According to the Institute of Management Accountants (n.d.), “management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy” (para. 1). In other words, management accounting focuses on the information that is needed by internal users (Horngren, Harrison, & Oliver, 2012). Therefore, internal users will apply management accounting to evaluate the cost behavior, cost allocation, and activity-based costing in their organizations. In management accounting, “cost behavior refers to how a cost reacts to changes in
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34). For example, a cell phone retail manager’s annual salary of sixty thousand dollars (total fixed cost) will remain the same if the store sells four thousand cell phone units or six thousand cell phone devices per year. Although the total fixed cost does not change, the fixed cost per device depends on the number of units sold. For instance, if the cell phone retail store sells four thousand devices in a year, the fixed cost (i.e., manager’s annual salary) per unit is fifteen dollars ($60,000 divided by 4,000 devices). On the other hand, if the retailer sells six thousand devices in a year, the fixed cost per unit is reduced to ten dollars ($60,000 divided by 6,000 …show more content…
For example, cost allocation supports the costs a company charges its customers when selling the manufactured product or making a bid for a job (i.e., service) (Boyd, 2013). As a result, electronic companies must take into account the direct and indirect costs when applying a profit margin to a manufactured cell phone. In addition, accurate cost allocation is important to evaluate and motivate staff (Boyd, 2013). For instance, some businesses “reward employees based on company profit or by meeting other financial goals” (Boyd, 2013, p. 214). Therefore, companies need to properly allocate costs to estimate profits and analyze the results to calculate financial goals that can assess the performance of employees (Boyd,
34). For example, a cell phone retail manager’s annual salary of sixty thousand dollars (total fixed cost) will remain the same if the store sells four thousand cell phone units or six thousand cell phone devices per year. Although the total fixed cost does not change, the fixed cost per device depends on the number of units sold. For instance, if the cell phone retail store sells four thousand devices in a year, the fixed cost (i.e., manager’s annual salary) per unit is fifteen dollars ($60,000 divided by 4,000 devices). On the other hand, if the retailer sells six thousand devices in a year, the fixed cost per unit is reduced to ten dollars ($60,000 divided by 6,000 …show more content…
For example, cost allocation supports the costs a company charges its customers when selling the manufactured product or making a bid for a job (i.e., service) (Boyd, 2013). As a result, electronic companies must take into account the direct and indirect costs when applying a profit margin to a manufactured cell phone. In addition, accurate cost allocation is important to evaluate and motivate staff (Boyd, 2013). For instance, some businesses “reward employees based on company profit or by meeting other financial goals” (Boyd, 2013, p. 214). Therefore, companies need to properly allocate costs to estimate profits and analyze the results to calculate financial goals that can assess the performance of employees (Boyd,