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Managerial Accounting: Variable Costing Case Study


Managerial and Financial Accounting: Differences

Differences Between Financial Accounting and Managerial Accounting

As a rule, the area of financial accounting (FA) is restricted to the creation and further analysis of the company’s financial statements. The results of the analysis are then made available to all stakeholders involved. Managerial accounting (MA), on the other hand, views the financial analysis as a tool for the decision-making process. The results of the analysis are discussed to make a choice between the company’s options.

Therefore, the viewpoint that the company’s key processes are viewed can be deemed as the primary difference between the two concepts. However, there are other ways to consider the identified frameworks. For example, in the process of conducting an FA, one is supposed to consider the past performances of an organization. The MA approach, however, is directed at the current specifics of the staff’s performance.

The frequency of performing the FA is quite different from that of the MA as well. In contrast to FA, which must take place strictly on an annual basis, the MA may be used whenever there is the necessity to reconsider the current approach toward the management processes.

Another important issue, the objectives that the two types of analysis address, needs to be brought up as well. MA is used to complete day-to-day, short-term objectives, while the FA is used to consider the long-term ones.

Furthermore, when a publicly-traded company conducts an FA, the outcomes of the FA must be made available to the general public as a part of the corporate transparency principle (Marcinko & Hertico, 2013). The MA results, in their turn, do not have to be offered to wide audiences.

Finally, forecasting comprises a significant part of the MA. Although the FA is also used as the platform for designing the further financial strategy that entrepreneurship will use in the context of the global market, forecasting is not included in the report, unlike the MA framework suggests.

Managerial Accounting Profession: Change

The phenomenon of MA has experienced tremendous changes over the years of its evolution. Previously, the concept of managerial accounting was reduced to cost accounting. As the subject matter developed, the elements of a behavioral analysis were introduced.

As a result, the principles of HR were included in the managerial accounting system. The identified change allowed for executing better control over the corporate processes and maintaining sustainability. Consequently, the significance of the organizational behavior strategy, the satisfaction levels among the staff members, etc., were acknowledged as the factors that determine the choice of an MA strategy and the range of skills that an MA expert must possess.

Presently, managerial accounting is used as the tool for retrieving the data that helps improve all corporate activities and, therefore, enhances the profitability of the entrepreneurship. In other words, from the necessity to execute control over the essential financial processes, theorists redesigned the MA requirements to meet the need to control the factors that determine the employees’ performance in the company.

As a result, the current MA theory encompasses a wide array of activities that need to be supervised and puts a special emphasis on the necessity to use the human resources at the company’s disposal in a manner that is as efficient as possible. At this point, the significance of investing in the employees’ progress needs to be brought up. Indeed, a closer look at the present-day priorities of an HR department in a firm will show that any company is concerned with increasing the staff’s competencies and promoting their personal and professional growth (Needles, Powers, & Crosson, 2013).

Certified Management Accountant (CMA) and Certified Public Accountant (CPA): Definition and Comparison

A CMA is an accounting expert that operates in financial accounting and strategic management. As the very titles of the positions mentioned above show, the focus of the operations is the key difference between the two. Whereas the CMA addresses the issues related to management, the CPA manages the concerns linked to the area of finances. In other words, audits, financial reports, etc., are included in the range of the CPA’s competency.

In addition, the CPA’s certification may vary depending on the state, particularly the requirements for completing the degree, such as the number of hours, the specifics of the examination, etc., which are quite different from the CMA standards. Apart from the academic characteristics, there are the practical implications of earning the CPA degree that set it apart from the CMA.

It should be noted that both the CMA and CPA are geared toward maximizing profit. Every single step that the experts in the areas above make is supposed to address a particular problem that makes the company weaker and reduces its competitive advantage. The CMA certification, however, demands that the issues faced by the entrepreneurship should be viewed from the perspective of a manager and not merely a financial accountant.

Income Statements and the Financial Analysis

Absorption vs. Contribution Income Statements

For a company to be efficient in the target market, it is imperative to make as efficient use of the available resources as possible. An income statement, in turn, helps get the priorities in line, pointing out the advantages and disadvantages of the recurrent financial approach.

As a rule, a Traditional (i.e., Absorption) Income Statement (AIS) is defined as a tool for measuring the opportunities for an organization to gain profit within a particular time period. In the specified framework, both the variable and the fixed costs are viewed as a part of the cost of goods sold (Warren, Reeve, & Duchac, 2013).

Compiling a Contribution Income Statement (CIS), on the other hand, requires that the expenses should be deducted from sales. As a result, the calculation of the contribution margin becomes a possibility. In other words, the subject matter can be determined as a difference between the total revenues of a company and its variable costs.

Therefore, the AIS helps differentiate between the product costs and the period costs. As a result, when determining the expenses taken for the sold goods, one will be able to take both variable and fixed manufacturing costs into account. CIS, in turn, does not allow for including the fixed manufacturing costs into the calculation since it attributes them to the overseas costs.

Break-Even Analysis is an Essential Tool

Significance

By definition, a Breakeven Analysis (BEA) permits the identification of the point at which the expenses taken to run the entrepreneurship are equal to the revenues acquired in the process (Penner, 2013). The significance of the BEA is quite evident in the contemporary environment of the global economy. For instance, the BEA can be used to determine the company’s pricing strategy so that its customers can enjoy its flexibility and the company can gain a benefit. Similarly, the outcomes of the BEA can serve as the foundation for shaping the marketing approach. Finally, the identification of the point at which the firm’s revenues meet its costs may be used as the factor for making a choice between the investment options available.

Formula and Example

The formula used to carry out the BEA is fairly simple. To calculate the BEA of a particular product, one will have to add the Contribution Margin thereof to its Fixed Expenses:

Formula.

The Contribution Margin is determined by subtracting the variable expenses from the revenues:

Formula .

Therefore, the formula for the BEA can be shaped in the following manner:

Formula .

For example, the breakeven point (BP) for the company selling plush toys for $30, with each toy’s cost price being $7, will be 180 toys, as the table below shows (Kahn, 2015).

Table 1. Breakeven Analysis for a Toy Manufacturing Company.

Sales (180 toys priced at #30 per toy) $5,400
Variable Expenses (180 toys at $7 per toy) -$1,330
Contribution Margin $4,070
Fixed Expenses -$4,070
Net Income 0

As the example provided above shows, in order to reach its breakeven point, the company will have to make sure that the contribution margin of the production reaches $4,070. While the analysis carried out above is a rather rough draft of the actual calculations, it serves as a foundation for locating opportunities that entrepreneurship may explore in terms of investments, brand development, marketing, etc. Therefore, the further evolution of the organization can be outlined in a rather accurate manner.

Reference List

Kahn, K. B. (2015). Product planning essentials. Armonk, NY: M. E. Sharpe.

Marcinko, D. H., & Hertico, E. R. (2013). Financial management strategies for hospitals and healthcare organizations: Tools, techniques, checklists and case studies. Chicago, IL: CRC Press.

Needles, B. E., Powers, M., & Crosson, S. V. (2013). Financial and managerial accounting. Stamford, CT: Cengage Learning.

Penner, S. J. (2013). Economics and financial management for nurses and nurse leaders (2nd ed.). New York, NY: Springer Publishing Company.

Warren, C. S., Reeve, J. M., & Duchac, J. (2013). Managerial accounting. Stamford, CT: Cengage Learning.

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IvyPanda. (2020, September 13). Managerial Accounting: Variable Costing. Retrieved from https://ivypanda.com/essays/managerial-accounting-variable-costing/

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IvyPanda. "Managerial Accounting: Variable Costing." September 13, 2020. https://ivypanda.com/essays/managerial-accounting-variable-costing/.

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IvyPanda. 2020. "Managerial Accounting: Variable Costing." September 13, 2020. https://ivypanda.com/essays/managerial-accounting-variable-costing/.

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IvyPanda. (2020) 'Managerial Accounting: Variable Costing'. 13 September.

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