Entourage Business Development

Managerial accountants are often called cost accountants because they focus primarily on costs. They collect information about costs, analyze that information, predict future costs, and use many different techniques to estimate how much different products or processes will cost. A given product may even have several different costs, depending on how managers plan to use the information. A cost is the financial sacrifice a company makes to purchase or produce something. Managers accept this necessary evil with the expectation that costs provide some kind of benefit, such as sales and net income. Costs can have many components. For example, a can of root beer includes raw material costs — the costs of purchasing water, sweetener, and other flavors. It also includes labor costs because the bottling plant must pay workers to run the machinery. And it includes overhead, which is the general expense of running the bottling plant. Product costs - and any costs that retailers must pay to purchase products - ultimately become part of cost of sales, an expense on the income statement. To make decisions, managers need to understand how certain choices affect costs and profitability. For example, suppose managers are trying to decide whether to pay employees overtime (time-and-a-half) in order to increase fac tory production. On one hand, more production will increase sales. On the other hand, overtime wages will increase cost rates. Which choice will result in higher profits? To answer these questions, managerial accountants focus on cost behavior, which can be variable or fixed. Variable costs change with volume made or sold: the more you sell, the higher the cost. Fixed costs don’t change with volume: Regardless of how many items you make or sell, the cost stays the same. Managerial accountants who know which costs are variable and which are fixed can use that information to predict how changes in volume affect total costs. That said, managerial accountants don’t know everything about cost behav- ior. They develop their understanding from what the company has experienced in the past. Radical changes push managerial accountants out of their comfort zones and make predicting future costs very difficult. For example, if a factory shuts down and then retools to make a new product, then managerial accountants have very little experience from which to make predictions. Similarly, if a factory doubles its production, hiring many more workers, then cost behaviors are also likely to change in unpredictable ways. Some costs behave very nicely, such that accountants can easily figure out how they relate to finished products. For example, if your factory makes leather wallets, you should have no problem figuring out exactly how much leather is necessary for each wallet. You can also observe and measure how long a single worker takes to sew a wallet together. However, some costs — namely, overhead — are really hard to handle. These overhead costs include all costs that can’t be easily traced to products, such as heat and electricity. How much heat and electricity cost goes into each wallet?

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