Difference between Management Accounting and Financial Accounting
Financial accounting can be defined as the system of accounting, which is associated with the preparation of the monetary report for the external business parties such as stakeholders, consumers, dealers, investors etc. It is regarded as the purest type of accounting procedure where appropriate keeping of record and financial reporting is done so that it can deliver pertinent and material information to its users (Drury 2013). Financial accounting is dependent on the numerous assumption, principles and principles such as going concern, materiality, realisation, matching, historical cost etc.
Management accounting is known as the accounting for managers, which aids the administration to devise strategies, forecasting, scheduling and monitoring for normal business operations of the firm. Management accounting undertakes both the “quantitative and qualitative” information for the analysis. The practical areas of financial accounting are not restricted to offering monetary or cost evidence only (Kaplan and Atkinson 2015). It is also engaged in the drawing out of significant material information for both monetary and cost accounting to help the administration in the preparation of planning, setting goals and policymaking.
The difference between the management accounting and financial accounting are as follows;
- Financial accounting is understood as the subdivision of accounting which helps in tracking of all the fiscal evidence for the organisation. Management accounting is regarded as that subdivision of accounting which helps in recording and reporting “financial and non-financial”evidence of an organisation (Weil, Schipper and Francis 2013).
- Both the internal management and external parties use financial accounting whereas only internal manager uses management accounting.
- Financial accounting requires reporting in public while the management accounting is used by the administration and therefore it is not to be disclosed.
- Financial accounting involves reporting of financial information. Management accounting comprises of both the financial and non-financial evidence involving the total number of workers, amount of raw material used and sold.
- Reporting of financial statement requires to be done in an agreed format while for the management accounting there is no such set format of reporting (Deegan 2013).
- Financial accounting emphasis on offering evidences concerning the functions of the organisation to its employers, while management accounting emphases on offering info to the management so that they can evaluate the performance and develop future strategies.
- Financial accounting is generally conducted for the specified period, which is generally for a period of one year. Management accounting is performed according to the requirements of the administration such as quarterly or half-yearly etc.
Break-even analysis refers to the examination of the interrelationships amongst the firm’s sales revenue or turnover, cost and profits since they are related to all the alternate level of output. Break-even analysis is relatively important in defining the sensible applications of cost functions. It is directed in categorising the vigorous association prevailing amid the total cost and amount of sales for the business (Bierer et al. 2015). It helps in knowing the operational functions prevailing in an organisation when a firm makes break-even.
This arises when sales reach a phase equivalent to all expenditure occurred in accomplishing that level of sales. The break-even point is understood as the level of sales where the total revenue is equal to cost and net income is equivalent to zero. This represents a stage where there is neither profit and nor loss.
Importance of breakeven analysis is as follows;
- The breakeven analysis is very important for the executives in forecasting profit, scheduling and in evaluating the outcome of alternatives commercial and managerial decisions.
- The managers, economist, and executives of company and government agencies to discover the break-even point are using breakeven chart.
- The breakeven analysis is important to find the breakeven point since it helps in undertaking the concept of total fixed cost, total variable cost, the total cost and total revenue is represented separately (Weygandt et al.2015).
The breakeven chart is the graphical representation of the cost at numerous level of activity, which is demonstrated in the same chart as the variation of income with the identical variation of activity.
The above stated diagram represents the output on the horizontal axis and the cost along with the revenue on vertical axis. The total revenue curve represents liner and it is presumed that the price is persistent, regardless of the productivity. This kind of supposition can be considered as adequate only when the administration is functioning in the perfectly competitive environment. Linearity of the “total cost curve” is the outcome derived from the supposition of continuous variable cost. It is noteworthy to denote that the total revenue curve is drawn at the straight line from the origin, which represents that each unit of the productivity contributes to the persistent sum of total revenue (Demski 2013). On the other hand, the total cost curve is represented in the straight line arising from the vertical axis due to the fact that the total cost consist of constant or fixed cost in addition with the variable cost which goes up linearly.
Importance of Break-Even Analysis
In the above stated “figure 1.1”, the point at which total revenue equals the total cost is the breakeven level of output. At the time of decision, making process managers usually makes the use of modified breakeven model. The modification follows from the idea that management may not think of profit in the economic sense of total revenues minus the total cost (Whitecotton, Libby and Phillips 2013). However, when the management makes the use of breakeven chart for short run decision making it represents a circumstances where the section of the organisation monetary resources has already been blocked at the time of purchasing fixed capital. Under such circumstances, a fitting measure such as “contribution margin” or “contribution to profit” is used.
There are different types of operational budget, which are as follows;
- Selling and distribution expense budget:Selling and distribution expenses budget are prepared to cater the selling expenses, which is incurred to create and arouse demand, securing orders and executing them. Distribution expense is defined as those expenses, which is related to manufacturing of product in order to make the product make the product available to the customers.
- Administration and expenses budget:This kind of budget is prepared to administer the expenses, which is incurred in the formulation of policy to direct the organisation so that it can control the processes of an organisation. It is not directly related to the manufacturing, selling, distribution and research and development or any other operations. Expenses generally belongs to the dedicated set of rents, rates, taxes of managerial buildings along with the insurance and depreciation of building and equipment arising from the commitment made by the management (Brewer, Garrison and Noreen 2014).
- Production budget:Production budgets are prepared to make an estimation of the numerous products, which the organisation proposes to produce throughout the budgeted phase. The amount of goods manufactured is reliant upon the sales budget. To create the most favourable budget an appropriate equilibrium needs to be set amid the sales, production and levels of stock.
- Direct materials budget: The direct materials budget can be defined as the budget designed for anticipated use of materials in manufacturing and procurement of required amount of direct materials (Warren, Reeve and Duchac 2013). The objective of this budget is to purchase the right amount of materials at right time with planned purchase price.
- Sales budget:This budget helps in demonstrating the projected sales of several products along with their aggregate selling price and total amount of sales realisation. The sales is generally characterised with higher amount of uncertainty given that the preparation of sales budget begins with sales forecast.
- Direct labour budget:The direct labour budget can be defined as the budget, which helps in reflecting planned expenditure for direct labour (Keller 2015). The direct labour budget helps in reflecting the rate per hour and the amount of hours required to meet the requirements of production.
The importance of operational budget for limited company is as follows;
- Administration of current expenses:Fixed overhead cost is the form of staff salaries forming the part of operational budgets. The management can track actively the operating expenses such as the cost incurred on supplies and may discover alternative areas, which could benefit the total budget by easing few financial strains.
- Projecting future expenses:Evaluation of actual past expenses is important in moving forward the budget (Kokubu and Kitada 2015). Perhaps if the management underestimated the last year or quarter operating expenditure, the management can develop new operating budget which additionally brings into line with the definite requirements of the their business. Alternatively, if the administration overestimates the past expenditure it can cut down the line of items in their budgets, which leads to unnecessary cost.
- Creation of reserves:An operating budget should be liberating instead of being restrictive. It may help in the management in reducing the debt where the managers can work towards the objective of constructing financial funds. Savings, investing and preparation for unexpected situation lays down a solid foundation in effective preparation of operating budget.
- Accountability:A company can rein its propensity to spend further than their means if they attentively stick to the operating budget. A well-designed and thoroughly followed operational budget an organisation can create financial responsibility rather than spending haphazardly and lose its sights on their designed goals (Schaltegger and Zvezdov 2015). This kind of budget does not requires to be outlined on paper hence it requires the management accountability in keeping the operating budget in time with the ongoing requirement.
Material variance: Material variance represents the difference amid the original cost for “direct materials” and the anticipated cost of the materials. It is useful in defining the capability of business to incur cost of materials adjacent to the level at which a company had intended to incur them (Keller 2015).
Labour variance: A labour variance incurs at the time when the original expenses related with the activity of the labour varying from the anticipated quantity. The anticipated quantity is characteristically the planned or standard quantity.
Variable overhead budget: The variable overhead budget represents the distinction amongst the original and budgeted hours worked which is then made applicable on the standard “variable overhead rate per hour”.
Sales variance: Sales variance represents the distinction amid the actual amount of sales and the budgeted amount of sales. It helps in measuring the performance of sales functions in order to analyze the business results with the objective to understand the market conditions (Demski 2013).
Analytical discussion of the importance of variance analysis as a cost controlling and decision making tool:
Cost of production is effected by the internal factors over which the organisation can exercise an enormous amount of control. One of the vital work for organisation is to assist the associates at numerous managerial levels to understand that they form the part of the administration team. Variance analysis keeps the administration informed of the efficiency of production effort along with the supervisory personnel. Materials and labour variance can be calculated for each material item, employment operation and for every employee (De Klerk 2016). Factory overhead variance is important to the business since it helps in reflecting the disappointment or accomplishment concerning the control of “variable and fixed overhead” expenses in each department. Labour variance is important to management since it helps in determining any kind of managerial lapse such as inappropriate assessment of internal rate, “provision for labour turnover and idle time”.
Material variance helps the managers in undertaking purchasing decisions by negotiating with the lower price per unit. This enables the management in finding new suppliers having larger supply materials. Thus, lower their inventory the suppliers can be willing to sell at lower cost and can help in creating a relatively favourable material variance. As opined by Garcia (2015) other costs involving overheads are generally controlled with the help of overhead budget. It is important in creating a distinction, which arises out of the different timing and control techniques for several numerous costs. “Direct material and direct labour” is usually considered as costly and it can effortlessly recognisable for controlling cost.
Reference list:
Bierer, A., Götze, U., Meynerts, L. and Sygulla, R., 2015. Integrating life cycle costing and life cycle assessment using extended material flow cost accounting. Journal of Cleaner Production, 108, pp.1289-1301.
Brewer, P., Garrison, R. and Noreen, E., 2014. Course ACCT 21011 Principles of Managerial Accounting (3). Cell, 314, pp.698-6582.
Campbell, D., Datar, S.M., Kulp, S.L. and Narayanan, V.G., 2014. Cost Accounting: A Managerial Emphasis. Journal of Management Accounting Research, 27, pp.39-65.
De Klerk, E.S., 2016. Throughput accounting versus standard cost accounting: a comparative study.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Demski, J., 2013. Managerial uses of accounting information. Springer Science & Business Media.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Garcia, M., 2015. Cost Accounting Practices in the Service Industry. Demand Media.[online]. Dostupno na: https://yourbusiness. azcentral. com/cost-accounting-practicesservice-industry-26920. html.[17. srpanj 2015.].
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Keller, W.D., 2015. Cost and Managerial Accounting II Essentials (Vol. 2). Research & Education Assoc..
Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management perspectives. Journal of Cleaner Production, 108, pp.1279-1288.
Schaltegger, S. and Zvezdov, D., 2015. Expanding material flow cost accounting. Framework, review and potentials. Journal of Cleaner Production, 108, pp.1333-1341.
Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
Whitecotton, S., Libby, R. and Phillips, F., 2013. Managerial accounting. McGraw-Hill Higher Education.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
