Analyzing The Differences And Importance Of Management Accounting, Break-even Analysis, Operational Budgets, And Variance Analysis

Differences between Management Accounting and Financial Accounting

Management accounting is one of the most important parts of accounting which are basics for every organization. Management accounting helps in taking decisions regarding the functions of an organization by the manager. It also provides sufficient aid to the firm regarding to use management against organization’s cost.

Management Accounting:

Management accounting helps in making financial reports along with accounts the helps the organization to provide the mangers with genuine and trustful information that helps them to make better decisions. Management accounting comes under accounting and can be described as a part of it which enhances the decision making skills of the manager (Davies and Crawford, 2011).

Financial Accounting:

Financial accounting is also a part of accounting. It focuses on preparing reports for the organization. This report contains for the information regarding the organization for the stockholders of that company. Financial accounting plays a crucial role as it helps in making accounting more significant (Kaplan and Atkinson, 2015).this helps a company’s manager to make more effective decisions. Elements like income, liabilities, expenditure, assets are considered in it.

Difference between management accounting and financial accounting:

Both Management and financial accounting are elements of accounting. Both help an organization in taking better decisions. The difference between these elements is stated below:

(horngren et al, 2005, Weston and weaver, 2011 and Hansen, Mowen, Guan, 2007)

Classifying the cost:

Classification of the cost is a crucial process of every manufacturing company. It helps the company to make better decisions regarding the pricing of the product, profit and other cost of the company. In classification of cost, many factors of the cost such as direct cost, indirect cost, fixed cost, variable cost etc are analyzed and the cost is allocated to each head accordingly.

Direct cost:

Direct cost depict about the cost which directly impact over the production of a company such as direct material cost, direct labor cost etc. such costs are directly take place and directly affect the production of a company. Such costs are treated as the prime cost in the cost sheet of the company, there are few points which depict that why should direct cost must be classified properly:

• It helps the company to organize the entire expenses of the company.
• It is required to make better decisions about the pricing and cost of the company.
• It is required to identify the cost which could not be eliminated.
• It is required for the company to analyze the government funds.
• It is required to maintain the transparency.

Indirect Cost:

Indirect cost depict about the cost which does not directly impact over the production of a company such as overheads, electricity cost, power consumption etc. such costs are indirectly take place and indirectly affect the production of a company. Such costs are counted after the prime cost of the cost sheet, there are few points which depict that why should indirect cost must be classified properly:

• It helps the company to maintain the accountability.
• It is required to make the determination about the administration cost.
• It is required to identify the cost which could be eliminated.
• It is required for the company to analyze the government funds.
• It is required to maintain the transparency.

Importance of Break-even Analysis

Cost card:

This cost card depict that the total produced units are 100 and the total sales revenue of the company is £500000 whereas the total cost of goods sold of the company is £435000. It depict that company has set a mark up of £ 650 on each unit. Thus through this cost card it could be said that it becomes important for a manufacturing company to analyze the direct and indirect cost of a company. 

Variance Analysis:

In budgeting, a variance is the disparity between a standard, planned cost and the actual cost. Variances could be evaluated for both revenues and cost. The variance concept is essentially connected with actual and planned results and it make an impact over the total performance of the company.

Material Variance:

Material variance of a company depict about the total difference of material consumption in a production house. Material variance technique is helpful as it becomes essential for every company to manage the difference as it is helpful for the company to make a control over the total material cost of the company.  Manager might determine such efforts and might make manage over the cost. Material variance also aids the superintendent to make choice about the buy level which is obligated to run the manufacturing smoothly. Administrators could take a gape over the material variances and could make an order of the material accordingly.  

Labour Variance:

Labour variance of a company depict about the total difference of labour hour consumption in a production house. Labour variance technique is helpful as it becomes essential for every company to manage the difference as it is helpful for the company to make a control over the total labour cost of the company (Weston and Brigham, 1975).  Manager might determine such efforts and might make manage over the cost. Labour variance also aids the superintendent to make choice about the hire or fire the workers which is obligated to run the manufacturing smoothly. Administrators could take a gape over the labour variances and could make a decision about the labours accordingly.  

Variable OH variance:

Variable OH variance of a company depict about the total difference of variable OH in a production house. Variable OH variance technique is helpful as it becomes essential for every company to manage the difference as it is helpful for the company to make a control over the total variable cost of the company (Weston and Brigham, 1975).  Manager might determine such efforts and might make manage over the cost. Variable OH variance also aids the superintendent to make choice about the variable factors which is obligated to run the manufacturing smoothly. Administrators could take a gape over the variable OH variances and could make the policies and strategy accordingly.  

Operational Budgets for a Limited Company

Sales Variance:

Sales variance of a company depict about the total difference of sales level in a production house. Sales variance technique is helpful as it becomes essential for every company to manage the difference and it is also helpful for the company to make a control over the total sales variances of the company (Radebaugh, Gray and Black, 2006).  Manager might determine such efforts and might make manage over the cost. Sales level variance also aids the superintendent to make choice about the external and internal factors which is obligated to run the manufacturing smoothly. Administrators could take a gape over the sales level variances and could make a strategy accordingly.  

Budget:

Operational budget is an account that is made by every company to make new policies and take decisions. This budget is helpful to make an analysis over the future income and expenses. Operational budgets are prepared by the companies to investigate over entire revenue and expenditure in near future (Zimmerman and Yahya-Zadeh, 2011). Budgets are of many types and every budget is helpful for the company to take decisions about the growth of the company.

Sales budget:

Sales budget of a company depict about the total sales unit which must be produced by the company to meet all the desires of the customer. It is a common budget and mostly all other operational budgets are dependent upon it. In this budget, entire external and internal analysis is done over the market and company to understand the customer’s requirement and consumption of the product (Hoque, 2002).

Production budget:

Production budget of a company depict about the total production unit which must be produced by the company to meet all the desires of the customer. It is a common budget and mostly all other operational budgets are dependent upon it. In this budget, sales budget, inventory etc are analyzed to make an effectual production budget (Simmonds, 2000). 

Direct Material Budget:

Direct material budget of a company depict about the total unit which would be required by the company to produce the desired units. It is a very common budget and helpful for many budgets to prepares and depict a better result. In this budget, production budget, inventory etc are analyzed to make an effectual production budget (Ward, 2012).

Direct Labour Budget:

Direct labour budget of a company depict about the total labour hour which would be required by the company to produce the desired units. It is a very common budget and helpful for many budgets to prepares and depict a better result. In this budget, production budget, inventory etc are analyzed to make an effectual production budget (code, 1990).

Importance of Variance Analysis

Expenses budget:

General & administrative budget of a company depict about the total indirect expenses of a company which would be required by the company to produce the desired units. It is a very common budget and helpful for many budgets to prepares and depict a better result. In this budget, entire indirect cost such as technical cost, office cost etc. are analyzed to make an effectual General & administrative budget (Ward, 2012). 

Overhead Budget:

Overhead budget of a company depict about the total fixed and variable expenses of a company which would be required by the company to produce the desired units. It is a very common budget and helpful for many budgets to prepares and depict a better result. In this budget, entire fixed and variable cost such material cost, rent, salaries etc. are analyzed to make an effectual overhead budget (Ward, 2012).

Conclusion:

This report helps in understanding the importance of managerial accounting and financial accounting for any organization in decision making. Break Even Analysis helps an organization to determine the required number of sales to avoid any loss and assist the company to define policies to increase their profit. Operating budget also plays an important role for any organization as it helps in determination of future aspects and helps the organization in strategy making with reference to it on the other hand variances helps an organization by helping them in  making decisions regarding cost control

References:

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Cadez, S. and Guilding, C., 2008. An exploratory investigation of an integrated contingency model of strategic management accounting. Accounting, organizations and society, 33(7), pp.836-863.

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

Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control. Cengage Learning.

Hoque, Z., 2002. Strategic management accounting. Spiro Press.

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Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. and Schatzberg, J., 2005. Introduction to management accounting. Upper Saddle River, New Jersey: Prentice Hall.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.

Radebaugh, L.H., Gray, S.J. and Black, E.L., 2006. International accounting and multinational enterprises. New York, NY: John Wiley & Sons.

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Ward, K., 2012. Strategic management accounting. Routledge.

Weaver, S.C., Weston, J.F. and Weaver, S., 2001. Finance and accounting for nonfinancial managers. New York: McGraw-Hill.

Weston, J.F. and Brigham, E.F., 1975. Managerial finance. Hinsdale, IL: Dryden Press.

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

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