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Name : Asri Marwa Umniati (29117037)

MM5002 ACCOUNTING

TAKE HOME ASSIGNMENT

1. What are the differences between financial and managerial accounting ?

Managerial Accounting is defined as the process of identifying, measuring , analysing,


interpreting and communicating information which are provided to managers, including
people inside an organization who direct and control its operations. In contrast with
Managerial Accounting, Financial Accounting is more likely to be more broadened than
Managerial Accounting, because Financial Accounting is providing financial information to
stockholders, creditors and others who are outside the organizations.

However, the difference between Managerial and Financial Accounting is not only at their
user orientation, but also there are some other differences, shown below :

Emphasis on the Past and the Future


As for Managerial Accounting, planning is important for managers job, Managerial
Accounting is focused on a strong future orientation due to the economic conditions,
customer needs and desires and desires that are always changing, and those should be
assessed in order to make a decision for the organization. In contrary, Financial accounting
generally summarizes past financial transactions.

Relevance and Irrelevance of Data


Managerial Accounting is for internal use which means that although the information
provided to people inside the organization could be not objective or variable, the information
is useful, because it is needed to be assessed by the managers. However for Financial
Accounting, the information should be objective and verifiable, usually not only by the
internal but also external assessors.

Less or More on Precision


Financial Accounting should be accurate at counting and analysing the amount of money that
is involved at organizational activities because it is required for external reports. However,
Managerial accounting more weight on monetary data, like data of customer satisfaction
which is less emphasized on precision, but much more reporting what occurred as it happens
routinely (timeless).

Segments of an Organization
While Financial accounting is reporting for the company as whole, which means that at the
end of the period of organizational activities, usually yearly, the company should provide the
information whether the company is gaining profit or the opposite. For Managerial
Accounting, it focuses on segments, including product lines, sales territories, divisions,
departments and other categories which are sought useful.

Needing to be Accepted GAAP or Not


Financial accounting should follow GAAP due to its mandatory to provide information for
external users which have rules, which could increase comparability and reduce fraud and
misrepresentation. While Managerial accounting does not really need accepted by GAAP
because it is not necessarily useful in internal decision.

Mandatory or Not Mandatory


For any organizations, financial accounting is mandatory, but Managerial accounting is not
mandatory.
2. What are the three inventory accounts used by manufacturing companies? Explain!

The three inventory accounts used by manufacturing companies are


Raw Materials Inventory
Raw material is the basic material that is processed and converted into finished
goods. The cost incurred to obtain raw materials that have not yet been placed into
production is reported as raw materials inventory in the current assets section of the
balance sheet.
Work-in-Process Inventory
The units that remain incomplete at the end of a period are known as work-in-process
inventory. These units need the addition of more materials, labour or manufacturing
overhead to be completed in the coming period. Like raw materials, work-in-process
inventory is reported in the current assets section of the balance sheet.
Finished Goods Inventory
Finished goods are completed but unsold goods. The total cost incurred to complete
these unsold goods are reported as finished goods inventory along with raw materials
and work-in-process inventory in the current assets section of the balance sheet.
Correspondingly, three inventory accounts are needed, those are
Raw Materials Inventory account
When raw material is purchased, the cost of the raw material will be posted to the
Raw Material Inventory account. Raw Material Inventory Account will store the
value of raw materials received but not yet issued to production department.
Work-in-Process Inventory account
When the raw material is transferred to production department, the cost of the
material will be transferred from Raw Material Inventory Account to WIP Inventory
Account. Direct Manufacturing Labour Cost and Manufacturing Overhead Cost will
also be debited into WIP Inventory Account.
Finished Goods Inventory account
When the finished good is completed, the WIP Inventory Account will be credited
with the total manufacturing cost and the cost will be debited into Finished Goods
Inventory account.

3. What are the three manufacturing cost for a manufacturing companies? Explain!

Direct Materials. Direct materials are those materials that become an integral part of the
finished product and whose costs can be conveniently traced to the finished product. For
example, A car manufactured by Honda uses SONY music players to be installed inside the
car.

Direct Labour. Direct labour comprises of labour costs that can be easily traced to individual
unit of products, or Direct labour has another term, which is touch labour, which means that
the labours typically touch the product while it is being made/ produced. For example,
assembly-line workers at Automobile Industry, like (taking delivery of parts from suppliers,
fixing the engine, assembling other parts, fitting interiors, wiring, lights, moving finished
vehicles to storage areas, etc.)

Manufacturing Overhead as the third element of manufacturing cost. This includes all
manufacturing costs except direct materials explained above. Manufacturing overhead is
comprised of indirect materials, indirect labour, maintenance and repairs on production
equipment: and heat and light, property taxes, depreciation, and insurance on manufacturing
facilities. Thus, those costs associated with operating the factory are included in
manufacturing overhead. However, administrative costs are not manufacturing overhead.
4. Give examples of cost associated with manufacturing overhead.
Indirect materials costs (ex. Cleaning supplies, Disposable safety equipment, Disposable
tools, Glue, Tape, Oil, etc.)

Indirect labor costs (ex. Costs for Production supervisor, Purchasing staff, Materials
handling staff, Quality control staff. Also it refers to many types of administrative labor
positions, such as, any accounting, marketing and engineering position).

Maintenance and repairs on production equipment; and Heat and light costs, Property
taxes, Depreciation, and Insurance on manufacturing facilities.

5. Explain the differences between product and period costs!


Product costs consists all costs involved in acquiring or making a product, which means it
includes manufactured goods, like direct materials, direct labour and manufacturing overhead.
Therefore, product costs are the costs that are attached to units of product from the goods
purchased or manufactured to the final process in which the products are awaited to be sold at
inventory.
In an income statement, product costs are referred as Cost of Goods Sold.

As contrast with product costs, Period costs consists all the costs that are not part of product
costs which are all selling and administrative expenses. For example, Advertising, executive
salaries, sale commissions, public relations and other nonmanufacturing costs.
In an income statement, period costs are referred as Selling and Administrative Expense

6. Explain the difference of variable costs, fixed costs and mixed costs.
Variable cost is a cost that varies in total which depends on direct proportion to changes in
the level of activity. A good example of a variable cost is direct materials, because the direct
materials used will not be the same from one period to another period due to its increasing or
decreasing amount of goods or services the organization produces. However in, per unit,
variable cost remains constant.
Some example of Variable Costs are direct materials, shipping costs, and sales commissions
and some elements of manufacturing overhead such as lubricants.

Fixed Cost is a cost that remains constant, in total, even though there are any changes in the
level of activity of an organization whether the activity goes down or rises. However, in per
unit, fixed cost decreases as the activity level rises and increases as the activity level goes
down. Unlike variable cost, there are few costs that are completely fixed, for example, cost
that should be spend on renting a building or a machine.

Mixed cost is a cost that combines between variable and fixed cost elements. It is also known
as semivariable costs. For example, for an a business-related travel. It involves fixed coat
such as annual insurance, and it also involves variable cost such as changing fuel prices and
differing amount of use according to distances the car has travelled. Second example is a
service businesses that use telecommunications. It requires fixed phone line fees and standard
monthly rates for internet access. However, using beyond the limit of basic data requires
added cost, which can be classified as variable cost. Third is wages, in which the fixed
element is the basic wage, and because of performance rewards and bonuses, the salaries
become mixed cost.

7. What are the assumptions needed in order for Cost-Profit-Analysis (CVP) analysis to be
performed ?
a.) All costs can be classified as fixed and variable
b.) Behaviour or costs will be linear within the relevant range
c.) Difficulty of steps fixed costs
d.) Selling price remains constant for any volume
e.) There is no significant change in the size of inventory
f.) CVP analysis applies only to a short term time horizon

8. Explain about the use of operating leverage in CVP analysis.


Operating leverage is a multiplier used to measure of how sensitive net operating income is
to a given percentage change in dollar sales. If operating leverage is high, it means that a
small percentage increase in sales can produce a much larger percentage increase in net
operating income.

For example, there are two companies, A and B generating sales at $100,000 and there is a
10% increase in sales to become $110,000, but somehow their contribution margins are
different, which A is $40,000 and B $70,000. Their net operating income is similar in this
case. If we calculate the degree of operating leverage from the two companies, company B
will get higher degree of operating leverage by 7 and company A is only 4.
In conclusion, the net operating income of company B grows seven times as fast as its sales,
while company A grows four times as fast as its sales.

This is also can be translated to a conclusion that we can expect the net operating from
company A to increase by 40% and the net operating of company B increases by 70%

9. What the differences and similarities between absorption and variable costing
approaches? Explain!
The differences :
a.) The methods account for fixed manufacturing overhead differently
In absorption costing, fixed manufacturing overhead is included in product costs.
In variable costing, fixed manufacturing overhead cost is not included in product
cost and instead as period expense, like selling and administrative expenses.
b.) Absorption costing allocates a portion of fixed manufacturing overhead cost to
each unit of product, along with the variable manufacturing costs. In contrast,
product costs are only those manufacturing costs that vary with output.

10. Consider the following scenarios in a manufacturing company :


a. Units produced = units sold
b. Units produced > units sold
c. Units produced < units sold
Using those three scenarios, please explain the consequences for the companys
operation income, when they use absorption cost and variable costing approaches.

Relation between Effect on Inventories Relation between


Production and Sales for Absorption and Variable
the Period Costing Net Operating
Incomes
Units produced = Units No change in inventories Absorption costing net
sold operating income =
Variable costing net
operating income
Units produced > Units Inventories Increase Absorption costing net
sold operating income >
Variable costing net
operating income
Units produced < Units Inventories decrease Absorption costing net
sold operating income <
Variable costing net
operating income

a. Units produced = units sold


When the number of units produced equals the number sold, profit is identical for
both costing methods. With absorption costing, fixed manufacturing overhead costs
are fully expensed because all units produced are sold (theres no ending inventory.
With variable costing, fixed manufacturing overhead costs are treated as period costs
and therefore are always expensed in the period incurred. Because all other costs are
treated the same regardless of the costing method used, profit is identical when the
number of units produced and sold is the same.

b. Units produced > units sold


When the number of units produced is higher than the number sold, the absorption
costing results in higher profit. When absorption costing is used, a portion of fixed
manufacturing overhead costs remains in ending inventory as an asset on the balance
sheet until the goods are sold. However, variable costing techniques that all fixed
manufacturing overhead costs remain in ending inventory as an asset on the balance
sheet until the goods are sold. However, variable costing requires that all fixed
manufacturing overhead costs be expensed as incurred regardless of the level of sales.
Thus when more units are produced than are sold, variable costing results in higher
costs and lower profit.

c. Units produced < units sold


When fewer units are produced than are sold, absorption costing results in higher
costs and lower profit, while variable costing results in higher profit. Using variables
costing, the cost of goods sold in fixed manufacturing overhead costs continues to be
expensed when incurred. However, using absorption costing, the entire cost of goods
sold is expensed because all units produced were sold.

REFERENCES

Garrison, Ray H., Eric W. Noreen, and Peter C. Brewer. 2008. Managerial
accounting. Boston: McGraw-Hill/Irwin.

Averkamp, Harold, Manufacturing Overhead (explanation), Accounting Couch, 13


April 2013. Web. 22 September 2017.

Accountlearning, Assumptionsin Cost-Volume-Provit (CVP) Analysis,


Accounting-Management, 24 May 2011. Web. 22 September 2017.