Essay On Management Accounting

Managerial accounting is not governed by accounting standards and principles. Techniques and systems are developed by looking at most commonly adopted methods in organizations. Therefore, such filed is less sharply defined. 2. Managerial accounting as outlined by its name is more linked to the business needs of management. Indeed a central tenant of management accounting is to provide financial information to managers to aid them in their economic decision. Financial accounting is more targeted towards the need of external users.

The financial information conveyed in financial accounting is more in aggregate terms and such information would not be suitable for management. Management is more interested in financial information separated in accordance to products and divisions to aid in controlling and planning purposes. Therefore, such aspect is more closely related to management accounting. 3. A key difference between financial accounting and management accounting is that financial accounting is regulated by accounting standards and principles.

Management accounting moves more along best practice and provides room for a lot of flexibility. However, financial accounting is more restricted with the aforesaid standard, which provides frameworks on the presentation of financial reports and the accounting treatment of items. Therefore, financial accounting has less flexibility. 4. The information

Therefore, detailed and numerous reports are necessary to accommodate such needs linking it to management accounting. 5. Financial accounting reports are based on the historical cost convention and external users utilize such information to evaluate past events, which reflect the effectiveness of management. Management accounting also reflects historical past events. However, it also encompasses master and functional budgets, which entail future events. Therefore, management accounting is more oriented towards the future. 6. Management accounting is in line with best practice.

On the contrary, financial accounting is prepared in line with GAAP to enhance the salient objective of financial accounting, which is to provide useful information to external users to aid them in their economic decisions. 7. The external users of financial accounting are more interested in the overall financial health of the company. Thus human behavior is secondary for them. Question 2 Total Predicted Costs: April: $1,250 x 5 = $6,250 May: $1,250 x 6 = $7,500 June: $1,250 x 8 = $10,000 Question 3 The contract cost per clean is higher than the present variable cost per clean of $1,250.

However, the removal of the Janitor’s fixed costs of $24,000 has to be taken into consideration. The cleaning costs in April, Many and June if the outside cleaning company is employed will be as follows: April: $5,900 x 5 = $29,500 May: $5,900 x 6 = $35,400 June: $5,900 x 8 = $47,200 The discrepancy between the present variable cost and the cleaning cost if outside company is employed amounts to the following in the three months considered: April: $29,500 – $6,250 = $23,250 May: $35,400 – $7,500 = $27,900 June: $47,200 – $10,000 = $37,200

The higher expenditure incurred if the outside cleaning company is employed exceeds the Janitor’s fixed costs of $24,000 in May and June, which is financially undesirable. The only financially viable time frame is in April when the factory is cleaned four times. Therefore, to decide the most optimal solution, management should see on average the number of times the factory needs to be cleaned every month. If four times cleaning or lower are frequent, then it is financially desirable to employ the outside cleaning company. Otherwise it should not be engaged.

Question 4 a. Public relations personnel are normally paid a fixed salary that does not alter in line with production levels, which implies that it is a fixed cost. b. Supervisors are normally paid a fixed salary again directing towards a fixed cost. c. The sales commission is determined in line with the sales revenue generated by the salesmen. Therefore, such expenditure is variable to the sales revenue made, leading it to a variable cost. d. The consumption of jet fuel will be in line with the number of flights made. Therefore, this is a variable cost. e.

The $3,000 lease payment per month is fixed and is not altered by the number of miles driven by the trucks. However, there is also a variable element of $0. 20 per mile, leading to a mixture of fixed and variable cost. Hence, the total cost is a mixed cost. f. Straight line depreciation is computed as a fixed depreciation charge based on the number of years of the product use. Thus it is a fixed cost, which is not affected by production/sales changes. g. Since it is a lump sum, it will not be affected by production/sales alterations and it thus a fixed cost. h.

The rent payment will entail periodic fixed payments based on the life of the lease. Hence, they are not variable to production, leading it to a fixed cost. i. Cost accountants are paid a fixed salary. However, five cost accountants were employed in the firm due to projects and work needed. Such cost will alter in line with the cost accountants engaged, which means that it is a step cost. j. Repairs and maintenance costs are determined in line with the wear and tear of the classrooms used. Therefore, the more the usage of the classrooms the higher the cost. Thus this is a variable cost.

Question 5 The cost accounting reason behind such action stems on the pricing policy the company adopts. The firm utilizes a mark-up pricing system, which means that a profit mark-up is added to the product in order to reach the desired price, leading to the targeted profitability. The break-even point is computed in order to see the point at which the firm will neither make a profit nor a loss on the cars sold. Based on such break-even point, management instructs salesmen to abide with that price to ensure that the break-even point is exceeded and no losses are made.

If customers comprehend the approach the company is adopting, this may lead to negative resistance from the market. They will feel that price discrimination is being put in place and some clients may be reluctant to purchase from that company. This may thus lead to a loss in market share. In addition, customers that will still buy from the firm will demand lower prices when they approach the salesmen and if it is not granted, they will shift to competitors. Question 6 It is not a rare occasion that an organization sells inventory at a loss because its selling price is lower than the original cost.

Some people may regard this action as irrational. However, there are reasons behind such an approach. The value of certain type of inventory, like clothes is affected by the fashion. Inventory may go out of fashion, where clients are no longer demanding such product highly. If the company persists with such original price, the likelihood of selling such products will be remote. Therefore, rather than keeping such obsolete inventory, whose price may further fall, management is willing to sell it at a small marginal loss.

Further more, one needs to remember that there are certain types of expenditure, normally referred to as holding costs, which are directly associated with the inventory kept. Thus if the company persists in keeping such obsolete inventory, it will be incurring additional holdings costs that would be removed if such inventory is sold. Question 7 There are four main kinds of budgets, which comprise incremental budgeting, zero based budgeting, rolling budgeting and activity based budgeting. Incremental budgeting is a budgeting system where previous period’s budget is used as a basis for the current period budget.

In this respect, the manager is only required to justify any increments necessary for this year. For example, the previous period’s budget of Division A comprised cash of $10,000 provided to the division to cater for day-to-day expenses. In the current budgetary time frame, those $10,000 cash will be given and the division’s manager is required to justify only any additional money necessary for the division. Such method is often criticized to promote inefficiency. However, there are certain benefits that one needs to consider.

For instance, such budgeting system enhances consistency and provides a stable environment where change is gradual. The system is easy to understand and implement, which diminishes risk of conflict between managers that may arise. Coordination between departments is also facilitated and executive management can easily see changes implemented through such a budgeting system. Zero based budgeting, as hinted by its name starts from a zero base, which means that all expenditure has to be justified by the departmental manager irrespective that this is a recurring expenditure for the division.

Such system is often criticized on grounds that it entails a lot of work and provides uncertainty on the funds available to the division. However, such method is acclaimed of enhancing cost efficiency in the organization. Such system also outlines redundant and non-value adding activities, which when removed enhance more effective operations. Zero based budgeting aids management to focus their attention on the actual resources adopted. Thus it provides a stronger linkage between budgets and corporate objectives.

Further more, such a technique stimulates a flexible environment, where resources may be altered between the divisions to stimulate financial prosperity. A rolling budget encompasses the preparation of a twelve month budget a number of times each year, like for example each quarter. The purpose behind such an approach is to provide room for revision in budgetary plans and enhance more realistic figures. The first advantage of rolling budgets that comes to mind, as already hinted above is the preparation of more accurate forecasting figures.

In addition, the budget is no longer viewed as a static statement, but as a continuous approach, where flexibility and change are enhanced. Such a system stimulates a proactive organization to the market. More realistic plans are also prepared through rolling budgets. Activity Based Budgeting is a budgetary system that adopts an activity approach in the determination of budgeted costs. Rather than relying on a predetermined absorption bases rate, activity based budgeting looks at the cost drivers of each cost pool.

Activity based budgeting is an extension of zero based budgeting, where a more elaborate identification of value and non-value adding activities takes place. This thus further enhances the optimum utilization of resources benefit derived under zero based budgeting. Activity Based Budgeting is also beneficial for the organization because it increases emphasis on the activities of the organization and may thus aid management in identified better courses of action to enhance day-to-day operations. Question 8 The cost efficiency remarked by the decrease in operating costs may be due to the effective performance of the plant manager.

However, there is a vast spectrum of elements that may affect the reduction in operating expenditure. For instance, since more units were produced, more materials were acquired and additional bulk discounts were provided by suppliers. Another reason may be that workers were more efficient in operations due to the learning curve, which resulted in from additional production. Another plausible solution may be that a lower wage rate than originally envisaged was negotiated by the Personnel Division with the Trade Union, leading to lower labor costs.

Therefore, in light of all this, detailed variance analyses have to be computed and examined in order to shed light upon the elements that led to the aforesaid financial gain. Such variance analyses can be classified under material variances (price and usage), labor variances (rate and efficiency) and overhead variances (expenditure and efficiency). References: Blackhallpublishing. com (n. d). Solution 9. 3 (on line). Available from: http://www. blackhallpublishing. com/webresources/html/solutions/ma_s09-03. htm (Accessed 19th May 2010). Lucey T (2003). Management Accounting. Fifth Edition. London: Continu