ACCOUNTING FOR MANAGEMENT (MBA Notes)

 UNIT 1 FINANCIAL ACCOUNTING  

The history of accounting is as old as civilisation. It is the process of identifying, measuring, recording and communicating economic information, capable of being expressed  in terms of money. The utility of accounting information lies in its ability to reduce uncertainty. The information has to be relevant, verifiable quantifiable and free from bias.

Financial accounting is mostly concerned to record the business transactions in books of accounts so that final accounts can be prepared. Financial accounting provides information to external financial statement users. Financial accounting is what outside investors or creditors typically see. Financial accounting presents a company’s financial position and performance to external sources through financial statements which include information about its revenues, expenses assets and liabilities.

************************************************************************************ 

COST ACCOUNTING 

Scholar’s believe the cost accounting was first developed during the industrial revolution. When the emerging economics of industrial supply and demand forced manufacturers to start tracking  their fixed and variable expenses in order to optimize their production processes. Cost accounting allowed rail,  road and steel companies to control costs and become more efficient.

Cost accounting is a form of management accounting that aims to capture a company’s total cost of production by assessing the variable cost of each step of production as well as fixed costs, such as lease expenses.

Cost accounting is used internally by management in order to make fully informed business decisions. Cost accounting considers all input cost associated with production including variable and fixed costs. Types of coast accounting include standard costing, activity based costing ,lean costing and marginal costing.

Types of Cost Accounting 

Standard Costing 

Standard costing assigns "standard" costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. The standard costs are based on an efficient use of labor and materials to produce the good or service under standard operating conditions, and they are essentially the budgeted amount. Even though standard costs are assigned to the goods, the company still has to pay actual costs. Assessing the difference between the standard (efficient) cost and actual cost incurred is called variance analysis.

If the  variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines the actual costs are lower than expected, the variance is favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost of the input, such as the cost of labor and materials. This is considered to be a rate variance. Additionally, there is the efficiency or quantity of the input used. This is considered to be a volume variance. If, for example, XYZ company expected to produce 400 widgets in a period but ended up producing 500 widgets, the cost of materials would be higher due to the total quantity produced.

Activity-Based Cost  identifies overhead costs from each department and assigns them to specific cost objects, such as goods or services. The ABC system of cost accounting is based on activities, which is any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. These activities are also considered to be cost drivers, and they are the measures used as the basis for allocating overhead costs.

 

Traditionally, overhead costs are assigned based on one generic measure, such as machine hours. Under ABC, an activity analysis is performed where appropriate measures are identified as the cost drivers. As a result, ABC tends to be much more accurate and helpful when it comes to managers reviewing the cost and profitability of their company's specific services or products.

For example, cost accountants using ABC might pass out a survey to production line employees who will then account for the amount of time they spend on different tasks. The cost of these specific activities are only assigned to the goods or services that used the activity. This gives management a better idea of where exactly time and money is being spent.

To illustrate this, assume a company produces both trinkets and widgets. The trinkets are very labor intensive and require quite a bit of hands-on effort from the production staff. The production of widgets is automated, and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good. It would not make sense to use machine hours to allocate overhead to both items, because the trinkets hardly used any machine hours. Under ABC, the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use.

Lean Accounting 

The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which has the stated intention of minimizing waste while optimizing productivity. For example, if an accounting department is able to cut down on wasted time, employees can focus that saved time more productively on value-added tasks..

Marginal Costing is also called cost- volume profit analysis

Marginal costing  is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit. This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.

The break- even point  which is the production level where total revenue for a product equals total expense, is calculated as the total fixed costs of a company divided by its contribution margin. The contribution margin calculated as the sales revenue minus variable costs, can also be calculated on a per unit basis in order to determine the extent to which a specific product contributes to the overall profit of the com

 

What Is Managerial Accounting? 

Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization's goals. It varies from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions.

Managerial accounting encompasses many facets of accounting aimed at improving the quality of information delivered to management about business operation metrics. Managerial accountants use information relating to the cost and sales revenue of goods and services generated by the company.

Since managerial accounting is not for external users, it can be modified to meet the needs of its intended users. This may vary considerably by company or even by department  within a company. For example, managers in the production department may want to see their financial information displayed as a percentage of units produced in the period. The HR department manager may be interested in seeing a graph of salaries by employee over a period of time. Managerial accounting is able to meet the needs of both departments by offering information in whatever format is most beneficial to that specific need.

KEY FACT ABOUT MANAGEMENT ACCOUNTING

·       Managerial accounting involves the presentation of financial information for internal purposes to be used by management in making key business decisions.

·       Techniques used by managerial accountants are not dictated by accounting standards, unlike financial accounting.

·       The presentation of managerial accounting data can be modified to meet the specific needs of its end-user.

·       Managerial accounting encompasses many facets of accounting, including product costing, budgeting, forecasting, and various financial analysis.

·       Cost accounting is also a part of management accounting.