- May 8, 2020
THE NAME OF THE SCHOOL (UNIVERSITY) MANAGEMENT ACCOUNTING REPORT
Management accounting report 10
THENAME OF THE SCHOOL (UNIVERSITY) MANAGEMENT ACCOUNTING REPORT
TheName of the Class
TheName of the School (University)
TheCity and State where it is located
Thereport will take a management perspective with the forsat partfocusing on the diffrence between management and financialaccounting.The second part will focus on the need for costclassification based on functions,behavior,relevance andfunctions.The following part will look at operationalbudgets and analytically discuss the benefits of preparing suchbudgets.Lastly the report will analysethe use of standard costing as a decision making tool.
Managementaccounting differsfrom financial accounting from variousperspectives. The different points of view from how the two branchesof accounting differ and compare will form the first part of thisreport. The need to categorize costs regarding types of costs, theway the costs behave under different circumstances, and the functionsand relevance of various costs will also be analyzed in the report.The different types of operational budgets and the accompanyingbenefits will also be part of the report. The report will alsoexamine how standard costing can be used as a decision-making tool.All the subtopics will be approached from a management perspective toimprove efficiency and decision making.
Differencebetween management and financial accounting
Managementaccounting differs from financial accounting regarding applicability,need, objectives, segment reporting, focus, and users. Managementaccounting provides accounting information whose potential user isthe management. On the other hand, financial accounting informationis mostly consumed by users like, government, shareholders, customersand others who are somehow external to the organization .Theobjective of preparing management accounting report emanates as aresult of better decision making and provision of necessaryinformation to enable the managers determine profit levels of all thedepartments and cost centers(Drury,2013p. 12).Financial accounting information is only required to abide by thecompany laws and at the same time enlighten the shareholders,customers and competitors about the profit levels that theorganization achieved in a particular financial year.
Managementaccounting reports are not mandatory as compared to financial reportwhich must be prepared every year as they are one of legalrequirement. As per the company law, the organization must make itsfinancial accounting report which must be prepared as per theaccounting and reporting standards and presented in a particularformat for easy comparison with other firms. The report must bepresented to shareholders and other external users like creditors toenable them to make informed decisions. However, managementaccounting is not a legal requirement organizations have the optionof not preparing management accounting reports. The format formanagement accounting report is also informal. Additionally, thecompany management uses the accounting system which it will bestunderstand and easily determine the profit margins and otherimportant features that touch on the management of the organization.The reporting frequency of financial accounting is annual,semiannually or quarterly, the reporting frequency of managementaccounting reports is not defined as it is on when required basis.
Managementaccounting also differs from financial accounting as per the types ofreports presented. While financial accounting focuses on financialstatements like statement of financial affairs, profit and lossaccounts, management accounting places a lot of its focus on costbehavior, break-even analysis and budgets. The segment reporting forfinancial reporting covers the whole organization. However, there arefigures which might be required to be broken out to cater formaterially insignificant business units. Management accounting, onthe other hand, gives information that pertains to individual unitsor departments instead of focusing on the whole organization. Theinformation presented in a financial accounting report is most of thetimes monetary and also verifiable while that prepared in amanagement accounting report is mostly Monetary as well as companygoal was driven.
Needfor classifying costs by types, behavior, functions, and relevance.
Itis important to classify costs regarding types, behavior, functionsand relevance to efficiently determine the cost of various productsand profits realized by cost centers. The initiative also helps inidentifying the profitable products, areas as well asactivity/capacity levels. In the same way, planning and controllingbecome easy as the management comes up with informed plans on how tocarry out the operations of the firm. Therefore costs ought to beclassified regarding functions, types, behaviors and relevance.
Costclassification regarding type falls into various categories likevariable cost, direct, indirect, fixed cost, and operating(Kaplan andAtkinson,2015 p. 33).The classification is important as it enablesthe management to understand the various types of costs that the firmis incurring in a deeper way and therefore help in analyzing thecosts.
Fixedcosts refer to those costs whose value does not change despite thelevel of the firm`s operations. Such kind of costs remains the samethroughout a particular period. Direct costs include salary topermanent employees, factory rent among others. Fixed costs are evenincurred when the firm is at zero production. Variable costs arethose type of costs whose magnitude directly varies with theproduction level of the firm. Under variable costs, the higher theproduction/operational level of a firm the higher the variable costsincurred. At zero level of production, there are no variable costsincurred.it is important for the management to differentiate betweenvariable costs and fixed costs so as to come up with ways of doingaway with unnecessary costs and also to increase the firm`sefficiency.
Directcosts are those costs which can be directly linked to the productionof a certain product while indirect costs cannot be associated withthe production of any product. The management needs to differentiatebetween the two costs to effectively determine the profitability ofproducts / services that the various cost centers are dealing with.Operational costs refer to costs which have a direct relation to theoperations of a firm.It is important to classify these costs so thatthe management can clearly understand the costs incurred as a resultof ongoing operations as such kind of costs include businessoverheads(Ellisonetal 2015p. 40).
Costsclassified regarding behaviors show how the total production isaffected by fluctuations in the level of the firm`s operations or thelevel of production. The level of activity refers to the magnitude ofactivities or even the number of operations carried out in the firm.The basic principle when categorizing costs regarding how theirbehavior and production level is that costs rise when the level ofactivity rises. However, there are those costs which remain the samedespite the level of activity. It is, therefore, prudent for the firmto classify these costs as per the attributed behavior so as toeffectively determine the overall profitability of all products andcost centers. The classification results into various costs like fixed costs, variable costs and semi-fixed costs. Costs classifiedregarding functionality falls into production costs andadministration cost.Other costs include: finance cost, selling anddistribution cost. The classification is important as it enables themanagement to determine the value of cost involved in various stagesof production or operation like production, selling, and distributionamong others(Rebane,et al, 2016p. 3).Relevance costs refer to how important costs are. The classificationresults into various types of costs like opportunity costs sunkcosts, differential costs and out of pocket costs. The classificationhelps in determining those costs which are influential whendetermining the profit margin and therefore being given highpriority.
Typesof operational budgets
Operationalbudgets refer to budgets prepared to indicate the expenses and costsincurred in different types of operations that the firm carries out.Such kind of budgets include: cash budget ,sales budget, directmaterial budget, production budget, direct labor budget, , fixedoverhead budget and variable overhead budget. Each of the budgetsaforementioned is important to the management as they help indecision making.
Thecash budget is an estimate of all the cash inflows and out flows inan organization over a given period. Benefits of preparing a cashbudget include the ability to identify whether a firm has enough cashor liquidity to go on with operations. Cash budget also helps incomparing the receivables with spending and therefore identifyingthose operations which were not profitable(Turner,2016p.31).The sales budget is an estimate of the sales that the companyforecasts to make in a certain period and an accompanying estimate ofthe earnings or profit expected from the forecasted sales. A companyis required to prepare a sales budget in order to figure out howresources will be distributed for the forecasted sales to beachieved. The sales budget also indicates how much profit is expectedin a financial year and therefore helping the managers to effectivelyset sales targets and also inform the management whether their goalsare achievable.
Aproduction budget helps in calculating the number of units ofproducts that ought to be manufactured and sold to achieve a givenprofit margin.The production budget directly relates to the saleforecast as well as the planned amount of inventory to keep as safetystock and in a case of unexpected fluctuation in demand. It is,therefore, important to prepare production budget to enable themanagement figure out how much stock is needed and how to meet theproduction level set within a certain period. The direct materialbudget shows both beginning and ending stock value. The value ofdirect material required for production and the value of the materialthat should be purchased and the accompanying cost in a given periodof time. The direct material budget also forms part of the masterbudget. The direct material budget must be prepared to identify thecost of materials that will be used in production process.
Thedirect labor budget is prepared to show the value of direct laborcost and the labor hours that are needed in production. The budget,therefore, assist the management to effectively plan for the firm`slabor requirements and the corresponding costs. The variableoverhead budget shows all the manufacturing costs except the costs ofdirect materials as well as direct labor and therefore helpingmanagement determine the cost of goods sold. The fixed overheadbudget is prepared to show all the fixed cost incurred in aproduction process and therefore helping in identification andevaluation of fixed variable costs in a manufacturing process.
Standardcosting is useful in helping the management to improve costs. Costimprovement is normally conducted through controlling all the costthat are incurred during operations .The control also helps indetermining the profit margins and consequently firm profitability.Stock valuation is also made simpler as both new and purchased stockis easily assigned to various cost centers and periods. The ultimateresult of this process is easy determination of product prices as theprofit margin is easily identified and therefore leading to betterdecions (Kaplanand Anderson 2013p. 101).
Managementand financial accouting are two distinct areas of accounting andshould always be treated as such from any managementperpsecitive.Costs should also be clasifed into various categoriesbased on relevance,behavior and functionality for informed decisionmaking and computation of profit margins.Additionally operationalbudget are an important item in Planning and controlling of costs forbetter profits forecasting and evaluation of firms goals.Finallystandard costing helps in cost control and improvement leading tobeter decision making.Standard costing is therefore an importantdecision making tool which should be emabraced by all organisations.
Themanagement must make use of both financial and management accountingreports for imporved decision making.Both reports must also beprepared as per the generally accepted principles and formats.Costsshould be classified by types, behavior, functions, and relevance toenable management easily calculate the profit margin assist indecision making.Operational budgets are vital for planning andforecasting.Standard costing should always be applied to control andimprove costing method because it is an important decision makingtool.
DRURY,C.M., 2013. Managementand cost accounting.Springer.P .12
Ellison,S.F., Snyder, C.M. and Zhang, H., 2015. Costsof Managerial Attention and Activity as a Source of Sticky Prices:Structural Estimates from an Online Market.Mimeo, Massachusetts Institute of Technology.P. 40
Kaplan,R. and Anderson, S.R., 2013. Time-drivenactivity-based costing: a simpler and more powerful path to higherprofits.Harvard business press.P .101
Kaplan,R.S. and Atkinson, A.A., 2015. Advancedmanagement accounting.PHI Learning.P33
Turner,J.A., 2016. Net Operating Working Capital, Capital Budgeting, AndCash Budgets: A Teaching Example. AmericanJournal of Business Education (Online), 9(1),p.31.
Rebane,M., Parts, V. and Värnik, R., 2016, April. CALCULATION OF PRODUCTCOST IN DAIRY FARMING: EXAMPLES FROM ESTONIA. In EconomicScience for Rural Development Conference Proceedings (No.42).P.3