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Over the past six months, I have been linked with the accounting department of Red Duv Aviation as an apprentice. During this period, I was exposed to a range of practical learning situations that allowed me to experience on-the-job training in a range of areas associated with management accounting. Mainly, I was privileged to gain experience in mentorship and immersion into the organizational culture of the organization. As such, I became an integral part of the accounting and general organizational team for Red Duv Aviation. In this report, I will my training journey through the management accounting department. The summary shall entail the essential learning insights that comprised the learning objectives during the start of the apprenticeship. The author of this report shall thereby unveil the learning gains from the apprenticeship in areas such as Managerial Accounting, Job Order Costing, Process Order Costing, Cost Management Systems, Cost-Volume-Profit Analysis, Variable Costing, Decision Making, and Budgets and Standard Costing. In this report, the author aims to integrate the understanding and application of the accounting concept in both theory and practice.
Management accounting refers to the process by which a managerial accountant makes and communicates reports about the operations of the business to help management in making short and long-term business decisions. Also called cost accountants, management accountants identify, measure, analyze, interpret, and communicate financial and operational information to the top management to aid in informed decision-making for the organization´s internal operation metrics. Managerial accountants thereby collect and interpret organizational information related to costs and revenue and uses them to inform the position of the organization to the internal decision-makers. While financial accounting focuses on reporting the financial position of the organization to stakeholders and outsiders of the company, management accounting allows the managers (internal decision-makers) to make informed decisions on the health of the organization and future growth and strategic directions. Financial accounting, as such, focuses mainly on the profitability of the organization, while management accounting focuses on the organization´s operations and potential bottlenecks to the growth of the firm. The two accounting methodologies also differ in terms of their reporting frequency with financial accounting reporting coming at the end of a fiscal period while managerial accounting occurs more frequently. As the key ethical considerations, managerial accountants must aim to be credible, competent, confidential with the reporting, and of high integrity.
Job Order Costing
As suggested by the name, Job Order Costing refers to the determination of the cost for each product in a company producing more than one brand of product. Such costing entails the cost of direct materials, labor, and manufacturing for the specific product. Such order costing helps to determine the profitability of the specific product or job. The costing allows the organization to make a data-driven decision on a product option and the level of the company´s fixed assets being used in production. Process costing differs from the job order costing approach by focusing on standardized instead of unique products. Furthermore, process costing is mostly used with large production runs, unlike the job order costing which works with smaller runs. Job costing also reflects in the final price of the product as opposed to process costing which only aggregates production line costs.
In a Job Order Costing system, the flow of cost begins when the cost accountant records the labor and material cost as well as manufacturing overhead. The direct cost of materials and labor are then debited in Work in Process (WIP) account. Indirect labor and materials costs and actual manufacturing overhead are then debited to Manufacturing Overhead control. WIP is then subjected to the manufacturing overhead at a given rate. This resulting value from applying the manufacturing overhead on the WIP is then credited in the Manufacturing Overhead control account. Finished unit costs are then credited to the WIP and debited to the Finished Goods inventory account.
The manufacturing overhead refers to the indirect production costs. These are costs incurred on production machinery and indirect materials and labor during production. Manufacturing overhead is applied to each produced unit while calculating the cost of goods sold. The manufacturing overhead account must always be adjusted for underapplied or overapplied overhead situations.
Process Order Costing
For companies producing large quantities of the same product, Process Order Costing is applied to assign costs to the various units of production. This costing method assigns costs at specific stages of product manufacture. In this costing method, each department maintains a process account. As the product goes through the stages of production, the costs are transferred through the stages of production. The process begins when the materials are procured from the storeroom. The process involves the general processes and not the specific products and thereby appear more straightforward than the job order costing approach. In the cost accounting system of the process order costing approach, equivalent units of production refer to the work that the manufacturer does on the partially completed units of output.
Equivalent units of production = Completed Units + (incomplete units × percentage completed)Production cost reports (PCRs) act to break down the expenses associated with a product and their equivalent costs per unit. This cost awareness allows decision-makers to strategically decide on the preferred suppliers, product development, and the currently marketed products.
Cost Management Systems
Cost Management Systems (CMS) are methods used by cost accountants to evaluate cost management strategies. The CMS assesses the results of the decisions made from the strategies of cost management. Cost allocation, as such, allows managers to identify, aggregate, and assign costs to the specific items and activities whose costs are to be measured. In cost assignment and allocation, the costs are spread among inventory items. Activity-based costing (ABC) refers to the attribution of cost to cost units based on the benefits of indirect activities like quality assurance and setting up. In developing an ABC, the accountant must identify the product-creating activities and divide them into cost pools. Cost drivers must then be assigned to the cost of pool activities. This is then converted into a cost driver rate by dividing the total overhead by the cost drivers. Finally, multiply the cost drivers by the cost driver rates.
ABC may be employed in quality control decisions, public relations, production decisions, sales, and material management. The evaluation of the costing strategies allows the accountant to determine what costs may be appropriately allocated to various domains while attempting to make production, marketing of unit costing decisions. Just-in-time systems refer to the systems that provide only the required information when they are required and in the necessary amounts. Such provision of the necessary quantity of materials allows the managers to help avoid wastage, save on time, and focus on quality. Total Quality Management, on the other hand, ensures continued product improvement to ensure continuous quality assurance. TQM allows managers to improve operations and reduce defects as a continuous process.
Cost-Volume-Profit (CVP) Analysis
As the name suggests, CVP analysis checks the effects of varying costs and volume on operating profits. The analysis helps to determine a business´s break-even point. In CVP analysis, cost behavior is often used to represent the change (behavior) of cost variable as a factor of the changes in another variable, say volume. The three types of cost behavior include Variable costs, fixed cost, and semivariable costs. As the production volume increases, thereby, the variable cost increases too and thus determines the CVP analysis and, consequently, the BEP of the business. Fixed costs, on the other hand, change depending on the depreciation and insurance on the fixed asset. The contribution margin refers to the unit selling price of a good and the variable cost for each unit. To calculate the operating income of the business, the accountant should find the difference in the contribution margin and total fixed cost. The CVP analysis assists in making business decisions regarding the economical components of the manufacturing domain of the product. It allows the organization to determine the break-even price of the business and whether the sales required to achieve a particular profit margin is workable and sustainable.
In variable costing, the cost accountant includes all the variable costs of production in the product cost, while absorption costing entails a combination of all the costs associated with the production process. Under the absorption costing approach, fixed costs and fixed overheads are considered in the cost calculation approach. Variable costing only considers direct labor and material costs alongside variable manufacturing overheads. As variable costs only consider the variable direct costs, such a cost accounting approach allows managers to make strategic decisions regarding the preferred products to continue offering and ones to discontinue. They allow the decision-makers to determine the overall production costs for a given unit of production. Furthermore, variable costing allows organizations to estimate and control the cost and price of a product and determine its profitability. They may be able to narrow the gap between the budgeted production costs and the actual determining costs of production based on direct expenses and overheads.
While aiming to make the best decisions in management accounting situations, managers must ensure that they measure the costs and benefits presented by the various alternatives. The tradeoffs presented in the alternatives must be sufficiently analyzed and reviewed by the full cost accounting process to ensure the best alternative is selected. Short-term break-even analyses assist in understanding the viability of the business and its requirements for complete profitability. Financial flow and expense analysis decisions are necessary for improving the soundness of the investments and their profitability. Capital budgeting is a longer-term budgeting approach that offers rational judgment on the various alternative fixed assets proposed for investment. This fixed approach to investment determines which fixed asset should be retained and which one must be declined. Capital budgeting techniques, including discounted cash flow (DCF) method, payback method, and accounting rate of return method, are essential methods for approaching the analysis of assets for selection or rejection choices. DCF analyses the initial outflow that is required to fund a project contrasted with the revenue inflows maintenance and other outflow costs.
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