Management Accounting Unit no 1st BBA 5th Semester

Difference between Financial Accounting and Cost Accounting.

Point of Financial Accounting Management Accounting

Distinction
Meaning Financial Accounting is an The accounting system which
accounting system that focuses on provides relevant information to
the preparation of financial the managers to make policies,
statement of an organization to plans and strategies for running
provide the financial information to the business effectively is known
the interested parties as Management Accounting.
Is it Yes No
compulsory?
Information Monetary information only Monetary and non-monetary
information
Objective To provide financial information to To assist the management in
outsiders. planning and decision making
process by providing detailed
information on various matters.

Format Specified Not specified

Time Frame Financial Statements are prepared The reports are prepared as per
at the end of the accounting period the need and requirements of the
which is usually one year. organization.

User Internal and external parties Only internal management

Reports Summarized Reports about the Complete and Detailed reports

financial position of the regarding various information.
organization

Publishing and Required to be published and Neither published nor audited by

auditing audited by statutory auditors statutory auditors.
Difference between Cost Accounting and Management Accounting.

Point of Cost Accounting Management Accounting

distinction
Meaning Cost accounting revolves around Management accounting helps
cost computation, cost control, management make effective decisions
and cost reduction. about the business
Application Cost accounting prevents a Management accounting offers a big
business from incurring costs picture of how management should
beyond budget strategize
Scope The scope is much narrow The scope is much broader.
Measuring Quantitative. Quantitative and qualitative
grid
Sub-set Cost accounting is one of the Management accounting itself is pretty
many sub-sets of management vast.
accounting.
Basis of Historic information is the basis Historic and predictive information is
decision of decision making. the basis of decision making.
making
Statutory Statutory audit of cost The audit of management accounting
requirement accounting is a requirement in has no statutory requirement.
big business houses.
Dependence Cost accounting isn’t dependent
on management accounting to be Management accounting is
successfully implemented. Dependent on both cost & financial
accounting for successful
Implementation.
Used for Management, shareholders, and Only for management.
vendors.

Need and Importance of Management Accounting

1. Increase Efficiency
2. Proper planning
3. Measurements of performance
4. Maximising profitability
5. Improves service to customers
6. Effective management control

Limitations of Management Accounting

1. Based on accounting information
2. Lack of knowledge
3. Intuitive decisions
4. Not an alternative to administration
5. Top heavy structure
 6. Evolutionary Stage
7. Personal bias
8. Psychological Resistance

Role of Management accounting in decision making

Small business owners and managers are faced with countless decisions every business day.
Management accounting uses information from your operations to produce reports that
provide ongoing insight into business performance, such as profit margin and labor
utilization, so you and your managers have data-driven input to make everyday decisions.
Small businesses can leverage this powerful trove of calculations to improve decision-
making over time for higher profitability and greater competitive advantage.

1. Relevant Cost Analysis

Managerial accounting information is used by company management to determine what

should be sold and how to sell it. For example, a small business owner may be unsure
where he should focus his marketing efforts.

To evaluate this decision, an accounting manager could examine the costs that differ
between advertising alternatives for each product, ignoring common costs. This process is
known as relevant cost analysis and is a technique that is taught in basic managerial
accounting courses. The same process can be used to determine whether to add product
lines or discontinue operations.

2. Activity-based Costing Techniques

Once the company has determined what products to sell, the business needs to determine to
whom they should sell the products. By using activity-based costing techniques, small
business management can determine the activities required to produce and service a product
line. Embedded in this information is the cost of customers. Deciding which customers are
more or less profitable allows the business owner to focus advertising toward the
consumers who are the most profitable.

3. Make or Buy Analysis

A primary use of managerial accounting information is to provide information used in

manufacturing. For example, a small business owner may be considering whether to make
or buy a component needed to manufacture the company's primary product. By completing
a make or buy analysis, she can determine which choice is more profitable.

While this technique is certainly useful, small business owners should only use these
analyses as a factor in the decision. There could be other non-financial metrics that are
important to consider that would not be part of the analysis.

4. Utilizing the Data

Managerial accounting information provides a data-driven look at how to grow a small
business. Budgeting, financial statement projections and balanced scorecards are just a few
examples of how managerial accounting information is used to provide information to help
management guide the future of a company. By focusing on this data, managers can make
decisions that aim for continuous improvement and are justifiable based on intelligent
analysis of the company data, as opposed to gut feelings.