Financial vs. Managerial Accounting Financial Accounting
MBA FPX 5010 Assessment 2 Financial accounting presents a general financial situation of the company. Financial accounting is intended primarily for external use by users such as investors, shareholders, and banks. They base their decisions on it. These reports will be weekly, monthly, quarterly, or yearly. These are needed to meet Generally Accepted Accounting Principles (GAAP) and the guidelines set by the Financial Accounting Standards Board (FASB).
Accounting Standards Board (FASB).
Managerial Accounting
On the other hand, managerial accounting focuses on the internal operation of an organization and tends to focus on specific operating units of the company (Marshall, McManus, & Viele, 2017). Managerial accounting information is used by internal personnel to make decisions about production and the operational process. Managerial accounting reports may also be generated daily, weekly, monthly, or yearly but without any specific report guidelines.
Acme Pickle Company: Production Analysis
Acme Pickle Company currently produces 9,000 units at a cost of $20.00 per unit. The per-unit cost is calculated at $10.00. Acme is considering an offer to produce 2,000 additional units at significantly less cost. Interesting fact: the company can increase production to 12,000 units without purchasing extra equipment or hiring more employees. The company does not yet have a distinction between variable and fixed costs when calculating profit margins.
Variable vs. Fixed Costs
Variable Costs
Variable costs go up directly with the level of production (Wilkinson, 2013). For Acme Pickle Company, some of them are cucumbers, spices, vinegar, jars, lids, and direct labor, which is paid per case.
Fixed Costs
MBA FPX 5010 Assessment 2 In contrast, fixed costs do not fluctuate as a result of the level of production (Wilkinson, 2013). Acme’s fixed costs are line supervisors’ salaries, factory depreciation, property taxes, and insurance
Total Production Cost: 9,000 Units
| Variable Cost | Fixed Cost |
| Cucumbers: $15,000.00 | Line supervisors: $10,000.00 |
| Spices/Vinegar: $11,000.00 | Depreciation on factory: $10,000.00 |
| Jars/Lids: $10,000.00 | Property taxes: $3,000.00 |
| Direct Labor: $30,000.00 | Insurance on factory: $1,000.00 |
| Total: $66,000.00 | Total: $24,000.00 |
| Grand Total: $90,000.00 |
• Variable cost per case: $66,000 ÷ 9,000 = $7.33 per case
• Total production cost per case: $90,000 ÷ 9,000 = $10.00 per case
Cost Comparison: 9,000 vs. 11,000 Cases
| Cost Category | Variable Cost per Case | Fixed Cost per Case |
| Cucumbers | 1.667 | |
| Spices/Vinegar | 1.222 | |
| Jars/Lids | 1.111 | |
| Direct Labor | 3.333 | |
| Total Variable Cost | 7.333 | 2.666 |
| Total Fixed Cost | 9.999 |
• Cost to produce 9,000 cases: $66,000 (variable) + $24,000 (fixed) = $90,000
• Cost to produce 11,000 cases: $80,663 (variable) + $24,000 (fixed) = $104,663
Profit Analysis: 9,000 vs. 11,000 Cases
| Profit Category | 9,000 Cases | 11,000 Cases |
| Sales Revenue (9,000 cases) | $180,000 | $180,000 |
| Additional Revenue (2,000 cases @ $9.50) | $19,000 | |
| Total Revenue | $180,000 | $199,000 |
| Total Cost | $90,000 | $104,663 |
| Profit | $90,000 | $94,337 |
By manufacturing the extra 2,000 units, Acme Pickle Company can raise its profit from $90,000 to $94,337, even though the price for the additional units is lower.
Plan of Action
The ultimate goal of Acme Pickle Company is maximizing profit. Managerial accounting will play a crucial role in establishing financial objectives and making sound operating decisions to realize desired outcomes in financial accounting.
References
Marshall, D., McManus, W., & Viele, D. (2017). Accounting: What the numbers mean (11th ed.). New York, NY: McGraw-Hill Education. Wilkinson, J. (2013). Variable vs Fixed Costs Definition. Retrieved July 12, 2018, from https://strategiccfo.com/variable-vs-fixed-cost/
