Management Accounting - Assignment Example

1. Managerial accounting? Briefly explain the objectives of the same? Managerial accounting is the accounting discipline concern with providing information to managers or people inside a corporation who are directly responsible with the control of the firm (Garrison & Noreen, 2003, p.4). It differs from financial accounting since the latter is performing to provide information for outsiders, while managerial accounting is prepared for insiders within a company. The report created in managerial accounting are not standardized like the financial statements, thus there are many variations in the types of report that are prepared. Cost accounting is correlated with managerial accounting work, since it is highly use in the preparation of managerial accounting work. The objectives of managerial accounting are to prepare information in order to optimize the firm’s value and production activity. The reports utilize in managerial accounting include comparing actual results with plans or benchmark prepared at the beginning of the accounting cycle. Other reports include indicators such as orders received, order backlog, capacity utilization, and sales (Garrison, et al., p.4). Some of the main functions of managerial accounting are planning, directing & motivating, controlling, evaluating year end results and closure of the planning and control cycle. Managerial accounting differs from financial accounting in the time scope. Financial accounting deals with historical events, while managerial accounting places emphasis on the future. Managerial accounting does not follow the general accepted accounting principles (GAAP) (Moore & Jaedicke, 1972). The reports prepared by managerial accountants must be timely and relevant so that the users of this information can make decision based on what is occurring or the projection of what may occur. The main users of the work perform by managerial accountants are the executive management team of a company. 2. Briefly explain Just-inTime (JIT) inventory management? Just-in-time inventory management is a philosophy of manufacturing based on planned elimination of all waste and on continuous improvements of productivity (Ashland). In practical accounting terms what JIT does is minimize the amount of inventory on hand in order to improve the cash flow position of a firm. Companies order the exact amount of material needed for a production run and the reorder point occurs when the inventory runs out. Precision and timeliness is necessary so that the company does not run out of raw materials or inventory needed to continue to operate. The business world in the 21st century is very competitive and business owners can no longer afford to have dead inventory (waste) in their shelf’s that does not generate instant cash flow for the firm. JIT has become a sophisticated business discipline with many other aspects. The list below illustrates some of the key principles of a JIT inventory implementation: Stabilize the levels of MPS with uniform plant loading Reduce / eliminate setup times Reduce lot sizes Reduce lead times Preventive maintenance Flexible work force Supplier quality assurance Small lot conveyance (Ashland). 3. Differentiate between period costs and product costs. The key components that make up manufacturing costs are direct materials, direct labor and manufacturing overhead. These components constitute product costs (Weygant & Kimmel & Kieso, 2002, p.833). These costs are primary expenses that must be incurred in order to produce a final product or service to be sold to the end-state user / customer. Direct materials and direct labor are product costs that are often referred to as prime costs (Weygant, et al., 2002). On the other end of the spectrum are period costs. Period costs are costs that are identified with a specific time period rather than with an actual product (Weygant, et al., 2002). They represent non-manufacturing costs such as administrative expenses, rent, and insurance among many others. These are expenses that firm must incur in order to operate. Other examples of period costs are marketing expenses and research and develop expenses. 4. Differentiate between fixed cost and variable cost. A fixed cost is an expense that is recurring and specific. The expense reoccurs in cycles such as a rent expense which is paid every month at the same exact amount. A business has to generate enough sales to cover its fixed expenses otherwise the business will go bankrupt. A variable expense is related with product costs. The purchase of raw materials which varies is an example of variable costs. The key difference between these two types of expenses is that fixed cost always occurs and typically is paid in specific cycles, while the variable cost occurs in variable cycles. Variable costs are associated with product costs, while fixed costs are associated with period costs (Kieso & Weygand, 1993, p.403). 5. Give two examples of each of the following: a) cost driver A cost driver is a factor such as machine-hours, beds occupied, computer time, flight hours, or some other time factor that is utilized to determine overhead costs. The cost driver must have correlation with the overhead determination of a particular firm in order to provide accurate overhead results. For example if direct labor hours is used to allocate overhead, then products with high direct labor-hours requirement will be effectively measured utilizing this cost driver. b) variable cost Variable costs are costs that vary in total directly and proportionally with changes in the production activity level. In a retailing business dedicated to selling clothes the purchase of shirts and pants are variable costs which vary. During Christmas season these store have a higher variable costs of merchandise being purchase. A second example of variable costs is cement in a construction company. The amount of cement purchase depends on how many contracts the company has at any particular point in time. c) fixed cost Fixed costs are recurrent expenses that a business entity endures. Two examples of fixed costs of a business are rent and insurance expenses. Other examples of fixed costs are the payment of long term loans and the payment of payroll of the administrative / executive staff of a particular corporation. d) sunk costs A sunk cost is a monetary investment in a project or machinery that once it gets started cannot be completed for whatever reason and the company assumes the loss known as a sunk cost (Horngreen & Foster & Datar, 2000, p.379). One example of a sunk cost is a construction of a building that only gets partially completed. A second example is a marketing campaign in which a company invests a large sum of money and the product ends up being defective and the company takes the product out of the marketplace. 6. Explain opportunity costs? An opportunity cost is the potential benefit that may be obtained by following an alternative course of action (Weygant, et. al, p.1108). For example a company can have $5000 available for the purchase of new machinery. An opportunity cost would be using that money in a different manner such as raising the salaries of the staff or investing the money in a consultant to give training to the employees. References Ashland.edu (2008). Just-in-time (JIT) Production. Retrieved July 18, 2008 from http://personal.ashland.edu/~rjacobs/m503jit.html Horgreen, C., Foster, G., Datar, S. (2000). Cost Accounting: A Managerial Emphasis (10th ed.). New Jersey: Prentice Hall. Kieso, D., Weygandt, J. (1993). Intermediate Accounting (Volume 1). New York: John Wiley & Sons. Moore, C., Jaedicke,R. (1972). Managerial Accounting (3rd ed.). Cincinnati: South-Western Publishing Company Weygandt, J., Kieso,D., Kimmel, P. (2002). Accounting Principles (6th ed.). New York: John Wiley & Sons Read More