Applying Managerial Accounting Concepts
Managerial accounting comprises of internal functions of a business concerned with the identification, measuring, recording and analyzing the financial data and information of an organization. It also includes forecasting, financial report projection, budget and cost allocation of an organization. According to Edmonds (2010), although most of the managerial accounting concepts were developed for the manufacturing companies, the concepts are also applicable to service companies. Service organizations including businesses, restaurants, transportation industries and maintenance service companies employ the concepts of managerial accounting in calculating various function costs of the companies. Service companies employ the concepts in determining the number of materials to use and labor usage. In addition, service companies use the concepts in determining the amount of time spent on the clients. The paper focuses on transportation industry
Variable Cost in Transport Industry
The transport industry is a service sector and utilizes managerial accounting in calculating the various cost and in the management of all of its operations. In the service industry, variable costs differ with the level of services that the company offer. The variable costs increase with increase in the amount of services that the companies offer. In the transportation sector, the variable costs include planes, ships, trucks, and railcars. Transportation companies employ managerial accounting to help determine the amount of variable cost to employ in maintaining smooth operations of the organization. Managerial accounting is useful in determining the number of casual employees that the company may require to effectively offer the service to the clients.
Fixed Cost in Transport Sector
Horngren, Datar and Rajan (2012) state that managerial accounting helps the service companies in determining the fixed costs involved in offering various services. Fixed costs are the ones that do not change depending on the volume of production. In the service industries, fixed costs are the ones that remain constant despite the level of services offered. In the transport industry, the fixed cost includes fixed infrastructure that comprises of road constructions, ports and airports. Managerial accounting helps in determining the value of fixed cost that the company incurs in its daily operations. Managerial accounting concepts help in determining the measures that a service company can use to maintain its fixed cost low therefore improving the profitability of the company. Fixed cost in the transport sector also comprises of permanent employees working in the sector and the concepts of managerial accounting help in calculating the total fixed cost that goes to the employees of the company (Edmonds, 2010).
Research by Shim and Siegel (2012) indicate that mixed cost is the behavior of expenses and costs and comprise of variable and fixed components. As an example, the total cost of operating an automobile in a year is mixed cost. Mixed cost is a component of managerial accounting that is commonly applied in determining the cost involved in manufacturing and offering various services to service companies. Mixed cost comprises of some cost that change with the services provided while others remain constant despite the level of services. In the transport company, the variable costs in the mixed cost concept include the repair cost and depreciation cost. Fuel cost is also variable because it will increase with the distance that vehicles covers. The fixed cost for example in the mixed cost concept maybe $500 that remain the same despite the number of services offered. Managerial accounting is essential for the transport companies because it helps in determining the mixed cost that the company should expect to incur in rendering or delivering services to its customers.
Job Order Costing
Job order costing is a managerial accounting concept applied in assigning the costs of manufacturing to a product or multiple of products. The concept is useful even in the service companies through the use processing cost system if the services offered are similar. Transport industry uses the concept in allocating cost used in delivering the services to all the tasks involved. According to Bamber, Braun and Harrison (2014), the system of process costing help to distribute the individual cost elements including direct labor used in service delivery or operation of the company
Although most concepts in the managerial accounting were initially developed for the manufacturing industries, concepts including variable cost, fixed cost, mixed cost and job order costing are applicable also to the service industries. The aspects help in determining the average costs that the company should incur in conducting their various activities. The concepts are effective and reliable to a higher level in determining the efficiency and effectiveness of the companies. They are also useful in ways that the company can reduce their cost and therefore improve their productivity. In addition, the concepts help in evaluating the variable elements applied in delivering various services to people and their real value. Through the application of the concepts, the service companies can evaluate the fixed cost, mixed costs and the proportion of both variable and fixed costs and their effectiveness in maintaining the well-being of the companies.
Bamber, L. S., Braun, K. W., & Harrison, W. T. (2014). Managerial accounting. Upper Saddle River, NJ: Pearson Prentice Hall.
Edmonds, T. P. (2010). Fundamental managerial accounting concepts. New York: McGraw-Hill/Irwin.
Horngren, C. T., Datar, S. M., & Rajan, M. V. (2012). Cost accounting: A managerial emphasis. Upper Saddle River, NJ: Pearson/Prentice Hall.
Shim, J. K., & Siegel, J. G. (2012). Managerial accounting. New York: Schaum.