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How does management accounting differ from financial accounting?

Management accounting measures analyzes and reports financial and nonfinancial information that helps managers
make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally
accepted accounting principles (GAAP).

Financial accounting focuses on reporting to external parties such as investors, government agencies, and banks. It
measures and records business transactions and provides financial statements that are based on generally accepted
accounting principles (GAAP).

When should a company prepare budget? What are the advantages of preparing
budgets?
By creating a budget, you’ll be able to hold the company accountable for its expenditures, reduce costs, and prepare for
a worst case scenario. It serves as a measurement tool that can visually illustrate if you have enough cash to operate or
to grow.

1. Gives you control over your money


2. A budget is a way of being intentional about the way you spend and save your money. ... Keeps you focused on
your money goals
3. You avoid spending unnecessarily on items and services that do not contribute to attaining your financial goals.
4.

How do you distinguish job costing from process costing?


Job-costing systems assign costs to distinct units of a product or service. Process-costing systems assign costs to masses
of identical or similar units and compute unit costs on an average basis. These two costing systems represent opposite
ends of a continuum. The costing systems of many companies combine some elements of both job costing and process
costing.

How can ABC system be used to manage better?


Activity-based management (ABM) is a management method of decision making that uses ABC information to satisfy
customers and improve profits. ABC systems are used for such management decisions as pricing, product-mix, cost
reduction, process improvement, product and process redesign, and planning and managing activities.

What are the advantages of Job costing?


1. The costs may be ascertained at any stage of completion of a job. This gives scope for control of costs by taking
suitable steps.
2. The profit earned from each job is known separately in Job costing.
3. On completion of a job, each element of cost, selling price and profit can be compared with the estimates for
the purpose of cost control and reduction so that the profit on each job is maximized in job costing.
4. Management can estimate the cost of job on the basis of past records in job costing.
5. The actual costs of previous job can be compared with present job executed.
Long Question
The Chief executive officer of Button Corporation attended a conference in which one of the sessions was
devoted to variable costing. The CEO was impressed by the presentation and has asked that the following data
of Button Corporation be used to prepare comparative statements using variable costing and the company’s
absorption costing. The data follow:
Direct Materials---------------------------------------------------Rs.90, 000
Direct labor-------------------------------------------------------- 120,000
Variable factory overhead-------------------------------------------60,000
Fixed factory overhead----------------------------------------------150,000
Fixed marketing and administrative expense---------------------180,000
The factory produced 80,000 units during the period, and 70,000 units were sold for Rs.700, 000

Required:

a) Prepare an income statement using variable costing.


b) Prepare an income statement using absorption costing.
Solution:

Number of Units 70000 70000


Absorption Costing Variable Costing
D. Material 90000 90000
D. Labor 120000 120000
Variable Factory 60000 60000
overhead
Fixed Factory overhead 150000
Total cost 420,000 270,000
Unit cost = total 5.25 3.375
cost/total unit

Income statement under Variable Costing


Sale 700,000
(-) CGS (70000 * 3.375) (236,250)
C.M 463,750
(-) Fixed Factory overhead (150,000)
Net income 313,750

Income statement under Absorption Costing


Sale 700,000
(-) CGS ( 70000 * 5.25) (367,500)
Gross Profit 332,500
Long Question
Khan enterprises manufacture tires for the formula I motor racing circuit. For august 2012, it budged to manufacture
and sell 3,000 tires at a variable cost of Rs. 74 per tire and total fixed costs of Rs.54000. The budgeted selling price
was Rs.110 per tire. Actual results in august 2012 were 2800 tires manufactured and sold at a selling price of Rs. 112
per tire. The actual total variable costs were Rs. 229600 and the actual total fixed costs were Rs. 50,000.

Required:

Prepare a performance report that uses flexible budget and a static budget.