Trident University

Module 1 Case Variable and Fixed Costs

ACC202: Managerial Accounting

Introduction The purpose of this assignment is to demonstrate a basic understanding of the managerial accountants role and a few of the functions they perform. The first part of this assignment requires us to explain the difference between a financial and managerial accountant as well as describe how internal management might find financial information useful. I then discuss how the managerial accountants role has evolved over time and briefly cover the Certified Management Accountant (CMA) designation. The second part requires an explanation concerning the difference between absorption and contribution income statements, why the net income might not be the same on both statements and then comment on the need for those different statements. Finally, discuss how the breakeven analysis can be a useful tool. Differences between Financial and Managerial Accountant While both financial and managerial accounting professionals prepare and analyze financial data, their roles are very different. According to an article titled Difference Between Managerial Accounting and Financial Accounting, Financial accountants help monitor and describe the companys financial position and managerial accountants assist companies in making the right financial decision (DifferenceBetween, 2011). A financial accountant primarily compiles data and prepares reports for external agencies such as investors and creditors; whereas a managerial accountants reports are prepared for use within the organization by managers, employees and executives (DifferenceBetween, 2011). Other differences between the two professions are how the data is prepared and the purpose of the data. A financial accountants focus is on historical data to describe a companys performance as a whole as well as highlight problem areas and point out potential investment opportunities (DifferenceBetween, 2011). The reports are required and usually prepared at the end of a fiscal year or period in accordance with strict rules outlined in the general acceptable accounting principles (GAAP) (DifferenceBetween, 2011). In contrast, the managerial

accountant has a future-based focus and prepares reports that can be used for sales forecasting, feasibility studies, merger and consolidation to name a few (DifferenceBetween, 2011). Their reports are prepared in any manner the management finds useful and dont have to follow any specific rules (DifferenceBetween, 2011). The reports can be prepared daily, weekly or monthly as well as tailored to a particular segment in a company such as an individual product or an entire line of products (DifferenceBetween, 2011). Targeting a specific product allows management to see if the product is actually contributing in a positive manner. Different Needs and uses of financial information for internal purposes Outside agencies really only care if a company is yielding profits as a whole. Internal management is more concerned with how individual products or product lines are performing. Specific financial information can show whether or not a product is costing too much to make and pin point areas that could be altered to hopefully lower costs (Accounting for Management, 2011). Areas or products experiencing lower sales might indicate a change in the marketing strategy is needed or perhaps that a product is no longer a viable contributor and needs to be eliminated (Accounting for Management, 2011). Additionally, the information can be used to determine whether a company can afford to accept a lower than normal sales price for a particular item (Accounting for Management, 2011). How the Managerial Accountants role has changed The Managerial Accountants role has evolved from being a passive data information provider number cruncher to that of an active team member or leader guiding strategic and day-to-day decisions that affect organizational operations (Malonis and Cengage, 2000). According to a Mangerial Accounting article written by Jane A. Malonis and Gale Cengage, Significant advances in automating routine transaction-related accounting tasks, combined with a strong corporate emphasis on value creation, have signaled new directions for managerial accounting. The thrust of the changes have been to make management accountants strategic partners and analysts in management decision making, rather than simply suppliers of data. Many companies now expect their managerial accounting staff to assist in developing strategies to enhance shareholder wealth and to participate on cross-

functional teams with managers from operating departments throughout the organization, among other things (Malonis and Cengage, 2000). Certified Management Accountant designation To stay competitive, one must be willing to learn and grow within their chosen profession. Obtaining an advanced degree or a professional certification is one measure of continued professional growth. For example, the CMA designation is a tangible measurement indicating an individual has gone above the basic normal accountant degree requirements and has mastered the areas of financial planning, decision support, analysis, control and professional ethics. Difference between Absorption and Contribution Income Statements The main difference between the absorption and contribution income statements is how the costs are organized (TUI). An absorption income statement organizes costs by function such as product costs and operating costs and labels the intermediate step as costs of goods sold (TUI). A contribution margin or variable income statement separates costs according to their behavior such as variable and fixed which highlights the products contribution margin as the intermediate step (TUI). Variable costs can be directly attached to the product for example wood used to make furniture or sewing machine operator in a clothing factory and they change as the production rate changes (Edwards, 2007). Fixed costs are expenses that need to be paid but cant be directly attached to a product such as rent, insurance premiums or loan interest which means they stay the same even when the production rate changes (Edwards, 2007). Net income differences A difference in the net income between the two statements will occur when the number of units produced is different than the number of units actually sold (Jones, 2011). For example, if the units produced were greater than the units sold, the net income will be larger on an absorption income statement (Jones, 2011). If there was some beginning inventory and the units produced was less than the units sold the net income on an absorption statement would be smaller (Jones, 2011). The

reason for this is because absorption costing assigns the fixed manufacturing overhead (FMOH) equally to each unit that was produced (Jones, 2011). However, it doesnt account for those expenses until the product is actually sold (Jones, 2011). Variable costing expenses FMOH in total in the period they occurred no matter how many units are produced or sold (Jones, 2011). Need for creating a different income statement Contribution margin or variable income statements are beneficial for making internal decisions such as short-term price setting, determining how many units need to be sold in a particular period, whether to accept a special order or discontinue a product line (Jones, 2011). Additionally, this type of income statement can show a product manager just how much a product is contributing to the overall profits (Malonis and Cengage, 2000). Lets assume there is one product that experiences a greater sales volume over other products. However, its variable expenses consume enough of those sales that its contribution margin is actually less than the contribution margin of the other products (Malonis and Cengage, 2000). Once a production manager has that information, they could then determine if marketing strategy needs to be altered to focus in the higher profitability items or find a way to lower the manufacturing costs (Malonis and Cengage, 2000). Break even analysis The breakeven point (BEP) is the middle ground where a product is neither operating at a loss nor bringing in a profit (Jones, 2010). Conducting a break-even analysis shows how many units will need to be sold in order to cover expenses and then start providing a profit (Jones, 2010). Additionally, the analysis can show loan officer whether or not the BEP is a realistic goal and can help determine if they should grant the loan (Jones, 2010). The figure below is what I used to compute the data points for the BEP graphs in the SLP assignment and the template for this chart was retrieved from an on-line lesson presented by Mike Girvin on YouTube.com. The figure shows the BEP is 5,000 units assuming the units selling price was $300, the units variable costs were

$230 and the fixed expenses were $350,000. Selling more than 5,000 units in a given period would yield a profit anything less than that would yield a loss. If they experienced continual a loss, a company might want to change its marketing strategy to increase sales or find a way to cut the manufacturing expenses.

Conclusion I have clearly demonstrated a basic understanding of the managerial accountant profession by first explaining how the role of a financial accountant is different from that of a managerial accountant. I then briefly commented on the different needs and uses of financial information for internal purposes followed by explanation of how the managerial accountants role has changed and then discussed the Certified Management Accountant designation. In the second part I cover the differences between the absorption and contribution margin income statements and explain why the net income might not be the same on both of those statements. I follow that up with why a company might have a need for a differently prepared income statement and how they can be helpful for decision making and finally, I briefly covered the purpose for conducting a break-even analysis.

Works Cited
Accounting for Management. (2011). Difference Between Financial and Managerial Accounting (Financial Accounting Vs Managerial Accounting). Retrieved July 2011, from accountingformanagement.com: http://www.accountingformanagement.com/financial_ accounting_vs_managerial_accounting.htm DifferenceBetween. (2011). Difference Between Managerial Accounting and Financial Accounting. Retrieved July 2011, from DifferenceBetween.net: http://www.differencebetween.net/business/accounting-business/difference-betweenmanagerial-accounting-and-financial-accounting/ Edwards, J.D., Hermanson, R.H. & Invacevich, S.D. (2007). Accounting Principles: A Business Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 73-87. Retrieved from HYPERLINK "http://docs.globaltext.terry.uga.edu:8095/anonymous/webdav/Accounting%20Principles/Ac counting%20Principles%20Vol.%202.pdf" http://docs.globaltext.terry.uga.edu:8095/anonymous/webdav /Accounting%20 Principles%20Vol.%202.pdf Jones, P. D. (2010, November 28). IX. C. BEP Units.wmv. Retrieved July 20, 2011, from You Tube: http://www.youtube.com/watch?v=knrm4g2stMI&feature=related Jones, P. D. (2011, January 10). X. B. & C. Absorption vs. Variable Costing Income Statement.wmv. Retrieved July 20, 2011, from You Tube: http://www.youtube.com/watch?v=_fj8Tz_1Wm4&feature=related & http://www.youtube.com/watch?v=N4CKkMB6-3c&feature=related Malonis, J. A. & Cengage, G. (2002) "Managerial Accounting." Encyclopedia of Business. Ed. eNotes.com. 2006. Retrieved 20 Jul, 2011 <http://www.enotes.com/biz-encyclopedia/ managerial-accounting> TUI. (n.d.). Module 1 Background; Variable and Fixed Costs. Retrieved July 20, 2011, from Trident University: http://cdad.tuiu.edu/CourseHomeModule.aspx?course=3&term=96&module=1&page=bkg