Managerial Accounting Defined
Managers who work within an organization need different financial data than that provided to investors and stockholders. Balance sheets, income statements and other routine accounting documents are still needed in managerial accounting, but additional reports and schedules–such as the quality cost report, and the schedule of cost of goods manufactured/needed as well.
Job-order costing is another report needed in managerial accounting. This managerial accounting practice helps internal company managers keep up with what each job’s cost is, in order to produce - which includes materials, labor and manufacturing overhead-related costs.
Managers can easily tally up the cost for materials used on a job, by multiplying the company’s cost for that quantity, with the amount used. Likewise, they can multiply a laborer’s hourly wage by the number of hours worked to get that job-order cost figure. But managerial accounting practices need another way to figure the manufacturing overhead cost.
Examples of managerial accounting practice problems that relate to job-order costing include, therefore:
- Computing a pre-determined overhead rate.
Pre-determined Overhead Rate Practice Problems
Computing pre-determined overhead rate problem:
XYZ Corporation estimates it will cost them $300,000 this year in total manufacturing overhead costs. They also believe the labor cost incurred for the entire year will run $30,000. They need to know how much to use for their pre-determined overhead rate on the job cost sheet for each job completed. They need to know this, in order to properly charge the customer and not undercut themselves or charge too much.
Estimated total manufacturing overhead cost / Estimated total amount of labor cost = pre-determined overhead rate
$300,000 / $30,000 = $10. pre-determined overhead rate
XYZ needs to multiply the total number of hours their laborers work on a job by the $10 pre-determined overhead rate, to know their cost for manufacturing overhead expenses on each job.
Break-even Point Practice Problems
XYZ Corporation needs to have some idea about how many units of the ABC product they need to sell, in order to break-even (make enough money to pay for their materials, labor and overhead costs–but not show any profit).
Knowing the break-even point for your product allows you to determine how many units have to be produced before you start to turn a profit.
Break-even managerial accounting practice problem:
Use the contribution margin method to determine the break-even point for XYZ Corp.‘s total annual fixed expenses of $30,000 and a variable expense (per product unit) of $100, with each ABC product unit selling for $200.
Unit product selling price ($200) - unit product variable expense ($100) = unit contribution margin ($100).
Break-even formula: Fixed expenses / unit contribution margin = Break-even point.
Fixed expenses ($30,000) / unit contribution margin ($100) = Break-even point (300 ABC product units).
XYZ will begin to make profit after making and selling 300 units of ABC product.
Turning a Profit
When you work within a company your goal is making a profit rather than analyzing the profit made. That’s why managerial accounting is different from financial accounting. And that is why you need to know things like a product’s break-even point, or the pre-determined overhead rate for producing it; so you can keep the company on track with the production goals set by investors and the company owner.
“Managerial Accounting,” 12 ed.; Garrison, Noreen and Brewer (2008); McGraw-Hill, New York, New York