new business experience negative operating income initially W r i t i n g
4 Different Peer review on the discussion below
5 sentence each
Chapter 5: Activity- based Costing and Management
Activity-based costing and management in chapter five are two of the significant concept that I found worth understanding in line with this week’s reading assignment. In activity-based costing and management, I was able to understand how the concept works in process costing. The concept involves allocating overhead costs by transferring them to activities. Lastly, I was able to terminate the basic features and cost flow related to processing manufacturing in the chapter process costing.
Product and Cost
Some of the concepts involved in activity-based costing and management including but are not limited to; non-unit-related overhead costs which involve non-unit levels activity drivers such as product sustaining that measure non-unit activities by-products and various cost objects. Unit-level activity drivers measure consumption unit-level activities thereby using unit-based drivers to measure non-unit activities leads to distorted product costs. Activity-based costing systems work for product costing in that costs of the secondary activity is assigned to primary activity through activity drivers then primary activities are finally assigned to products and customers. In supplier costing, organizations need to trace customer-driven costs to consumers to produce better competitive positions and increased profits.
Analysis of Driver
Also, the concept of process value analysis is important in activity-based management. This concept involves terms such as driver analysis, activity analysis, and performance measurement. Activity analysis can either be value or non-value. Assessing these values helps determine the non-value added costs as well as root cause analysis on how to reduce waste identified. Performance is measured through efficiency, time, and quality. This is done to increase profitability. The significance of driver analysis is to identify root cause analysis and manage identified root causes. Similarly, activity-based management is used for cost reduction to aid in strategic decision making through activity elimination, selection, reduction, and sharing.
Chapter 6: Process Costing
Types of Cost
Process costing is a methodology used to assign production cost units to output. The two types of processing which produce a unit that shares a common property include parallel processing which is a pattern that requires more than two consecutive processes to produce a finished good. Sequential processing necessitates units pass through one process before they can be worked on in the next process in the sequence. Some of the features of process costing associated with process manufacturing include cost flows under process costing are similar to those under job-order costing.
Steps of Cost
Additionally, factors that affect processing costs include non-uniform units and multiple processing departments which are controlled by processing cost methods. When materials are added at the end of the beginning of a process, completion percentages will vary for materials and conversion costs. The five steps of cost out production that enables a production report to be prepared include physical flow analysis, calculation of equivalent units, computation of unit cost, valuation of inventories, and cost reconciliation. In this concept, each process accumulates its costs in work in process account that accounts flow of manufacturing costs through accounts of a process-costing firm.
Importance of Accounting
The two topics are broadly discussed to explain different models of managerial accounting that help organizations increase profitability as well as make strategic business decisions. Similarly, direct materials, labor, and overhead are charged under the same count. They both give a better understanding of the importance of managerial accounting and create organizational value while improving financial performance. Managerial accounting concepts are essential for planning and setting objectives and controlling performance to implement corrective action plans that increase performance.
Chapter 7: Cost-volume-profit analysis
Break-even points is one of the concept that I found to be interesting in Chapter 7 of this week’s assigned reading. Break-even point refers to the point where the total revenues equal total costs. Normally, most new business experience negative operating income initially and consider their first breakeven point as an essential milestone. Business applies costs-volume-profit analysis to determine significant benchmarks like break-even point. In addition to identifying the break-even point, the cost-volume-profit analysis addresses: the number of units to be sold to attain break-even, the impact of the reduction in fixed costs on break-even point, and the impacts of increased price on profit.
Contribution margin refers to the difference between variable expense and sales. In other words contribution margin refers to the amount of sales revenue left over after all variable expenses are covered that are used to contribute to fixed and variable costs. Contribution margin was an important concept that I felt was interesting and worthy of my understanding since by separating expenses into fixed and variable costs, organizations can identify the impact of higher or lower sales on profits. Firms apply the concepts of contribution margin throughout major aspects of the business such as profit center, distribution channels, sales by customers, product line, and price mix.
Assumption of cost
Assumption of cost –volume profit analysis is another topic cover in chapter 7 that I found be interesting in this week’s assigned reading. The cost-volume-profit analysis relies on four important assumptions. These four assumptions are as follows: Linear cost and revenue functions, Price and costs known with certainty, production equal to sale, and constant sales mix. The costs-volume profit analysis assumption has been instrumental and vital to my understanding of the application and calculation of cost-volume-profit analysis.
Chapter 8: Tactical Decision Making and Relevant Analysis
Step 4 in the decision-making model is the most challenging step for managers as it involves determining the relevant revenues and relevant costs for each decision alternative. Chapter 8 emphasizes that without a clear definition of relevance, the accountant may include unnecessary information that is expensive to verify, collect, and explain to interested parties. The chapter demonstrates that estimating the relevant costs and revenues enables the business to make a more effective tactical decision. A tactical decision is only possible and effective affects all the relevant costs and benefits of each alternative have identified.
Product mix decision was an important concept that I found interesting in chapter 8 of this week’s reading. The product mix is the relevant amount of each product or service provided by a business. Product mix decision plays a significant role in a company’s profitability. Enterprise often faces where its resources or processes cannot handle all the demand place on them. Thus, organizations must decide how to allocate the resources or processes to production operations to maximize organization profit.
Cost-based pricing is another key concept that I found interesting and worthy of my understanding in Chapter 8 of this week’s assigned reading. The chapter states that pricing decision is one of the most challenging decisions faced by a business. When deciding the price of a product or service, a firm considers the demand and supply of the product or service. in addition to demand and supply, enterprises also consider costs since the revenue must cover the cost to achieve profit . One challenge of cost-based pricing is accurately determined the best product or service costs to be marked up and the marked-up percentage to be used.
Chapter 9: Profit planning and flexible budgets
The master budget
The master budget was one of the concepts that I found to be interesting in this week’s assigned reading. The master budget is a compressive financial plan that covers the entire firm as a whole. The master budget is prepared on an annual basis, corresponding to the fiscal year of the business. The master budget is divided into two categories: operating and financial budget. By estimating both operating and financial budget organizations can identify the interdependencies of each component budget.
In addition to the master budget, a flexible budget is another concept I felt to be interesting and worth my understanding. As stated in the chapter Flexible budget enable enterprises to calculate and estimate expected costs for a range of activity levels. companies apply the concept of a flexible budget for planning and performance planning. The chapter demonstrates that the key to an effective flexible budget is having a vast understating and knowledge of fixed and variable costs. There are two types of flexible budgets: before -the- fact and After-the – facts.
Businesses often use the budget to evaluate the performance of managers. Thus, using budgets for performance evaluation was an interesting concept that I felt was worth understanding. Managers’ ability to achieve the company’s budget goals affects factors such as salary increases, bonuses, and promotions. The manager’s effects of salary increases, bonuses, and promotions can either be positive or negative. Whether the effects are positive or negative depends on the manager’s ability to manage, assign, and control the company’s budget.