Managerial Accounting Concepts

Managerial Accounting: Manufacturing Overhead: The costs allocated to a cost object can be considered as fixed or variable as well as direct or indirect costs. There are two types of costing systems that are used by management accountants i.e. job-costing systems and process-costing systems. While job-costing systems mount up and track costs differently for every product or service, the process-costing systems are basically used by companies manufacturing huge quantities of similar or identical products. Notably, companies usually classify manufacturing costs into three various categories i.e.

manufacturing overhead, direct materials, and direct labor ("Systems Design: Job-Order Costing," n.d.). Even though direct materials and direct labor costs are traced to jobs, manufacturing overhead costs are not traced to jobs in similar ways. However, manufacturing overhead costs are included with direct materials and direct labor on the job cost sheet since it is also a product cost.

Assigning these costs to overhead units of product is a relatively difficult process because it is an indirect cost, it contains several different items, and it tends to remain seemingly constant because of the presence of fixed costs. Therefore, the only way to allocate manufacturing overhead costs is through an allocation process because of this difficulty. Absorption Costs: Absorption costing is a costing system in which all costs of manufacturing are regarded as product costs regardless of whether they are fixed or variable.

This system allocates part of fixed manufacturing overhead cost to every product unit together with the variable manufacturing cost. Under absorption costing, if fixed manufacturing overhead costs are released from inventory, the fixed manufacturing costs of the present period do not appear on the income statement as part of the cost of products sold. The costs are instead deferred to a future period and included in the balance sheet as a segment of the inventory account ("Absorption Costing or Full Costing System," n.d.).

Notably, when the units related to net operating fixed costs are sold in the next period, the costs attached to the units become part of cost of goods sold in the next period. Under absorption costing, if the fixed manufacturing overhead costs are released from inventory, the level of production must have been less than the level of sales because of decrease in inventory levels.

Management Support: While there is an increasing desire among organizations to understand their costs and behavior of characteristics that fuel these costs, there is huge confusion in understanding costs and how to differentiate competing cost measurement methods. Consequently, managers and employees received mixed messages regarding which costs are the correct ones. Notably, the cost measurement methodologies do not necessarily compete since they can be combined, reconciled and coexist. One of the cost measurement methodologies that have generated confusion among employees and managers is activity-based costing system.

The implementation of this system requires top management and cross-functional involvement in order to avoid the confusion. Since the implementation of an activity-based costing system is like any new management technique, it requires buy-in from the top management during implementation. Cross-functional involvement helps staff to understand the current costing system and promote adequate communication in the process (Cokins, 2006). Therefore, the support and involvement not only helps in avoiding confusion but helps in promoting integration of the system.

Product Costs: Prentice Company is evaluating the probability of dropping one of its product lines, a decision that requires decision making regarding the relevant and irrelevant costs to the decision. The company's situation is an example of scenarios in which managers need to make decisions regarding costs between alternatives.

The process of differentiating between relevant and irrelevant costs and benefits is important because irrelevant data can be ignored in order to save time while bad decisions can easily contribute to erroneous inclusion of these costs when evaluating alternatives (Garrison, Noreen & Brewer, 2006, p.602). The relevant costs in the company's decision to drop one of its product lines are those that would be avoided because of the decision. In this case, the avoidable costs can be completely or partly eliminated by choosing one alternative over the other.

The irrelevant costs in this decision are those that are unavoidable i.e. sunk costs and future costs that do not vary between the alternatives. Sunk costs refer to those that have already been incurred and are unavoidable despite of the manager's decision. Budget: A budget can be primarily defined as a comprehensive plan for the future that is generally explained or presented in formal quantitative terms.

In some cases, the plan is expressed in terms of cash in which it provides plans on how cash resources will be obtained and used within a specific period of time. Consequently, budgetary control is a process that incorporates using budgets to enhance the likelihood that all segments of the organization work together ("ACTG Chapter 8," n.d.). Organizations use budgetary control because of the significance of the plans and revenues in promoting organizational health and survival.

Therefore, budgeting is an important process for organizations because of the benefits that can be gained from it. Some of these benefits include acting a communication tool for expressing the management's plan in the entire organization and enables the managers to plan for the future. In addition, budgets offer a way for distributing resources for effective use in the organization, enable coordination of activities throughout the organization, and providing benchmarking and performance assessment. Variances: Organizations usually prepare budgets as part of their planning process in order to ensure effective operations.

One of the most important processes used by firms to control costs, evaluate the performance of workers, and assess the budgeting process is comparing budgeted costs with actual costs ("Variances," n.d.). The comparison process is carried out through computing budget.