1) Define the following concepts,

*Fixed Cost,

*Variable Cost,

*Unit Cost,

*Relevant Range,

*Managerial Accounting

*Financial Accounting.

2. Discuss the differences between.

a) Managerial Accounting and Financial Accounting

b) Fixed Cost and Variable Cost

c) Be sure to note your source and citation in text

 

Answer:

Fixed Cost -  is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities. Management usually sets fixed costs at predetermined rates based on company necessities. Some example of fixed costs include rent, insurance and property taxes. All of these expenses are completely independent from production volume. Fixed costs are set over a specified period of time and do not change with production levels. Fixed cost can be direct or indirect expenses and therefore may influence profitability at different points along the income statement.

Variable Cost - is a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company's production volume, they rise as production increases and fall as production decreases. Examples of variable costs include the costs of raw materials and packaging. A variable cost can be contrasted with a fixed cost. When production increases, variable costs increase; when production decreases, variable costs decrease. A variable cost stands in contrast to fixed costs, which do not change no matter the change in production levels.

Unit Cost - is a total expenditure incurred by a company to produce, store and sell one unit of a particular product or service. Unit costs are synonymous with cost of goods sold (COGS). Unit costs represent total expense involved in creating one unit of a product or service. Goods-centric unit cost measures will vary between businesses. A large organization may lower the unit cost through economies of scale.

The cost is useful in in gross profit margin analysis and forms the base level for a market offering price. Companies  seek to maximize profit by reducing unit costs and optimizing the market offering price.

Relevant Range - refers to a normal range of volume or normal amount of activity in which the total amount of a company's fixed costs will not change as the volume or amount of activity changes. The term relevant range is included in the definition of fixed costs, because if a company's volume were to decline to an extremely low level, the company would take action to decrease its total amount of fixed costs. Similarly, if the company's volume were to increase dramatically, the company would likely have to increase the total amount of its fixed costs.

Managerial Accounting - is the practice of identifying, measuring, analyzing, interpreting and communicating financial information to managers to pursuit of an organization's goals. It varies from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions. The presentation of managerial accounting data can be modified to meet the specific needs of its end-user. Managerial accounting encompasses many facets of accounting, including product costing, budgeting, forecasting and various financial analysis. Techniques used by managerial accountants are not dictated by accounting standards unlike financial accounting. 

Types of Managerial Accounting

1. Product costing and Valuation - deals with determining the total costs involved in the production of a good or service. Cost may be broken down into subcategories, such as variable, fixed, direct or indirect costs. Cost accounting is used to measure and identify those costs in addition to assigning overhead to each type of product created by the company. Managerial accountants calculate and allocate overhead charges to assess the full expense related to the production of a good. The overhead expense may be allocated based on the number of goods produced or other activity drivers related to production such as the square footage of the facility. In conjunction with overhead costs, managerial accountants use direct costs to properly value the cost of goods sold and inventory that may be in different stages of production.

2. Cash Flow Analysis - managerial accountants perform cash flow analysis in order to determine the cash impact of business decisions.  Most companies record their financial information on the accrual basis of accounting. Although accrual accounting provides a more accurate picture of a company's true financial position, it also makes it harder to see the true cash impact of a single financial transaction. A managerial accountant may implement working capital management strategies in order to optimize cash flow and ensure the company has enough liquid assets to cover short-term obligations.

3. Inventory Turnover Analysis - inventory turnover is a calculation of how many times a company has sold and replaced inventory in a given time period. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing and purchasing new inventory. A managerial accountant may identify the carrying cost of inventory, which is the amount of expense a company incurs to store unsold items. If the company is carrying an excessive amount of inventory, there could be efficiency improvements made to reduce storage costs and free up cash flow for other business purposes.

4. Constraints Analysis - managerial accounting also involves reviewing the constraints within a production line or sales process. Managerial accountants help determine where bottlenecks occur and calculate the impact of these constraints on revenue, profit and cash flow. Managers can then use this information to implement changes and improve efficiencies in the production or sales process.

5.Financial Leverage Metrics - financial leverage refers to a company's use of borrowed capital in order to acquire assets and increase its return on investments. Through balance sheet analysis, managerial accountants can provide management with the tools they need to study the company's debt and equity mix in order to put leverage to its most optimal use. Performance measures such as return on equity, debt to equity and return on invested capital help management identify key information about borrowed capital, prior to relaying these statistics to outside sources.

6. Accounts Receivable Management - appropriately managing account receivable can have positive effects on a company's bottom line. An accounts receivable aging report categorizes AR invoices by the length of time they have been outstanding. Through a review of outstanding receivables, managerial accountants can indicate to appropriate department managers if certain customers are becoming credit risks.

7. Budgeting, Trend Analysis and Forecasting - budgets are extensively used as a quantitative expression of the company's plan of operation. Managerial accountants utilize performance reports to note deviations of actual results from budgets. The positive or negative deviations from a budget also referred to as budget-to-actual variances, are analyzed in order to make appropriate changes going forward. Managerial accountants analyze and relay information related to capital expenditure decisions. This includes the use of standard capital budgeting metrics such as net present value and internal rate of return, to assist decision-makers on whether to embark on capital-intensive projects or purchases. Managerial accounting involves examining proposals, deciding if the products or services are needed and finding appropriate way to finance the purchase. It also outlines payback periods so management is able to anticipate future economic benefits.

Financial Accounting - is a specific branch of accounting involves in process of recording, summarizing and reporting the myriad of transaction resulting from business operations over a period of time. These transactions are summarized in the preparation of financial statements including the balance sheet, income statement and cash flow statement, that record the company's operating performance over a specific period. Financial Accounting follows either the accrual basis or the cash basis of accounting.  Financial reporting occurs through the use of financial statements in five distinct area. Non profits, corporations and small businesses use financial accountants

Five Main classification of Financial data:

1. Revenue - is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.

2. Expenses - is the cost of operations that a company incurs to generate revenue. Common expenses include payments to suppliers, employee wages, factory leases and equipment depreciation.

3. Assets - are resources with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduece expenses or improve sales, regardless of whether its manufacturing equipment or patent.

4. Liabilities - something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Recorded on the right side of the balance sheet. Liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties and accrued expenses.

5. Equity - referred to as shareholder's equity(or owner's equity fro privately held companies), represents the amount of money that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debt was paid off in the case of liquidation. In the case of acquisition, it is the value of company sales minus any liabilities owed by the company not transferred with the sale.

Managerial Accounting versus Financial Accounting

The key difference between managerial accounting and financial accounting relates to the intended users of the information. Managerial accounting information is aimed at helping managers within the organization make well-informed business decisions, while financial accounting is aimed at providing financial information to parties outside the organization.

Financial Accounting must conform to certain standards such as generally accepted accounting principles(GAAP). All publicly held companies are required to complete their financial statements in accordance with GAAP as a requisite for maintaining their publicly traded status.  Financial accounting utilizes a series of established accounting principles. The selection of accounting principles to use during the course of financial accounting depends on the regulatory and reporting requirements the business faces.

Managerial accounting encompasses many facets of accounting aimed at improving the quality of information delivered to management about business operations metrics. Managerial accountants use information relating to the cost and sales revenue of goods and services generated by the company. Cost accounting is a large subset of managerial accounting that specifically focuses on capturing a company's total costs of production by assessing the variable costs of each step of production, as well as fixed costs. It allows businesses to identify and reduce unnecessary spending and maximize profits.

Managerial accounting encompasses many facets of accounting aimed at improving the quality of information delivered to management about business operation metrics. Managerial accountants use information relating to the cost and sales revenue of goods and services generated by the company. Cost accounting is a large subset of managerial accounting that specifically focuses on capturing a company's total costs of production by assessing the variable costs of each step of production, as well as fixed costs. It allows businesses to identify and reduce unnecessary spending and maximize profits. Because managerial accounting is not for external users , it can be modified to meet the needs of its intended users. This may vary considerably by company or even by department within a company.

Variable cost vs. Fixed Cost

Variable costs and fixed costs in economics are two main types of costs that a company incurs when producing goods and services. Variable cost vary with the amount of the output produced and fixed costs remain the same no matter how much a company produces.  Variable costs may include labor, commissions and raw materials while fixed costs may include lease and rental payments, insurance and interest payments. Variable costs are generally different between industries therefore it is not useful to compare the variable costs, for example, of a car manufacturer and an appliance manufacturer, because their product output isn't comparable. Unlike variable costs, a company's fixed cost do not vary with the volume of production. Fixed costs remain the same regardless of whether goods or services are produced or not. Thus, a company cannot avoid fixed costs. 

Step-by-step explanation

all answers are based on research. references: www.accountingtools.com., www.accountingcoach.com., www.investopedia.com