Recently, a colleague of mine mentioned that he is not making as much profit as he expects.

Nse,
who owns a sharwama and pizza joint expressed concern regarding the amount of money he is
investing into his business, without seeing the expected profits. Immediately, I started thinking in
managerial accounting concepts. Specifically, I was probing questions relating to product
costing, contribution margin, and differential analysis.
Nse mentioned something that really has me applying what I have learnt so far in managerial
accounting to real life situations. While expressing concern over not making enough profits as he
expected, Nse said, “And I cannot just raise prices suddenly to cover costs”. Originally, the first
questions I asked were, “What are your prices? And how do you determine these prices?” These
questions relate to costing methods reviewed in Unit 2. Walther & Skousen (2009) mentions job
order costing, process costing and activity-based costing as the primary costing methods. Each
are different from the other but are very essential in managerial decisions, such as setting sales
price, determining the value of inventory, planning production, determining labor needs, and
making short- and long- term plans.
Nse identified job order costing as his method of costing. Greenberg & Schneider (2010) explain
that job order costing is appropriate in situations where each job is distinct, easy to identify and
serves as a cost objective. And how did my understanding of costing methods come into play
here? From evaluating Nse’ production process, I was able to determine that job order costing is
indeed the preferred method of costing for his company.
I also wanted to know how much Nse spends on variable expenses. The aim was primarily to
determine how much per ₦1 contributes to fixed costs and profits. This contribution margin is
essentially calculated by subtracting variable expenses from revenues (Walther & Skousen,
2009). A high contribution margin is usually what management would prefer. A high
contribution margin shows that a high percentage of every ₦1 generated by the sale of the
products contributes to fixed costs and profits (Gallo, 2017). For Nse, the contribution margin for
the sale of his products is quite low. How would I advise Nse to improve his contribution
margin? To improve his contribution margin, Nse would have to reduce variable expenses or
increase the price of products (Gallo, 2017). If he fails to improve his contribution margin, he
could find it difficult to cover fixed costs.
Additionally, it could be the case that keeping or dropping one of his products could drastically
change the volume of profits. This is an example of differential analysis discussed in Unit 4.
Differential analysis can assist companies in keep or drop decisions. Heisinger & Hoyle (n.d.)
explain that differential analysis is the process of analyzing the difference in revenues and costs
among varying courses of action. Nse provided me information on sales revenue, variable costs,
direct fixed costs, and allocated costs, and I preceded to carry out a differential analysis. The
analysis showed that if Nse decided to discontinue any of his products, then he loses more
revenue. But these numbers should not be the only factors in his consideration. How would I
advise Nse on factors to consider when making decisions based on differential analysis? It is
important that Nse considers qualitative factors, such as the morale of his employees, the
satisfaction of his customers, and the reputation of his business. Heisinger & Hoyle (n.d.)
contend that qualitative factors may in fact outweigh quantitative factors in these sort of
decisions.
My conversations with Nse was needed and provided valuable insight into real world
applications of managerial accounting concepts. Nse, or another company, could hire me as a
financial analyst, and while all the tools I have acquired through each unit is important, these
three concepts could be a starting point of my analysis. I also understand that various tools are
needed for specific situations. Importantly, this course is a valuable preparation for more
advanced learning in the MBA program.

References
Gallo, A. (2017). Contribution margin: What it is, how to calculate it, and why you need it.
Harvard Business Review, 1-3. Retrieved from
https://hbr.org/2017/10/contribution- margin-what-it-is-how-to-calculate-it-and-why-you-need-it
Greenberg, R., & Schneider, A. (2010). Job order costing: A simulation and vehicle for
conceptual discussion. Academy of Educational Leadership Journal, 14(3), 39.
Heisinger, K., & Hoyle, J. (n.d.). Accounting for Managers.
https://2012books.lardbucket.org/books/accounting-for-managers/index.html
Walther, L. & Skousen, C. (2009). Managerial and Cost Accounting. http://library.ku.ac.ke/wp-
content/downloads/2011/08/Bookboon/Accounting/managerial-and-cost-accounting.pdf