Mark P. Holtzman

Managerial accounting helps managers and other decision-makers understand how much their products cost, how their companies make money, and how to plan for profits and growth. To use this information, company decision-makers must understand managerial-accounting terms. When planning for the future, they follow a master budgeting process.

A wide variety of factors can cause overhead to increase. To gain a better understanding of these factors, managerial accountants use activity-based costing. The assumption that the more direct labor your employees work, the more overhead your company incurs made sense in the days before automation, but today completely automated factories operate with little or no direct labor.

A scattergraph helps you visualize the relationship between activity level and total cost. To scattergraph, just follow these steps (with explanations for creating the scattergraph in Microsoft Excel):Set up a table that shows production level and total cost by time period.To prepare a scattergraph, you need basic data about the number of units produced and the total costs per time period.

Factories and other companies typically must pay costs that include variable and fixed components, challenging accountants to figure out which camp these costs belong in. These mixed costs typically change with the level of activity, but not proportionately. Therefore, in order to predict cost behavior, you need to split mixed costs into variable and fixed components.

Responsibility centers are identifiable segments within a company for which individual managers have accepted authority and accountability. Responsibility centers define exactly what assets and activities each manager is responsible for. How to classify any given department depends on which aspects of the business the department has authority over.

Information about product cost helps managers to set and adjust prices and to decide how to best utilize limited production capacity. Here you use only two credit accounts: Accounts payable (which are moneys owed to suppliers), and Wages payable (moneys owed to employees). To increase one of these credit accounts, credit it to the right.

Managers often want to know how much they need to sell in order to break even or in order to earn a target level of profit. To get this information, managers derive something called a break-even point (BE) — the amount of sales necessary to earn zero profit. Why bother? Because knowing the break-even point helps you set sales targets.

A direct labor variance is caused by differences in either wage rates or hours worked. As with direct materials variances, you can use either formulas or a diagram to compute direct labor variances. Utilizing formulas to figure out direct labor variances To estimate how the combination of wages and hours affects total costs, compute the total direct labor variance.

The overhead budget estimates the coming year’s total overhead costs and sets an overhead allocation rate. To prepare it, you need detailed information about the company’s overhead, including an analysis of fixed and variable components of the overhead. Overhead consists of the costs of making products above and beyond direct materials and direct labor.