Financial Accounting and Managerial Accounting

Financial accounting and Managerial accounting are two of the largest branches of

accounting discipline, cost accounting and audits being others. Even though they both have

similar approach and operations they are significantly different from each other. The major

differences exists between them exist in term of compliance and accounting standards.

Managerial accounting focuses planning, monitoring, analyzing and interpreting the financial

data and information by managers to meet the organizational goals (Mihăilă, 2014). On the other

hand, financial accounting includes the planning, summarizing and analyzing the financial

activities to the general public.

In public accounting, financial statements are used to communicate with internal and

external partners, as well as the general public. Whereas, the interchange of financial data within

the internal members of a corporation is the subject of managerial accounting. The purpose of

financial accounting is to keep track of a company's profitability and output. Managerial

accounting investigates the root of an issue and how to solve it. Although public accounting is

required at the conclusion of the fiscal year, managerial accounting can be supplied more

regularly to provide management with timely information.

Hypothetical income statement of Indreni Group for public reporting

Income Statement as at the end of 31st Asadh 2076

Particulars Amount (NPR)

Sales (70000 units × Rs. 90) 6300000
Less: Cost of goods sold
-3500000
(70,000 pieces× Rs.50)
Gross Profit 2800000
Administrative and Operating Expenses -155,000
Selling and distribution expenses -175,000
Earnings Before Interest and Tax (EBIT) 2,470,000
Interest expenses (9.5% per annum) -234650
Earnings Before Tax (EBT) 2,235,350
Tax expenses (13%) 290595.5
Earnings before Interest and Tax (EBIT) 1,944,755

Process Costing of Indreni Group

Income Statement as at the end of 31st Asadh 2076

Particulars Amount
Sales (70000 units × Rs. 90) 6,300,000
Variable Costs  
Cost of goods sold 3,500,000

Selling and Distribution (70000 units x Rs. 1.5) 180,000

Administrative and operating expenses 30,000

Total Variable Cost (3,710,000)

Gross Profit 2,590,000
Fixed Costs  
Rent expenses 70,000
Electricity expenses 10,000
Salary and Wages 45,000
Total Fixed Cost 125,000

Earnings Before Interest and Tax (EBIT) 2,465,000

Interest expenses (9.5%) 234,175

Earnings Before Tax (EBT) 2,230,825
Tax (13%) 290,007.25
Net Income 1,940,817.75
Manufacturing vs selling costs

Manufacturing costs refer to the indirect costs that are spent during the production process. It is

calculated with the help the number of units produced during the signified period. It includes

costs like rent expenses, depreciation on plant and equipment, wages and salaries of factory

workers etc. On the other hand, selling costs refers to the costs that are associated with the sales

and distribution of the finished products. The examples of selling costs are marketing expenses,

salaries and wages of the salesman, logistics and shipping costs, etc.

The total of all expenditures associated with the product's distribution, promotion, and sale is

known as the selling cost. For salary, incentives, and out-of-pocket expenses.

Direct vs. Indirect cost

Direct costs are the costs that are tied up directly to make a commodity. We can easily

trace the direct costs in a production of goods. The examples include the materials used in a

production of a product and also the direct labor. In the production of garments, the cost of fabric

and the accessories used in the products are the direct cost. Indirect costs are the costs we aren’t

able to assign the specified products. These costs are also used in for other purposes in the

business. The examples are depreciation, insurance expenses, salaries and wages. Direct costs are

related to the production of goods but indirect costs are related to the administration. In most

cases, the direct costs are variable and indirect costs are not variable in nature.

Variable Cost and Fixed Cost.

In the production process there are two types of costs incurred, namely, fixed cost and variable

costs. Variable costs are associated with the quantity of the production of goods as per the

capacity and the demand. It varies according to the quantity produced. The examples are the

labor costs, the cost of raw materials, freights. On the contrary, the fixed cost doesn’t change

with the demand or quantity of production (Chen & Koebel, 2017). These costs have to be paid

by the company despite the reduction of production. The examples are rent expenses, mortgage,

utility payments, insurance expenses etc. These costs don’t differ from time to time.

Explain the predetermined variable overhead criterion and include an example.

Predetermined variable overhead

A predefined variable overhead rate is an allotment rate assigned to expense items for a specific

reporting period to reflect the expected manufacturing overhead cost. Because it avoids the

collection of actual production overhead charges as part of the time frame closure operation, this

rate is widely employed to help close the books more rapidly. At the end of each fiscal year, the

difference between actual and expected expenses must be adjusted. For example if the controller

of the Indreni Group wants to establish a predetermined overhead rate that he can use to impose

overhead more quickly in each reporting period, allowing for a faster closing procedure. Based

on the most recent production schedule for the period, he divides the estimated number of labor

hours to be spent in the current month by the average manufacturing overhead cost for the

preceding three months. As a result, he decides to allocate Rs.75,000 as inventory during the

length of the project. After acquiring the real data, they find out that the inventory they should

hold requires Rs. 90,000 so they fall short on the inventory by Rs. 15,000.

References
Mihăilă, M. (2014). Managerial Accounting and Decision Making, in Energy Industry. Procedia

- Social and Behavioral Sciences, 109, 1199–1202.

https://doi.org/10.1016/j.sbspro.2013.12.612

Xi Chen, & Bertrand M. Koebel. (2017). Fixed Cost, Variable Cost, Markups and Returns to
Scale. Annals of Economics and Statistics, 127, 61–94.
https://doi.org/10.15609/annaeconstat2009.127.0061