Accounting Question

Essay Prompt:

Write an essay of 750 to 1000 words that explores the role of management accounting and how it differs from financial accounting. In your essay, ensure that you cover the following points:

The Role of Management Accounting vs. Financial Accounting

Explain the purpose and functions of management accounting.

1. Compare and contrast management accounting with financial accounting in terms of their goals, users, and scope of information.

Discuss the importance of management accounting in decision-making within organizations.

Accounting Concepts Used to Classify Costs

• Identify and explain key accounting concepts and terminology used in the classification of costs (e.g., fixed costs, variable costs, direct and indirect costs, etc.).
• Discuss how these concepts are applied in business to help management make informed decisions.
• Relationship Between Manufacturing Activities and Flow of Costs

1. Illustrate how costs flow through the various stages of manufacturing, from raw materials to finished goods.

Describe how cost flows are tracked in accounting systems, and how they reflect in financial records.

Differences Between Financial Statements for Manufacturing and Merchandising Companies

• Identify and describe the major differences between the financial statements of manufacturing companies and those of merchandising companies.
• Highlight specific areas such as inventory, cost of goods sold, and the presentation of expenses.

Module 1: Notes 1 – Management Accounting
Management Accounting
What is management accounting? Is it different from financial accounting? Do management
accountants support the strategic decisions of an organization?
You will receive answers to these questions and more in this course. You will also learn how
management accounting aids decision making and what professional ethics mean to management
accountants.
Management and Financial Accounting Differences
Management Accounting and Financial Accounting fulfill two different roles in an organizational
setting.
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Management accounting helps managers arrive at decisions while financial accounting
communicates the financial position of the organization to investors, banks, regulators and
other interested parties.
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The primary users of management accounting are the managers of the organization, while
the primary users of financial accounting are investors, banks, regulators and suppliers.
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The focus and emphasis of management accounting is future-oriented, while financial
accounting focuses on the past.
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Financial accounting measures and records business transactions and provides financial
statements that are based on Generally Accepted Accounting Principles (GAAP), while
management accounting is based on cost-benefit analysis.
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Financial accounting is concerned with quarterly and annual financial reports primarily on
the company as a whole, while management accounting varies from hourly information to
over a span of two decades, with both financial and non-financial reports on products,
departments, territories and strategies.
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Management accounting is designed to influence the behavior of managers and other
employees. Financial accounting reports economic events but also influences behavior
because a manager’s compensation is often based on the financial results of the company.
Refer to Exhibit 1-2 in the assigned textbook for more information on the differences between
Management and Financial Accounting.
Decision Making, Planning and Controlling
Management accountants serve as business partners in the decision making process. The decision
making process comprises two main categories – planning and controlling.
Planning involves identifying the problem and uncertainties, selecting the related organizational
goals, gathering information, making future predictions for various alternatives, choosing the
alternative to the achieve goals and communicating the decision to the organization. A budget is an
important planning tool that numerically communicates the expected result of implementing the
decision.
Controlling includes implementing the decision of management, evaluating how actual
performance compares to budget and providing feedback to enable learning.
Organizational Structure
In an organization, line management is directly responsible for achieving the goals of the
organization such as production, marketing and distribution, while staff management provides
advice, support and assistance to line management.
The Chief Financial Officer (CFO) is an important staff function whose responsibilities include
controlling, treasury, risk management, taxation and investor relations. The Controller is primarily
responsible for management accounting and financial accounting.
Some of the skills you must possess or acquire to become an effective management accountant,
besides a strong sense of integrity, are abilities to:
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Work well in cross-functional teams.
Promote fact-based analysis and make hard critical judgments.
Lead and motivate people to change and be innovative.
Communicate clearly, openly and candidly.
Professional Ethics
Ethical standards are important for all organizations and form the culture of the organization and
expected behavior of individuals in the organization. Many companies have internal ethical
standards that are applicable to all employees. However, accountants have additional ethical
standards due to their responsibility for the integrity of the company’s financial information.
The Sarbanes-Oxley Act (SOX) was enacted in 2002 and focuses on internal control, corporate
governance, monitoring and disclosures. SOX imposes penalties on managers and accountants for
non-compliance.
Additionally, ethical certification programs are offered by professional accounting organizations
that promote high ethical standards for financial accounting or management accounting.
The Institute of Management Accountants (IMA) provides guidelines to management
accountants that focus on competence, confidentiality, integrity and credibility.
Please refer to Exhibit 1-7 in the assigned textbook for more information on the IMA’s guidelines.
Module 1: Notes 2 – Cost Terminology
Cost Terminology
In organizational terms, cost is a resource sacrificed to achieve a specific objective. It is usually
measured as the monetary amount that must be paid to acquire goods or services. An actual cost is
the cost actually incurred, while a budgeted cost is a predicted or forecasted cost.
You will be introduced to basic cost terms in this lesson. You will learn about cost objects, cost
assignment, direct and indirect costs, and variable and fixed costs within an organizational setting.
Cost Assignment
A cost object is anything for which a measurement of cost is desired. In a manufacturing company,
the cost object is the product. In a service company, the cost object is the service.
Cost data is accumulated or collected by means of an accounting system and then assigned to
specific cost objects. Cost assignment is accomplished by tracing direct costs to a cost object and
allocating indirect costs to a cost object.
Direct and Indirect Costs
Direct costs are costs that are directly related to a specific cost object. If you are producing a
diamond ring, the diamond in the setting can be easily traced to the specific setting.
Indirect costs cannot be traced to a specific cost object in a cost-effective manner. Continuing with
the diamond ring example, the tools used to cut the stone are not specific for one diamond ring but
are used across multiple diamond rings or even multiple products.
The factors that affect direct and indirect cost classifications are:
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Materiality of cost
The smaller the cost, the less likely that it is economically feasible to trace.
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Information availability
Improvements in information-gathering technology make it possible to consider more and more
costs as direct costs and help trace cost objects in an economically feasible way.
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Design of operations
Classifying a cost as direct becomes easier if exclusive space is allocated for a specific cost object,
such as a specific product or customer.
Variable and Fixed Costs
There are two basic types of cost-behavior patterns – variable and fixed.
Total variable costs fluctuate in proportion to changes in levels of activity or volume. For example,
the total cost incurred for gold for a jewelry store increases as the number of pieces of jewelry
produced increases. A cost driver has a cause-and-effect relationship between the change in the
level of activity and the change in the level of total costs. For example, the number of diamond
rings produced is a cost driver for the total variable cost of diamond rings.
Total fixed costs remain unchanged for a given time period, despite changes in the related level of
activity. Therefore, in the short run, fixed costs do not have a cost driver. For example, the
supervision cost remains the same despite a change in the level of activity during a specific period.
Average Cost
Average cost, also known as unit cost, is calculated by dividing total cost by the related number of
units produced.
Variable cost per unit does not change based on changes in the activity level within a relevant range.
However, total variable costs for the company do change when the activity level changes. For
example, the cost of gold per piece of jewelry ($200) is the same if 1,000 pieces of jewelry are
produced or 1,200 pieces but the total variable cost would change ($200,000 versus $240,000).
Fixed costs per unit change based on changes on the activity level. However, total fixed costs for
the company do not change when activity level changes. For example, if supervisor costs are
$360,000, the fixed cost per unit will be higher when 1,000 pieces of jewelry are produced ($360
fixed cost per unit) than when 1,200 pieces of jewelry are produced ($300 fixed cost per unit).
Relevant Range
Relevant Range, refers to the range of normal activity or volume in which there is a specific
relationship between the level of activity and the cost in question.
For example, fixed costs may include the wage and benefit cost for one supervisor. Supervisor cost
is fixed within a relevant range. The relevant range is the level of activity that can be handled by
one supervisor. If the company suddenly triples its activity and the company now requires two
supervisors, this activity level would be outside the relevant range.
Module 1: Notes 3 – External Reporting of Costs
Module Notes: External Reporting of Costs
Generally Accepted Accounting Principles (GAAP) must be followed for external reporting. You
will be introduced to how costs are classified and reported in the financial statements that are
reported externally. Although these concepts apply to manufacturing, merchandising and service
companies, manufacturing companies have additional classifications of costs related to the
conversion of raw materials into finished goods.
Cost Classification
The costs of a manufacturing company can be categorized as product costs and period costs.
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Product costs are all costs associated with manufacturing the product. Examples include
materials that are used to make the product, wages for workers who make the product,
utilities for the manufacturing facility, etc. Product costs are reported as inventory on the
balance sheet until the finished product is sold. For this reason, product costs are also
referred to as inventoriable costs.
Period costs are all costs not related to the purchase or manufacture of the product.
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Examples include costs related to sales, marketing, and corporate functions (such as human
resources, finance, and information technology) who provide support company-wide. Period
costs are reported as expenses on the income statement in the period incurred.
Refer to Exhibit 2-16 in the assigned textbook for more information on the flow of costs through a
manufacturing company’s financial statements.
Product Costs
Product costs include all costs related to the purchase or manufacture of products. Manufacturing
costs are comprised of direct material costs, direct labor costs and manufacturing overhead.
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Direct material costs are the acquisition costs of all materials that eventually become part
of the cost object and can be traced to the cost object. Computer chips that are used to make
cellular phones is an example of direct materials.
Direct manufacturing labor costs include the compensation of manufacturing labor
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directly involved in the conversion of raw materials into finished goods, and can be traced to
the cost object. Wages and fringe benefits paid to machine operators is an example of this.
Manufacturing overhead are all manufacturing costs that are related to the cost object
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throughout the process, but cannot be easily traced to the cost object. Examples include
costs of the manufacturing facility (such as utilities and property taxes), supplies and
materials used in the manufacturing process (such as glue and thread) that cannot be traced
to the cost object, and the compensation of employees who are indirectly involved in the
manufacturing process (such as plant supervisors and plant janitors).
Direct materials and direct labor together are often referred to as prime costs. Whereas, direct labor
and manufacturing overhead together are often referred to as conversion costs.
Balance Sheet
Product costs are assigned or allocated to cost objects and reported in inventory accounts until the
product is sold. A merchandising company has one inventory account. However, a manufacturing
company maintains three types of inventory:
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Direct materials inventory: Materials in stock and awaiting use in the manufacturing
process
Work-in-process inventory: Products that are in the manufacturing process but not yet
completed
Finished goods inventory: Products that are completed but not yet sold
Income Statement
Once the product is sold, the product costs are moved from finished goods inventory (on the
balance sheet) to cost of goods sold (on the income statement). Cost of goods sold is the cost of
finished goods inventory sold to customers during the current accounting period. Cost of goods sold
are deducted from revenues resulting in gross margin.
Period costs are reported as operating expenses on the income statement. Operating expenses are
deducted from gross margin resulting in operating income.
Refer to Exhibit 2-12 to 2-19 in the assigned textbook for more information on the Income
Statement and the calculation of Costs of Goods Sold.