activities may have different implications on the cost within an organization. The knowledge of the fixed costs is important to the managers in order to ensure that their decisions do not alter the fixed costs as it will have negative implications for the business (Agoglia, et al, 2011). The by product costs are also important in terms of determining the profits that an organization can make. Understanding the cost concept is important for the managers to determine the profits that they can make incase the products are sold at a particular price. The knowledge of cost is useful in ensuring that allocations are funds are carried out in an effective manner. The managers can also be in a position to understand the impacts on their decisions over a certain period of time in relation to the costs. When making huge investments, it is important to ensure that the managers have adequate knowledge on the issues concerning costs. The make or buy decision The make or buy decision involves the process of making strategic decision regarding the choice of producing the product internally and buying it externally from the supplier. This decision is usually prompted by various factors including the capacity of the company to continue producing (Weygandt, et al, 2015). The make or buy decision is usually conducted at an operational level within the presence of the management team. This is an indication that the decision is crucial for an organization. The management team needs to understand the issues of costs as it may influence the decisions. The make or buy decision may be expensive for the organization and hence the importance of understanding the accounting concepts. This is an indication that the decision making process is guided by the accounting concepts and the managers must possess the required skills in order to make the right decisions. The increase in the inventory-carrying costs is a factor that contributes to the make decision. The cost consideration in the buy decision includes the transportation cost, receiving and inspection cost, increase in the purchasing cost and the purchase price of the part. Opportunity cost Opportunity cost is the best alternative foregone when choices have to be made between several mutually exclusive alternatives when limited resources are available (Du, 2011). This means that once a choice has been made, the company will not be in a position to enjoy the benefits that the second best choice would have offered to the organization. The costs involved include monetary, real cost, output, lost time or pleasure. During the production process, the explicit cost involves the monetary payment to the producers. The implicit costs involve the opportunity cost that is not reflected in the cash outflow but it is implied by the failure of the firm to allocate its own resources to the best alternative use. The Managers should therefore have knowledge o the issues of costs for the purposes of ensuring that the best alternative decision is made in the face of limited resources. Capital budgeting decision Capital budgeting planning investment Capital budgeting planning investment involves the process of determining whether an organization long term investment is worth the funding of the cash through the capitalization structure of the company (Weygandt, et al, 2015). Capital budgeting is also a process of allocating resources for an investment within an organization. The main goal of the capital budgeting is to increase the value of the firm to the shareholders. Different methods and techniques can be used for the purposes of carrying out capital budgeting process. The commonly used methods are the incremental cash flow methods. The methods and techniques that can be used during the process includes accounting rate of return, payback period, net present value, profitability index, internal rate of return, modified internal rate of return, equivalent annuity and real options valuation. Various factors affects influences the capital budgeting decision and this may includes the availability of funds, capital structure, taxation policy, government policy and financial policies lending policies. Discounted cash flows the net present value method The net present value is the sum of the present values of the incoming and outgoing cash flows over a period of time (Agoglia, et al, 2011). According to the concepts of time value of money, time has an impact on the cash flows. The future cash flows can be made less valuable by the cash flows of nominal values. This means that the cash flow today can be considered more valuable than the identical cash flows in future. The present value of a subsequent future cash flow is usually decreased with an additional period. In order to calculate the net present value, the present value of the total benefits and costs which is achieved by discounting the future value of each cash flow has to be established. A positive value after the calculation of the net present value indicates a profit while a negative value is an indication of a loss. During the capital budgeting, most of the organizations require positive values as it is an indication of profitability within the company. The flowing formula can be used for calculating the net positive value: NPV=R⁄ (1+i) ^t Where t= the time of the cash flow i= the discount rate At Fujifilm, a product development project required an initial investment of 243,000 Yens; it was to generate a cash flow of 50,000 Yens every month for a period of 12 months. The target rate of return is 12% per annum. NPV = R⁄ (1+i)^t =50,000/(1+12/100)^12-243,000 =562,754-243,000 =319,754 Yens. Discounted cash flows: the internal rate of return Internal rate of return is the annualized effective compounded rate. It is also considered as the rate of return that makes the net present value of all cash flows from a particular investment equals to zero (Cheng, 2015). At the internal rate of return, the net present value of costs of the investment equals the net present value of the benefits. An investment has a potential when the internal rate of return is greater than an established cost of capital. A company whose internal rate of return is greater than the cost of capital is attractive to the investors who would like to be shareholders of the company. The managers therefore need to understand the concepts of internal rate of return so as to make the decision s that will benefit the business. The information obtained from the internal rate of return may be used for the purposes of making decisions that can be used for expanding the business. Budgetary planning and control Relevance of planning and control Budgetary planning and control is useful to an organization in terms of enhancing communication and coordination of the funds that needs to be used for certain activities within an organization (Zimmerman & Yahya-Zadeh, 2011). The budget making process is useful in enabling the managers to consider specific objectives in relation to the funds allocated for different activities. The budgets are important in an organization as they provide a control mechanism as it is used for evaluating performance. The actual performance of an organization is usually compared to the budgeted performance and hence establishing control within an organization. Zero base budgeting This method of preparing the budget starts from a clean slate at the start of every budgetary period. This is considering that the budgets are usually developed on a yearly basis. This method of preparing a budget requires the managers to start from zero and justify each of the budget. When using this type of budget, the money that has not been spent during the last financial year has to be returned to the accounts. This method of developing a budget may not be effective in a business and it is mainly used by the government or the government agencies. When using this method, the control of the processes may not be effective and it may lead to wastage of funds or lack of accountability (Cheng, 2015). Production budget The production budgets are important for the companies that carry out the production processes (Zimmerman & Yahya-Zadeh, 2011). The production budget is based on the finished goods as well as the sales forecasts. The production budget determines the capacity in which the organization can operate. The following formula can be used for the purposes of calculating the production budget: Finished units to be produced= expected sales in units +desired ending inventory of finished units-beginning inventory of finished units. In the year 2013, Samsung expected to produce about 5million smartphones, the desired ending inventory of the finished units was 6 million while the beginning inventory of finished units was about 6.5 million. Finished units to be produced =Expected sales Unit + Desired ending inventory of finished units – Beginning inventory of finished units Finished units to be produced= (5+6)-6.5 =4.5 million units. References Agoglia, C. et al. (2011). Principles-based versus rules-based accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions. The Accounting Review, 86(3), 747-767. Cheng, J. (2015). Small and Medium Sized Entities Management’s Perspective on Principles- Based Accounting Standards on Lease Accounting. Technology and Investment, 6(01), 71. Du, C. (2011). A comparison of traditional and blended learning in introductory principles of accounting course. American Journal of Business Education (AJBE), 4(9), 1-10. Weygandt, J.et al. (2015). Financial & Managerial Accounting. New York: John Wiley & Sons. Needles, B., & Crosson, S. (2013). Managerial accounting. London: Cengage Learning. Needles, B. et al. (2012). Principles of accounting. London: Cengage Learning. Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259. Nestle. (2015). About us. Retrieved on 28 February 2015 from, . Read More