MGMT 312 Red Duv Aviation Simulation
Tyler J. Gage
Embry-Riddle Aeronautical University
Managerial Accounting
The purpose of managerial accounting is for managers within an organization to gain
financial and operational insight about the inner workings of their organization (Miller-Nobles et
al, 2019). With the data and information acquired from managerial accounting, an organization’s
leadership can equip themselves with knowledge to make necessary adjustments to their shortterm and long-term business plans. By controlling their operations, organizations who engage in
managerial accounting can achieve greater sustainability and function more efficiently. By
interpreting cost reports, balance sheet, sales data, income statements, and other managerial
information, organizations can be directed to the completion of their goals with proper planning
techniques. In short, controlling, directing, and planning are three of the primary responsibilities
of a managerial accountant.
One of the differences between managerial and financial accounting is that the former is
utilized by internal parties and the latter is used by external parties (Miller-Nobles et al, 2019).
Internal parties include an organization’s leadership whereas external parties include financial
institutions and auditors. The decisions made with managerial accounting are related to the
direction in which an organization moves regarding its policies, framework, and operations with
sights set on the future. With financial accounting, the focus is geared more toward investment
and lending decisions based on historical data and trends.
Being ethical in the execution of duties as a managerial accountant is paramount due to
the importance of the outputs and its use in corporate decision making. Many corporations may
create their own code of ethics in addition to a code of conduct in order to document the set of
expectations for managerial accountants. The Institute of Management Accountants (IMA) is an
organization which sets the industry ethical standards for managerial accountants (Miller-Nobles
et al, 2019). These ethical standards set by the IMA focus upon responsibility, objectiveness,
fairness, integrity, and honesty. These guidelines set the global expectations of ethical principles
any managerial accountant must operate by in any position and are meant to complement, rather
than supersede, any corporate guidance.
Job Order Costing
Job order costing is the process where the cost is assigned to the job in which it was
incurred (Miller-Nobles et al, 2019). This is different than process order costing in that each
order is treated as a separate cost as opposed to allocating costs to the respective manufacturing
process stage (Miller-Nobles et al, 2019). The flow of costs in a job order costing system begins
with the material costs associated with the job. The next step would be to track the labor costs
associated with the work required to complete the job. Finally, the last cost tracked is the
manufacturing overhead costs accumulated against the completion of the job. The manufacturing
overhead costs are applied using a predetermined overhead rate that is multiplied by the amount
of hours spent completing a certain job. Since the manufacturing overhead is calculated using a
predetermined rate, there is a requirement to reconcile the estimated overhead costs using this
rate against the actual overhead incurred (Miller-Nobles et al, 2019). This reconciliation assists
managerial accountants calculate an updated predetermined overhead rate in an effort to bring
the estimated costs and actual costs closer together.
Process Order Costing
Process order costing is a method of allocating costs to units that are being produced
throughout multiple stages of a manufacturing process (Miller-Nobles et al, 2019). With this
method, it is possible to calculate the costs for each step in the process, and costs may be
transferred between the steps. In a simple manufacturing or production process, raw goods are
accounted for as debits and each work-in-progress account is debited as well until the final
product is achieved. Along the way, manufacturing overhead costs are accounted for as well as
wages payable until the final product is complete and the cost of goods sold are deducted from
the profits. Equivalent units of production used to express the completion of all goods throughout
a production process. This figure includes both intermediate and final goods (Miller-Nobles et
al, 2019). To calculate equivalent units of production, the actual number of units is taken and
multiplied by the percentage of work completed. The production report is often used as a
decision-making tool (Miller-Nobles et al, 2019). For the purposes of estimation, managers are
able to use this report to provide timelines that are based on equivalent units of production.
These numbers can provide the aggregate amount of how much work is completed, what
remains, and the financial requirements to meet goals. Based on the costs associated with
production for each intermediate and final good, management can make informed decisions
about how to allocate funds while expressing their profitability in the most ethical manner.
Cost Management Systems
The first step in the process of allocating and assigning costs is to determine what one’s
top cost drivers are (Miller-Nobles et al, 2019). This means pinpointing the factors that will
cause the greatest and most frequent increases in costs. Take a logistics business as an example.
Fuel for trucks, aircraft, and other equipment may be one of the greatest costs because more fuel
is required for greater distances traveled. Here, distance travelled and the amount of time the
equipment is up and running is the cost driver. Next, the sum of the costs incurred by every
department in the company is calculated and allocated to each department by dividing the total
cost by the number of departments. This simpler method is known as traditional costing (MillerNobles et al, 2019). The other method is the activity-based costing or ABC method. Instead of
only taking into account broad costs such as manufacturing overhead, the ABC method focuses
on period costs. Two sets of books are used; one is for audits and the other is for internal
accounting purposes (Miller-Nobles et al, 2019). The ABC method tends to be more accurate
because with traditional costing, costs are averaged out and do not factor in surges in pricing for
certain departments. This is beneficial because management can use ABC costing to determine
where to cut and/or increase their expenditures. With a Just-In-Time management system, fat
can be trimmed off a company’s inventory thereby freeing up capital. However, delays due to
logistical failures can impact the effectiveness of Just-In-Time systems. Just-In-Time
management systems are better suited for companies that offer a wide range of products, so in
the case of Red Duv, it is not a wise idea to implement such a system. It is also unknown if Red
Duv uses multiple vendors, so this is another turn-off to Just-In-Time. With a quality
management system, more energy is put into research and development. Red Duv ought to adopt
this system because they are not a company who relies on a constant stream of products which
are guaranteed to be flawless.
Cost-Volume-Profit Analysis
There are two types of costs in relation to the fluctuations caused by changes in volume.
The first type of cost is a fixed cost which remains constant regardless of the quantity of units
produced or sold (Miller-Nobles et al, 2019). The second type of cost is a variable cost (MillerNobles et al, 2019). Variable costs usually increase with the number of units that are produced
or sold. With a greater volume, more units are processed, and variable costs will rise
proportionately. Contribution margin takes into account variable costs and sales. It is that
amount of money that is required to cover fixed costs. To calculate the contribution margin,
variable costs are subtracted from net sales revenue. Operating income is calculated by taking
the total fixed costs and subtracting the contribution margin from that figure. Cost-volume-profit
(CVP) analysis is a method that is commonly used to calculate profit. Selling price multiplied by
the number of units sold less the variable costs for each unit and fixed costs equals the profit
from total sales. CVP analysis can be used as a decision-making tool (Miller-Nobles et al,
2019). If a company desires to increase their profit margin, they may either increase their
revenue by increasing price per unit. In addition to or instead of this, the company can cushion
their operating income by reducing their fixed costs such as labor or reduce some of their
variable costs such as materials used in production.
Variable Costing
Variable costing is a popular product costing method, except its primary purpose is to
calculate or estimate variable costs related and only takes into account manufacturing costs
(Miller-Nobles et al, 2019). This method is used for internal reporting. The second popular
costing method is absorption costing. Absorption costing is a method that is best suited for
external reporting as material, labor, and non-fixed manufacturing overhead of the products
(Miller-Nobles et al, 2019). Both methods involve period costs which are associated with
individual transactions. With the first method, variable costing, both variable and fixed
administrative and selling costs are included as the relevant period costs while only fixed
manufacturing overhead is used. With the absorption method, manufacturing overhead is not
categorized as a period cost. Disparity is to be expected with the operating income results of
both methods (Miller-Nobles et al, 2019). This is caused by the different uses of manufacturing
overhead costs and fixed administrative costs. With variable costing, all fixed costs are deducted
from the contribution margin, but with absorption costing, selling and administrative costs are
taken from the gross profit. This is how operating income is found with both methods. If a
manufacturing firm needs to figure out how to set their sales prices and plan short-run production
efforts, they should use the variable costing method. This method will also help managers figure
out how to increase their contribution margin and therefore profitability for each product. For
company that is in a service industry, this method can also be used to figure out how profitable
their operations are again based on their contribution margin. It can also be used to calculate or
estimate their operating income.
Decision Making
In terms of information related to costs, there are relevant costs and irrelevant costs.
Relevant costs are incurred in the future and vary among alternative choices (Miller-Nobles et al,
2019). Irrelevant costs remain constant in the short-term and long-term and do not change
despite alternatives (Miller-Nobles et al, 2019). Relevant information about costs and pricing is
used to make a wide variety of short-term decisions. An example of such a decision is whether a
firm should accept and fulfil a special order. A special order is a one-off order where
considerations are made to sell a product at a decreased price point (Miller-Nobles et al, 2019).
Two short-term factors are considered when decided whether to go through with the order. First,
does the firm have the production capabilities to accept the order? Second, will the modified
sales price of the product or service be great enough to cover incremental/variable costs and
newfound fixed costs? Long-term sales potential will also need to be analyzed. In terms of a
costs, if the altered revenue from a special order will still be greater than expenses, there should
not be any harm in accepting the order. At certain points in the lifecycle of a business, there will
be times when a decision must be made to drop or retain a product, department, or territory. This
decision should be based on whether the asset or product provides the firm with a positive
contribution margin. The decision also considers the fixed cost before and after its being
dropped, production possibilities with freed up capacity, and how the current product mix will be
impacted (Miller-Nobles et al, 2019). The final decision should answer questions relating to cost
savings and/or lost revenue. If the firm is able to save more money by dropping the product,
department, or territory as opposed to keeping it and possibly losing revenue, it should be
dropped. Next, outsourcing has become a popular, cost-saving decision for many companies to
make. This decision is made to reduce variable costs and avoid fixed costs while freeing up a
firm’s capacity for production. With freed capacity and outsourcing, opportunity costs will
always exist (Miller-Nobles et al, 2019). Other factors negligible, if incremental/variable costs
can be reduced by outsourcing production, the decision should be executed. Another short-term
decision that relevant costs help firms make is whether they should further improve or “process”
their product. If the final revenue from processing turns out to be greater than the original
revenue after the additional costs from processing are accounted for, then processing may be a
good idea for the firm to pursue.
Capital budgeting is a tool that firms use when determining whether they should purchase
assets in the long run (Miller-Nobles et al, 2019). Examples of such assets include property or
equipment, real estate, and facility-related assets. Other long-term decisions include but are not
limited to the replacement or leasing of equipment or even the acquisition of other firms. Three
capital budgeting tools include the payback method, accounting rate of return method, and
discounted cash flow method. The payback and discounted cash flow methods are quite similar
to each other in the sense that they can be used to calculate how much time is needed to
recuperate the principal of an investment. However, the discounted method can provide more
utility because it takes into account the time value of money (i.e. compound interest) (MillerNobles et al, 2019). With modern technology, computerized spreadsheets that incorporate
interest rates and time periods to calculate the factors or coefficients for the principal loan or
investment amount. Formulas for net present value and present value of lump sums or annuities
are used to calculate these factors and in turn feasibility of a firm’s venture (Miller-Nobles et al,
2019). The accounting rate of return method involves much simpler arithmetic. Net profit is
divided by the principal investment to determine the rate of return. The result is multiplied by
100 to convert the number to a percentage. With capital investments or assets, depreciation is
subtracted from revenue to determine profitability.
Budgets and Standard Costing
A budget is a plan used by a company’s managers to plan and execute their operations in
line with their organization’s objectives (Miller-Nobles et al, 2019). A company’s master budget
is a composite summary of the various budget components required to account for a company’s
activities and is used for comprehensive planning by the entire firm. The components of a
master budget are an operating budget, capital expenditures budget, and financial budget (MillerNobles et al, 2019). The operating budget contains a sales budget which is based on forecasted
revenue from goods and/or services sold (Miller-Nobles et al, 2019). A sales budget is the
foundation of the master budget (Miller-Nobles et al, 2019). Operating budgets account for cost
of goods sold as well as selling and administrative costs (Miller-Nobles et al, 2019). These
components of the operating budget tie into the organization’s financial statements. The
operating budget also itemizes direct materials and labor plus manufacturing overhead. The
capital expenditures budget outlines expenses relating to the purchase of specific capital.
Property, plant, and equipment plus certain long-term assets fall under this category of expenses.
The financial budget includes the essential cash budget which shows how funds in a company’s
income statement become expenses. In addition to these components, an operational budget (not
to be confused with operating budget) is a financial plan used by a company for short-term
operations, and a strategic budget focuses on the long-term. Then there is a static budget which
is geared toward a fixed projected sales volume. For different quantities of units sold, a flexible
budget is appropriate.
A budgeted income statement forecasts income for a specified period of time in the
future, usually monthly, quarterly, or annually (Miller-Nobles et al, 2019). Since the master
budget is a roll-up aggregation of all the lower-level budgets based on the various functional
areas of a corporation, it goes through multiple iterations until the budget allocation achieves the
desired results. The order a master budget is created starts at the bottom and goes up. This
means the essential costs of direct labor is done first, followed by direct materials, finished
goods, manufacturing overhead, production, sales, and finally the selling and administrative
budgets. Preparing a master budget out of order of precedence may result in inadequate budget
allocation and a failure of the company to meet its goals. Variance in one will have a cascading
effect that impacts all other budgets (Miller-Nobles et al, 2019).
References
Miller-Nobles, T. L., Mattison, B., Matsumura, E. M., & Horngren, C. T. (2019). Horngrens
financial & managerial accounting: the managerial chapters. Boston: Pearson.