Management Accounting vs. Financial Accounting
Difference between management accounting and financial accounting:
Management accounting is a type of accounting which is used by the business to prepare the accounting reports and offer the continuous information about the business to make a decision. On the other hand, financial accounting is a type of accounting which is used by the business to offer the information about the overall financial position to the stakeholders of the company (Zimmerman & Yahya-Zadeh, 2011). Both of these types of accounting are crucial to each other. However, there is huge difference among both the types.
Management accounting focuses on the internal factors of an organization which includes budgets report; cost evaluation, expenses analysis and variances whereas the financial accounting focuses on the financial statement of the business which are income statement, balance sheet, cash flow statement etc. (Libby, 2017). Management accounting process is used by the business to make decision about the internal functions of the company whereas the financial accounting offers the base to stakeholders to make decision about the company.
The reports of management accounting are break even analysis, cost behaviour report, budgets, profit planning etc whereas the reports of financial accounting are final financial statement of the business. It is not required for the business to follow accounting standards while preparing the management accounting reports, but is mandatory for the business to follow accounting standards while preparing the financial accounting reports.
Functions of management accounting:
The main four functions of the management accounting are as follows:
- Planning:
Management accounting helps the management of the company to make various short term and long term plan for the betterment of the business and smooth operations of the business. These plans are mainly prepared to meet the objectives of the business. Such as, a business plans that which product should be sold on what prices? Whether the price of the business must be increased to 5%? Etc.
- Organizing:
Organizing is the process of manage and prepare an organizational frame and assign the responsibilities to the people who are working in an organization to meet the common goal of the business. Such as, the management accounting reports are prepared in such a way that a manager could decide that which product is to add or remove from the product mix to maintain the cost and improve the profit (Hilton & Platt, 2013).
- Controlling:
Controlling is the process to monitor, evaluate measure and correct the actual result of the business in order to ensure that the goals and objectives of the business could be achieved. This process is mainly done through considering the feedback. Such as, the accounting manager takes the feedback from the product which could be reduced from the product mix so that the cost could be reduced.
- Decision making:
Decision making is the last process of accounting functions which helps the management to choose from 2 or more alternatives, the best option. This is done after considering all the above functions of the management accounting (Nielsen, Mitchell & Nørreklit, 2015). Such as, the accounting managers make the decision to remove that particular product from the product mix to reduce the cost of the business.
Functions of Management Accounting
Concept relevance of management accounting:
Panopticism:
Panopticism is an accounting concept which describes that the company could reduce the cost and improve the profit of the business through following this concept. It explains that the less staff and fewer resources could also achieve the goals of the business. The main motto of this concept is to get the work done and meet the objectives in no cost.
Control:
Controlling is the process to monitor, evaluate measure and correct the actual result of the business in order to ensure that the goals and objectives of the business could be achieved and the cost could be reduced through implementing the relevant changes. This process is mainly done through considering the feedback.
Discipline:
Discipline is also a process which express that the management accountant and the manager of the company must have enough knowledge about the accounting concept and they should complete the working discipline to meet the common goal of the business (Garrison et al, 2010).
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Lake Limited |
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Statement of cost of goods manufactured |
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For the year ended 30th June 2017 |
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Direct Material Used: |
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Opening raw Material Inventory |
$ 183,000.00 |
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ADD: Purchase of Raw Material |
$ 1,200,360.00 |
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Less: Closing raw Material Inventory |
$ 186,000.00 |
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Raw Material used |
$ 1,197,360.00 |
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Less: Indirect Material used |
$ 52,500.00 |
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Direct Material Used |
$ 1,144,860.00 |
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Direct Labour |
$ 1,284,000.00 |
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Manufacturing overhead: |
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Indirect Labour |
$ 75,000.00 |
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Depreciation expense – factory equipment |
$ 90,000.00 |
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Factory Rent |
$ 152,820.00 |
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Total Manufacturing overhead |
$ 317,820.00 |
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Total Manufacturing cost |
$ 2,746,680.00 |
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Add: Opening WIP |
$ 60,600.00 |
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Less: Closing WIP |
$ 57,330.00 |
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Cost of goods manufactured |
$ 2,749,950.00 |
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Lake Limited |
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Income statement |
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For the year ended 30th June 2017 |
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Revenue |
$ 6,751,500.00 |
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Less: cost of goods sold |
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Opening Finished goods |
$ 264,000.00 |
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Cost of goods manufactured |
$ 2,749,950.00 |
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Cost of goods available for sale |
$ 90,000.00 |
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Less: Closing Finished goods |
$ 345,000.00 |
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Cost of goods sold |
$ 2,758,950.00 |
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Gross profit |
$ 3,992,550.00 |
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Operating expenses: |
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Selling & distribution expenses |
$ 1,200,000.00 |
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Administration expenses |
$ 600,000.00 |
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Total operating expenses |
$ 1,800,000.00 |
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Net profit |
$ 2,192,550.00 |
Budgeted manufacturing OH rate:
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Part 3 (A) |
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Budgeted manufacturing overhead rate for each department |
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Department A |
Department B |
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Budgeted machine hours |
4000 |
8000 |
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Budgeted manufacturing overhead |
$ 57,500.00 |
$ 62,500.00 |
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Overhead rate per machine hour |
$ 14.38 |
$ 7.81 |
Journal entries:
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Part B |
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Particulars |
Debit |
Credit |
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Material control department A a/c |
$ 110,000.00 |
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Accounts payable control a/c |
$ 110,000.00 |
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WIP control department A a/c |
$ 32,500.00 |
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Manufacturing overhead control department A a/c |
$ 7,500.00 |
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Material control department A a/c |
$ 40,000.00 |
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WIP control department A a/c |
$ 52,500.00 |
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Manufacturing overhead control department A a/c |
$ 11,000.00 |
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Wages payable control a/c |
$ 63,500.00 |
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Manufacturing overhead control department A a/c |
$ 17,250.00 |
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Leaseholds payable control a/c |
$ 16,250.00 |
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Utilities payable control a/c |
$ 1,000.00 |
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WIP control department A a/c (800*$14.375) |
$ 11,500.00 |
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Manufacturing overhead allocated a/c |
$ 11,500.00 |
Total cost of job X:
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Total cost of job X |
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Direct material department A |
$ 32,500.00 |
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Direct material department B |
$ 13,500.00 |
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Direct manufacturing labour dept. A |
$ 52,500.00 |
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Direct manufacturing labour dept. B |
$ 53,500.00 |
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Manufacturing overhead depart. A (800) |
$ 11,500.00 |
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Manufacturing overhead depart. B (300) |
$ 2,343.75 |
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Total cost |
$ 165,843.75 |
Major cost object:
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Part D |
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Two major cost objects that managers focus on are: |
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(1) Various jobs in production and products |
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(2) The responsibility centres and the departments |
Direct method:
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Statement of cost reallocation |
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Department (Amount in $) |
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Particulars |
Production department A |
Production department B |
Maintenance department (MD) |
Personnel department (PD) |
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Budgeted cost |
$ 80,000 |
$ 120,000 |
$ 180,000 |
$ 30,000 |
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80000 |
120000 |
180000 |
30000 |
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Department MD Reallocation |
135000 |
45000 |
-180000 |
– |
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Department PD Reallocation |
10000 |
20000 |
– |
-30000 |
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225000 |
185000 |
0 |
0 |
It explains that the cost of production department A would be $ 145000 + $ 80,000 = $ 2,25,000 in total. The allocated cost from service department is $ 145000.
Step down method:
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Part B (step-down method) |
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Step 1 |
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Maintenance provided to Personnel |
0.2 |
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Step 2 |
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Personnel provided to Maintenance |
0.1 |
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It explains that the MD offers the highest cost so; the maintenance department cost would be allocated firstly. |
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Statement of cost reallocation |
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Department (Amount in $) |
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Particulars |
Production department A |
Production department B |
Maintenance department (MD) |
Personnel department (PD) |
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Budgeted cost |
$ 80,000 |
$ 120,000 |
$ 180,000 |
$ 30,000 |
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80000 |
120000 |
180000 |
30000 |
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Department MD Reallocation |
$ 108,000 |
$ 36,000 |
-$ 180,000 |
$ 36,000 |
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Department PD Reallocation |
20000 |
10000 |
-$ 66,000 |
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208000 |
166000 |
0 |
0 |
It explains that the cost of production department A’s allocated cost from service department (maintenance department) is $ 1,08,000.
Reciprocal method:
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Algebraic Method |
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MD = 180000+.1PD |
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PD = 30000 + .2 MD |
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MD = 180000 + .1(30000 + .2 MD) |
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MD = 180000 + 3000 + 0.02 MD |
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0.98 MD = 183000 |
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MD = 183000 / .98 |
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MD = $ 186735 |
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PD = 30000 + .2 * 186735 |
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PD = 67374 |
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Statement of cost reallocation |
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Department (Amount in $) |
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Particulars |
Production department A |
Production department B |
Maintenance department (MD) |
Personnel department (PD) |
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Budgeted cost |
$ 80,000 |
$ 120,000 |
$ 180,000 |
$ 30,000 |
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80000 |
120000 |
180000 |
30000 |
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186735 |
67347 |
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Department PD Reallocation |
20204.1 |
40408.2 |
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Department MD Reallocation |
112041 |
37347 |
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212245 |
197755 |
It explains that the cost of production department A’s allocated cost from maintenance department is $ 1,12,041.
Reasons:
The reasons behind preference on budgeted rates are the fact that it is not affected by the department’s inefficiencies. These rates also help the managers to identify the total cost in advance to make more options to allocate the cost (Bonner, 2008). Further, these budget rates also assist the business to evaluate the variance amount after considering the actual and budgeted amount.
Total cost of manufacturing:
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Part A |
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Deluxe |
Standard |
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Sales price per unit |
$ 690.00 |
$ 475.00 |
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Total cost per unit |
$ 260.00 |
$ 250.00 |
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Profit per unit |
$ 430.00 |
$ 225.00 |
Explanation:
In the case, the manufacturing overhead cost has been allocated through considering the direct labour hours sue to the case that the company is using the robotics systems to manufacture the product line of deluxe and due to it, less direct labour hours have been used. It explains that less labour would be utilized for produce each unit.
Activity based costing:
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Cost driver rate for each activity |
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Setups |
$ 5,800.00 |
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Machine related |
$ 73.50 |
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Packing |
$ 20.00 |
Revised manufacturing OH cost:
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Revised manufacturing overhead cost per unit |
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Deluxe |
Standard |
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Setups |
$ 2,320,000.00 |
$ 580,000.00 |
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Machine related |
$ 22,050,000.00 |
$ 22,050,000.00 |
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Packing |
$ 1,000,000.00 |
$ 4,000,000.00 |
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Total cost |
$ 25,370,000.00 |
$ 26,630,000.00 |
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Per unit cost |
$ 507.40 |
$ 66.58 |
Explanation:
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Revised total cost of Deluxe door |
$ 687.40 |
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Revise profit per unit |
$ 2.60 |
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Current estimated profit per unit |
$ 430.00 |
No, the deluxe product line of the business is not profitable as a disproportionate share is required of the overhead activities which are like robotics. So, overhead cost is allocated while using the ABC costing in a product (Schneeweiss, 2012).
References:
Bonner, S. E. (2008). Judgment and decision making in accounting. Prentice Hall.
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
Libby, R. (2017). Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research (pp. 42-54). Routledge.
Nielsen, L. B., Mitchell, F., & Nørreklit, H. (2015, March). Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum, 39 (1), 64-82.
Schneeweiss, C. (2012). Distributed decision making. Springer Science & Business Media.
Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.
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