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Differences and similarities between financial and managerial accounting
The importance of managerial accounting
Differences and similarities between financial and managerial accounting
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ACCOUNTING – UNIT 3
Explain the difference between financial and management accounting, the fundamentals of management accounting. Explain how costs are classified using examples.
Accounting is a systematic process or work that identifies, records, reports and analyses financial transactions and information of a business. It allows a company to analyse the financial performance of a business and reveals profit or loss for a certain period of time and the value of assets, liabilities and owners’ equity. Thus, its purpose is to provide information needed for decision making. However, there are two types of accounting. In this essay I am going to explain the differences between financial and management accounting including what fundamentals of accounting management are as well as the classification of various costs in accounting.
Financial accounting is specialised to track a company’s financial transactions which are recorded, summarised and presented in a financial report or statements such as balance sheets, income statements, statements of cash flows and statements of owner’s equity. These statements are annual basis and considered external as they are given to people or stakeholders outside of a company. The audience of financial accounting reports are stakeholders or owners, lenders, board of directors and financial institutions, which are known as the primary recipients. Financial accounting enables them to see how the company has performed in the past. Once a company’s stock is publicly traded, its financial statements will be spread and the information will reach secondary recipients. They are competitors, employees, labour organisations, customers and investment analysts.
The purpose of financial accounting is to provide e...
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...f product. Examples of this type of costs are wood, electricity for factory, production workers wages, and so on. The indirect cost is the cost that cannot be easily and conveniently traced to a unit of product. This includes manufacturing overhead, rent, admin staff wages and so on.
According to the behaviour, costs classify as fixed and variable. Fixed costs are the ones which remain constant or unaffected within a certain level of output or sales. Examples of fixed costs are rent, insurance, depreciation of building, managers’ salary etc., which remain constant even though a large number of units are produced. On the other hand, variable costs vary in direct proportion to the output. It can increase or decrease based on the production unit. Examples of variable cost are electricity for factory, materials used to manufacture a product, wages of workers and so on.
Management accounting in organisation is very important for decision-making and to make the business more efficient and therefore increasing its profits. Is the process of preparing accounts that can help managers to make day-to-day and short-term decisions, by providing them with accurate and timely key financial and statistical information...
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
Remember fixed costs do not vary with output, whilst variable do. The TOTAL costs of a firm are its fixed and variable costs added together. We also need to remember that we borrow something from economists when we introduce time to the calculation. By this I mean the dreaded long and short run. Remember that in the short run the scale of the operation cannot be changed and any expansion in output has to come from what spare capacity may be available.
Regarding form, management accounting does not provide for any standard format of preparing management accounts.It follows any size as long as the information is well presented to internal users and management of an organization to enhance decision-making. On the other hand financial accounting prescribes a composition for preparing published financial statements and accounts following a standard size as guided by Generally Accepted Accounting Principles (GAAPs) and International Financial Reporting Standards (IFRS).In financial accounting, there are concepts which accountants must adhere to in preparing financial statements.The accountants are guided by uniform concepts and standards of reporting which is not the case in managerial
Variable Cost- Total cost is a sum of fixed cost and variable cost. The expensive that are fluctuated with the output quantity called variable cost. (book references). The variable cost of Apple is labour that is depended on production of new product, meet the needs of existing orders, the need of labour can be fluctuated. All costs on material used in production, wages, and utilities of Apple Company are variable costs.
There are two main types of cost accounting systems, job costing and process costing. In job costing, each job is tracked separately. For example, a company that install roofs can keep track of each cost separately. They can easily track labor by tracking the total amount of human hours spent of the job and what each person was paid. Materials can easily be tracked by tracking the total costs of supplies needed to complete the job. For job costing the total costs of each job can be easily tracked. Some examples of professions that use job costing are carpenters, painters, and computer repair. In process costing, a large number of the same or very similar products are produced in large numbers - examples include
Total cost is all of the expenses incurred in the production of a product, to include fixed and variable costs. Fixed costs, are expenses that are constant and do not change from month to month regardless of the amount of products sold. For instance, the rent of the factory is considered a fixed cost, for the reason that, the rent must be paid whether products are produced and sold or not. Variable costs,
Cost Accounting: Its role and ethical considerations Introduction: Accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgements. The major areas of within the accounting are: Financial Accounting, Managerial Accounting/Cost Accounting and Auditing- Public Accounting Managerial accounting is concerned with the use of economic and financial information to plan and control the activities of an entity and to support the management in planning and decision-making process. Cost accounting is the subset of managerial accounting and it helps management in determination and accumulation of product, process or service cost. Role of Cost Accounting: Increased competition and uncertain business conditions have put significant pressure on corporate management to make informed business decisions and maximize their company?s financial performance. In response to this pressure, a range of management accounting tools and techniques has emerged.
Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do.
For example: with the increase of the number of products produced, the cost of operating a machine also increase. Second we have batch level costs which is associated with batches; producing a multiple units of the same product that are processed together is called a batch. The third type is product level costs which arise from any activity in order to support the production of products. The fourth and the last type is facility level costs, this costs cannot be determined with a particular unit, product or batch; this costs are fixed with respect to batches, products and number of units produced. A single measure of volume is used for allocating costs to each service or product in traditional method for example: direct material cost, machine hours, direct labor cost and direct labor hours. A cost driver is an activity that generate costs, it can be generated by two types of costs the first is a particular machine 's running costs where the costs is driven by production volume as machine hours; the second is quality inspection costs where the cost is driven by the number of times the relevant activity occurs as the number of
Costs are usually fixed and direct with respect to the capability. Example is the salaries of front office personnel such as the receptionist and office manager.
Variable costs, are costs that can be reduced for example, electrical and gas costs are variable cost because the price is fluctuating all the time, it is not set to the same amount because it changes due to energy consumption made by the business.
Labor costs enter into two categories: fixed costs and variable costs. Fixed costs refer to salaries of core staff or permanent staff and variable costs to hourly or casual staff. Labor costs are the highest costs in food and beverages operations. On the other hand food costs are said variable costs. Thus controlling labor costs is fundamental in increasing revenue. Also the reduction of food cost will add revenue and make business more sustainable.
Managerial accountants have many definitions, with several very constant characteristics. Professor Michael Bromwich (1988) states that management accounting is "future-oriented, is dynamic, produces forward looking figures and is meant to be decision and control relevant, should not be too concerned with objectivity and is not generally subject to external regulations" (p. 26).
Variable costs- these are costs that change depending on amount of use and output of sales and the capacity of production e.g. Electricity, parts and materials.