Managerial Accounting and Profit Analysis

Managerial Accounting

Managerial accounting refers to the act of identifying, estimating, analyzing, communicating, and interpreting financial data to managers for the pursuit of a firm’s goals.

Role of Managerial Accounting

Managerial accounting helps the management of a firm effectively perform its organizing, planning, controlling, and directing functions. It provides historical data that managers can use to identify the growth of a business (Loan et al., 2018). Hence, the data can be used in forecasting the company. Managerial accounting is essential in converting the organizational objectives and strategies into feasible goals, therefore, helps an organization to achieve its target aims.

Difference Between Variable and Fixed Costs

Variable costs refer to expenses that change directly and equally to a business activity, volume or level changes. In contrast, fixed costs refer to ongoing expenses for a certain period regardless of outputs.

Contribution Margin (Variable Costing) Income Statement

Company ABC sells onions at $20 per kg in 2020. The sales obtained are 80,000kgs. Finished goods were 15000 Kgs at the beginning of the year and 20000 Kgs at the end of the year. Variable costs were $10 per kg. Variable expenses were$5 per kg, and fixed payments were $250000.

Company ABC

Variable Costing Income Statement

The Year Ended 2020

Sales (80000kgs*30) 2400000
Less Variable Costs
Opening inventory (15000Kgs*10) 150000
The variable cost of goods available for sale 2250000
Less closing inventory 200000
Contribution margin 2050000
Less fixed expenses 250000
Net income 1800000

Variable costing income statement subtracts all variable expenses to get contribution margin. Afterward, fixed fees are removed from the contribution margin to obtain net loss or profit.

Various Approaches to Categorizing Costs

Costs are categorized according to their nature, function, traceability, and normality. Organizing by nature includes expenses, labor, and material costs, while classifying by function depends on production and commercial costs. Categorizing by traceability includes direct and indirect costs, while classifying by normality determines normal and abnormal prices.

Segmented Income Statement

Segmented income statements help managers determine how much a segment is profitable and the profit the element contributes to the business’s bottom line.

ABC Shop

Segmented Income Statement

December 2021

Department 1 Department 2 Total
Total sales $100000 $200000 $300000
Variable costs
Goods sold 50000 40000 90000
Administrative and selling expenses 9000 29000 38000
Total 59000 69000 128000
Contribution margin 410000 131000 172000
Fixed costs
Manufacturing overhead 50000 80000 130000
Administrative and selling expenses 15000 30000 45000
Total 65000 110000 175000
Net income 345000 21000 324000

Special Pricing for Some Customers or Markets

Great pricing for some consumers or markets may vary depending on the customer or market profiles. For instance, increased competition and new competitors in the market trigger the revision of pricing policies to hinder the entrance of new firms to the market (De Toni et al., 2017). Companies may also increase their market shares by lowering prices to make their items popular.

Determination of Customer Profitability

Organizations determine their customer profitability by choosing a profitability metric, adding total sales in a particular period, obtaining customer listing, adding all costs and sales, and dividing the outcome by the number of potential customers.

Effects of Special Pricing on Revenues and Profitability

Special pricing impacts revenues and profitability by increasing or decreasing production costs. High prices stimulate fewer profits because prices affect the profit margin of the goods sold (De Toni et al., 2017). High prices give businesses high profits per product sold without incurring losses. High prices lower sales due to overhead costs incurred when companies sell few units.

Disadvantages and advantages of Special Pricing

The benefits of pricing include its capability to make products attractive to clients while covering costs also. The disadvantages of special pricing include unsuccessfulness, particularly when a business cannot appeal to customers or provide the business owners with the income they need.

References

De Toni, D., Milan, G. S., Saciloto, E. B., & Larentis, F. (2017). Pricing strategies and levels and their impact on corporate profitability. Revista de Administração (São Paulo), 52, 120-133.

Ioan, È. A., Ioana, G. A., & Andreea, M. P. (2018). Influence of managerial accounting in the decision-making process. Ovidius University Annals, Economic Sciences Series, 18(2), 707-711.

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NerdyRoo. (2022, August 26). Managerial Accounting and Profit Analysis. Retrieved from https://nerdyroo.com/managerial-accounting-and-profit-analysis/

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