Analyzing Management Accounting Vs Financial Accounting

Management accounting and financial accounting

Management accounting lays a crucial role in the life of an organization. It helps the organization and its manger to take important decisions regarding the operations of the company. It helps the internal stakeholder of the company to understand the situation of the company and work accordingly.

Management accounting is the main part of accounting system. This part of accounting system is used by the company to prepare and analyze some reports and accounts to provide the accurate and consistent data of the organization to the internal stakeholders. This reports and information help the management of the company in making the policies, strategies and decision making (Besley and Brigham, 2008).

It is also a important part of accounting system. This part of accounting system is used by the company to prepare the annual reports. Mainly these reports offer the information to the external stakeholders of the company. Preparation of financial reports is compulsory for every company (Von Hagen and Harden,1994). This technique helps the stakeholders in measuring and judging the performance of the company in market. Mainly, the concern of financial accounting is related with the assets, liabilities, income and expenditure of the organization.  

Management and financial accounting are crucial part of accounting. Both of these parts offer different facilities to the organization. One is used for internal stakeholder as well as another one is for external stakeholder. The difference between both of these techniques has been described as follows:

Management accounting focuses over the internal factors such as budgets, cost sheet, operating expenses, COGS etc of an organization whereas financial accounting focuses over the external factors such as liabilities, expenditures, income and assets (Horngren, 2009). The reports of management accounting are only prepared for the internal stakeholders to make decisions about the operations, policies and strategies of the company whereas financial accounting reports are prepared for the external stakeholders to judge and analyze the reports to make decisions regarding the investment. These reports also help the auditors to analyze the organization and its operations (Garrison, Noreen, Brewer and McGowan, 2010).

Management accounting are only concerned about the employees, managers whereas financial accounting reports are concerned about the customers, debtors, creditors, financial institute, auditors, suppliers, shareholders, investors  etc. Mainly, budgetary reports, cost sheet, profit reports, break even analysis reports are prepared in management accounting whereas balance sheets, profit and loss statement, cash flow statement, fund flow statements are prepared in financial accounting (Horngren, 2009).

Importance of break-even analysis

There are not any specific rules and regulations to prepare the statements in management accounting whereas in financial accounting many rules must be applied to make the reports more reliable. Accounting standards of accounting boards are only applied upon the financial accounting; managerial accounting is totally free from it. For  the purpose of auditing, financial accounting reports are compulsory, management accounting reports are not even taking consideration for.

Financial accounting reports must be audited to check the reliability and curability whereas management accounting reports are prepared for the internal decisions so auditing is not required. Thus, it could be said that both the types are quite different. Management as wel as financial accounting plays a different role in the life of an organization as well as the part of both the types is not connected to each other.

Break even analysis is a report of managerial accounting. This report is prepared by an organization for analyzing the relationship among sales revenue, turnover, cost, profit etc. this report is prepared by profit making firms to find out the sales units which are required to sale the firm to meet all the expenses (Hogarth and Makridakis, 1981). The main goal of a profit making firm is to cover all the expenses first of all and then make the profits. Break even analysis identify a point where the revenue and expenses of the company are same.

These reports are prepared by the companies to conduct a research over the expenses of the organization. These reports are prepared by the managers to know a point where company would be free from any kind of loss.

The above chart depicts that the breakeven point is on 2000 units. It explains that if company would sell the 2000 units than the revenue would be equal to the expenses.

Break even analysis is crucial for every profit making organization. It is analyzed by the management of the company to identify the total required units to cover all the expenses of the organization. It helps the management to take many decision regarding manufacturing, pricing, fixed and variable charges etc. It plays a crucial role in decision making.  

With the help of this chart, the importance of break even analysis could be understood in a clear manner. The above chart is depicting all the points very well such as total revenue, breakeven point, loss area, profit area, fixed expenses and variable expenses. All these factors are directly related with the production house of the company. This analysis helps the management of the company to identify the point “breakeven point” where company would not suffer with any kind of loss as well as would not enjoy the profits (Stevenson and Sum, 2002).

Operational budgets for a limited company

The break even analysis helps the management to cover all the expenses through revenues. The chart shows that if the company would be able to sell 2000 units, than company would be able to recover all the expenses.

This chart helps the organization to identify the total profit company would get if company would sell more units than break even sales unit. As shown, if company sells 3500 units than company would earn $20000 profit.

This analysis helps the company to take decision about the production. If company would not be able to reach at breakeven point, than there is no meaning to produce a single unit, because it would be tough for the organization to recover the fixed cost.

This analysis would also help the company to identify that how company could reduce the fixed cost to reduce the break even units (Davies and Crawford, 2011). This would help the company to bear less risk. It also helps the company to identify the difference among the variable and fixed cost.

Thus it could be said that the role of break even analysis is very crucial in a production house. It helps the management to make decisions, change the policies and make new strategies to earn more profits.

Operational budget is used by an organization to forecast the future expenses on the basis of present income and expenditure. Budgets are always prepared by the companies in advance to set the policies and strategies according to that. Operational budget is the main budget prepared by an organization to identify the future sales; future material required and forecast the labor hour etc (Weygandt, Kimmel and Kieso, 2015). It especially helps the production house to make decisions.

This budget is the basic budget. All other budgets are prepared on the basis of sales budget. This budget is prepared by the company to forecast the future sales unit. It could be prepared monthly, quarterly or annual basis by the organization.

“BHP Billiton” makes the sales budget to forecast the future market and demand of the products accordingly (Davies and Crawford, 2011). Through this budget, company identifies the future sales which may happen in future accounting year and prepare the new policies and strategy accordingly. It also helps the company to prepare the other budgets on the basis of forecasted units.  

This budget depends upon the sales budget. According to the forecasted sales unit, company plans to produce the units. Basically, the closing stock of finished goods and forecasted units are taking consideration for preparing this budget (Faleti and Myrick, 2012).

The significance of variance analysis

“BHP Billiton” makes this budget to analyze the total units which are required to produce to meet the demands of the customer in next accounting year. Through the help of production budget “BHP Billiton” manages the stock at warehouses and make a control over all the extra expenses.

This budget is based upon the production budget. In this budget, total material which is required for production of units is calculated. Finished goods and production units are taken consideration for direct material budget (Bryson, 2012).

“BHP Billiton” makes this budget for calculating all the wants of organization related to production. This budget helps the “BHP Billiton” to order a accurate amount of raw material. It also helps the company to reduce extra cost.

This budget is based upon the production budget. In this budget, total labor hours which are required for production of units are calculated. Finished goods and production units are taken consideration for this budget (Weygandt, Kimmel and Kieso, 2015).

“BHP Billiton” makes this budget for calculating all the wants of organization related to labor. This budget helps the “BHP Billiton” to hire enough labor to produce the required units. It also helps the company to reduce extra cost.

This budget makes an involvement of all the cost which is directly related with the production except the direct labor and material cost. This budget is a part of COGS. This analyzes the total cost per unit.  

Through this budget “BHP Billiton” analyzes the cost per unit and set the prices accordingly. This helps the “BHP Billiton” to set the competitive price and reduce the extra cost.

All the costs which don’t come in the category of Overhead budget, falls under this budget. All the costs which are not directly have a relationship with production are determined such as office expenses, salary, stationery, marketing, sales, engineering etc (Brown, Beekes and Verhoeven, 2011).

This budget is prepared by the “BHP Billiton” to understand the indirect cost and reduce the extra cost. This helps the company to set the policies and competitive price.   

It is an investigation technique to forecast the difference among the actual and planned result of an organization. It is used by the manufacturing companies to find the reason behind the differences (Juan García-Teruel and Martinez-Solano, 2007). There are many methods to analyze the variances but Trend line method is more effective and the result offered by this technique is also reliable. There are many types of variances. Some of them are as follows:

Difference between management accounting and financial accounting

Material variances are the difference between the budgeted material required and the actual material required. This variance is calculated to analyze the total difference and the reason behind the variances. This is used to find the ability of organization to incur the cost of material close to the planned level (Niu, 2006).

These variances help the organization to identify the extra cost and through it, company could make decisions either to change the supplier or the quality of material. This also helps the manager of the company to make decisions regarding the supplier, quality and production process.                                     

labor variances are the difference between the budgeted labor hour required and the actual labor hour. This variance is calculated to analyze the total difference and the reason behind the variances. This is used to find the ability of organization to incur the cost of labor close to the planned level.

These variances help the organization to identify the extra cost and through it, company could make decisions either to change the standard of labor or the quantity of labor (Datta, ISKANDAR?DATTA and Raman, 2005). This also helps the manager of the company to make decisions regarding the total labor hour, skilled or unskilled labor and production process.              

Variable overhead variances are the difference between the budgeted Variable overhead required and the actual Variable overhead. This variance is calculated to analyze the total difference and the reason behind the variances (Ahmed and Duellman, 2013). This is used to find the ability of organization to incur the cost of variable expenses close to the planned level.

These variances help the organization to identify the extra cost and through it, company could make decisions either to make some change in the process or other factors. This also helps the manager to reduce the extra cost through analyzing all the factors of variable cost deeply.                    

Sales variances are the difference between the budgeted Sales units forecasted and the actual sales units. This variance is calculated to analyze the total difference between the budget sales unit and actual sales unit (Graham, Harvey and Puri, 2013). This is used to find the ability of organization to analyze the total sales units close to the planned level.

These variances help the organization to identify the less sales unit and extra cost occurred due to it and through it, company could make decisions either to make some change in the marketing or other factors. This also helps the manager to reduce the extra cost through analyzing all the factors of sales.                    

Conclusion:

Through this report, it could be concluded that managerial and financial accounting both are important for an organization. Both of these types are crucial and plays different role. Analysis of breakeven point helps the company to identify the required minimum sales and also help in covering all the expenses. Organizational budget of a company helps it to forecast the future and expenses which would be incurred in future. Variance analysis helps an organization in decision making and cost controlling.

References:

Ahmed, A.S. and Duellman, S., 2013. Managerial overconfidence and accounting conservatism. Journal of Accounting Research, 51(1), pp.1-30.

Besley, S. and Brigham, E.F., 2008. Essentials of managerial finance. Thomson South-Western.

Brown, P., Beekes, W. and Verhoeven, P., 2011. Corporate governance, accounting and finance: A review. Accounting & finance, 51(1), pp.96-172.

Bryson, J.M., 2012. Strategic Planning and. The SAGE Handbook of Public Administration, p.50.

Datta, S., ISKANDAR?DATTA, M.A.I. and Raman, K., 2005. Managerial stock ownership and the maturity structure of corporate debt. the Journal of Finance, 60(5), pp.2333-2350.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Faleti, K.O. and Myrick, D., 2012. The Nigerian Budgeting Process A Framework for Increasing Employment Performance. Mediterranean Journal of Social Sciences, 3(12), pp.193-213.

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Graham, J.R., Harvey, C.R. and Puri, M., 2013. Managerial attitudes and corporate actions. Journal of Financial Economics, 109(1), pp.103-121.

Hogarth, R.M. and Makridakis, S., 1981. Forecasting and planning: An evaluation. Management science, 27(2), pp.115-138.

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Juan García-Teruel, P. and Martinez-Solano, P., 2007. Effects of working capital management on SME profitability. International Journal of managerial finance, 3(2), pp.164-177.

Niu, F.F., 2006. Corporate governance and the quality of accounting earnings: a Canadian perspective. International Journal of Managerial Finance, 2(4), pp.302-327.

Stevenson, W.J. and Sum, C.C., 2002. Operations management (Vol. 8). New York, NY: McGraw-Hill/Irwin.

Von Hagen, J. and Harden, I., 1994. National budget processes and fiscal performance. European Economy Reports and Studies, 3(1994), pp.311-418.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order