Q2- Explain How Do Managerial Accountants Support Strategic Decisions

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How do managerial accountants support strategic decisions?

Management accounting is a profession that involves partnering in management

decisions, arranging planning to performance management systems, and providing
expertise in financial reporting and control to assist in the formulation and
implementation of an organization's strategy. Managerial accountants look at a
variety of events that happen in and around a business while considering the needs
of the business. Once completed data and estimates surface, cost accounting brings
the estimates and data into knowledge that will eventually be used to guide decision-
making. In managerial accounting, managers use the collected information to get
better informed before any decisions are made within their organizations. After
strategies are set and plans are made, management's primary task is to take steps
to ensure the plans are carried out, or if need be, that the plans are modified. This
is considered to be the critical control function of management. Since management
involves directing the activities of others, a major part of the control function is
making sure other people do what should be done. For example I work for a company
that has a process in place called Project Momentum, each year the leadership team
comes…show more content…
It focuses on the entire organization and occurs after environmental scans, analyses,
and identifying strategic issues and goals for the company. Implementation involves
assigning individuals to tasks and timelines that will help an organization reach its
goals. A strategic plan is of little use to an organization without a means of putting it
into place in fact implementation is an essential part of the strategic planning
process, and organizations that develop strategic plans must expect to include a
process for applying the
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= Role of Strategic Management Accounting in Decision Making
Whether the adoption of strategic management accounting contributes to decision
making? Let’s take a look!! In the current business scenario, organizations are
experiencing greater challenges, increased complexity, and changes within the
global economy, increased competition and rapid diffusion of data. So as to be
significant in the new environment, accountants should relocate their roles within
organizations to have a greater strategic focus. Strategic
management accounting uses information from your operations to generate current
insightful reports on business performance. Small businesses can take advantage of
this strategic management accounting to improve decision making overtime for
higher profits and more competitive gains. Strategic management accounting is
introduced as a method to live up with today’s competitive and business
environment
Q5-distirbution- Distribution cost is the total of all those expenses that the
producer of a product incurs to make possible the delivery of the product from its
 location to the end customer’s location. Thus, for a manufacturer, it includes all
those expenses incurred to make possible the product delivery from its production
site to the customer’s location, whether retailer, wholesaler, or the final customer.
An item is manufactured at the production site, say factory, and is then kept at
the warehouse for distribution to potential customers afterward. To deliver the
product from the warehouse to the customer’s location, the producer may incur
several expenses, including but not limited to shipping costs. Thus, it includes all
those expenses incurred for making the delivery to the customer. The same is
usually recovered from the customer by adding the same in the per-unit price of
the product. Research Costs
Research is original investigation carried out to gain new scientific or technical
knowledge. At this stage there is no reasonable expectation of future revenue and
so research costs are always charged to the income statement in the year they are
incurred. In the business plan financial projections template, they are included as
part of the operating expenses in the income statement.
Development Costs
Development is the application of research with a view to getting ready for
commercial production resulting in product development costs, for example pre-
production testing of a new machine model would be regarded as development. In
such circumstances there might be a reasonable expectation of future revenue.
HR- What Influence Does HR Have On Costs?
 Reduce Fluctuation and Employee Disengagement Employee resignations and
disengagement are two of the major drivers of HR costs. ...
 Personnel Development to Minimise Fluctuation ...
 Poor Leadership Affects Employee Loyalty ...
 Reducing Inefficiencies ...
 Automated Processes vs. Manual Routine Tasks
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provide us with an attribution link

Distribution Cost Examples

#1 – Freight Cost
Freight Cost refers to the transportation expenses incurred for transferring the
product from the manufacturer to the customer’s location. It can either be
incurred by the customer itself or maybe first incurred by the manufacturer and
then recovered from the customer by including the same in the product’s price.
#2 – Storage Cost
The products, once manufactured, are kept for storage at the warehouse until
they are sold to the customer. Therefore, a manufacturer incurs expenses
concerning storing the products in the warehouse, such as warehouse rent, which
forms part of the distribution cost.
#3 – Product Handling Cost
It includes costs related to maintaining the products kept at the warehouse. It will
consist of all those expenses incurred to maintain the quality of the product and
keep them in good condition.
#4 – Direct Selling Expenses
A manufacturer may incur expenses directly by selling the product or attracting
customers to buy the products. Examples of such expenses include the salary of
marketing personnel (only involved in targeting customer sales), training costs,
office expenses necessary for sales, etc.
#5 – Advertisement Expenses
Advertisement expenses also form part of the distribution costs. Such cost helps a
manufacturer develop its presence in new areas. Examples may include amounts
spent on advertisements done by hoardings, newspapers, media channels, and so on.
#6 – Managerial Personnel Cost
Apart from these costs, this may also include other expenses  such as the cost of
managerial personnel involved in warehouse management, packaging cost, and so on
Acc- Cost Drivers examples
 1

In activity based costing method, to identify cost drivers is very necessary for
unit cost and total cost. We know that activity-based costing is based on the
concept that products consume activities and activities consume
resources. From activity pools, we can find cost drivers. Suppose, a company wants
to produce several products. At that time, what will company do for calculating per
unit cost? Just adding of raw material and labor cost and absorbing production
overheads on direct labour hours or machine hours is not good way. There will be
many activities where we have to spent money. All these activities will become cost
drivers. Examples of these cost drivers are given below:

1st  : No. of Purchase Orders

When we have to make any product, we issue the order. This is a simple activity.
Its cost can be calculated one the basis of no. of purchase orders. So, number of
purchase order is an example of cost driver.

2nd : No. of Set Up of Machine

Setting up the machine is an activity of production. This activity will also consume
certain expenses. To know machine set up rate, we need a cost driver. No. of set up
will be cost driver. With this, we can calculate set up of machine overhead  rate
per set up of the machine for production.

3rd : No. of Machine Hours

No. of Machine hours is different cost driver which can be used for calculating
machine hour rate relating to depreciation, repair and maintenance of machines.

4th : No. of Parts or Weight of Material Handled

Suppose, a company is making 4 products. These 4 products need 16 parts to

assemble with each other. Different expenses may be spent for this activity. We
can calculate rate of this overhead on the basis of no. of parts. So, number of
parts is a cost driver.

5th : No. of Test or No. of Inspections

When any product is made, it is test for checking its quality. Specific experts are
appointed for this. They consume money in the form of salary, electricity, travel
and other depreciation of their specific equipment’s. Now, we need to calculate
rate of these type of overheads. It can be calculated on the basis of no. of test.
So, number of test is cost driver. Suppose, we need 5 test per unit of  A product
and suppose we have made 1000 units. It means, we need 5000 tests for these
units. If the accounts of inspection and test departments show the total cost Rs.
1,00,000. We can calculate rate of per unit test.

= 1,00,000 / 5000 = Rs. 20 per unit test

6th : No. of Direct Labour Hours

No. of direct labour hours is that cost driver which can be used for calculating
supervising cost per unit.

8th : No. of Batches of Material

For calculating, storage cost per batch, we have to make a cost driver that will be
no. of batches of material.

9th : No. of Machine Operators

No. of machine operators is better cost driver for calculating electricity rate per
machine operation.

Above are just examples of cost drivers which are used but you can also different
cost drivers which may be appropriate for calculating overhead cost of products
under ABC method
Types of Drivers in Cost Accounting
In a traditional system of accounting, the indirect costs or manufacturing
overheads are allocated to the production cost based on a predetermined rate. In
some accounting systems, cost drivers are almost irrelevant in determining the
contribution.
 Number of set-ups
 Number of machine hours
 Number of processed orders
 Number of orders completed
 Number of labor hours
 Number of orders packed and delivered
Significance of Cost Drivers in Cost Accounting
Whatever determines the total cost of a particular activity should be analyzed in-
depth to ensure that a proper allocation base is used. Cost drivers follow a cause-
effect relationship, and if the relationship cannot be established, then a more
relevant driver should be looked for.
Example of a Cost Allocation Based on Cost Drivers
We are going to look at the following example in order to get a clear picture of how
cost drivers are used to derive each product or line of production’s total costs.
The following information is for the three lines of production of ABZ Company,
which uses Activity-Based Costing:

The company plans to produce 300 units of product A, 400 units of product B, and
500 units of product C. Compute the cost per unit of each product.
 
Cost per set-up
Based on the number of set-ups as the basis of allocating set-up cost to products,
the cost per set-up will be:
 Total set-up cost = $100,000
 Total number of set-ups = 100
 Cost per set-up = 100,000/100 = $1,000
 Set-up cost associated with product A = 1,000 x 20 = $20,000
 Set-up cost associated with product B = 1,000 x 30 = $30,000
 Set-up cost associated with product C = 1,000 x 50 = $50,000
Cost per machine hour
 Total cost associated with machine maintenance = $150,000
 Total number of machine hours = (800+1,000+1,200) = 3,000 hours
 Cost of each hour of machine maintenance = 150,000/3,000 = $50
 Machine maintenance cost associated with product A = 800 x $50 = $40,000
 Machine maintenance cost associated with product B = 1,000 x $50 =
$50,000
 Machine maintenance cost associated with product C = 1,200 x $50 =
$60,000
Cost associated with each customer served
 Total cost associated with the number of customers served = $200,000
 Total number of customers served = 500
 Cost per each customer served = $200,000/500= $400
 Customer service cost associated with product A = 150 x $400 = $60,000
 Customer service cost associated with product B = 150 x $400 = $60,000
 Customer service cost associated with product C = 200 x $400= $80,000
 
 Based on the above cost drivers, the company’s cost can be allocated to the
products as follows:
Product A
Set-up + Machine Maintenance + Customer Service =
($20,000 + $40,000+ $60,000) = $120,000
Product B
Set-up + Machine Maintenance + Customer Service =
($30,000+ $50,000+ $60,000) = $140,000
Product C
Set-up + Machine Maintenance + Customer Service =
($50,000 + $60,000 + $80,000) = $190,000
Cost associated with each unit produced
 Cost per unit of product A = Total cost/Number of units = $120,000/300=
$400
 Cost per unit of product B = $140,000/400= $350
 Cost per unit of product C = $190,000/ 500= $380
Key Takeaways
1. A cost driver is the most appropriate way of calculating or determining a
specific cost.
2. Variable cost drivers can come in the form of hourly costs, costs per unit, or
batch costs, among others.
3. Cost drivers can be fixed costs, such as in the case of set-up costs.
-R & D- All costs are driven by activities, and in the case of research and
development the key cost drivers include the following:
 Staff
 Prototyping
 Beta testing
 Subcontracting
 Time to market
Q6- target net income-Target Net Income
Target net income is the target profit that top management or shareholders set
for the company to achieve in an accounting period. It is the goal for company to
achieve in a year. At the beginning of the year, each company prepares the annual
budget, which is the target for company to achieve during the year. We cannot just
set the target net income alone as it has a close relationship with sales, variable
cost, and fixed cost.
In order to complete the target, the company needs to understand the relationship
between variable cost, fixed cost, and selling price. It is usually called the cost-
profit analysis. Before achieving target net income, we need to hit the sale target,
budgeted variable cost, and fixed cost.

Account Name Amount

 Sale 000

Variable Cost (000)

Contribution Margin 000

Fixed Cost (000)

Operating Income 000

Tax on Profit (000)

Net Income 000

The top managements may have no interest in all the figures here, they just want
the company to reach a certain of net income during the year. But as the
management account, we have separated all the figures in order to bring a clear
message to all departments. Sale departments must know about their target,
production department needs to ensure that the variable cost must be within the
control and the so on.
We need to calculate:
 Target Operating Income
 Target Contribution Margin
 Target Sale quantity
Target Net Income Formula
\[Target\ Operating\ Income = {Target\ Net\ Income \over 1 – Tax\ Rate}\]
Then, Target Contribution Margin = Target Operating Income + Fixed Cost
\[Target\ Sale\ quantity = {Target\ Contribution\ Margin \over Contribution\
Margin\ per\ Unit}\]
Example
Company ABC is preparing a budget for each department after the board of
directors had set the target net income for next year. The target net income is $
200,000, and the variable and fixed costs are:
Description Amount

Selling Price $ 100

Variable Cost $ 40

Fixed Cost $ 300,000

Tax rate 30%

Solution
First, we need to calculate the Net operating income.
Target Operating Income = Net Income/(1 – Tax rate)
Net Operating Income = Net Income / (1 – 30%)
Net Operating Income = 200,000/70% = $ 285,714
Second, calculate target contribution margin
Contribution Margin – Fixed Cost = Net operating Income
Contribution Margin = Net Operating Income + Fixed Cost
Contribution Margin = $ 285,714 + $ 300,000 = $ 585,714
Finally, calculate the target sale quantity
Sale quantity = Total Contribution / Contribution per unit
Sale Quantity = $ 585,714 / ($100-$40) = 9,761 units
It means that Company ABC needs to sell 9,761 units to achieve a contribution
margin of $ 585,714. So the company will be able to get a net operating income of
$ 285, 714, and net income of $ 200,000.