Financial vs. Managerial Accounting: A Comparison

The assignment delves into the distinct characteristics of financial and managerial accounting. It examines their objectives, target audiences (investors, creditors vs. internal managers), reporting methods (GAAP vs. flexible), and the types of information they provide. The comparison highlights how these two branches of accounting serve different purposes within an organization.

Unit 5
Management Accounting

Table of Contents
Introduction...........................................................................................................................................3
P1: Explaining Management Accounting and Providing Essential Requirements of Different types
of Management Accounting System..................................................................................................4
P2: Explaining Different Methods Used for Management Accounting Reporting..............................5
Task 2.....................................................................................................................................................9
P3: Calculation of Costs Using Appropriate Techniques of Cost Analysis for Preparing an Income
Statement Using Marginal and Absorption Costs..............................................................................9
Task 3...................................................................................................................................................11
P4: Explaining the Advantages and Disadvantages of Different Types of Planning Tools Used for
Budgetary Control............................................................................................................................11
Task 4...................................................................................................................................................13
P5: Comparing How Organisations are Adapting Management Accounting Systems to Respond to
Financial Problems...........................................................................................................................13
Conclusion...........................................................................................................................................15
References...........................................................................................................................................16
REPORT

From: MAO
To: GM
Subject: To write a report to GM covering management accounting and
management accounting system together with different costing techniques
and reporting to enable the organization implement them.
Introduction
In general that report is widely used across the world market which is known as financial
accounting. In any annual report of a certain company we can get financial statements of that
company, financial statements includes different five methods of performance those are
income statement, balance sheet, cash flow statement, changes in stockholder’s equity and
equity statement. Financial accounting is prepared for publishing in the public market, apart
from market publication there is an internal side. Managerial Accounting plays an important
role for internal stakeholders. Managerial accounting is the base ground of all financial
statements which determines the production volume and revenue of the entire company.
There are some advantages and disadvantages of different methods of management
accounting systems. Management can follow any of several tools for calculation of net profit
in the aspect of management accounting.

P1
Management Accounting:The aim of management accounting is to provide necessary
information and to help managers for taking day to day decisions. Basically management
accounting is prepared solely for internal purposes. The crucial difference between financial
accounting and management accounting is financial accounting is prepared for outside of the
organisation such as for shareholders, public and tax authority on the other hand managerial
accounting is prepared for internal organisation such as managers and employees. Financial
accounting follows formal procedures where managerial accounting doesn’t need to go
through the all steps of financial accounting; it only fulfils the some essential criteria.
Management accounting is too mandatory for operation managers; they are helpless without
management accounting. Operational managers take day to day decision from management
accounting. For example management accounting provides the information of how many
units need to be produced, what is the current margin, margin ratio, we can find out break-
even point by using the tools of managerial accounting (Britton and Waterston, 2013). After
producing in which level our production cost will compensate the total revenue and in which
stage variable cost is lowest. It is the process of identifying, measuring, analysing and
communicating all the essential information of organisation transaction. In this definition
identifying is generally known as journal, measuring is known to all as ledger, analysing
means to preparing trial balances and communicating indicates showing the outcomes in the
income statement and balance sheet. Management accounting accumulates the revenue, cash
flow, production unit, variable cost per unit and fixed cost of total production process.
Management accounting is too concerned about raw materials, sales revenue, production cost,
labour cost, manufacturing cost and other overhead cost (Christensen, Cottrell and Budd,
2016).
Management Accounting System: The goal of management accounting system is to provide
the best tools for the managers and to attain best performance for organisation. The system of
management accounting gives the path for solving day to day manufacturing related problems
and run the business activities easily. There is break down of management accounting such as
margin analysis, constraint analysis, capital budgeting, trend analysis and forecasting, product
valuation and costing and so on. Managers have some necessary responsibilities, among them
most important responsibilities are planning, directing and controlling. These are the role of
management accounting, planning, organising, controlling and decision taking. Managerial
accounting is viewed as internal accounting most of the times. Management accounting
system gathers different financial data from the operations like sales information; raw
materials data and inventory related data then analyse these sorts of data for preparing output
which help to make decision for better performances (Acikerisim.deu.edu.tr, 2017).
Managers who are responsible for managing the function of management accounting look
after the existing data of organisation and then start to analyse the previous shortcomings.
They give priorities on comparison between cost budget and actual budget. They prepare
different types of report and include several methodologies in those reports. Sales report,

expense report and budget report are among them. They understand the real scenario when
they compare budgeted expenses and actual expenses (Crosson and Needles, 2014).
In this particular organisation management accounting will have its own benefits. As this
organisation is into production and produces different products so management accounting
will be beneficial in analysing the cost of production and also the margin that each product
yields. Further zero based budgeting techniques that are based on management accounting
principles would be beneficial for preparing the budgets. There are several products that are
being manufactured and therefore it is important to understand the contribution of each
product. Further, management accounting also ensures that the overhead costs are calculated
separately and as such the management can focus on lowering the overheads. Management
accounting will also be beneficial for analysing each product and products which are not
performing well can be modified or can be stopped. The profitability of the organisation will
enhance when management accounting principles are implemented within this organisation
P2
Management accounting uses various forms of reporting and in this section four such reports
will be discussed. The following are four types of reporting that are used for management
accounting reporting
Job Cost Reports: Job cost report is used for job costing. In this report a job is defined and the
cost for that specific job is calculated. A job can be a specific project that is done for a
specific customer or it can be a single unit of product. The job costing method ensures
calculation of profitability based on single unit of production. In the manufacturing setting
the job cost report consists of direct expenses such as materials and labour and also indirect
expenses or the overheads for the job. The job cost report is almost like the profitability
report for the organisation but is specific to the job. The following is an example of a job cost
report

Inventory Management Report: Inventory management reports help in analysing the
inventory and are also useful for the management for easily tracking the inventory. Excess or
low inventory can both have negative implications on the organisation. In financial
accounting inventory is treated as an asset but however it needs to be noted excess inventory
requires money for holding and also blocks operational capital. Thus the inventory needs to
be managed effectively and therefore in management accounting there is the provision of
inventory management reports. The following is a sample of inventory management report

Operating Budget Report: This report tracks the operating budget of the organisation and
tracks both budgeted expenses and revenues. Further, the operating budget report provides a
contrast with previous years operational expenses so as to provide an idea to the management
regarding the changes that have occurred. The operating budget report is useful for the
management to understand the changes in the revenues and the expenses and accordingly
strategies can be defined so as to lower expenses and enhance revenues. The following is an
example
Product/Service Profitability Report: Any organisation has multiple products or services.
Financial accounting provides the overall profitability statement but management accounting
focuses on specific products so as to understand how each product has contributed towards

the profitability. The product or service profitability ratio is useful for the management to
take decisions regarding each product or service individually.

Task 2
P3
Calculation
Unit cost under Absorption Costing:
Absorption Costing
Direct Material 6
Direct Labour 5
Variable Production Overhead 2
Fixed Production Overhead= 1800/600 3
Total unit cost 16
Income Statement
Net Profit using Absorption Costing
Absorption Costing
Sales 21000
Less: Cost of sales/Production
Opening inventory 0
Production= 700*16 11200
Closing inventory=100*16 1600
COGS(Opening inventory+Production-Ending) 9600
Sales-COGS 11400
Fixed production overhead over absorbed 100
Gross Profit 11500
Less: Variable sales (1*600) 600
Less: Fixed administration 700
Less: Fixed Selling 600
Net Profit 9600

Unit Cost under Marginal Costing:
Marginal Costing
Direct Material 6
Direct Labour 5
Variable Production Overhead 2
Total unit cost 13
Income Statement
Net Profit using Marginal Costing
Marginal Costing
Sales 21000
Less: Variable costs
Opening inventory 0
Production (700*13) 9100
Closing inventory (100*13) 1300
VC(Opening inventory+Production-Ending) 7800
Sales- Variable costs 13200
Less: Variable sales overhead(600*1) 600
Contribution margin 12600
Less: Fixed Production overhead 2000
Less: Fixed administration cost 700
Less: Fixed selling cost 600
Net Profit 9300
Reconciliation between two costing methods:
Reconciliation of profit figures
Profit under absorption costing 9600
Difference in units of inventory*fixed overhead per
unit(100*3)
300
Profit under marginal costing 9300
Difference between Two Management Accounting Techniques:

Here are presented key differences between Marginal Accounting techniques and absorption
accounting techniques.
In absorption costing both variable cost and fixed cost are counted as product costing in
inventory cost calculation on the other hand when it goes for marginal costing only the
variable costs is counted as product costing.
In case of marginal costing the higher the unit volume increases the higher the profit rises.
Production unit affects the revenue system in marginal costing. In case of absorption costing
similar thing doesn’t happen because here fixed cost also will be included in the cost system
that’s why it will affect the profitability.
The differences are few in nature between absorption cost and production cost. Because
direct material cost, direct labour cost and the manufacturing overhead cost are remained
same in both costing system. They put same influence in two methods.
In absorption costing the main highlighting point is net profit per unit. Net profit is crucial
matter for absorption costing on the opposite contribution margin per unit gets the more
importance when following marginal cost systems (Sedgwick, 2014).
When we run production procedure of a company there is created two parties automatically
those are lenders and borrowers. We have some lending and borrowing in the year end, it is
very natural in business market. So some inventories remain unsold in the end of the year and
some money remains in the hand of others and we have due also. In this case the variability
between opening balances and closing balances influences the absorption costing when
calculating cost per unit (Shim and Siegel, 2012). On the other hand this variability doesn’t
put any effects in case of marginal costing for cost per unit of output.
Task 3
P4
In order to focus upon the “planning and budget control” of a business organisation, it can be
said that effective utilization of tools being used for planning and controlling the budgetary
policies can be considered as beneficial for any business organisation. It can be helpful for
the organisation in evaluating and keeping control over the day- to- day financial operation in
accordance to the target, set up by the budget. The main objective of the budget control is to
enable the organisational management to execute the business operation especially the
financial performance in most effective and optimal manner. In order to keep effective
control over the budgetary policies of the business organisation, Planning is one of the most
important criteria. Planning can help the organisational management in evaluating and
identifying financial situation of the organisation, financial goals of the organisation and so
on.
Planning: budget generally provides an elaborate plan regarding the financial performance of
the business within a fixed period of time. Planning associated with the production

procedures, sales promotion, optimal utilization of resources, advertisements, developmental
activities and so on that can generate the economical benefits for the organisation. Proper
planning can be effective way out for any business organisation by which any anticipated
condition can be created for avoiding business emergencies especially financial downfalls.
There are different types of budgetary control in the organisation which are master budget,
operating budget, cash flow budget, financial budget and static budget. Now let’s look the
key differences among them in the planning tools of budgetary control.
There are different types of budgetary control in the organisation which are master budget,
operating budget, cash flow budget, financial budget and static budget. Now let’s look the
key differences among them in the planning tools of budgetary control.
Budget for a business organisation can be classified in different types, like:
 Cash budget: most important and effective budgetary tool for any business
organisation. By adopting such tool, an organisational management can focuses upon
the elaborated estimation of the money being receipt from every possible source and
the cash payments for several purposes. It also sheds light on the resultant or
remaining case balance all through the budget period. It also allows the organisational
management to keep effective control and coordination over the financial setup of the
organisation so that the organisation cannot face any economical downfall or
bankruptcy in the future.
Advantages- This helps in determining whether cash balances remain sufficient to full fill
regular obligations and its minimum liquidity and cash balance requirements. It also helps in
company to determine whether too much cash is retained that could be otherwise used in
production.
Disadvantages- They may cause distortions. Cash inflows do not rely to profit. Cash inflows
results from security deposits, fines, the sale of capital assets, non sustainability of funds.
 Production cost budget: this budget focuses upon the estimated expenditure required
for the production purposes. The advantageous aspect of this budgetary tool is that, it
can shed light over the predictable cost or expenses required to execute the production
process of the organisation. It is beneficial as it can enable the organisational
management to provide maximum importance on the financial performance for
production process by which they can maintain the cost effectiveness of the
production expenditure. Apart from the advantageous it also have some basic
disadvantage, like: by maintain cost effectiveness of the production process, the
organisational management can negotiate with the quality of the raw materials being
used for the manufacturing process.

 Capital expenditure budget: it signifies the total expenditure on each and every fixed
assets of the organisation throughout the budgetary period. The biggest disadvantage
of this budget method is, it needs some accurate and effective control as it does not
shed light over the profit and the loss account of the organisation. Moreover this
budgetary tool associated with excessive amount of the expenditure which needs
approval from the organisational management. For this particular reason, it can be
said that this method needs strict management control.
Advantages- Helps company to understand various risks involved in an investment
opportunity and how these risks affect the return of the company. It helps companies to
estimate their investment option that yield in the best possible return.
Disadvantage- The decisions are for long term and are majorly irreversible in nature. Most
times these techniques are based on estimations and assumptions as the future would remain
uncertain.
 Market led pricing: this budgetary method refers to the financial strategy by which an
organizational management can focus upon the market demand and the customer
expectation associated with services and products being offered by them. It relies on
the market research. A market led pricing strategy is helpful for any business
organisation by which the organisational management can make proper financial
strategy to maintain the production cost which ultimately helps them to maintain the
cost effectiveness of the final products and services (Weil, 2017).
Task 4
P5
In order to exhibit organizational business activities in corporate environment, financial
problem has been considered as normative for any organisation. Any business organisation
can face financial emergencies due to economical downfall in capital market, high employee
turnovers and for several other reasons. In order to prevent or deal with those problems with
ease and efficacy, the business organizational management can choose appropriate tools and
planning procedure.
In order to run any business, an organisation can face several finance related problem like:
Problem related with the profit level, organisational growth and developmental procedures,
output per employee, distribution of services within time framework, liquidity level or return
on investment of the organisation and so on.
Profit levels- it can be a hindrance or barrier related with the organisational operational
performance. In order to run business activities in a systematic manner, every organisation
has the necessity to set up proper financial target; but due to poor or inadequate strategy, the
organisation may not fulfill their profit making target.

Productivity levels- in order to maintain the cost effectiveness or other production criteria,
organisational management may not fulfill the productivity level or some times, due to high
employee turnover, productivity level may not be fulfilled properly. This can be an effective
barrier for organisational management.
Product or service quality: if the organisation fails to maintain or manage the quality of the
products and services being offered by them, the organisational management can face serious
problem with their customer retention policies. It also provides great impact on the
economical setup of the organisation.
Delivery or turn -around time: in order to survive in business arena over a long period of time
or to earn huge economical benefits from capital market, every business organisation has the
responsibility to provide maximum importance on their distribution or delivery process and
time management strategy (Sedgwick, 2014)
Growth levels: financial downfall or economical emergencies can be another important
barrier for any business organisation. it is also important as it has the potentiality to impact
directly over the growth or the developmental level of the business organisation.
Output per employee or department: employees are considered as a main pillar for any
business organisation. Similarly, employee turnover can be the biggest problem or hindrance
for any business organisation.
In order to overcome or deal with such problems, an organisation can adopt different
financial strategy like:
Benchmark: by adopting such strategy, an organisational management can directly focus
upon the continual improvement of the internal developmental process specifically to
enhance the financial performance of the organisation. It is also helpful as it can enable the
organisational management to focus upon the organisational survival process as well as on
the financial sustainability. “Benchmarking” , this strategy is usually adopted by the
management while the they believe that the organisation needs proper and effective strategy
and programming process to maintain the economical sustainability as well as earn
competitive edge in capital market (Weygandt et al. 2012).
Budgetary targeting: it can enable the organisational management in prejudging future
outcome regarding the financial performance by targeting the present budgetary scenario of
the organisation. It helps the organizational management in focusing upon such strategy by
which they can minimize the loss of the financial sustainability or the bankruptcy and at the
same time it can allow the management to design effective strategy for gaining huge
economical benefits for the organisational purposes (Weil, 2017).
Key performance indicators- It is a measurable value that helps in identifying the effectively
a organisation is achieving its business objectives. Organisation use KPI's at multiple level so
that they can evaluate the success rate at reaching targets. It shows the efficiency of the
business and the need to develop its strategy for the development in different departments
such as sales, marketing etc.

Conclusion
From the above, it is concluded that management accounting has a significance in the
manufacturing process of the organisation. It includes all the core practices of the
organisation such as inventory managements like, purchase of raw materials, labour
recruiting, managing advertising, market costing are the segments of the management
accounting. Management is responsible for attracting external stakeholders for the
organisation and when they are busy in doing so the tax authority decisions are also taken
care of within it. There are different types of managerial accounting such as absorbing cost
principles, variable costing, and marginal costing. Different policies are used in different
industries for processing the organisational activities better. It is considered for budgetary
planing of the organisation and accounts in the financial stability of the company.

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