Variable costing in managerial accounting income statements

Managerial and Financial Accounting

Case Managerial Accounting - Variable Costing Managerial accounting emphasizes short-term profit analysis, income statement important. Consequently, 'll examine discuss income statements case.

Managerial and Financial Accounting

Financial and managerial accounting basic difference comes on the uses. While, financial accounts are prepared for use by external parties, managerial accounts are prepared for use internally. The process of preparing the accounts in both financial and managerial accounting use similar source for data their emphasis differs. Managerial accounting has a measure to guide and direct the mangers orientation on future perspectives of a firm. Financial accounts primarily provide information on the firms past performance and transactions in summary. The managerial accounting aspect gives a detailed reflection of constantly monitored performances and a reflection for projected estimates (Rachchh, 2011).

Objectivity and validity of financial accounting information is an expectation of the users. Managerial accounting information need only to be relevant its verifiability is not paramount. Managerial accounting relies on estimate to plan and predict the future. This predictive function does not require verification and since flexibility is paramount for managerial accounting validity is ignored. To managers, precision is important in order to make decisions that can be relied upon. Managers concentrate more on non-monitory data such as customer satisfaction compared to financial accounting that gives more information in monetary terms (Siegel G., 2000).

Financial accounting with giving reports on the company as a whole looking at the company as one entity. Managerial account considers looking at segmented components of the whole organization. The mangers account show the contribution of sales to profits, the appropriation of the overheads and also shows a breakdown of the revenues and cost.

Regulations are given in the preparation of financial accounts for use by external stakeholders. There are generally accepted accounting principles set for the preparation of financial accounts. These principles make assurance to the external users that the account preparation does not reflect information otherwise untrue. From these principles, a common ground is laid to facilitate comparability. The preparation of financial accounts is mandatory for use by the external user such as tax authorities, shareholders and creditors. The managerial accounting is not necessary and a firm is free to undertake their own measures in the preparation of such account. Managerial accounts come in handy where the valuation of assets held by the company required being disposed. Example, financial accounting requires the firm to report the value of land held at the cost value rather than market value. To relocate a plant will require the manager to revalue the land property to the market value in order to dispose it (Kaplan, 2009).

Role of managerial accounting

Management accounting is purposed to support the organization decision making process to support its sustainability and competitive functions. The decision making process is supported by gathering information, analyzing it, communicating, controlling and planning a strategy. Management accounting is tasked with the role to ensure a flow of information on the organization's to support planning and control of work within the organization. Management accounting makes an audit of the resources available to an organization to highlight the potential within the organization (Blocher, Stout, Cokins, & Chen, 2008).

Changes in managerial accounting

Managerial accounting has changed from strict staff capacity functioning to incorporation of consultants in cross functional team managers in different departments. Managerial accounts are not independent accounting departments within a firm any more. Rather, they are an operating department working in coordination with other department managers, facilitating decision making and resolving operational problems. Managerial accounting has over time come to be a proponent component of the firm acting as an accurate measure to relay advice. Management accounting adds values to the organization (Harrison Jr., Horngren, & William, 2012).

Certified Management Accountant (CMA) designation

Certified management accountant works mainly with a corporation in providing advice on matters relating to finance affecting company management. CMA gives advice to a company on financial planning, budgeting, corporate spending, and tax compliance. A Certified management accountant works seldom to oversee the in-house financial affairs of a corporation. A person qualified as a certified management accountant has training in economics, performance measurement, financial analysis, financial planning, budgeting, corporate taxation and business accounting ethics (Gerhart, Hollenbeck, Noe, & Wright, 2007).

Unlike the CMA a certified public accountant is more concerned public domain of the corporation. A CPA handles task relating to the company auditing function, taxes and preparation of mandatory final year statements. A certified public accountant has the obligation to follow the legal financial requirements in preparation of the accounts set by the local government body. In terms of qualification, a CPA certification is broad in covering varied perspective of account preparation. The CMA covers specialized aspect of a corporation (Gerhart et al., 2007).

Breakeven Analysis

Breakeven analysis can be a very useful and relatively simple tool for management to use in making decisions. It can be used for dealing with unknown variables such as demand. By specifying the levels of known variables such as cost or profit, a required or minimum level can be found for the unknown variable. Any problem requiring income estimation can be set up so that the most difficult variable to estimate is isolated for solution. Breakeven analysis is not a panacea. It is only one of the many tools available to the business decision maker.

It serves as a substitute for estimating an unknown factor in making project decisions. In deciding whether to go ahead or to skip it, there are always variables to be considered: demand, costs, price, and miscellaneous factors. When most expenses can be determined, only two missing variables remain, profit (or cash flow) and demand.

Break-even analysis is the use of a simple mathematical formula to determine the sales level at which the business is neither incurring a loss nor making a profit. In other words, when the firm's total expenses equal its net sales revenue that is the break-even point for the operation. In mathematical terms, Breakeven is the point where: Total Expenses = Net Sales Revenue. Precisely the amount of sales revenue should be readily available on your income as "Net Sales" (Harrison Jr. et al., 2012).

The breakeven formula tells us that the total cost both fixed and variable cost ought to be equal to the total revenue in sales for a firm to break even. Example Considering that furniture making company. That makes chairs for office use. The Fixed cost for the company amount to $30,850. The variable cost comprising of material and labor hours amount to 90 per chair produced (Harrison Jr. et al., 2012). The breakeven point (BEP) for the will be as given below

BEP = total revenue from sales equals to total cost (Fixed and viable cost).

The total number of chairs produced is given as X. The value of a single chair sold is 150. The Breakeven point in units will be

150X = 90 X + 30850

30850 = 150X - 90X

X = 30850 + 60

X = 515 chairs

The furniture making firm needs to make and sell at least 515 chairs in order to reach the breakeven point.