Role Of Management Accounting In An Organization: Comparison To Financial Accounting, Costs Classification By Function, Type, Behavior, And Relevancy

Role of Management Accounting in Service Organization

Discuss the role of management accounting in an organisation (make comparisons to financial accounting).

Discuss the classification of costs by function (production, non-production); by type (direct, indirect); by behaviour (fixed, variable, stepped fixed) and relevance. Provide examples and diagrams where necessary.

Discuss the FIFO (First In First Out) and LIFO (Last In First Out) methods of inventory valuation making comparisons between them.

Discuss the concept responsibility accounting. Your discussion must include responsibility centres – cost, revenue, profit and investment centres.

Introduction

Management Accounting refers to the process of identifying, analyzing, measuring as well as communicating information in concerned with organization’s goal. The main objective of the management accounting  to provide support to competitive decision making for the management  by collection of information and  processing information that would help in management planning, control and also to evaluate business process.

Role of management Accounting in Service Organization

In the service organization, management accounting is broadly described as tools involving the use of quantitative data in the control of organization. In addition, it is also provided that it has been observed that larger the organization is the greater will be the need for management’s/ management accounting for gathering information in order to identify and achieve organization’s goal and objective (Accountingtools,2015)

Basis of Comparison	Financial Accounting	Management Accounting
Meaning	It refers to the accounting system which mainly focuses on the preparation of financial statement. Financial position of the organization with an objective to provide the information regarding the financial position to  the  interested parties	It refers to the accounting system which provides important information to the mangers / top management so as to make plans, strategies, policies for running the organization/ business effectively (Accounting Tools,2015)
Mandatory	Yes, it is mandatory s per law & regulation	It is not mandatory yet advisable to be  maintained by  the organization
Purpose/ Objective	The main objective is to provide required /true & fair information  to the outsiders about the financial position of the organization (Accounting Tools,2015)	To assist management in planning as well as decision making.
Format	Specified Format	There is no specified format
Time Period	Financial Statements are prepared at the need of the accounting period which is mainly one year	Here, reports are prepared on the basis of requirement and need of the organization. There is no specific time period (Accounting Tools,2015)
Main Users	Internal as well as External parties	Only Internal management since the same is for internal use only.
Reporting	Financial Accounting summarizes reports regarding the financial position of the company	Here, it provides complete and detailed reports regarding various reports

There are many classifications of costs & the same are not mutually exclusive:

Classification as per function/ by function

Production Cost- It involves all cost related to the production of goods or services it may be direct or indirect cost. It is mainly divided into direct and indirect production cost

Direct cost such as direct material, direct labor, other expenses like job work charges in respect of particular product

Some example of indirect cost are Supervisor salary, quality control testing, store expenses other labor related expenses

Administrative e Cost-  These cost refer to the cost incurred in relation to the general management of the business .they are usually  indirect cost & also called as administrative overhead. For example- rent expenses, depreciation charged on fixed assets, telephone stationery expenses etc.

Selling Cost – It refers to the cost incurred in connection to the achievement of target sale during the specified period for example- salary to be paid to the selling staff, commission, discount, royalty etc.

Traceability i.e. classification of cost by Type– it is provided that cost can be classified by traceability

Direct cost- it refers to the cost which can be directly traced to a department, product, service such as Labor and supplies. Example- during production of concrete, cost of cement, sand wages are direct cost

Basis of Comparison

Indirect Cost- it means the cost which cannot be directly traced to a department, product and/or service for example- overhead cost, cost associated directly with heating and cooling or cost of insurance, depreciation, salary of supervisor incurred  in a concrete plant

Full cost it involves both direct and indirect cost.

Behavior – it states that cost could be classified by behavior with regard to the volume of products and/or services.

Fixed Cost- it refers to the cost which remains constant in relation to changes in volume for example- rent charges for manufacturing space will be considered as fixed cost or depreciation since this is considered as gradual charging to the expense of tangible assets for a period of time over the useful life of an asset. For instance Rent, depreciation calculation using straight line method. It has been provided that fixed cost per unit decreases with the increase in production (Accounting Tools, 2015).

Variable Cost- it refers to the cost directly proportionate to the change in quantity/volume. For instance – cost of supplies is directly proportional to the volume therefore the same is considered as a variable cost. It is provided that variable cost varies with the unit of production. As the number of unit increases, variable cost will also increase & vice versa.

Semi Variable Cost- this cost varies incrementally to the changes in volume for example- there is no requirement to hire new housekeeper if patient volume increases by 1%. It has properties of both fixed as well as variable cost because of presence of both variable & fixed component (Accounting Tools, 2015)

Cost classification as per Relevancy

It is provided that cost can be classified by its relevancy

Controllable Cost- refers to the cost under the manager’s influence for example labor

Uncontrollable cost- it is not influenced by the management. For example utility cost

True Cost- it refers to the hypothetical cost which is considered as most accurate representation of full cost that is easily determined by the managers/management.

Differentiate Cost- it refers to the cost arises due to difference in the costs among two or more alternatives.

Opportunity Cost- it refers to the potential revenues forgone by rejecting an alternative, for example – amount spent in purchase of fixed cost recovered as an interest income on leasing of machinery. Another example if a gardener decides to grow radish then his or her opportunity cost will be that alternative crop which might have been grown instead (Tomato, pumpkin etc.) as in both cases choice is required to be made.

Classification of Costs by Function

Sunken Cost- it refers to the cost already incurred and is consider that the same will not affect by and would not affect any future decision for instance- A person opens a new manufacturing factory with 1 million it is sunk cost. Another example can be advertisement expenses as expense paid for the same cannot be recovered once made.

Above mentioned methods are costing method which is used to evaluate the value of cost of goods sold and also inventory at the end. FIFI means First in first out which clearly provides that goods initially entered in the inventory will be removed for the sale first on the contrary LIFO i.e. last in first out means that the good which is added last in the inventory will be removed first for the sale from the inventory (Accountingtools, 2015).

Basis of Comparison	FIFO	LIFO
Status of unsold inventory	It comprises of the goods acquired most recently	However, it comprises of good acquired earliest
Laws or restrictions	For Use of FIFO Method, there is no restriction of GAAP or IFRS. Both allow this method	IFRS does not allow to use this LIFO Method by an entity
Inflation Effect	Due to increase in cost. Goods which were acquired become cheaper which consequently decrease the COGS and hence result in increase of profit. Income tax is higher	Due to increase in cost, goods acquired recently become expensive thus increases the cost of goods sold which consequently reduce the profit. Income tax is smaller
Deflation Effect	In converse to above, accounting profit and therefore tax is lower. However value of inventory would be high	In converse to above, accounting profit and therefore tax is higher. However value of inventory would be low.
Book keeping	There are lesser number of record since  oldest tem are used to be sell first	There is requirement to maintain number for records since old item remains an inventory for many years and new item are sold first
Main Users	Internal as well as External parties	Only Internal management since the same is for internal use only.
Deflation Effect	In converse to above, accounting profit and therefore tax is lower. However value of inventory would be high	In converse to above, accounting profit and therefore tax is higher. However value of inventory would be low.

Responsibility Accounting- It refers to the system in which organization is divided into similar units and each of these units are assigned to particular responsibilities. Divided units may be in various forms like segments, branches, departments, etc. Each such department is consisting of various individual who would be responsible for particular functions to ensure that people in the department will achieve the goal. Various cancers are as follows

Revenue Centre- It usually has full authority over sales and little control over costs. It provides that to evaluate the performance of revenue centre and to ignore other things. Even though it is advantage but it have some demerits also like their evaluation are based on the revenue only which clearly implies that they have no reason to control the cost.die to this, to will be required to hire other person.

Cost Centers – This centre basically focus on providing services as well producing of the goods to other parts of the company this is because they have no control over the revenue/ sale price and hence evaluation can be done on the basis of their total cost. It is advisable that while dealing with the cost centre one must carefully monitor the quality of goods because purchasing of inferior quality cost with an aim to reduce cot may lead to effect quality of goods.

Profit Centers- it refers to the businesses within a larger business, like individual stores which make mall, where manager have right to enjoy full control over revenue as well as expenses. They also have authority to set their own prices. Classification of responsibility centre as a profit centre is considered as disadvantage. Even though it gets evaluated on the basis of revenue and expenses, attention has not been given to the use of assets. This fact provides thee manager an incentive to boost profit by the use of excessive assets.

Investment Centers- this centre can be called as a luxury car for responsibility centre since they feature everything. It is provided that investment centre’s manager have right over and is held responsible for the expenses, revenue as well as investment in their centers Moreover, ROI is used to evaluate their performance.

Conclusion

On the basis of above discussion, it is advisable that every organization should adhere to the management Accounting so as to keep the records accurate as well help the managers for decision making on the basis of gathering of information. Moreover, in the responsibility accounting, Each department is consisting of various individual who would be responsible for particular functions helps to ensure that people in the department will achieve the goal.

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