Abstract Order Costing Job Order Costing is defined

Abstract

During
this training I was able to learn many valuable concept that are used in the
world of managerial accounting. Below eight different topics that were covered
during training will be summarized. The eight topics covered are managerial
accounting, job order costing, process order costing, cost management systems,
cost-volume-profit analysis, variable costing, decision making and budget
standards.

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Managerial Accounting

            The IMA defines Managerial
Accounting as “a profession that involves partnering in management decision
making, devising planning and performance management systems, and providing
expertise in financial reporting and control to assist management in the
formulation and implementation of an organizations strategy” (IMA, 2009). The
purpose of managerial accounting is to assist management and other internal employees
with the decision-making processes of the company. Management accounting mainly
consists of “controlling costs and the planning and controlling of operations”
(referenceforbusiness.com, 2018). Management accounting focuses on internal
future forecasting for a company. Management accountants create reports that
give the information needed for management to accurately form tactful business
strategies in regards to the company’s financial moves. Reports generated by
managerial accountants consist of planning and controlling the companies
operations. Planning is performed by creating budgets, identifying profit goals
and cash flow. The controlling portion of managerial accounting involves
analyzing the company’s performance and rectifying any budgetary shortfalls if
needed.

            Managerial accounting is used for
internal future forecasting decision-making. In contrast financial accounting
is used for analyzing past financial history which is used in external
decision-making. One of the biggest differences between managerial accounting
and financial accounting is in the reports that are created by each department.
Financial accounting reports must adhere to the General Accepted Accounting
Principles standards. Government agencies such as the Internal Revenue Service,
Financial Accounting Standards Board and the Securities and Exchange Commission
all have access to financial accounting reports and standardization in the
reports is important when analyzing a company’s history. Another difference
between management accounting and financial accounting is the time at which
reports are created. Management accounting reports are created in real time,
while financial accounting reports are created on a routing schedule throughout
the year. Managerial accounting reports are also much more concentrated to
smaller portions of a company. Financial accounting reports involve the
breakdown of an entire company.

            The Institute of Managerial
Accounting dictates the ethical standards for management accountants. There are
four principles that IMA members need to follow, they are honesty, fairness,
objectivity and responsibility. The standards set out by the IMA are
competence, confidentiality, integrity and credibility. IMA also requires
members to attempt to resolve or anonymously report it.

Job Order Costing

            Job Order Costing is defined as the “system
for assigning manufacturing costs to an individual product or service”
(AccountingCoachLLC.com, 2018). Job order costing is used to set prices for
companies with different types of products or services within the company. Job
order costing is different than process costing in many ways. Process costing
is used when a company has to produce identical products in mass quantities. Job
order costing is developed differently than process costing.  Job order costing for a product begins by
generating a job cost sheet. The job cost sheet includes a direct material,
direct labor, and manufacturing overhead sections. In Job order costing the
manufacturing overhead is readjusted at the end of the accounting period due to
the differing products being created. Manufacturing overhead are “indirect
costs associated with manufacturing a product”(AccountingCoachLLC.com, 2018).
Overhead cost may include electricity used in the manufacturing factory,
supplies, equipment, property taxes on the factory, and any personnel needed to
upkeep the factory. There are different methods for allocating manufacturing
overhead costs; one example is through direct labor. The activity of direct
labor is assigned a cost and used as the cost driver for calculating the
predetermined overhead. The predetermined manufacturing overhead is just an
estimate and may need to be adjusted at the end of the period in order to
reflect actual manufacturing overhead costs. Once all cost have been determined
they will be entered into the job order cost sheet.

Process Order Costing

            Process Order Costing is used to
create identical products in mass quantities. This process begins by
identifying the steps needed to produce the product and assigning direct labor,
raw material and overhead costs. Once costs are assigned a work in process
account is created, and the costs in the work in process account is moved from
account to account as the product moves through to the finished goods portion
of the process.

Process Order Costing

            Process Order Costing is used to
create identical products in mass quantities. This process begins by
identifying the steps needed to produce the product and assigning direct labor,
raw material and overhead costs. Once costs are assigned a work in process
account is created, and the costs in the work in process account is moved from
account to account as the product moves through to the finished goods portion
of the process.

Equivalent Units Completed
(weighted method)

            Equivalent units completed are the
amount of partially completed units at the end of a period expressed as
completed units. (AccountingCoachLLC.com, 2018). It is much easier to deal with
completed units versus partially completed units when calculating cost.
Equivalent units of product is calculated by multiplying the percent completed
of a unit to the total amount of units attempted, then adding that total to the
number of units actually completed. To the get the cost of equivalent units
produced the company will take the direct labor cost and divide it by the
amount of equivalent units.

Production Report

            The production report contains the
information on cost acquired by each department. The report compiles the
numbers on material, labor and overhead for each department. It is an important
tool that is helpful in making educated decisions as it allows a manager to get
an overview of the departmental costs.

Cost Management System

            Cost
management system is defined as “a set of formal methods developed for planning
and controlling an organizations cost-generating activities relative to its
short term objectives and long term strategies” (coops.northseattle.edu, 2018).
Cost allocation is the process of identifying specific costs within a
production or department. Cost allocation helps a company keep track of where
costs are being incurred in the company. Proper costs calculations are required
in order to correctly price items and manage company resources. In order to
allocate costs the cost object must be known, once the cost object is
identified, the amount of money spent on that cost object must be totaled up
and assigned to the cost object.

            Activity
based costing is used to assign overhead costs to products that require
specific activities in order to complete the production. During activity based
costing, similar process activities are put into a cost pool that relate to
cost drivers. Once cost pools are analyzed they are assigned as pre-determined
overhead. Activity based costing is a more precise way of assigning indirect
costs.

Just in Time management is very
similar to quality management systems.     

Just in time management is a method
of keeping costs low by maintaining low inventory. A company will only put in
orders for inventory when needed and forecasted by producers. This type of
management requires producers to run very efficient processes. Supply chains
are at risk of disruption if one link in the chain has a malfunction.

            Quality
management systems focused on quality by incorporating every person involved
into the process. They focus on improving the production process and the
product itself. The customer is the number one concern since they are the ones
who dictate quality in a product.

Cost-Volume-Profit Analysis

 

            Cost Volume Profit analysis estimates how
variations in cost affect profit within a company (thebalance.com, 2018).  Cost volume profit analysis takes into
account three variables: fixed and variable cost, sales volume and price and
how they affect profit. Some costs are affected directly by the level of
production within a company. The way costs behave when volume is changed can be
analyzed in order to make better decisions. Cost volume profit analysis is a
very popular tools used by all companies at some point or another.

            Contribution margin is the products
price minus all variable costs. The formula for calculating contribution margin
is (Net product revenue-Product variable)/ Product revenue). Contribution
margin is used to determine price for products during certain situations such
as special pricing events. It is also used to identify which product should
continue to be sold based on the contribution margin associated with it and the
estimated profit. Contribution margin can be used with single products,
customer sales, product lines as well as whole businesses.
(accountingtools.com, 2018).

Variable Costing

            Variable
Costing and absorption costing are two techniques used when applying production
costs to products. (strategiccfo.com, 2018) Variable costing assigns all direct
and variable manufacturing overhead costs to the end product. The fixed
manufacturing overhead costs are expensed at the time they are incurred. The
assigned costs stay with the product until the item is sold, then expensed in
the costs of goods sold statement. (strategiccfo.com, 2018)

            Absorption
costing assigns directs costs and both fixed and variable manufacturing costs
to the end product. Like in Variable Costing, assigned costs stay with the
product until it is sold and expensed through the income cost of goods sold
statement. (strategiccfo.com, 2018)

            When
it comes to making decisions about the business variable costing is much more
telling of the companies situation. Variable costing only looks at the variable
labor, materials and overhead costs for a specific product. This way of
analyzing a companies costs paints a much more precise picture of the actual
costs associated with the product being produced.

Decision Making

            The
decision making process for managers involves analyzing relevant information
and relevant cost. Relevant information is “expected future data that differs
among alternatives, and relevant costs are costs that are relevant to a
particular decision” (Nobles & Mattison & Matsumura, 2018). There are
different situations that may require a manager to make a short-term decision
such as regular and special pricing, removing products that have not made any
profit, and outsourcing. A popular technique for making short-term decisions is
by analyzing how each decisions outcome would affect the operating income of
the company.

            Capital
budgeting is the process of planning long-term asset investments so that they
return the most profit to the company. There are four steps to the capital
budget process: Developing a strategy, plan, act, and control. Some stages of
capital budgeting involve screening potential capital investments and further analyzing
potential investments by using the net present value or the internal rate of
return methods.

            The
payback method is an analysis method used to evaluate shorter capital
investments. Payback method involves the calculations that indicate the amount
of time it will take to make back the cost of the initial investment. The
payback method formula is amount invented/expected annual net cash flow. In
order to invest under the payback method a company should invest only if the
payback period is equal to or less than the investment useful life.

            The
Account rate of return measures the profitability of an investment. The ARR
formula is Average annual operating income/Average amount invested. In order to
invest the ARR should meet or exceed the rate of return. The discounted cash
flow method is another analysis tool. It involves using cash flow projections
and discounting them so they are at set to the present value. The present value
is used to assess the potential of the future investment.

Budget and Standard Costing

            Budgets
are financial plans used to create future business activities. There are many
types of budgets; two examples would include strategic and operational budgets.
A strategic budget is associated with long-term goals. It is a long-term financial
plan that is used to create the activities needed to complete the long-term
goal set out by the company. Strategic budgets last about 3-10 years and are
sometimes a little vague. Operational budgets are used for short-term goals
that could be completed in a smaller window of about one week to a month.
Operational budgets require more details because of how quickly they must be
fulfilled.

            Operational
budgets are prepared by including the sales budget, production budget, direct
material purchases, direct labor budget, overhead budget, selling and
administrative expense budget, and cost of goods manufactured budget. The
financial budget includes the schedule of expected cash receipts from
customers, schedule of expected cash payments, cash budget, budgeted income
statement, and budgeted balance sheet.

            Budgets
and standard costs are used to control business activities through pricing
decisions and expected cost forecasting. If current costs become greater than
the standard forecasted costs the company knows that it will make less profit
than originally planned. “When actual costs are greater than the standard cost
the variance is unfavorable. If actual costs are less than the standard cost
then variance is favorable.” (AccountinCoachLLC.com, 2018)

Reference

 

 

 

 

 

Reference

What is an equivalent unit of
production? | AccountingCoach. (n.d.). Retrieved from
https://www.accountingcoach.com/blog/what-is-an-equivalent-unit-of-production

 

Process Costing –
principlesofaccounting.com. (n.d.). Retrieved from http://www.principlesofaccounting.com/chapter-20/process-costing/

 

 

 

 

 

 

 

 

References

The
Comprehensive Guide to Understanding GAAP | Accounting.com. (n.d.). Retrieved
from http://www.accounting.com/resources/gaap/

Managerial
Accounting – benefits, expenses. (n.d.). Retrieved from
http://www.referenceforbusiness.com/encyclopedia/Man-Mix/Managerial-Accounting.html

Process
Costing – principlesofaccounting.com. (n.d.). Retrieved from

Process Costing

Tanner, D.
(n.d.). Chapter 1 – Introduction to Managerial Accounting. Retrieved from
http://www.unf.edu/~dtanner/dtch/dt_ch1.htm

Traditional
Methods of Allocating Manufacturing Overhead | Accounting Coach. (n.d.).
Retrieved from https://www.accountingcoach.com/manufacturing-overhead/explanation/2