Question

Assignment: Managerial Accounting in Business

Scenario

You are the product line manager for a snow board manufacturing company based in Provo, Utah. As product line manager for the company’s Xtreme line, you are ultimately responsible for all aspects of production as well as the profitability of the line. You have direct authority over the production, marketing and sales of the company’s Xtreme line of snowboards. The first quarter sales figures are in and you see that sales are down and in several key markets you no longer hold the #1 position. You are concerned that when you attend the quarterly management meeting that this poor performance is going to be a topic of much discussion. Several months ago, you received information from an overseas manufacturer that can manufacture the bindings for the snow board at a fraction of your current cost to produce them in-house. This will lower the cost to produce the Xtreme line allowing the company to increase their margin, lower prices to customers or some combination of both. Consequently, you believe it is now time to revisit that correspondence and start putting together a plan to address the lackluster Q1 earnings report.

Questions

1. What qualitative and quantitative factors will you have to consider before recommending that the company outsource the production of the binding component of the Xtreme snow boards?

2. What accounting information will you need in order to make the best decision for the company? When identifying the accounting information needed, indicate the following:

a. Is the information you need financial or managerial in nature?

b. How will you use the accounting information in evaluating the decision?

3. Identify any potential risks associated with making this decision and how those risks can be addressed.

Answer 1

The qualitative factors that may considerd are as follows

• Will the quality of the products remain constant?
• Will shutting down the manufacturing facility have a negative impact on the morale of remaining employees?
• Is the producer that will be making the product financially stable ?
• whether it is finacialy realiable or not ?

quantitative factors

1. Unit cost of purchasing from outside supplier
2. Production capacity available to manufacture components
3. Opportunity costs of using facilities for production rather than for other purposes
4. Amount of space available for storage
5. Costs associated with carrying inventory
6. Increase in throughput generated by buying components

accounting allows a business to keep track of all its financial transactions. It is the process in which the company records and reports all the financial data that go in and out of its business operations. The accounting data is recorded on a series of financial statements including the balance sheet, income statement, and cash flow statement.

There are a series of accounting principles companies adhere to in their financial accounting. The majority of publicly traded companies in the United States follow the generally accepted accounting principles (GAAP), a common set of standards accountants follow when they complete their financial statements. Companies outside the U.S. generally follow other international standards that vary by region and country.

There are three main areas where financial accounting helps decision-making:

• It provides investors with a baseline of analysis for—and comparison between—the financial health of securities-issuing corporations.
• It helps creditors assess the solvency, liquidity, and creditworthiness of businesses.
• Along with its cousin, managerial accounting, it helps businesses make decisions about how to allocate scarce resources.

Investing Decisions

Fundamental analysis depends heavily on a company's balance sheet, its statement of cash flows and its income statement. All of the financial statements for publicly traded companies are created and reported according to the financial accounting standards set forth by the Financial Accounting Standard Board (FASB).

Investors use the information from financial statements to make decisions about the valuation and creditworthiness of a company. Without the information provided by financial accounting, investors would have less understanding about the history and current financial health of stock and bondissuers. The requirements set forth by the FASB create consistency in the timing and style of financial accounts, which means investors are less likely to be subject to accounting information that has been filtered based on a firm's current condition.

Lending Decisions

Financial accounting is also a key for lenders. Because financial statements outline all its assets as well as the short- and long-term debt, lenders get a better sense of a company's creditworthiness.

A number of common accounting ratios creditors rely on, such as the debt-to-equity (D/E) ratio and times interest earned ratio, are derived from a company's financial statements. Even for privately-owned businesses that do not necessarily follow the requirements of the FASB, no lending institution assumes the liability of a large business loan without critical information provided by financial accounting techniques.

Ultimately, a lender wants to know just how much risk is involved by lending a company money, which can be determined by reviewing the company's financial accounting. Once this is determined, the lender will also be able to outline exactly how much to lend and at what interest rates.

Corporate Governance

Reliable accounting serves a practical function not only for investors and lenders but also for the firms themselves.

The most obvious benefit for businesses to complete their financial accountingis to meet the legal and regulatory obligations outlined for (public) companies. Companies must be honest about their financial activities and the data must be accurate and published regularly.

Beyond the regulatory and compliance hurdles financial accounting helps clear, financial accounting also helps managers create budgets, understand public perception, track efficiency, analyze product performance, and develop short- and long-term strategies.