Accounting Concepts

Accounting Concepts

Most BComm and BAdmin programs require two levels of accounting courses. Managerial accounting is traditionally the second level. The course focuses on managerial accounting, which unlike financial accounting, is designed for internal users – managers (vs. external users – shareholders).

Product Costs

In a manufacturing firm, the three main components of production costs are direct material, direct labor and manufacturing overhead (required to compute the cost of goods manufactured and cost of goods sold). In contrast, a merchandiser only has the purchases’ cost. Direct materials and labor are those that can be physically and conveniently associated with the product made, whereas indirect materials and labor are not and are considered part of factory overhead.

Whether variable or fixed, selling and administrative expenses are excluded from the three main components, and are written off as period costs, under both variable and absorption costing. The main distinction between variable and absorption costing is that variable costing writes off the fixed part of overhead as a period cost, whereas absorption defers it in inventory. For this reason, absorption managers could be tempted to overproduce.

POR & ABC

Due to timing requirements, the predetermined overhead rate (POR) is often obtained by dividing the estimated overhead by the expected cost driver (direct labor cost or hours, or machine hours when production is highly automated). Then, the POR is multiplied by the actual cost driver incurred for a given job. A further refinement on the POR is activity based costing (ABC), which subdivides overhead into activity cost pools, and basically repeats the same operation for every cost driver.

Job order costing assigns costs to each job, whereas process costing deals with processes. In process costing, depending on whether the weighted average or the FIFO (first in first out) method is used, the results are different, mainly because of the varying ways of assigning unit costs to beginning inventories.

Economic Market Equilibrium Supply and Demand Graph. Drawing by Elena.

CVP Analysis

Cost volume profit (CVP) analysis starts with rewriting the usual income statement in the CVP format. All variable costs are subtracted from sales to obtain the contribution margin (CM). The CM ratio can be obtained by diving the CM by sales. These operations will be useful in establishing the break-even point (BE). To determine the BE in units, the fixed costs are divided by the CM per unit; to get the BE in dollars one performs the same operation but with the denominator being the CM ratio.

Incremental Analysis

Incremental analysis compares costs and expenses that vary under different alternatives. The items that change are called incremental and are relevant to the decision, all others, such as sunk, joint or common costs, are considered irrelevant.

Budgeting

The master budget is composed, in that precise order, from the following budgets: sales budget ⇒ production budget ⇒ direct materials, direct labor, manufacturing overhead budgets ⇒ selling and administrative expenses budget ⇒ budgeted income statement ⇒ capital expenditures and cash budgets, budgeted balance sheet. An important point to remember is that amortization is excluded from the calculation of the cash budget since it lacks the characteristics of a cash expense.

Accounting and Finance

From a mathematical ability point of view, accounting is somewhat easier than finance. For example, financiers must learn more complicated mathematical formulas than accountants, in general. However, becoming a professional accountant remains far from being a piece of cake… and takes a lot of time in this blogger’s opinion.

In Quebec, Canada, there used to be three designations in the accounting profession: CA, CMA and CGA. Nonetheless, the professional orders are working on simplifying the equation (no pun intended!) to converge on a single certification: CPA.

So you want to be an accountant? What does it take? At least in Quebec, the mostly French speaking part of Canada, becoming an accountant usually requires a combination of completed undergraduate studies and professional experience. A bachelor of business administration (BBA) with an accounting major, plus an internship at a recognized CA firm should fulfill the requirements of the professional order, but one is advised to find out for oneself on the respective regulating bodies’ Websites.