The Role Of Financial And Management Accountants In An Organization

Part 1

The financial manager who has suggested for creating two more positions in the organisation needs to tell the human resource manager the role of financial accountants and management accountant and their importance in the organisation.

• The management accountant will prepare the management reports that will help the management in running effectively and efficiently (Berman, Knight and Case, 2013). The financial accountant helps to record the day to day transaction that is happening in the entity so that a financial statement can be prepared which is compulsory for every entity to prepare.
• The managers of the company will be able to manage the operations in a planned manner and it will also help them for decision making is a management accountant is appointed. The financial accountant helps to give a true and fair view of an entity to an external party so that they can take prudent decisions.
• The management accountant will help in providing information to internal users and the financial accountant will provide it to external as well as internal users (Bragg, 2014).

There may be certain questions that the HR manager ask the financial controller relating to these two positions-

Who should be appointed as a financial accountant or a management accountant?

• A person who has practical knowledge of finance and having a professional diploma in field may be appointed as a financial accountant and management accountant.

What is the importance of their role in an organisation?

• The financial accountant will help to manage the funds of the company and prepare financial statements (Brigham and Ehrhardt, 2017). He will make the optimum utilisation of funds so that there is no loss of interest to the company. The management accountant will improve the efficiency of the planning process which will have several positive impacts on the organisation. This enables the managers of the company to know the present situation and prepare several budgets which will help them to take short term decisions confidently (Brigham and Ehrhardt, 2017).

Will this be beneficial for the organisation? If yes, then how?

• Yes, appointment of financial accountant and management accountant will be beneficial for the organisation because it will help in making improved plans and optimum utilisation of the resources which will help the company to achieve its targets. Both management accountant and financial management has its own significance in the company (Ehrhardt and Brigham, 2011).

How will they affect the working of the company?

• The management accountant motivates the employees and guides them towards the goals and on the other hand the financial accountant will give information about the present financial position which will keep them informed about the areas where they can improve (Garrison, Noreen and Brewer, 2012). There may be various drawbacks in the entity which may be identified by the accountants and the introduction of corrective measure will make the functional system of the company more efficient and effective (Gitman and Zutter, 2012).

Will the newly recruited accountant able to understand the procedures and will they are able to coordinate with the existing way in which the operations are carried out?

Accountants are those persons who has specialised knowledge about the entire field of finance. Accounting can be classified in two broad categories management accounting and financial accounting. They are knowledgeable enough to study the current position and workings of the company and therefore it is not difficult for them to coordinate (Hoyle, Schaefer and Doupnik, 2015).

1. Prime costs can be defined as those cost which are directly related to the manufacturing process. Therefore, it is the sum of the raw material and the direct labour charges (Kinney and Raiborn, 2011).

1. Manufacturing overhead means all the indirect expenses incurred in the course of production. It does not include the cost incurred by selling department or the service department.

1. Conversion costs are those cost that are incurred to convert the raw material into finished goods.

Conversion Cost = Direct Labour Cost + Manufacturing Overhead.

1. Total product costs includes all the fixed, variable, manufacturing or selling expenses that are incurred to make a product marketable.

1. The costs that are not capable of being capitalised in the form of inventory, fixed cost or prepaid expenses are known as period cost. The period cost is closely related with time and not with the transactional events.

In order to answer this question it is important for us to understand the meaning of some technical terms of cost accounting (Koster, 1997).

Variable cost- Variable costs are those cost which varies with the volume of production. Higher the volume of production, higher will be the variable cost and vice versa. These cost can be called engineered fixed cost when it can be quantitatively measured and identified in the product (Mondy, 2015).

Fixed cost- Fixed cost are those which remains fixed even though there is huge increase or decrease in the volume of production. Fixed cost are of two types-

• Committed fixed cost- These are those cost which are incurred even in the situation when the volume of production is zero. These costs will be incurred even if the operations are temporarily stopped (Pratt, Anthony and Clement, 2003). These costs cannot be avoided in the short run.
• Discretionary fixed cost – These costs can be avoided by the management in the short run. These are usually for a particular period. However they are not affected by the volume of production but it is not compulsory to be paid therefore they are known as discretionary fixed cost.
• Cost of daily radio advertising on the local community local station.
• This is a discretionary fixed cost because the advertisement expense remains unaffected because of the change in volume of production. These costs are incurred for a short span and hence considered discretionary (Ramsey and Ramsey, 2003).
• Cost of the fabric used to make the t-shirts.
• Fabric is the raw material used for the production of finished goods which is a t-shirt. This is considered as variable cost because with the increase in the volume of production the requirement of raw material will also rise (Schipper, 2012).

The cost of raw material is an engineered cost because the fabric used and the cost incurred id easily identifiable in the finished goods.

(a) Cost of the ink used in designs.

• The requirement of ink to print the t-shirts will be more if the production is high whereas it will be less if the production is less. Therefore, these cost are variable in nature(Weil, 2014).

However these costs cannot be considered as engineered cost because it is not possible to ascertain the quantity of ink used. So these are variable cost but not engineered cost.

(b) Salary of the managing director.

• The salary of a managing director is not based on the number of t-shirts that are manufactured. So these costs do not have any connection with the volume of production and has to be incurred even if the company stops producing for a short time. Therefore, these are considered fixed cost.

The salary of the managing director cannot be avoided till the manufacturing company shuts down and it also invariant. Therefore, this cost is said to be committed fixed cost

(c) Wages of the production employees who sew and print the t-shirts.

• The wages of the production employees can be both fixed and variable depending on the way of their wage payment. If the employees are paid depending on the number of units produced by them then these cost will be said to be variable as it has direct relationship with the volume. But if the employees are paid for a specified month irrespective of the fact that there is production or not. Then it is said to fixed cost
• In case it is considered as a variable cost and the employees are paid on the basis of the units produced by them then such cost are ascertainable in the final product and so these are engineered cost. If the wages are fixed then it is a discretionary fixed cost because the management of the company can avoid paying wages to such workers in the short run.

Part 2

(d) Cost of movie tickets provided for the employee of the month each month.

These are the cost incurred not in relation to production but to motivate the employees and reward the best employee for his performance. This cost is incurred every month even when there is very less production or no production. Therefore, these costs are fixed cost.

The cost of movie tickets is discretionary fixed cost because this cost can be easily avoided by the management to control cost.

(e) Depreciation of the sewing machine, calculated on the production basis.

If the depreciation of the sewing machine is calculated on the basis of production then it is considered as variable cost. If the number of t-shirts produced is large then the depreciation will be more but if the number of t-shirts produced is less then the depreciation will also be low.

Depreciation is the wear and tear of machine because of its excessive use. It is not possible to ascertain or quantitatively measure depreciation in a particular t-shirt. Hence, these are not engineered cost.

(f) Cost of electricity used in the building.

The consumption of electricity changes from one period to another. It keeps on changing and hence it is a variable cost. If the production of t-shirt is huge for a particular month then the power consumed will be more and so will be the cost of electricity.

These cost are not considered engineered cost because the cost of electricity is not directly associated to the production of t-shirts.

(g) Rent of building

The rent of a building is committed fixed cost. Fixed cost is those cost which remain unchanged irrespective of the volume of production. Such fixed cost which cannot be avoided by the management in the short run are called committed fixed cost. These are invariant in nature.

(h) Wages of the staff who pack the t-shirt.

• If the wages are paid on the basis of piece rate system i.e. higher the number of t-shirts packed higher will be the wages and as the wages are dependent on the volume of production, it is a variable cost. These are not engineered cost because the wages cannot be identified in the t-shirts.
• If there is a contract of paying the staff on the basis of hours worked then it is fixed cost and the company will have to pay such cost even when the volume of production is minimal. These are discretionary in nature as it can be avoided by the management of the company for a short period of time.

(i) Cost of sewing machine maintenance.

This cost is considered to be a variable cost when considered for per unit but in overall this is fixed cost. If it is a variable cost it is not an engineered cost because it cannot be recognised in the product. If it is considered fixed cost then it is a discretionary fixed cost.

(j) Cost of the new advertising sign at the front of the factory.

• The cost of new advertising sign at the front of the factory is a fixed cost and discretionary in nature. These are fixed cost because they remain unchanged even when the production increases or decreases. These costs are discretionary as they are avoidable and controlled by the management.

(k) Cost of the company car used by the managing director.

These costs are fixed cost as the cost of the car purchased by the company is not affected by the production that a company does. These are considered as committed fixed cost and are also known as sunk cost because they have already been incurred.

References:

Berman, K., Knight, J. and Case, J. (2013). Financial intelligence. 1st ed. Boston, Mass.: Harvard Business Review Press.

Bragg, S. (2014). Corporate cash management. 1st ed. Centennial: Accounting Tools.

Brigham, E. and Ehrhardt, M. (2017). Financial management. 1st ed. Boston, MA, USA: Cengage Learning.

Cafferky, M. (2014). Breakeven analysis. 1st ed. New York: Business Expert Press.

Ehrhardt, M. and Brigham, E. (2011). Financial management. 1st ed. Mason: South-Western Cengage Learning.

Garrison, R., Noreen, E. and Brewer, P. (2012). Managerial accounting. 1st ed. New York, N.Y.: McGraw-Hill/Irwin.

Gitman, L. and Zutter, C. (2012). Principles of managerial finance. 1st ed. England: Pearson Education Limited.

Hoyle, J., Schaefer, T. and Doupnik, T. (2015). Advanced accounting. 1st ed. New York, NY: McGraw-Hill Education.

Kinney, M. and Raiborn, C. (2011). Cost accounting. 1st ed. Mason, Ohio: South-Western Cengage Learning.

Koster, R. (1997). The on production budget book. 1st ed. Boston: Focal Press.

Mondy, R. (2015). Human resource management. 1st ed. [Place of publication not identified]: Prentice Hall.

Pratt, J., Anthony, J. and Clement, R. (2003). Financial accounting in an economic context. 1st ed. New York, N.Y.: Wiley.

Ramsey, D. and Ramsey, S. (2003). Financial peace revisited. 1st ed. New York: Viking.

Schipper, K. (2012). Financial accounting. 1st ed. [Place of publication not identified]: South-Western.

Stickney, C. and Weil, R. (2003). Financial accounting. 1st ed. Mason, Ohio: Thomson South-Western.

Weil, R. (2014). Financial accounting. 1st ed. Mason, Ohio: South-Western.

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