Managerial & Financial accounting

Advance e Cost And Managements M.com (F13)

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Financial accounting Financial accounting (or financial accountancy) is the field of accounting concerned with the

summary, analysis and reporting of financial transactions pertaining to a business. This involves

the preparation of financial statements available for public consumption.

Cost accounting The recording of all the costs incurred in a business in a way that can be used to improve its

management.

Managerial accounting The process of identifying, measuring, analyzing, interpreting, and communicating information

for the pursuit of an organization's goals.

This is also known as "cost accounting."

Accounting has been called the language of business and is used in many different situations.

Cost accounting is used to streamline manufacturing operations. Managerial accounting is used

to compile data necessary for sound management decisions. Financial accounting is used to

report the financial result of a company's operations. Public companies are required to report

their results to the public, while private companies report to their owners. In either case,

accounting creates financial statements for analysis.

Financial accounting

Users of the Financial Statements The users of financial information are essentially divided into two groups:

(1) Internal Users

(2) External Users.

Internal Users:

(a) Owner or owners:

The owner or owner’s invests capital in the business with a view to earning profit they always

keep their waterfowl eyes on earning of capital invested.

(b) Managers:

The managers use various information of financial statements for policy formulation, planning,

co-coordinating and communication.

(c) Employees:

The employees for the sake of ensuring their job securities keep constant watch on financial

statement and nature of financial changes. They also keep observing the profit earning capacity

of the business.


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External Users:

The external users of accounting information are many in number. They are stated below:

(a) Investors:

The investors take decision after careful study before investment the investors are to depend on

necessary accounting information to know where the investment is profitable or where it is not

and to take decision in the regard.

(b) Loan givers and creditors:

The Capital supplies by the owners of the business concerned are not sufficient in many cases for

running the business successfully. In that case the business concern is to depend upon loan

ginners and creditors, Bank, industrial bank and insurance companies are included in loan giving

organizations.

(c) Tax authority:

Actual information is needed to know whether fixation of tax has been proper or not. Tax infixed

depending upon profit of the organization and VAT or current tax is determined on the basis of

trading.

(d) Regulatory agency:

Regulatory agencies like register of joint stock Company, stock exchange authority asks for

necessary information from the companies concerned to know if the joint stock company will run

as per specific lows.

(e) Consumers:

With the help of proper management depending on accurate accounting system production cost

and transport cost may be minimized and at the same time the qualitative standard of

commodities can be improved. For this reason consumers remain interested to know whether in a

business concern accounting system prevails or not.

(f) Researchers and economist:

Researchers and economist want to know accounting information for finding out or innovating

any system relating to a particular business concern and for economic plan.

(g) Unions:

Labor unions use financial information to judge whether employee wage rates and benefit

packages are fair.

(h) Brokers and Analysts:

Brokers and analysts are often potential investors that use financial information about companies

to chart performance trends and growth rates. These external users create reports that influence

current investor’s opinions and actions.

(i) Press:

Finally, the last main external user is the press. Although the press doesn't use financial

information for its decision bases, it does report on the financial information of companies.


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Uses of cost accounting 1. Helps in Ascertainment of Cost

Cost Accounting helps in the ascertainment of cost of each product, process, job, contract,

activity etc. by using different methods of costing such as Job Costing and Process Costing.

2. Helps in Control of Cost

It helps in the control of material costs, labor costs and overheads by using different techniques

of control such as Standard Costing and Budgetary Control.

3. Helps in Decision making

It helps the management in making various decisions such as –

(a) Whether to make or buy a component

(b) Whether to retain or replace an existing machine

(c) Whether to process further or not

(d) Whether to shut down or continue operations

(e) Whether to accept orders below cost or not

(f) Whether to expand or not

(g) How much reduction in the selling price should be made in case of depression?

4. Helps in fixing Selling Prices

It helps the management in fixing selling prices of products or services by providing detailed

cost information.

5. Helps in Inventory Control

It helps in inventory by using various techniques such as ABC analysis, Economic Order

Quantity, Stock levels, Perpetual Inventory system and Continuous Stock Taking, Inventory

Turnover Ratio etc.

6. Helps in Cost reduction:

It helps in the introduction of cost reduction programmed and finding out new and improved

method to reduce costs.

7. Helps in measurements of Efficiency:

It helps in measurements of efficiency of operations through establishment of standards and

variance analysis.

8. Helps in preparation of Budgets:

It helps in the preparation of various budgets such as Sales Budget, Production Budget, Purchase

Budget, Man-Power Budget, Overheads budget.

9. Helps in identifying Unprofitable Activities:

It helps in identifying unprofitable activities so that the necessary correction action may be taken.


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10. Helps in identifying Material Losses:

It helps in identifying material losses such as wastage, scrap, spoilage and defective through

report on material losses so that the necessary corrective action may be taken.

11. Helps in identifying Idle Time and Labor Turnover:

It helps in identifying idle time and labor turnover through the report on idle time and labor

turnover so that the necessary corrective action may be taken.

12. Helps in identifying Idle Capacity:

It helps in identifying idle capacity so that the necessary corrective action may be taken.

13. Helps in improving Productivity:

It helps in improving productivity of materials and labor.

14. Helps in Cost Comparison:

It helps in Cost Comparisons such as –

(a) Comparison with Standard Figures:

Comparison of actual figures with standard of budgeted figures for the same period and the same

firm;

(b) Intra-firm Comparison:

Comparison of actual figures of one period with those of another period for the same firm;

(c) Inter-firm Comparison:

Comparison of actual figures of one firm with those of another standard firm belonging to the

same industry; and

(d) Pattern Comparison:

Comparison of actual figures of one firm with those of industry to which the firm belongs.

15. Helps in checking the accuracy of financial accounts:

It helps in checking the accuracy of financial accounts with the help of reconciliation statement

prepared to reconcile the profit as per cost accounts with the profit as per financial accounts.

Users of Managerial Accounting

Sales Managers Sales managers work with managerial accountants to determine the impact of various pricing

decisions, to create a sales budget and to evaluate unique business opportunities. Sales managers

negotiate with customers regarding sales volumes and pricing options.

Production Managers

Production managers use labor reports, material reports and variance reports created by

managerial accountants. Production managers oversee the labor hours, including overtime hours,

spent with each production run.


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Senior Management

Senior management works with managerial accountants to learn the financial implications of

various actions being considered and to receive ad hoc information. Senior management spends

time considering the direction of the company.

Employees

Employees work with managerial accountants to maintain their own responsibilities. For

example, an employee running a machine might need to know the production levels for each of

his shifts to ensure he meets a quota. The managerial accountant can provide production quantity

information for the employee.

Comparison chart

Financial Accounting

Management Accounting

External vs.

Internal

A financial accounting system produces

information that is used by parties

external to the organization, such as

shareholders, bank and creditors.

A management accounting system

produces information that is used

within an organization, by managers

and employees.

Segment

reporting

Pertains to the entire organization or

materially significant business units.

May pertain to smaller business units

or individual departments, in addition

to the entire organization.

Focus Financial accounting focuses on history. Management accounting focuses on

future & present.

Format

Financial accounts are supposed to be in

accordance with a specific format, so that

financial accounts of different

organizations can be easily compared.

(Formal recordkeeping)

No specific format is designed for

management accounting systems.

(Formal and informal recordkeeping)

Planning and

control

Financial accounting helps in making

investment decisions, and in credit rating.

Management accounting helps

management to record, plan and

control activities to aid decision-

making process.

Information Quantitative and monetary Quantitative and qualitative; Monetary

and non-monetary


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Financial Accounting

Management Accounting

Users

Financial accounting reports are primarily

used by external users, such as

shareholders, bank and creditors.

Management accounting reports are

exclusively used by internal user’s viz.

managers and employees.

Reporting

frequency and

duration

Well-defined - annually, semi-annually,

quarterly. (Verifiable)

As needed - daily, weekly, monthly.

Optional

Preparing financial accounting reports are

mandatory especially for limited

companies.

There are no legal requirements to

prepare reports on management

accounting.

Objectives

The main objectives of financial

accounting are :I) to disclose the end

results of the business, and ii) to depict

the financial condition of the business on

a particular date.

The main objectives of Management

Accounting are to help management

by providing information that used by

management to plan, evaluate, and

control.

Legal/rules

Drafted according to GAAP - General

Accepted Accounting Procedure.

Drafted according to management

suitability.

Accounting

process

Follows a full process of recording,

classifying, and summarizing for the

purpose of analysis and interpretation of

the financial information.

Cost accounts are not preserved under

Management Accounting. The

necessary data from financial

statements and cost ledgers are

analyzed.

Strategy & Management Accounting

Strategic decision Strategic decision making, or strategic planning, describes the process of creating a company's

mission and objectives and deciding upon the courses of action a company should pursue to

achieve those goals.

The strategic decision process begins with the introduction of a simple four-phase decision

making model.

http://www.diffen.com/difference/GAAP_vs_IFRS

http://www.diffen.com/difference/GAAP_vs_IFRS


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The elements of this model are:

Decision Framing

Information and Intelligence Gathering

Coming to Conclusions

Learning from Experience

There are two types of strategic approach:

Emergent Strategy

Deliberate Strategy

Deliberate strategy

It is process driven. Traditional calls for "strategic planning" indicate a desire for an analytic and

somewhat linear approach to strategy.

Emergent strategy

On the other hand, is characterized by recursive learning loops, as an organization sets about on a

course and then senses and reacts to opportunities that may not have been recognized at the

onset.

Management Accounting Management accounting helps answer important questions such as:

Who are our most important customers, and how do we deliver value to them?

What substitute products exist in the marketplace, and how do they differ from our own?

What is our critical capability?

Will we have enough cash to support our strategy or will we need to seek additional sources?

Value chain analysis (VCA)

It is a process where a firm identifies its primary and support activities that add value to its final

product and then analyze these activities to reduce costs or increase differentiation.”

“Value chain represents the internal activities a firm engages in when transforming inputs into

outputs.

1) Primary Activities

Those that are directly concerned with creating and delivering a product (e.g. component

assembly);

2) Support Activities

This whilst they are not directly involved in production, may increase effectiveness or efficiency

(e.g. human resource management). It is rare for a business to undertake all primary and support

activities.


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Primary Activities

Primary value chain activities include:

Primary Activity Description

Inbound logistics All those activities concerned with receiving and storing externally sourced

materials

Operations The manufacture of products and services - the way in which

resource inputs (e.g. materials) are converted to outputs (e.g. products)

Outbound

logistics

All those activities associated with getting finished goods and services to buyers

Marketing and

sales

Essentially an information activity - informing buyers and consumers about

products and services (benefits, use, price etc.)

Service All those activities associated with maintaining product performance after the

product has been sold

Support Activities

Support activities include:

Secondary

Activity

Description

Procurement This concerns how resources are acquired for a business (e.g. sourcing and

negotiating with materials suppliers)

Human Resource

Management

Those activities concerned with recruiting, developing, motivating and

rewarding the workforce of a business

Technology

Development

Activities concerned with managing information processing and the

development and protection of "knowledge" in a business

Infrastructure Concerned with a wide range of support systems and functions such as finance,

planning, quality control and general senior management


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Supply chain analysis Supply chain analysis consists in a quantitative analysis of inputs and outputs between firms,

prices and value added along a supply chain through agent accounts. These inputs and outputs

can be expressed in physical flows of material and services needed to manufacture a final

product as well as in their monetary equivalents.

Key success factors The combination of important facts that is required in order to accomplish one or more desirable

business goals.

Factors:

Product Development

Whether you sell a tangible product or a service, if you do not keep up with the changes in your

marketplace as dictated by your customers, you cannot survive.


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Cash Management

In any industry, with any company, one of the main keys to success is managing your cash flow

properly. Maintain open lines of communication to potential investors and lenders at all times.

The ability to manage your business so you have cash on hand can also help you get financing.

When lenders see that you are able to balance your books and maintain a profit, they are more

likely to approve your financing. Cash on hand is also important for those times when you

cannot get approved for financing but need operating capital right away. Learn to manage your

cash to help your company survive and prosper.

People

Those who make up the organization.

Purpose

A reason for organizing and working together

Processes

Activities which the people undertake to fulfill their purpose

Physical Resources

A place to work, the right equipment, money to pay the bills and the people who work there.

Customers

People outside the organization who are willing to pay money in return for the products and

services the organization provides; for government organizations taxpayers are the customers;

many nonprofits depend on contributions from donors who believe in the value of what the

organization is doing.

Managing and developing people

People today want some direction and structure, but they also want freedom and encouragement

to develop their skills and knowledge.

Strategic focus

In today’s rapidly changing world, it’s not just enough to have a purpose for existing. Leaders

have to focus the organization’s resources on the greatest opportunities, which shift with each

new day.

Operations, or what people do all day - What the people in your organization do day in and day

out to create value for customers, to earn or justify income, strongly determines whether you

succeed or fail.

Quality

Maintain the quality of product. Also increase it.

Time

Do the work on time.

Innovation

Bring innovation in the product and services.


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Decision-making Decision-making is an essential skill for operational team leaders. Applying a systematic method

to solve problems is critical to team performance and the safety of operations. Team members

share the responsibility for solving problems by contributing timely and valuable information to

the team leader.

Decide model

Structured Decision Making

D Detect change

E Estimate significance of change

I Identify options

C Choose outcome

D Do best option

E Evaluate results

Steps of Decision Making Process

Following are the important steps of the decision making process. Each step may be supported

by different tools and techniques.

Step 1: Identification of the purpose of the decision

In this step, the problem is thoroughly analyzed. There are a couple of questions one should ask

when it comes to identifying the purpose of the decision.

What exactly is the problem?

Why the problem should be solved?

Who are the affected parties of the problem?

Does the problem have a deadline or a specific time-line?

Step 2: Information gathering.

In the process of solving the problem, you will have to gather as much as information related to

the factors and stakeholders involved in the problem. For the process of information gathering,

tools such as 'Check Sheets' can be effectively used.

Step 3: Principles for judging the alternatives

In this step, the baseline criteria for judging the alternatives should be set up. When it comes to

defining the criteria, organizational goals as well as the corporate culture should be taken into

consideration.

Step 4: Brainstorm and analyze the different choices

For this step, brainstorming to list down all the ideas is the best option. Before the idea

generation step, it is vital to understand the causes of the problem and prioritization of causes.


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Step 5: Evaluation of alternatives

Use your judgment principles and decision-making criteria to evaluate each alternative. In this

step, experience and effectiveness of the judgment principles come into play. You need to

compare each alternative for their positives and negatives.

Step 6: Select the best alternative

Once you go through from Step 1 to Step 5, this step is easy. In addition, the selection of the best

alternative is an informed decision since you have already followed a methodology to derive and

select the best alternative.

Step 7: Execute the decision

Convert your decision into a plan or a sequence of activities. Execute your plan by yourself or

with the help of subordinates.

Step 8: Evaluate the results

Evaluate the outcome of your decision. See whether there is anything you should learn and then

correct in future decision making. This is one of the best practices that will improve your

decision-making skills.

Planning & Controlling related with decision making

Planning

How do organizations formalize their strategic plans?

Control

How do organizations assess the implementation of their plans?


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Management Accounting Guidelines

Cost – benefit approach is commonly used: benefits generally must exceed costs as a basic

decision rule

Behavioral Considerations – people should be involved in decisions

Different definitions of cost may be used for different applications .

Job order costing

Job order costing or job costing is a system for assigning manufacturing costs to an individual

product or batches of products. Generally, the job order costing system is used only when the

products manufactured are sufficiently different from each other. (When products are identical or

nearly identical, the process costing system will likely be used.)

Job costing involves the following accounting activities:

Materials. It accumulates the cost of components and then assigns these costs to a product or

project once the components are used.

Labor. Employees charge their time to specific jobs, which are then assigned to the jobs based

on the labor cost of the employees.

Overhead. It accumulates overhead costs in cost pools, and then allocates these costs to jobs.

Cost object.

In a job costing system, the cost object is a job. Sometimes a job consists of an individual

product, and sometimes it consists of a batch of products.

Cost pools

A cost pool is a group of individual costs that are accumulated for a particular purpose. In the

second stage, costs are allocated from the cost pool to individual jobs.

Allocation base

It is chosen to assign overhead costs to cost objects. If some portion of an overhead cost pool

varies with a cost driver, it can be used as the allocation base. For example, the cost of some

employee benefits varies with labor hours and labor costs.

Product Cost= Direct Material + Direct Labor + Factory Overhead

Cost-driver

It is a base used for allocation of costs to the cost pools (Ex. Number of machine hours, number of

labor, area occupied, number of engineering hours etc.).

http://www.accountingcoach.com/blog/what-are-manufacturing-costs

http://www.accountingcoach.com/blog/what-is-process-costing


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For Job costing four steps as follows.

1. Identify the relevant cost object.

In a job costing system, the cost object is a job. Sometimes a job consists of an individual

product, and sometimes it consists of a batch of products.

2. Identify one or more overhead cost pools and allocation bases.

Overhead costs are accumulated in one or more cost pools. Some organizations use a single

company-wide or plant wide cost pool for all fixed and variable overhead costs. Other

organizations use separate cost pools for fixed and variable overhead costs.

3. For each overhead cost pool, calculate an overhead allocation rate.

The allocation rate is the dollar amount per unit of allocation base used to allocate overhead to

each cost object. (In a job costing system, each job is a cost object.) If we know the total amount

of overhead cost and the total quantity of the allocation base, the actual overhead allocation

Rate is calculated as follows:

Actual allocation rate = Actual overhead cost / Actual quantity of allocation base

Alternatively, overhead may be allocated using an estimated allocation rate. To compute an

estimated rate for the next period, we estimate total overhead costs and the total quantity of the

allocation base, and then calculate the rate as follows:

Estimated allocation rate = Estimated overhead cost / Estimated quantity of allocation base

4. For each overhead cost pool, allocate costs to the cost object.

We allocate overhead costs by multiplying the overhead allocation rate times the quantity of the

allocation base used by each job.

Actual Costing

It uses the actual direct cost rates times the actual quantities of the direct-cost inputs in order to

trace direct costs to a cost object.

The following seven-step approach is used to assign actual costs to individual jobs:

1. Identify the chosen cost object(s).

2. Identify the direct costs of the job.

3. Select the cost -allocation base(s).

4. Identify the indirect costs associated with each cost-allocation base

5. Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the

job.

6. Compute the indirect costs allocated to the job.

7. Compute the cost of the job by adding all direct and indirect costs assigned to it.

Example Swing Squeak (Sw&Sq) Limited manufactures various sporting goods.

Sw&Sq is planning to sell a batch of 25 special machines (Job 100) to Sweat & Groan Gym for

$104,800.


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The 7 steps:

Step 1: The cost object is Job 100.

Step 2: Identify the direct costs of Job 100.

• Direct material = $45,000

• Direct manufacturing labor = $14,000

Step 3: Select the cost-allocation base.

• S&S chose machines hours as the only allocation base for linking all indirect

Manufacturing costs to jobs.

Job 100 used 500 machine hours.

2,480 machine hours were used by all jobs.

Step 4: Identify the indirect costs.

Actual manufacturing overhead costs were $65,100.

Step 5: Compute the rate per unit.

Actual indirect cost rate is $65,100 ÷ 2,480 = $26.25 per machine hour.

Step 6: Compute the indirect costs allocated to the job.

$26.25 per machine hour × 500 hours = $13,125

Step 7: Compute the cost of Job

Direct materials $45,000

Direct labor 14,000

Factory overhead 13,125

Total $72,125

Managerial & Financial accounting

Business

Transcript of Managerial & Financial accounting