Management Accounts for Costs and Control

Management Accounts for Costs and Control
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Question 1
a) The various differences between management accounting and financial accounting are
reflected in the tabular format shown as follows (Drury, 2016).
Management Accounting Financial Accounting
1) The management accounting is
carried out with the underlying
objective of providing information to
management so as to assist them in
decision making .
1) In contrast, financial accounting is carried
out with the underlying objective of
capturing the financial transactions which in
turn would highlight the financial
performance and position of the company.
2) The targeted audience for
management accounting are the internal
stakeholders particularly the
management that needs to take
decisions and hence requires crucial
business inputs provided in the form of
management reports
2) These are essentially directed at the
external stakeholders so that periodic
information could be provided to the external
stakeholders about the company's
performance which aims at satisfying their
informational needs for decision making
about relationship with company.
3) There is high degree of flexibility in
terms of formatting since the report
format is based on the needs of the
management or other internal
stakeholders. Hence, there is no fixed
format which needs to be necessarily
adhered to.
3) The degree of flexibility tends to be quite
limited since these are accounting standards
and other guidelines that need to be adhered
so that the external users can interpret the
financial reports and also draw comparison
with peers and past performance. Hence,
standardised reports are desirable.
4) The frequency in case of
management accounting tends to exhibit
a high degree of flexibility since these
reports are provided as and when
required by management.
4) In sharp contrast, the frequency of
financial reports is fixed with quarterly being
the most common and certain other reports
released on an annual basis. Thus, the
financial reports are not released on ad-hoc
basis.
5) The concern of reports produced
under management accounting are
based on the present and forecasting of
possible future scenarios based on
underlying decision made in present.
5) On the contrary, financial accounting
reports are essentially aimed at captured
aspects about the past performance and are
not directed at the future.
b) The various functions of management accounting are highlighted and briefly explained as
shown below.
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 Planning – Organisational planning needs to be carried out for the short term and long term
which would focus on procurement of resources in a time bound manner and usage of the
same to generate value for the shareholders. Management accounting is an enabler in this
regards as it helps the managers and decision makers to plan for the future considering the
likely scenarios to emerge based on different scenarios. Also, management accounting would
help the company in making strategic decision related to product pricing, production which in
turn can enable future forecasting of the performance in the form of budgets (Emmauel &
Otley, 2015).
 Organising – It is imperative that the available resources must be used in an organised manner
so that the underlying business objectives may be achieved. This requires the organisation to
have a defined structure where the various personnel should be aware of their underlying
responsibilities and also there should be a defined line of authority. Management accounting
plays a pivotal role in this regards as it provides a communication medium between the upper
and lower level of management. Various strategic decisions regarding operational aspects of
the company are taken at the top and then communicated to product managers or line
managers so that the operations can be suitably organised to achieve the objectives
(Northington, 2015).
 Controlling – This is an essential activity which is directed at ensuring that the performance of
the company does not deviate from the planned performance levels. This is essentially
achieved through the feedback mechanism which allows for remedial measures to be taken in
a timely manner. The control and performance reports that are regularly generated tend to
highlight the variances in the performance and thereby allow for any corrective measure to be
taken on time so as to control these variances (Damodaran, 2015).
 Decision making – One of the key roles of the management is to make strategic decisions for
the company taking into perspective the future business environment. However, considering
the host of parameters that the company’s performance is dependent on and the underlying
risks, management reports are necessary for decision making. This could be in the form of any
strategic investment or capital outlay that the company may be planning. In order to decide
whether to proceed with it or not, a host of information about the likely future scenarios based
on the key decisions variables is required coupled with application of acceptable decision
making tools and techniques. The management reports tends to provide such analysis which
enables prudent decision making by management (Heisinger, 2014).
c) Panopticism refers to the surveillance required to instil discipline and avoid any wrongdoing.
Management accounting plays a crucial role in ensuring control, discipline and minimising
the incidence of corruption. This is because it deals with internal report generation which is
primarily based on technology. Such internal reports tend to work as excellent surveillance
mechanism and can assist in internal financial audits of the company. The management
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reports are regularly provided to the internal audit committee which takes requisite measures
in order to bring down the audit risk and thereby avoid the risk of financial corruption and
potential misstatement (Emmauel & Otley, 2015).
Further, as highlighted in the previous question, management accounting through performance
and control reports tends to highlight the variances in actual and budgeted performance and
thereby enable in controlling the firm’s performance. Simultaneously, it also ensures that
discipline particularly in the form of cost discipline is practiced by taking corrective measures to
minimise variances which are often responsible for lacking discipline in the firm (Brealey, Myers
& Allen, 2014).
Question 2
Statement of Cost of Goods Manufactured
Normal view
Formula view
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