BY: Mohammad Amer Qais Abro Submission Date: 09/01/12


people in the business world have been held more accountable for their financial practices. the cost accounting function can have a pervasive influence in the modern manufacturing companies. These are just a few of the many possible positions where an understanding of accounting is necessary. measuring and sharing economic information to allow for educated decisions and choices by users of the information. companies require some basic knowledge of accounting to avoid any future misstatements unintentionally occurring. and executives need to judge the success of their business using accounting statements from the past and present. The definition of accounting according to Colin Drury is the process of classifying. auditors have to study financial statements to evaluate the accuracy and integrity of the business. Unfortunately. Thus. Since the Enron and WorldCom crisis when independent auditor Arthur Anderson failed to report illegal accounting practices. This report describes the main categories of activities in which this function can become involved. Another reason for the importance in accounting is because in recent years. the SEC has been monitoring public corporations more closely. 2 . (ii) Internal parties within the organization (management accounting). it is not always properly implemented because management often is not completely aware of all the uses to which the cost accounting function can be put. Accounting information is significant secretaries must use accounting skills to manage the company check-book and orders.CHAPTER 1: IMPORTANCE OF FINANCIAL CONTROL When properly implemented. Users of accounting information can be divided into two categories (i) External parties outside the organization (financial accounting).

Reports are considered to be "future looking" and have forecasting value to those within the company. Financial Accounting. This contrast in basic orientation results in a number of major differences between financial and managerial accounting. for internal use the manager wants information that is relevant even if it is not completely objective or verifiable. However. Managerial accounting is used primarily by those within a company or organization. managerial accounting has a strong future orientation. Feasibility studies and Merger and consolidation reports. financial accounting primarily provides summaries of past financial transactions. Financial accounting is required by law while management accounting is not. we mean appropriate for the problem at hand. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Financial accounting covers the entire organisation while management accounting may be concerned with particular products or cost centres. these differences are discussed in the following paragraphs. Budget analysis and comparative analysis. Reports of this nature can be accessed by internal and external users such as the shareholders. the banks and the creditors. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company. it is difficult to verify estimated sales volumes for a proposed new store at a new location. on the other hand. such as a fiscal year or period. These summaries may be useful in planning. Emphasis on the Future: Since planning is such an important part of the manager's job. solvency and stability. By relevant. weekly or monthly. Reports can be generated for any period of time such as daily. Financial accounting is used primarily by those outside of a company or organization. liquidity. For example. concentrates on the production of financial reports. Such reports may include: Sales Forecasting reports. The managerial accounting 3 . Financial reports are usually created for a set period of time. but only to a point. In contrast. including the basic reporting requirements of profitability. Relevance of Data: Financial accounting data are expected to be objective and verifiable. such as shareholders. but this is exactly the type of information that is most useful to managers in their decision making. Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization.CHAPTER 2: DIFFERENCE BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTING There are differences between management accounting and financial accounting include such as management accounting provides information to people within an organisation while financial accounting is mainly for those outside it. Specific standards and formats may be required for statutory accounts such as International Financial Reporting Standards.

managerial 4 . Generally Accepted Accounting Principles (GAAP): Financial accounting statements prepared for external users must be prepared in accordance with generally accepted accounting principles (GAAP). employees. "Is the information useful?" rather than. or any other categorizations of the company's activities that management finds useful. government agencies. Segments of an Organization: Financial accounting is primarily concerned with reporting for the company as a whole. this means.information system should be flexible enough to provide whatever data are relevant for a particular decision. but they do not necessarily lead to the type of reports that would be most useful in internal decision making. In fact. By contrast. no one needs more than three significant digits. and other stakeholders. is not mandatory. If a decision must be made. A decision involving tens of millions of dollars does not have to be based on estimates that are precise down to the penny. banks. These segments may be product lines. managerial accounting places considerable weight on non-monitory data. Financial accounting does require breakdowns of revenues and cost by major segments in external reports. sales territories divisions. In managerial accounting segment reporting is the primary emphasis. but this is secondary emphasis. departments. than nothing on an income statement needs to be more accurate than the nearest million dollars. Managerial accounting. of a company. Managerial Accounting Not Mandatory: Financial accounting is mandatory. Less Emphasis on Precision: Timeliness is often more important than precision to managers. "as a general rule. the important question is always. A company is completely free to do as much or as little as it wishes. it must be done. for example. "Is the information required?" Advantages of Financial Accounting Systems Financial accounting is the field of accountancy concerned with the preparation of financial statements for decision makers such as stockholders. on the other hand. a manager would rather have a good estimate now than wait a week for a more precise answer. one authoritative source recommends that. owners. that if a company's sales are in the hundreds of millions of dollars. Since managerial accounting is completely optional. or even to the dollar. External users must have some assurance that the reports have been prepared in accordance with some common set of ground rules. managerial accounting forces much more on the parts. for example. In direct contrast to financial accountancy. In addition. information about customer satisfaction is tremendous importance even though it would be difficult to express such data in monitory form. These common ground rules enhance comparability and help reduce fraud and misrepresentations. Various outside parties such as Securities and Exchange Commission (SEC) and the tax authorities require periodic financial statements. that is. suppliers. or segments.

point to a number of factors which they feel are advantageous. Management accountants will comb through this information and create a master budget for the entire company. Those in favour of financial accounting for a business or company. Business owners often use budgets so they have a financial road map for future business expenditures.accountancy is for internal decision making and does not have to follow any rules enforced by standard setting authorities. allowing achievements and losses to be measured against rivals and competitors and produce a clear picture of where a firm stands in its particular field.these pertain to likely remediation and liability issues. Firstly. rather like having a dossier of the business‘s transactions you can see how well or how poorly the company is doing. it allows people to measure the profitability and value of a business. there are guidelines on the reporting of environmental liabilities . Advantages of Managerial/Cost Accounting Systems Business owners often use management accounting to track a record and report financial information for managerial review. These advantages usually coincide with the ability for companies to improve operations and overall profitability. If overall product quality would not suffer by using a cheaper raw material. Business owners often use management accounting information to review the cost of economic resources and other business operations. Reduce Expenses Management accounting can help companies lower their operational expenses. who wish to see a full and detailed account before becoming involved. The main purpose of budgets is to save the company money through careful analysis of necessary and unnecessary cash expenditures. However. Larger business organizations may use several smaller budgets for divisions or departments. Disadvantages of Financial Accounting Systems Corporate financial statements also exclude estimates of social costs beyond those directly impacting the bottom line. Financial accounting and the information it generates can act like a barometer for an organization. large or small. All activities carried out by financial accountancy bodies are regulated by Generally Accepted Accounting Principles guidelines (GAAP). Management accounting does not usually follow any national accounting standards. 5 . Management accounting has several advantages. business owners can make this change to reduce production costs. this might be for prospective buyers or investors. These individual budgets usually roll up into the company‘s overall master budget. rather than long-term social issues. Business owners can also create a competitive advantage by developing cost allocation processes in their management accounting function. Business owners can design management accounting systems according to their company business operations or management need for business information. It also helps when attempting to compile a company report for those outside the company. Improve Cash Flow Budgets are a major part of management accounting. Many budgets are based on a company‘s historical financial information. These liabilities are often reported in the statement footnotes since their magnitude is unknown.

Management accountants can prepare financial forecasts relating to consumer demand. Rather than making business decisions based solely on qualitative analysis. are often finely tracked and allocated to particular product or process lines. Business owners will often use this information to ensure they can produce enough goods or services to meet consumer demand at current prices. business owners or managers can use management accounting information as a decision-making tool. Companies also pay close attention to the amount of competition in the economic marketplace. but many costs . Placing a cost in an overhead account allows it to be shared across activities.Business Decisions Management accounting often improves the business owner decision-making process. and safety costs.such as administration costs and environment. Disadvantages of Managerial/Cost Accounting Systems Most corporate managerial accounting systems do not track costs closely. Increase Financial Returns Business owners can also use management accounting to increase their company financial returns. potential sales or the effects of consumer price changes in the economic marketplace. Management accounting usually provides a quantitative analysis for various decision opportunities. or in the worst case. such as labour or raw materials. it is likely to be ignored. 6 . may increase as a result of efforts to reduce other costs. Business owners can review each opportunity through the prism of quantitative analysis to assure they have a clear understanding relating to business decisions. If no one is responsible for a cost. are considered to be indirect or overhead costs and are allocated broadly across product and process lines. Easily identifiable costs. health. Competition can reduce the company financial returns from business operations. but generally removes cost responsibility from any one particular product line or manager.

CHAPTER 3: DIFFERENT COSTS FOR DIFFERENT PURPOSES Accounting information also needs to provide relevant information to help managers make better decisions such as Profitability analysis. Make or buy (Outsourcing) and Product mix and discontinuation 7 . Product pricing.

direct costing. inventory turnover. which in turn impacts the cost of goods sold. the other tasks of the cost accounting information may very well be subordinated to providing various types of information for these external reports. Alternatively. a report can be based on throughput costs if the issue is how to push the correct product mix through a bottleneck operation in order to derive the highest possible profit. as different reporting items become less or more important to the senior management team. machine utilization. though most of these are handled by the financial accounting staff. the cost accounting information is free to use any costing paradigm that will result in the most informative reports for the management team—job costing. Several tasks are involved here. activity-based costing. For example. for the recipient (the plant manager) needs to know about the operation of each department. and so on. The exact format used varies not only by company but also over time within each company. A key piece of information provided by the cost accounting information is inventory valuation. throughput costing. The accounting method can therefore be precisely tailored to the use to which the report will be put. which may not be necessary or may even be counterproductive for internal reporting purposes. These reports must include a much larger quantity of information. INTERNAL REPORTING The advantage of having cost accounting information create reports strictly for internal consumption is that they are not restricted to generally accepted accounting principles (GAAP) when preparing these reports. Accordingly. such as deciding on the type of cost layering technique. such as compiling profitability levels for various product lines. There is certainly no reason to include deeply detailed reports in the reporting package that goes to senior managers—they do not have the time to wade through such a morass of information. or profit levels by division. Business unit-level reports. Further. Some examples of different reporting structures include: Corporate-level reports. as well as a host of operational issues such as the cost of quality. Other related work may also be needed. and cash 8 . direct costing can be used for an internal report that focuses specifically on activities in the extreme short term. full-absorption costing can be used for reports that focus on long-term decisions. and compiling the resulting data into the formats required for external reporting. process costing. bottom-line profits and return on assets for each production facility or store. direct cost costing.CHAPTER 4: COST ACCOUNTING INFORMATION EXTERNAL REPORTING The key task for the cost accounting information is contributing information to a company‘s external financial reports. profitability. where there is no impact associated with overhead costs. GAAP requires the use of full-absorption costing in the creation of external reports. ensuring that inventory quantities and costs are accurate. In many cases where the main accounting function is perceived to be financial reporting (such as in a publicly held company). These reports may include only trend lines of information about a few critical success factors that senior managers are most interested in influencing. The cost accounting information may also become involved in the compilation or updating of a few footnotes to the financial statements. and perhaps forecasts at the product line level.

For example.g. this report is concerned less with financial issues than with process efficiency. setup times. Because they lack the amount of structure imposed on external reports. Function-level reports. to the supervisors of individual machines. Another example is a review of waste in a production process—the report may cover such information as times elapsed when moving products between manufacturing stations. and receiving accuracy). 9 . with some requiring more financial data (e. they are much more interesting to prepare. Once the decision is made and the installation completed. giving the cost accounting information free rein to express creativity in designing the perfect format that will result in easy readability and effective management decision making. An enormous range of topics can be covered by internal reports. these reports can cover virtually any topic and can include any type of information financial. and the amount of space occupied by idle work in process. This format tends to have few operational statistics besides percentages of completion and lists of to-do items that must be finished in order to ensure conclusion of the project. there is no longer a need for the report. for the warehouse manager who is interested in inventory turnover. Decision-specific reports. Project-specific reports. This report usually compares incurred costs against budgeted costs expected to have been incurred at various stages of the project. as well as the one that includes the greatest mix of financial and operational information. the reporting structure can be converted to a profit center format. or a mix. cycle times. but it is still the cost accounting information‘s job to complete it. Clearly. These reports can be issued to individual departments or at lower levels. Such reports are custom-designed for each recipient.g. for example. If a project is already bringing in revenues.. operational. A project report is slanted more toward just those costs being incurred for a specific purpose and so tends to be heavy on direct costs and light on most other allocations.flow projections. kiting percentages. a report may be needed that describes the particular quality costs associated with the selection of three prospective production processes the management team is considering installing.. This tends to be the most voluminous of all reporting packages. Many times the cost accounting information is called on to report on a specific issue that occurs only once. after which the report is discarded. for the sales manager who wants to know about customer bad debts or orders booked) and others including almost entirely operational information (e.

based on forecasts and established goals. 10 . Standard costs: Costs.CHAPTER 5: COST CLASSIFICATIONS Direct versus indirect costs Direct costs are easy to match with a process or product. some of the costs increase accordingly (variable costs). and standard costs The actual costs a business incurs may differ (though hopefully not significantly) from its budgeted and standard costs. these costs could cause us to make the wrong decision. based on actual transactions and operations for the period just ended. if brought into the analysis. Relevant versus Irrelevant costs Relevant costs: Costs that should be considered and included in analysis when deciding on a future course of action. Relevant costs are future costs that would incur. Budgeted costs: Future costs. but some costs remain the same (fixed costs). for transactions and operations expected to take place over the coming period. or going back to earlier periods. depending on which course of action will be taken Irrelevant costs: Costs that we should disregard when deciding on a future course of action. primarily in the area of manufacturing. whereas indirect costs are more distant and have to be allocated to a process or product Fixed versus variable costs If business sells more units of a certain item. that are carefully engineered based on detailed analysis of operations and forecast costs for each component or step in an operation. or bring upon itself. Actual costs: Historical costs. Actual. An irrelevant cost is a vestige of the past that money is gone. budgeted.

In the case of manufactured goods. Committed costs are costs that will occur in the future. Activity-Based Costing Method Activity-Based Costing (ABC) is a method of allocating costs to products and services. neither is relevant with respect to any decision. their inability to give accurate product costs in multiproduct companies. using the usual rules of accrual accounting that we learn in financial accounting. The weaknesses of traditional costing systems are: their reliance on arbitrary rather than cause-and-effect allocation of overheads. or the single allocation base used is acceptable for allocating all of the overhead costs. services provided by the various departments are highly differentiated. because neither can be changed. but that cannot be changed. they are not expensive to operate. and manufacturing overhead. They are still being used after many decades. These costs are expensed on the income statement in the period in which they are incurred.Product Costs. their failure to analyse nonmanufacturing costs. The cost of employing labour can be directly fixed as "per man per hour" or "per man per day per hour per minute per annum". Similarly the raw material like cotton or threads or fabric can be another cost object. so essentially each part of the manufacturing process is assigned an equal estimated cost. a single plant-wide overhead rate is not acceptable if a company has a large amount of overhead to allocate. It was developed as an approach to address problems associated with traditional cost management systems. Sunk cost are costs that were incurred in the past. include all the costs that are involved in acquiring or making product. It is generally used as a tool for planning and control. Period Costs are all the costs that are not included in product costs. like labour or material. As a practical matter. Sometimes. The strengths of traditional costing systems are: simplicity – the calculation of overhead rates is relatively straightforward. Plant wide overhead rate is a single overhead rate that a company uses to allocate all of its manufacturing overhead costs to products or cost objects. Traditional Costing Method A traditional costing system does not divide cost by function or allocation or by each part of the manufacturing process. the services provided by the various company departments are relatively similar (a rarity). because they cannot be changed. that tend to have the inability to 11 . Sunk costs are costs that were incurred in the past. sunk costs and committed costs are equivalent with respect to their decision-relevance. so the labour is a cost object as one can directly associate cost with it. they are widely understood in the business. Using a plant wide overhead rate is acceptable in circumstances like the total amount of overhead to be allocated is so small that using multiple allocation rates to achieve a higher level of allocation accuracy is unnecessary. Conversely. Sunk costs are irrelevant for decisions. accountants use the term ―sunk costs‖ to encompass committed costs as well. direct labor. for financial accounting purposes. Manufacturing companies requires some amount of predetermined labour and predetermined raw material for any amount of cloth being manufactured. or it is apparent that a number of different allocation bases should be used Cost objects are tangible input for a product manufactured/Service provided. these costs consist of direct materials. It takes a total cost and divides it by each part of the process.

of course. The higher exposure is for companies with multiple products or services. ABC method has some limitations & disadvantages. gathering and maintaining accurate activity information has always been the Achilles heel of the ABC method. It has lost ground to the economic value-added (EVA) analysis and the balance scorecard methodology as a strategic tool. or provide useful information for operating decisions. is of minimal value unless there is an associated effort to reduce cost and improve performance. With these defiencies managers can be exposed to making decisions based on inaccurate data.accurately determine actual production and service costs. Finally. On the other hand. 12 . This. For instance. an ABC information system method might be very expensive to implement and requires special expertise. The advantage of ABC method has evolved from a product cost tool to a performance enhancement tool that helps to compute a more accurate cost.

the significant information needed for making business decision is the financial information. expenditure and cash flow. The statement summarized the revenues and expenses and reveals the net income or earnings of the firm during the period of time covered. Generally. 13 . The income statement is an aggregated record of all sales and all corresponding expenses over a given past period – typically a year. Therefore.usually the fiscal year. This information helped the management to manage problems in supervising and controlling the areas in costing. Example: Firms that aimed to be successful in its business activities and expected to be in long term competitiveness are firms that are having the ability to produce relevant information of its internal and external sources.Financial Accounting Systems Income Statement: The Income Statement presents the results of the operating activities of a company for a specific period of time . one of the most important tools to assist companies in processing and producing good financial information is by having suitable income statement.

Balance Sheet The balance sheet explains how the business is currently using its resources and how those uses have been financed. It ‗balances‘ the assets employed (all long-term resources in the business) against the capital employed (the long-term finance in the business). Example: 14 .

The cash flow statement doesn't show whether the business will be profitable. without adjusting for accrued revenues and expenses.Cash Flow Statement: Cash flow statements and projections express a business's results or plans in terms of cash in and out of the business. Example: 15 . but it does show the cash position of the business at any given point in time by measuring revenue against outlays.

The only common denominator among the various cost accounting tasks is that they focus on providing information for management decision making.htm 16 .php?option=com_content&view=article&id=66&Itemid=58&lang =en Peter C. Eric Managerial Accounting 12th C. Typically. McGraw Hill http://www. whose job is much more closely defined by external accounting reporting rules. which is what makes the job such an interesting one. and make recommendations that will be acted on by management to make improvements. for the cost accounting information‘s recommendations ultimately have a direct impact on company operations and overall profitability. Bibliography Drury. The cost accounting information can reliably expect to be assigned to tasks in every nook and cranny of a corporation. Brewer. Garrison. the task is to conduct a short analysis of a specialized topic. (2011) Management Accounting for Business 4th Edition Cengage Learning EMEA Ray H.accountingformanagement.maleafd. http://www. The responsibility here is great.htm http://www.accountingformanagement.CHAPTER 6: SUMMARY & CONCLUSION Despite the large number of categories of work discussed here. draw conclusions. it does not begin to reflect the full range of tasks that the cost accounting information may be involved. far more so than that of a financial accounting information.

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer: Get 4 months of Scribd and The New York Times for just $1.87 per week!

Master Your Semester with a Special Offer from Scribd & The New York Times