You are on page 1of 4


Question 1
There are two accounting system; Management accounting and financial

accounting. Management accounting is focus on providing information in the company

so that management level can operate the company more effectively (Awerkamp).
Financial accounting is focus on the financial statement which is distributed to
stakeholders (Awerkamp). Generally, management accounting is aim more at internal
users of accounting information and financial accounting is more towards on external
users of accounting information. There are five comparisons in two types of accounting
system, which are users, formats, planning and control, segment reporting, and focus.
First comparison is the users of accounting information. Financial accounting is
primarily used by external users such as investors, bank, and auditors whereas
management accounting is exclusively used by internal users like management level.
External users normally use the financial statement to evaluate how well the company
performance whereas internal users use it to evaluate how well the department
contribute to profit.
Next comparison is the formats. In financial accounting, the format must comply
with certain accounting framework that lay out by local accounting standard committee.
For example, in Malaysia, format of financial statement must comply with the accounting
framework that lay out by Malaysia Accounting Standard Board. In management
accounting, there is no specific format for management accounting system.
Third comparison is planning and control. Financial accounting majority is used
for make investment decision making and credit rating, whereas management
accounting is used to record, plan, and control activities to assist management level
decision making.
Fourth comparison is segment reporting. In financial accounting, it shows result
of an entire organization; and management accounting is show result in more detail
level such as report department, product line, and geographic region.
Last comparison is focus. Financial accounting is concerned on financial result
that a business achieved, which is focus on history. In contrast to financial accounting,
management accounting is concern on budget and forecast, which is focus on present
and future.


Question 2
Question 2A)
Cost allocation is the process by which whole cost items are charged direct to a

cost unit or cost centre. In short, allocate the cost under a section. For example, direct
material and direct labour will be charged into the production cost, and office rent will be
charged into the administration cost.
Cost apportionment is distribution of overheads to more than one cost centre. For
example, use the electric usage of each department to allocate each department electric
bill. By this way, the company can allocate the cost more efficient and management
level will know which department is using more electric and what should they do to the
electric bill in the particular department.
Cost absorption is the process whereby overhead costs allocated and
apportioned to production cost centres are added to unit, job or batch costs. For
example, produce product A and B need 2kg and 4kg of material; total overhead is
RM100,000; total direct material is 10,000kg; how much the cost to produce product A
and B. Therefore, the cost of product A is RM20 and product B is RM40.

Question 2B)
Traditional product costing system is the allocation of manufacturing overhead to
product on the basis of a volume metric such as direct labour hour or production
machine hour (Awerkamp, Accounting Coach).
Activity based costing (ABC) assigns manufacturing overhead costs to products
in a more logical manner than the traditional approach of simply allocating costs on the
basis of machine hours (Awerkamp, Accounting Coach). This system will assign cost to
the actual activities that cause the overhead.
ABC system has develop to overcome the shortcomings of traditional product
costing system, which the main shortcomings is traditional product costing system cant
allocate overheads cost precisely.
The limitation of traditional product costing system is lack of flexibility in way to
allocate overheads cost on finished goods. In this system, it often allocates costs based
on single-volume measures such as direct-labour hours, direct-labour costs, or machine
hours. Although it provide convenient to comply with financial reporting requirement, but
by using single-volume measures as an overall cost driver, it seldom meet the activity
that are real cause of the overhead, whereas ABC system is using unit-level activities,
batch-level activities and facility-level costs which more real cause of the overhead to
allocate the cost.
Furthermore, the limitation of the system is out-dated. Nowadays, the way we do
business have changed, many manufacturing company are using computers and
machines for their production. This system often use direct labour hour to calculate
costs and it not appropriately assigned due to today business mainly are using
automated equipment to replace manpower. Therefore, this system cant allocate the
cost overheads precisely.



Awerkamp, H. (n.d.). Accounting Coach. Retrieved JULY 10, 2014, from Financial
accounting and Management accounting:
Awerkamp, H. (n.d.). Accounting Coach. Retrieved JULY 10, 2014, from Activity Based
Awerkamp, H. (n.d.). Accounting Coach. Retrieved JULY 10, 2014, from Ttraditional
Bragg, S. (2013, JULY 1). Accounting Tools. Retrieved JULY 10, 2014, from Cost
Diffen, (n.d.). Diffen. Retrieved JULY 10, 2014, from Financial Accounting vs.
Management Accounting:
Steven Bragg (2012, March 22). Accounting Tools. Retrieved JULY 10, 2014, from What
is the difference between financial and managerial accounting?:
Micheal R.K & Cecily A. R. (2008). Cost Accounting: Foundations and Evolutions, 7th
Edition. Publisher: Cengage Learning
Jim Riley (2012, September 23). Tutor2. Retrieved JULY 10, 2014, from Accounting financial & management accounting compared:
Elliott Taylor. Small Business Retrieved JULY 10, 2014, from Activity-Based Costing vs.
Product Costing:
Rose Johnson. Small Business Retrieved JULY 10, 2014, from Traditional Costing Vs.
Activity-Based Costing: