Managerial Accounting Essentials: Concepts & Controls
Principles of Financial Planning and Budgeting
- Short-term planning is typically within one year.
- Long-term planning involves longer than a year, up to 5-10 years.
- When strategic planning is transformed into numbers, it becomes a budget. This is expressed in dollars.
Controls: Monitoring Planning Activities and Decisions
- Feedback for managers is needed to improve policies, procedures, and processes.
- Measurement of actions and processes.
- Analysis of company results versus competitors (Benchmarking).
Objective: Prevention
Purpose of Managerial Accounting
- Reporting: For internal use by managers and employees.
- Purpose: To take advantage of opportunities and overcome challenges.
- Flexibility: Information is provided as needed to make the best decisions for the company.
- Timeliness: Managers don’t have to wait for public auditors to obtain key financials.
- Time: Focus is on trends and predictive value.
- Focus: Very specific, by targeting the needs of each management level.
- Nature: Managers use both qualitative and quantitative information.
Objectives of Internal Control
- Reliable Accounting
- Protect Assets
- Uphold Company Policies
- Promote Efficient Operations
(Note: Monitoring and training personnel can improve overall organizational well-being.)
Ethical Considerations in Accounting
- Adhering to principles that are ethical, legal, and beneficial for civilized society.
Compensation Hierarchy: Staff to CFO
Study the compensation and learn the hierarchy from staff to CFO:
- Staff
- Senior Accountant
- Financial Analyst
- General Manager
- Division Controller
- Controller, Treasurer
- CFO (Chief Financial Officer)
Nature of Costs: Variable, Fixed, and Mixed
Within the Relevant Range of Production:
- Variable Costs: Are fixed per unit and variable in total volume (e.g., the more shirts you sell, the more in Cost of Goods Sold).
- Fixed Costs: Are variable per unit and fixed in total volume (e.g., you pay rent on a fixed space; the more students you place in the room, the lower the cost per student).
- Mixed Costs: Salespeople are typically paid on salary plus commission. The salary might be fixed, but additional sales would bring additional commissions. Depending on the split (e.g., 50%/50% or any other), the more allocated to variable, the more the total compensation can increase according to growth in sales.
Product Costs Defined
Direct Labor (DL) + Direct Materials (DM) + Factory Overhead (FOH). They are necessary to build a product.
Period Costs Defined
Related typically to a period, not a batch of products, such as administrative salaries and maintenance wages.
- A period cost is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets. A period cost is more closely associated with the passage of time than with a transactional event. Since a period cost is essentially always charged to expense at once, it may more appropriately be called a period expense.
Costing Systems: Job Order vs. Process
- Job Order Costing Systems: Used for customization (e.g., wedding planning services).
- Process Costing Systems: Used for mass production.
Job order costing, or job costing, is a system for assigning and accumulating manufacturing costs of an individual unit of output. The job order costing system is used when the various items produced are sufficiently different from each other and each has a significant cost.
Conversion Costs Explained
Conversion costs include Direct Labor (DL) and Factory Overhead (FOH) to convert Direct Materials (DM) into Finished Goods (FG).
Cost Classification Examples
Study Exhibit 14.9 and Example 14.2; and learn the distinctions between Fixed or Variable, Direct or Indirect, and Product or Period using these examples:
- Bicycle tires and wheels: Variable, Direct, Product
- Wages of assembly worker: Variable, Direct, Product
- Advertising: Fixed, Indirect, Period
- Production manager’s salary: Fixed, Indirect, Product
- Office depreciation: Fixed, Indirect, Period
- Factory depreciation: Fixed, Indirect, Product
- Oil and grease applied to gears: Variable, Indirect, Product
- Sales commissions: Variable, Indirect, Period
Calculating Predetermined FOH Rate
Calculate the predetermined Factory Overhead (FOH) rate based on estimated FOH costs and estimated activity base or level of activity (such as direct labor hours or machine hours).
Example Calculation:
Suppose GX Company uses direct labor hours to assign manufacturing overhead cost to job orders. The budget of the GX Company shows an estimated manufacturing overhead cost of $8,000 for the forthcoming year. The company estimates that 1,000 direct labor hours will be worked in the forthcoming year.
Using the above information, we can compute the predetermined overhead rate as follows:
Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Total Units in the Allocation Base
Predetermined Overhead Rate = $8,000 / 1,000 hours
= $8.00 per direct labor hour
Process Design Improvements
Change in design for management to separate products into sub-categories and improve efficiency and cost accounting.
Just-in-Time (JIT) Inventory
Materials are ordered from vendors just in time to arrive when they are needed; they are debited to Work-in-Process (WIP).
Automation in Manufacturing
Using robots to do manufacturing tasks and provide a healthier workforce environment.
Continuous Processing Workflow
To reduce the use of requisitions, manufacturing is an active workflow, and a report called the materials consumption report is used instead.
Services: Efficiency & Customer Focus
Tax preparation and other professional services, such as medical, are provided using computers and automation, increasing efficiency and improving customer service.
Customer Orientation Strategies
Use of consumer focus groups and feedback to cater to customers.
Yield: Material Efficiency
Efficiency in the use of materials, input versus output. The greater the yield, the better the use of inputs. Example: Sugar Cane production.
The Fraud Triangle Components
Identify and match the key nine components of the Fraud Triangle:
Opportunity:
- Executive Access
- Indirect Access
- Administrative Access
Rationalization:
- Timeline
- Change
- Self-view
Financial Pressures:
- Social
- Lifestyle
- Bills