Another Semester is Starting

Tonight I am starting a new semester teaching Managerial Accounting Applications at Fairleigh Dickinson University in its MBA program. I eagerly look forward to meeting the new students and having an opportunity to introduce them to skills that are essential to their success when they become a manager, and beforehand on their trek upward.

This blog repeats a process that started when I taught my first class there almost two years ago when I posted a related blog and had my students log on to access, open and read it and then I used that to start my prepared lectures.

Today I am posting the ten questions I will be asking them, with the responses that will provide them with a glimpse of the curriculum. Here are the questions and with my answers for your edification.

10 Initial Questions with Answers and Explanations

1. On a scale of 1 to 10 (the highest), how would you rate the importance of the manager’s ability to understand their division’s internal controls and operating and accounting systems?
2. 10 – It is essential that a manager understand the controls and how the operations and work flows through their department or division and how it interacts with the rest of the company.
   Can a company make more money by increasing prices and losing some sales, or by decreasing pricing and substantially increase sales volume?
   Depends on the reasons for each method – you will learn how to determine which is the appropriate way to proceed. These types of decisions cannot be made by the seat of the pants or based on gut, but need analysis and projections of the effect on the bottom line. The manager would have the division’s accountant assist in the analysis.
3. Which is more important to a company – greatly increasing sales volume or greatly increasing the gross margin?It depends. Every company is different particularly with its goals and mission. A company with a very high gross margin and low sales will likely generate a lower amount of profit than a company with very high sales volume with low margins. However, it is better to have high sales with a high gross margin. Also, gross margins are important, but so is the net income, so a company’s entire cost structure needs to be considered.
4. What is the relevance of cost accounting information when many companies’ market values (or market cap) are significantly greater than the book value?Cost accounting information is important to measure and control product and service costs. Further, the aggregate costs are significant in determining profits because profits, or sustainable profits, is a key factor when investors decide on the price to pay for a company’s stock, which ends up determining the market cap.
5. Should the cost of inventory that is purchased for resale without any alternations or changes include part of the company’s overhead?Yes – for accounting and costing purposes. However, for managing purposes, it is important for the manager to understand marginal costs, sunk costs, fixed costs and allocated corporate expenses and how the product costs are determined. Inventory valuations for accounting purposes, i.e. GAAP, are not usually relevant for a manager’s costing and controls, but that inventory valuation will be considered in determining the annual results for that business segment.
6. Are advertising expenditures a fixed or variable cost, or an investment?Advertising is a fixed expenditure since the spending is committed prior to any sales being generated. Advertising is usually referred to as a percentage of sales, but the cost is not incurred because of the sale but before the sale. In some cases when commissions are paid based on web-based sales the advertising cost would be variable since the payment is due as the sales are incurred. In other cases, some advertising might be considered as an investment such as brand building, but advertising costs are expensed when incurred and are never capitalized under normal business conditions. “Never’ is a dangerous word in accounting so should be qualified with “almost never” or “usually never.”
7. Who does a management accountant of a company’s major division directly report to?The division controller is the management accountant’s boss. In some cases, it is the division manager or supervisor. It is normally no one outside the division (unless it is a shared position). It is important for a manager to become familiar with the reports and data that can be generated by the accountants and how they can be used as a management tool. It is also important for the manager to let the accountant know what type of data they want or need, and its frequency, and then assist in its development if it is not conventional information.
8. Are ratio and trend analyses a major way to detect nascent developments in an organization or division?They are fantastic tools and should be done at the beginning of any business performance review, and every time a report or data is received. Many of these analyses can be done in less than a minute and those techniques will be shown in this course.
9. What is the second first thing a manager should do when introduced to a new company or division?Tour the factory or offices to review the operations and internal controls.

   The first thing is to review the financial statements and available underlying data and payroll information to get an overview of the operations from a financial perspective and who the higher paid employees are and their functions.

10. Are U.S. GAAP financials more meaningful for a manager than IFRS?Neither is that meaningful to a manager. The operations and costs and controls are the bailiwicks of management accounting. GAAP and IFRS are important in financial accounting. However, it is important for the manager to be able to understand and analyze conventional financial statements.

Do not hesitate to contact me if you have any questions or comments: [email protected]