Product Costing 

Product costing techniques calculate the total cost associated with production of goods or services.

·       Production cost break-down (i.e., fixed, variable, direct, and indirect costs and overheads) enables a manager to determine the total cost of unit output. Formula: Production cost per item = Fixed Cost (FC) + Variable cost (VC) / # of units produced

·       Overheads are determined by 1) activity drivers (i.e. sq. footage of a production facility); or 2) the number of units to be produced. Formula: Overheads = Operating Expenses / Operating Income + Taxable Net Interest Income

Process Costing

Process costing estimates direct material costs at the outset of the process, and all other costs (i.e., direct labor and overheads) over the course of the production process.

·       Process costing methods and formulae vary depending on the production scenario and operating conditions: Activity-based costing (ABC); Cost Allocation of indirect costs; FIFO inventory turnover; Standard cost method; and the Weighted average method.

·       A hybrid-costing system is often used by production managers to determine managerial accounting estimation of process costing across a range of activities and operations.

Job Costing

Managerial accounting application of the job costing method coincides with production scenarios responding to customer specification or other limited production run.

·       A job is defined as a project for a single customer, a batch of units, or a single unit.

·       Job numbers can be assigned to individual expense and revenue line-items for purposes of internal records.

·       The job costing method tracks the costs and revenues by job, useful for standardized reporting of profitability. Formula: Job Cost = Direct Materials + Direct Labor + Applied Overhead

Valuation

·       The value of the “cost-of-goods-sold” (COGS) and inventory during production stages is calculated from direct costs and overhead costs. Formula: COGS = Beginning inventory – Purchases during the period + Ending inventory

·       “Cost-volume-profit” (CVP) analysis or sum of “marginal costs” informs short-run decisions by adding a single unit to the production output total in the measurement of unit cost. Formula: CVP = Fixed costs / Contribution margin

·       Contribution margin (CM) is the production impact on company profit. Break-even analysis calculates the contribution margin to determine the unit volume ratio of gross sales equal to a company’s total expenses. Formula: CM = Sales – Variable Costs

·       Break-even point analysis measures the price per unit, equal to the total cost of production for individual products and services. Formula: Break-even point = Total fixed costs/ Unit contribution margin

Or

= Total fixed costs/ Contribution margin ratio

Where,

CM Ratio = Contribution margin per unit / Sale price

Cash Flow Analysis

Managerial accounting reports cash flow analysis to determine the impact of transactions on operations and planning.

·       Accrual accounting techniques are used by most U.S. GAAP reporting companies. Though accrual accounting is consistent with the external audit of a company’s financial position, this method lacks precision in the reporting of individual cash transactions.

·       Working capital management strategies for optimizing a company’s liquid assets to cover short-run obligations. “Working capital costs” (WCC) reflect the difference between a company’s current assets and current liabilities. WCC records labor costs and expense (i.e., salaries). and accounts payable, which may include interest rate accumulation or other adjustment as a result of a specific business decision.  

Inventory Turnover Analysis

Internal reporting of inventory turnover assists managers in making inventory, pricing, manufacturing, marketing, and purchasing decisions. Inventory reporting is also part of periodic annual reporting within a company’s financial statements.

·       Inventory replacement reporting for a given period may be subject to “first-in, first-out” (FIFO) or “last-in, last-out” (LIFO) accounting methods. Though some companies may apply FIFO internally, the conversion of internal inventory record to LIFO is required for purposes of external financial reporting. 

·       The “carrying cost” of inventory, the total cost a company can incur to stock unsold material or units, is an efficiency measure used to determine if there should be an elimination of overhead costs to free up cash flows for other operations. Formula: Inventory Carrying Cost = Capital costs + Storage costs + Inventory service costs + Inventory risk costs

Constraint Analysis

An accounting analysis technique based on the “theory of constraints” (TOC) enables a managerial accountant to estimate performance based on a single constraint in the interest of maximizing production or sales processes.

·       Incremental calculation of constraints on production or sales processes, estimates the impact of those limitations on cash flows, revenue, and profit.

·       Results of constraint analysis contribute important insights for implementation of new production or sales processes to improve the efficiency of cash flows within a firm.

Metric Reporting

Financial leverage (i.e., capital lending) used for purposes of asset acquisition and return on investment, gives insight into debt and equity mix optimization.

·       Key for financial management operations and pre-audit reporting, financial leverage metrics, these performance measures are a ratio analysis of debt to equity, return on equity, and return on invested capital.

·       Metric reporting of financial leverage enables managers to disclose information to creditors, directors, and investors, directly.

Accounts Receivable (AR) Management

The internal management of accounts receivable (AR) is one of the main methods by which a company improves its bottom line.

·       Record of AR invoices according is a timeline of outstanding accounts. AR aging reports list receivables outstanding for a period of less than 90+ days, 60 to 90 days, 30 to 60 days, and 30 days.

·       Review of AR communicates when a customer account is becoming a credit risk based on routinely late payment.

Budgeting

Key managerial planning accounting tool for determining distribution of finance for departmental or production operations.

·       The financial component within a company's plan of operations, the budget is utilized by managers to allocate costs and track performance.

·       Managerial accountants evaluate deviations or budget-to-actual variances affecting estimated returns.

Forecasting

Managerial accountants provide essential information related to a company’s capital expenditures, useful for managerial decision about a product or project proposals and financing options.

·       Forecasting relies on regression analysis of historical performance data (i.e., pricing, sales volumes, markets, customer response, or other financial information).

·       Trendline forecasting exhibits expense activity and investigating unusual variances or deviations over time.

·       Net present value (NPV) and internal rate of return (IRR) capital budgeting metrics are examples of forecasting techniques used for making capital project or purchase decisions.

·       Forecast projection of returns and payback periods linked to capital projects, anticipates the future economic benefits of managerial accounting decisions on company performance.