Management Accounting Report: Cost, Budget, and Decision Making

This report provides a comprehensive overview of management accounting, differentiating it from financial accounting by highlighting their distinct purposes, users, and reporting formats. It delves into cost classifications, including material, labor, and overhead costs, categorized by type, behavior, and function, as well as relevance. The report further discusses seven types of operational budgets, such as production, sales, and cash budgets, detailing their benefits in financial planning and control. Additionally, it analyzes the use of standard costing as a decision-making tool, emphasizing variance analysis to improve strategic actions and control overspending. The conclusion summarizes the significant differences between management and financial accounting, and highlights the impact of various costs on business performance.

Management Accounting

Table of Contents
INTRODUCTION......................................................................................................................3
TASK.........................................................................................................................................3
Difference between management and financial accounting...................................................3
Classification of cost..............................................................................................................4
Discussing the seven types of operational budget along with their benefits..........................6
Analyzing the use of standard costing as a decision making tool..........................................7
CONCLUSION..........................................................................................................................8
REFERENCES.........................................................................................................................10

INTRODUCTION
Management accounting is the process of identifying, measuring, analyzing and
interpreting the information of all the departments to higher authority. In this, managers at
different level provide higher management with the cost records and sheets which in turn
helps them in making suitable decisions. Moreover, such information helps company in
making competent strategic and policy framework for the near future. In this regard, the
present report will describe the extent to which management and financial accounting are
highly differs from each other. Further, it will also shed light on the concept of cost, budget
and standard costing.
TASK
Difference between management and financial accounting
Basis of difference Management accounting Financial accounting
Meaning Managerial accounting is
highly concerned with
providing effectual base to
the managers for decision
making (Kaplan and
Atkinson, 2015). In this way,
it assists in making
appropriate plan which
ensures optimum use of the
resources.
This field of accounting
involves in the preparation of
financial statements with the
aim to provide fair view to
the stakeholders about
company’s performance.
Objectives Aim of such accounting is to
provide useful information to
the managers for planning as
well as setting the goals. On
the basis of this aspect,
managers can easily evaluate
the performance of the
respective department.
Objective of it is to disclose
the information about the
company’s financial health
and performance at the end
of accounting year or a
specific date.

Users Information served by the
department of management
accounting is used by the
internal parties such as
managers and employees.
Both internal (management,
employees etc.) and external
(investors, suppliers,
government, banks etc)
makes use of the financial
information for the purpose
of decision making.
Requirements There are no legal
requirements for the firm to
prepare managerial
accounting reports.
Companies have legal
obligations to prepare and
present the financial report
for providing information to
the shareholders’ about their
wellbeing in monetary terms
(Difference between
management and financial
accounting, 2016).
Emphasis It lays high level of emphasis
on the present and helps in
forecasting the future trends.
Focus of such accounting on
history: reports in relation to
the prior quarter or year.
Rules Managers do not follow
specific rules for the
preparation of cost reports
(Malmi, 2016).
With the aim to ensure
integrity business units
follow rules and regulations
prescribed by IFRS &
GAAP.
Format Informal format is followed
by the managers for
preparing the cost reports and
sheets.
Unlike managerial
accounting, financial
statements are prepared by
the organizations in a
specific format.
Duration In this, reports are prepared
on a daily, weekly and
monthly basis.
Final accounts are prepared
on the basis of annually,
semi-annually and quarter
(Wagenhofer, 2016).

Information It serves information
regarding the monetary and
goals as well as objectives of
the company.
Financial management
provides deeper insight about
the monetary information
which can be verified
through the means of audit.
Classification of cost
Cost may be defined as amount which business unit has to incur during the business
operations and functions while offering the products or services.
On the basis of type
 Material cost: Money which is spent by the firm for purchasing the raw product is
known as material cost.
 Labor cost: It represents the cost of the labor which is incurred by the firm for
producing the cost. In this, payment made by the business enterprise on the basis of
hours spent (Cost Classifications, 2016). For instance: In retail sector, time spent by
the customers for packaging accounts for the labor cost.
 Overhead cost: Depreciation, electricity, fuel etc. comes under the category of
overhead cost (Yee and Khin, 2015). Al these costs are the one which business unit
has to incur for the smooth functioning of the business operations and functions.
On the basis of behavior
 Fixed cost: Factory rent, insurance, salaries of the personnel etc. are the main fixed
costs which do not change according to the volume of production (Sands, Lee and
Fonseka, 2016). In this, unit cost of the product decreases when production level
decreases and vice versa.
 Semi-variable cost: Under this, specific portion of the cost remains fixed and other
portion is variable. Electricity expense implies for the semi-variable cost which
changes after the certain level.
 Variable cost: It is highly associated with the volume which is produced by the firm.
Direct material and labor are the main variable costs that increase according to the
volume of production.
On the basis of function

 Production cost: It implies for the cost which is incurred by the firm for the
manufacturing of products or services.
 Commercial cost: This cost contains expense which is spent by the company at
operational level (Coad, Jack and Kholeif, 2015). Administration as well as selling &
distribution cost are the main commercial costs which company has to incur for
performing the functions.
On the basis of relevance:
 Future cash flows: Such cash amount is related with those which will be incurred by
the firm in near future. Hence, it is the result of present decision which is considered
as relevant cost.
 Opportunity cost: At the time of decision making business unit selects one alternative
out of several (Tappura and et.al., 2015). In this, loss of other profitable alternatives
available is regarded as opportunity cost.
 Avoidable cost: Expense which can be avoided in the future if projects will not be
implemented.
Discussing the seven types of operational budget along with their benefits
Budget is the financial expression of the activities which will be performed by the
firm during the accounting year. This financial tool is highly significant which helps in
making control on unnecessary spending (López and et.al., 2015). In this regard, there are
mainly seven operational budgets which can be undertaken by the firm for fulfilling the
overall aims and objectives of the firm. It includes production, sales, cash, material, labor,
fixed and variable overhead budgets. By using all such financial framework business unit can
make effectual use of the monetary resources.
Production budget: It contains information regarding the units which business unit
needs to manufacture during the year. Hence, business enterprise can determine the required
production units by subtracting the opening inventory from the sum of sales and closing
stock. In this way, it provides deeper insight to the manufacturing firm about the units which
they need to produce during the year.
Sales budget: This framework estimates the sales units along with the earning from
these. In this, management makes in-depth analysis of the economic condition, competition,
production capacity and selling expenses while developing the sales budget. Thus, such

budget is highly significant which provides guidance to the personnel about the units which
they need to sell during the period for the attainment of organizational goals.
Material: It assists in calculating that business unit purchase for the fulfillment of the
requirement of production budget. Such framework is usually prepared by the firm on the
basis of quarterly or monthly basis. Material budget includes almost all the cost which will be
incurred by the firm during the period (Wagenhofer, 2016). Hence, this budget plays a vital
role in making co-ordination with others. Besides this, it also prevents the possibility in
relation to production disruptions.
Labor: This budget is undertaken by the firm with the aim to determine the labor
hours which will be required to produce the predetermined units. Hence, this plan is highly
associated with the production budget (Tushar and et.al., 2016). The reason behind this on the
basis of production unit’s business enterprise can make proper estimation regarding the labor
hours needed for production activities. In accordance with the help of such framework
business unit can make effectual use of human resources in production activities.
Overhead budget: It shows all of the production cost other than material and labor. In
this, by multiplying the budgeted overhead rate from the activity business unit can determine
the suitable overhead cost. In this way, such budget provides input for the formulation of cash
budget to the large extent.
Fixed overhead budget: It refers to those expenses which remains fixed irrespective
the fact that changes take place in the volume of production. For instance: Administration
expenses such as rent, audit fees etc. which are incurred by the firm are regarded as fixed
overhead budget.
Cash budget: It reflects the cash which business unit has to spend over the specified
time frame. Along with this, it also contains information regarding the income which will be
generated by the firm in upcoming time frame. This budget is highly based on estimation and
market trend or pattern (Bargerstock and Shi, 2016). Besides this, it is prepared by the
manager according to sales and production forecast. Through this, business entities can
determine whether they have sufficient cash amount to operate the business or not. In
addition to this, company can also serve it as a control measure. On the basis of this aspect by
making comparison of the actual performance with the standard amount business unit can

assess the deviations. This in turn enables firm to take corrective measure within the suitable
time frame and thereby helps company in achieving the goals.
Hence, by taking into consideration all the above mentioned budgets it can be said
that such framework facilitates optimum utilization of the financial resources. Moreover,
budgeting frameworks provide deeper insight to the firm about the amount which they need
to invest in the varied activities.
Analyzing the use of standard costing as a decision making tool
Standard costing is associated with the cost of manufacturing company’s direct
material, labor and overhead. It is the most effectual tool which provides assistance to the
firm in assessing the deviation takes place at different levels (Farkas, Kersting and Stephens,
2016). On the basis of this method if actual cost is greater than the standard figures then it
may result into unfavorable performance. Variances provide deeper insight to the firm about
the strategic action which they need to undertake for making improvement level.
For instance: Material amount of £150000 is setting down by the higher management.
On the other hand, actual amount of material incurred is £160000. In the, by making
assessment it has been assessed that due to the wastage of material variance of £10000
occurred. In this way, such variance provides indication to the firm to undertake suitable
measure for the improvement purpose. Hence, by making competent policies and strategies
business organization would become able to control such wastage (Yee and Khin, 2015).
Further, company also needs to encourage the personnel to make optimum use of material
while performing the manufacturing activities.
Similarly, if actual labor expenses are higher than the budgeted amount then there are
mainly two reasons due to which unfavorable variance occur. Usually, labor variance occurs
due to the rise in the wages of per hour. Besides this, when personnel takes more labor hours
for manufacturing the products or services then it may result into unfavorable variances
(Akenbor and Agwor, 2015). In this way, by taking into account the strategic action or
measure business unit can reduce such variance to the large extent. In this way, standard
costing may be served as a control measure which helps in reducing the over spending to the
large extent. Moreover, by making continuous monitoring of the performance level with the
help of standard costing business unit can identify the deficiencies more effectively and
efficiently. In this way, such method helps in making setting suitable mission, objectives and
strategies for the near future.

CONCLUSION
From the above report, it has been concluded that significant difference takes place
between the management and financial accounting. Besides this, it can be inferred that
different types of cost which are incurred by the firm has high level of impact on the growth
and performance of it. Further, it can be revealed from the report that several budgets which
are prepared by the company ensure effective utilization of resources. It also has been
articulated that standard costing methods assist business enterprise in making most profitable
decisions.

REFERENCES
Books and Journals
Akenbor, C.O. and Agwor, T.C., 2015. Standard costing and cost control in Nigerian oil and
gas industry. Journal of Modern Accounting and Auditing. 11(4). pp.185-193.
Bargerstock, A. and Shi, Y., 2016. Leaning away from standard costing: Lean companies
need value stream costing and new performance metrics. Strategic Finance. 97(12). pp.38-
46.
Coad, A., Jack, L. and Kholeif, A.O.R., 2015. Structuration theory: reflections on its further
potential for management accounting research. Qualitative Research in Accounting &
Management. 12(2). pp.153-171.
Farkas, M., Kersting, L. and Stephens, W., 2016. Modern Watch Company: An instructional
resource for presenting and learning actual, normal, and standard costing systems, and
variable and fixed overhead variance analysis. Journal of Accounting Education. 35.
pp.56-68.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
López, V. and et.al., 2015. Cost-sensitive linguistic fuzzy rule based classification systems
under the MapReduce framework for imbalanced big data. Fuzzy Sets and Systems. 258.
pp.5-38.
Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management
Accounting Research. 31. pp.31-44.
Sands, J., Lee, K. H. and Fonseka, K. B. M., 2016. Advancing sustainability management
accounting in the Asia Pacific region. Accounting Research Journal. 29(2). pp.112-114.
Tappura, S. and et.al., 2015. A management accounting perspective on safety. Safety science.
71. pp.151-159.
Tushar, W. and et.al., 2016. Cost minimization of charging stations with photovoltaics: An
approach with EV classification. IEEE Transactions on Intelligent Transportation
Systems. 17(1). pp.156-169.