Accounting Essay: Differences Between Management And Financial Accounting, Product Cost Classification, And Cost Behavior In Manufacturing.

Answering Question 1: Differences between management accounting and financial accounting

Question 1: Differences between management accounting and financial accounting
You are the financial controller of a large manufacturing organization and intend to approach the human resources (HR) manager seeking to create two new positions: a financial accountant and a management accountant.
Required:
1 Prepare a briefing document for the HR manager which explains the differences between these two roles.
2 Formulate (and answer) the five likely questions that you anticipate the HR manager will ask you about these two positions when you meet.
Question 2: Product cost classification: manufacturer

The following cost data for the current year relate to Heartstrings Pty Ltd, a greetings card manufacturer:
Service department costs1  $ 50 000
Direct labour: wages   242 500
Direct labour: on-costs     47 500
Indirect labour: on-costs     15 000
On-costs for production supervisor       4 500
Administrative costs                   75 000
Rental of office space for sales personnel2     7 500
Sales commissions       2 500
Product promotion costs       5 000
Direct material               1 050 000
Advertising expense      49 500
Depreciation on factory building        57 500
Cost of finished goods inventory at year end   57 500
Indirect labour: wages      70 000
Production supervisor's salary     22 500
Total overtime premiums paid     27 500
Cost of idle time: production employees3    20 000
Required:
Calculate each of the following costs for the year:
1 Total prime costs.
2 Total manufacturing overhead costs.
3 Total conversion costs.
4 Total product costs (for external reporting purposes).
5 Total period costs.

Question 3: Cost behavior; engineered cost; committed and discretionary costs: manufacturer
HappyDaze T-shirts manufactures and prints customised designs on T-shirts. Below is a list of some of their major costs.
(a) Cost of daily radio advertising on the local community radio station.
(b) Cost of the fabric used to make the T-shirts.
(c) Cost of the ink used in the designs.
(d) Salary of the managing director.
(e) Wages of the production employees who sew and print the T-shirts.
(f) Cost of movie tickets provided for the Employee of the Month award each month.
(g) Depreciation of the sewing machines, calculated on a units of production basis.
(h) Cost of electricity used in the factory building.
(i) Rent of the building.
(j) Wages of the staff who package the T-shirts.
(k) Cost of sewing machine maintenance.
(l) Cost of the new advertising sign at the front of the factory.
(m) Cost of the company car used by the managing director.
Required:
For each cost:
1 Indicate whether it is fixed or variable.
2 If the cost is variable, indicate whether it is an engineered cost. Explain why.
3 If the cost is fixed, indicate whether it is committed or discretionary. Explain why.

Answer 1 (1):

Accounting is a vast field. In order to simplify the knowledge and its application it has been divided into management accounting and financial accounting. These two are very different from each other. In the discussion below we will discuss these differences:

• Objectives: the objective of financial accounting is to disclose and present the financial information of the company to its stakeholders, whereas the objectives of the management accounting is to help the managers set goals and evaluate policies in order to achieve these goals.(Cafferky, 2014)
• User: the main user of the reports of the financial accounting is the stakeholders who invest in the company. The main people who need the report of management accounting are the people within the organisation.
• Compulsion: it is necessary for all the organisations to make a financial accounting report at the end of financial year, but there is no such compulsion in case of management accounting. (Davidson, 2009)
• Focus: the main focus of financial reporting lies in what has already happened in the past. The main focus of management accounting lies in the future, in making and formulation of plans and policies for future working of the organisation.
• Format: there are specified formats and rules for presentation of financial accounting report. The management accounting is mainly for internal use and there is no specified layout for its report.
• Frequency of reporting:the financial accounting reports are usually made annually but for convenience and better reporting and compliance purposes they make is quarterly sometimes. The frequency of reports of management accounting is based on the requirements of the management. It can be weekly, monthly, daily as per the requirement of the management, (Glantz, Slinker and Neilands, n.d.)

Therefore, we see that even though both belong to accounting but the use and scope of both financial and management accounting are very different.

Answer 1(2):

The financial controller is the lead account in an organisation. In order to be appointed as the financial and management account of an entity a person must be competent and should carry a professional diploma for the same (Iversen and Norpoth, n.d.). This area requires expertise and practical knowledge in order to get the work properly done. The HR will be likely to ask the following questions:

Q1: what is the role of a financial and management accountant in an organisation?

A1: the role of a financial and management accountants is similar to an accounting controller, since it covers most of the accounting and important areas of the business. The main role of a financial and management accountant is to look after the accounting, internal control procedures, financial analysis and financial planning.

Q2: who should be appointed as a management and financial accountant?

A2: a person with professional diploma in finance and with appropriate practical knowledge would be eligible for being appointed as a financial and management accountant. (Kimmel, Weygandt and Kieso, 2011)

Q3: What would be the role of the person in the internal control section of the organisation?

A3: such person being appointed should understand and have knowledge of the internal control systems practically. It would be his duty to execute internal control methods on the accounts and finances of the company. It would be hi responsibility to keeps the records of the company up to date and ready for inspection any time.

Q4: what would the person do for financial reporting and planning for the organisation?

A4: for financial planning and reporting such person will be responsible to formulate plans and financial policies for the company. He needs to execute such plans which would improve the functioning of the company along with increasing its profitability. He would also make policies in order to make the other departments well coordinated with financial department as indirectly they are all related to it.

Q5: Will the person will be able to coordinate accounting, regulatory and financial reporting along with budget and forecasting and managing internal control procedures?
A5: yes, a person who has been a financial controller already knows how to manage different sections related to accounting. Moreover most of the financing and management accounting functions cover the whole of accounting section and therefore he would be able to manage them all in sync. (Scheffe?, 2010)

Answering Question 2: Product cost classification for a manufacturer

Answer 2:

Question 3:

Let us first understand the following terms:

Engineered variable cost- these are the variable cost which are based on the volume of production or sales. These costs are directly related to the level of production. The variable costs which are not based on the level of output are other variable costs and often referred to as discretionary variable costs. (Searle, Casella and McCulloch, 2006)

Committed fixed costs- these fixed costs are fixed costs which will be incurred even if the company is not in operations. These costs are to take place at the same amount in case of no production or low production or high production. Therefore in all cases these expenses are to be incurred irrespective of production.

Discretionary fixed cost- these are the fixed costs which take place for a particular period. It may or may not be incurred on the discretion of management. Since the amount is fixed and irrespective of production these are classified as fixed costs, but as they are not compulsory to be incurred they are discretionary fixed cost.

1. Cost of daily radio advertising on the local community radio station.

The cost of daily radio advertising on local community radio station are discretionary fixed costs as these are not affected by scale of production and are incurred for a specific time period. Theses fixed costs are avoidable at the discretion of the management and hence classified as discretionary fixed cost.

1. Cost of the fabric used to make the t-shirts.

The fabric used to make the t-shirts re the direct materials. The consumption of the direct materials is tally based on the production level and hence classified as variable costs. Since the variable costs are incurred on per unit basis and can be recognised on each unit produced these are classified as engineered variable cost.

1. Cost of the ink used in the designs.

This ink will be used only if production takes place. The cost of ink which is used to print designs on the t shirts will increase with the increase in the level of production. Therefore the cots for ink for design will be classified as engineered variable cost as they are affected with the level of production. (Shim and Siegel, 2009)

1. Salary of the managing director.

The salary of a managing director under no circumstances is related to the output. Even if there is no production theses cost will be incurred also the managing director will take his place in office till the company is operational. Since these expenses will be incurred in all cases, they are classified as committed fixed costs.

1. Wages of the production employees who sew and print the T-shirts.

Answering Question 3: Cost behavior; engineered cost; committed and discretionary costs for a manufacturer

Wages of the production employees can be both fixed and variable based on company policy. If the labour is paid on per unit or hourly basis then they are engineered variable costs. If they are paid under a contract even if there is no production then they are committed fixed costs. (Shim, Siegel and Shim, 2012)

1. Cost of movie tickets provided for the Employee of the Month award each month

The costs related to employee of the month are employee benefit expense. These are incurred irrespective of the level of production. Therefore they are fixed costs. Since the decision of award of employee of the moth is solely based on the discretion of the management it is classified as discretionary fixed expenses.

1. Depreciation of the sewing machine, calculated on the production basis.

Depreciation charged on asset is committed fixed costs as they are to be incurred irrespective of production, and once the asset is bought depreciation will be charged even if there is no production. But since in the given case the depreciation is based on the production basis it is classified as engineered variable cost. As these will be incurred only when production takes place.

1. Cost of electricity used in the factory building.

Electricity is to be classified as variable expenses as the amount to be incurred for electricity is not fixed. Also, the electricity consumption in a factory is related to production of goods and cannot be avoided on the discretion of the management. If there is more production the more electricity will be consumed which will increase the expenses. Therefore, we would classify them as engineered variable costs as they are based on production level. (Warren, Duchac and Reeve, 2014)

1. Rent of the building.

Rent of a building will be incurred for an entity irrespective of the production. They are contracted costs and are to be paid even if there is no production. The amount under the contract is fixed and committed. Therefore we will classify them as committed fixed costs as they will be incurred in all the cases.

1. Wages of the staff who package the T-shirts.

Just like the wages paid for production of T-shirts the wages of staff who pack the T-Shirts can be both variable and fixed based on the company terms and policies. If the wages are paid on unit basis then they are engineered variable costs. If the wages are paid irrespective of production on a contracted basis then they would be classified as committed fixed costs.

1. Cost of sewing machine maintenance.

The maintenance cost is fixed costs as they are to be compulsorily incurred once the asset is acquired. In case the company has a contracted for the maintenance then they will be committed fixed costs as they will be incurred even if the company does not get the asset maintained. If the maintenance charges are not contracted they will be discretionary fixed costs as they will be incurred only if desired by management.

1. Cost of the new advertising sign at the front of the factory.

The cost of an advertising sign is not related to production and hence not a variable cost. They are fixed cost which will be incurred if the management decides that the product of the company needs to be advertised. They are not fixed under a contract until the management so decides. They are hence classified as discretionary fixed costs.

1. Cost of the company car used by the managing director.

The cost of company car used by managing director will be classified as a fixed cost in the broad head as it is not influenced by the scale of production. Further, the cost can be classified as a discretionary fixed cost since the allowance for car perquisite will be the decision of the management.

Cafferky, M. (2014). Breakeven analysis. 1st ed. New York: Business Expert Press.

Davidson, I. (2009). Budgetary control in modern organisation. 1st ed. Saarbru?cken: VDM Verlag Dr. Muller.

Glantz, S., Slinker, B. and Neilands, T. (n.d.). Primer of applied regression & analysis of variance. 1st ed.

Iversen, G. and Norpoth, H. (n.d.). Analysis of variance. 2nd ed. 1st ed.

Kimmel, P., Weygandt, J. and Kieso, D. (2011). Accounting. 1st ed. Hoboken, N.J.: Wiley.

Scheffe?, H. (2010). The analysis of variance. 1st ed. New York: Wiley-Interscience Publication.

Searle, S., Casella, G. and McCulloch, C. (2006). Variance components. 1st ed. Hoboken, NJ: Wiley.

Shim, J. and Siegel, J. (2009). Modern cost management & analysis. 1st ed. Hauppauge: Barron's.

Shim, J., Siegel, J. and Shim, A. (2012). Budgeting basics and beyond. 1st ed. Hoboken, N.J.: Wiley.

Warren, C., Duchac, J. and Reeve, J. (2014). Financial and managerial accounting. 1st ed. Mason, Ohio: South-Western Cengage Learning.