Comparison Between Management Accounting And Financial Accounting, Cost Classification, And Operational Budgets

Management Accounting vs. Financial Accounting

Directors for effectively taking appropriate decisions mainly use management accounting system, which could help in improving their future performance. Richardson (2017) stated that information presented by the financial accounting system is mainly reviewed by the management accounting and depicts relevant sections, which needs improvement. Moreover, by using both management and financial accounting companies are mainly able to improve their performance.

Management and financial accounting have relative similarities, which could be depicted as follows.

• Both management and financial accounting are the part of accounting information system, which are mainly used by the management to take adequate decisions.
• Moreover, both the management and financial accounting deals with economic events, which are accounted based on monetary value.
• Both the management and financial accounting system are concerned regarding financial statements, revenues, expenses, assets, liabilities and cash flows.
• Both the accounting measure uses historical costs data for preparing the relative statements, while the perspective is still different.
• Moreover, cost accounting is mainly conducted by both the accounting method for effectively depicting the costs related to transactions.

The difference between management accounting and financial accounting are depicted as follows. 

Figure 1: Stating difference of financial and management accounting

(Source: Taipaleenmaki and Ikaheimo 2013)

Difference	Management accounting	Financial accounting
Users of Information	The management accounting system is mainly used by top level management of the company for making adequate decisions	The information is mainly used by external and internal personal of the company.
Usage	It mainly helps in making financial planning, organising, staffing, directing, controlling and decision making	It mainly helps in detecting financial performance of the company
Accounting method	It is not based on double entry system, as it only analysis statement, which allows management to identify relevant sections that could be improved.	It is mainly based on the double accounting system, which records, classifies and summarizes business transactions
Method of preparing accounting information	Information is mainly gathered department and section wise, as it helps in depicting purpose of each activity.	The system mainly balances all the accounts that are being prepared and maintained for particular period.
Period of time	It could be prepared as and when required, according to the specification and requirements of the management	It is mainly prepared only for one year without any fail
Purpose of the report	It is mainly prepared for supporting specific needs of the departments manager or chief officer	It is mainly prepared to depict overall performance of the company to potential investors, employees, regulatory authorities, customers, suppliers creditors, and shareholders

The overall cost classification mainly allow the company to effectively depict the relevant expenditure conducted during the fiscal year. The classifications of costs are mainly depicted as follows.

Behaviour:

 

Figure 2: Stating cost behaviour

(Source: Balakrishnan, Labro and Soderstrom 2014)

The above figure mainly depicts the relevant segregation of cost based on behaviour. In addition, fixed costs, variable costs, and mixed costs are mainly depicted as the classification of behavioural costs conducted by the company. Moreover, segregation of costs under behaviour mainly helps in depicting the relevant nature of the costs, which is essential for understanding its expenses. The identification of the overall nature of costs could effectively help in pinpoint the breakeven point in sales, which needs to be achieved by the company (Balakrishnan, Labro and Soderstrom 2014).

Function:

 

Figure 3: Stating cost on function

(Source: Schmidt 2015)

Costs functions are mainly identified as the expenses, which is been conducted by company to attain the required sales. Relevant examples of costs functions are administration cost, production cost, distribution cost, and selling cost. These cost function mainly help in understanding the relevant expenses, which is been conducted by the company to support its activities. Moreover, the segregation of cost based on function method mainly help in identifying the relevant administrative expenses conducted by the company to achieve targeted sales (Schmidt 2015).

Types:

 

Figure 4: Stating cost type

(Source: Langkilde, Thawley and Robbins 2017)

The segregation of costs under type is mainly helpful in identifying relevant expenses, which are conducted by the company to attain the required level of profit. This segregation of relevant cost mainly help organisation to minimise the costs by adopting adequate cost cutting methods, which could help in increasing their net profits. Moreover, the segregation of cost type mainly helps in depicting relevant fixed costs, variable costs and mixed costs, which is been conducted by the company to attain relevant net profits (Langkilde, Thawley and Robbins 2017).

Cost Classification

Relevance:

 

Figure 5: Stating cost relevance

(Source: Urick and Bowers 2014)

Classification of cost under relevant cost mainly helps in depicting the direct and indirect costs incurred by the company attain the targeted sales figure. Moreover, this segregation mainly allows the investor to identify the direct and indirect costs related to production. The classification of cost under relevance method mainly helps companies to prepare adequate budget, which could help in improving its profitability (Urick and Bowers 2014). The above figure effectively depicts the direct and indirect costs, which could be assigned to activities of the company.

Companies mainly use the operational budget to improve its overall profit generation capacity. In addition, the use of budgets mainly allows the company to meet the required expenses and reduce excess wastage of financial resources. The following type of operational budget is stated as follows.

Sales:

 

Figure 6: Sales budget

(Source: Andre, Lam and O’Donnell 2016)

The above figure depicts the sale budget, which is mainly conducted by companies to estimate its future sales. The company to allocate the required resources for producing relevant products mainly uses the budgeted sales figure. Moreover, sales budget is the most viable option, where limited companies are able to identify its future profits. In addition, the sales budget is mainly prepared after analysing competition and demand for is products among customers. In addition, sales forecasting and budget is mainly prepared based on trend, which is mainly depicted from the previous sales figure (Koochakpour and Tarokh 2016).

Production:

 

Figure 7: Production budget

(Source: Andre, Lam and O’Donnell 2016)

The production budget is mainly prepared after the preparation of the sales budget, as it helps in identifying the relevant materials and inventory needed for production. Moreover, with help of production budget, limited companies are mainly able to identify the relevant costs, which will be incurred. Furthermore, the production budget mainly helps limited companies to maintain the required level of working capital, which could smoothly conduct the production process. Production budgeted is mainly drafted by including inflation rate, as it helps in reducing the negative variances (Bau et al. 2014).

Labour costs

 

Figure 8: Labour budget

(Source: Andre, Lam and O’Donnell 2016)

The labour budget is mainly drafter after the production budgets, as companies are mainly able to identify the input of labour hours needed in the production process. In addition, their labour budget also helps in depicting the relevant direct or indirect labour costs, which could be included in the production expenses. Moreover, the production budget also helps the management to identify the rising labour costs, which could decrease its overall profitability. With the help inflation rate the limited company is mainly able to identify the adequate labour costs, which could be needed to support the projected production budget (Egle et al. 2014).

Behaviour

Materials costs

 

Figure 9: Material cost budget

(Source: Andre, Lam and O’Donnell 2016)

Moreover, the direct material budget is mainly prepared after the production budget, as it mainly needs the number of products, which is needed to be produced. The material budget is mainly essential for the limited company as it depicts the require funds needed to continue with the production. Moreover, material budget is ineffective during an economic crisis as companies mainly conduct cost-cutting measures by seeing the declining demand of their products. Lastly, the material budget mainly allows the limited company to purchase the adequate amount of inventory, which could support its future sales prediction (Reis 2015).

Overhead:

 

Figure 10: Overhead budget

(Source: Andre, Lam and O’Donnell 2016)

Factory overhead costs are mainly conducted to depict the relevant expenses, which is needed in the manufacturing department of limited company. Furthermore, the overhead budget also allows the limited company to segregate the variable and fixed overhead costs, which is related to production. In addition, the overhead budgets not essential if the segregations of cost are effectively distributed, as overhead allocation is only needed if costs related to single product could not be detected (Koochakpour and Tarokh 2016).

Manufacturing costs

 

Figure 11: Manufacturing budget

(Source: Andre, Lam and O’Donnell 2016)

The limited companies mainly use the manufacturing process as an effective measure to identify the indirect and direct cost associated with production. Furthermore, manufacturing budgeted mainly helps the company to allocate the required funds to support the projected sales forecast. Moreover, management with the help of manufacturing budget is mainly able to understand the relative expenses, which needs to be conducted during the next fiscal year (Bau et al. 2014).

Relevant costing mainly consists of two different types of costs, which needs to be understood for effectively identifying its significance. In addition, the two different costs are depicted as follows.

Relevant costs:

Relevant costs are mainly depicted as those costs, which could be changed by the management decisions. In addition, the types of relevant costs are future cash flows, avoidable costs, opportunity costs, and incremental costs. Moreover, with the help identified relevant costs the company is mainly able to make adequate decisions regarding make or buy decisions. Furthermore, it also helps the management with the pricing factors and decision to continue or shut down an operation. For example, if a retail chain wants to close down one of its unprofitable stores, relevant costs such as wages, will disappear after the close down. This indicates that wages is a relevant cost to the continuity of the shop. DRURY (2013) mentioned that the identification of relevant costs is mainly essential for the management to make adequate decision for improving profitability of the company. On the other hand, Mishan (2015) criticises that ignorance of irrelevant cost could lead to high expenses, which in turn could reduce ability of the company to retain more income.

Function

Irrelevant costs:

There are certain irrelevant costs associated with activities of the company, as it helps in maintaining the level of productivity and profitability. The company cannot control irrelevant costs such as sunk costs, committed costs, non-cash expenses, and general overhead. Furthermore, irrelevant costs are mainly considered not to change with the changing management decision and it remains constant. However, the same cost could be relevant on oath management decisions. For example if company is taking a decision changing the production system, relevant salary of the investor relation officer could not be affected, as it is an indication of irrelevant costs. Nevertheless if the company is going private then there is no need of investor relation officer and thus, it becomes relevant costs with management deacons assonated with the specific activity. Bolon-Canedo et al. (2014) stated that identification of relevant and irrelevant costing is an effective tool, which could help management make adequate decisions to increase their profitability.

Reference:

Andre, S.M., Lam, M. and O’Donnell, M., 2016. BUDGETARY SLACK: EXPLORING THE EFFECT OF DIFFERENT TYPES, DIRECTIONS, AND REPEATED ATTEMPTS OF INFLUENCE TACTICS ON PADDING A BUDGET. Academy of Accounting and Financial Studies Journal, 20(3), p.147.

Balakrishnan, R., Labro, E. and Soderstrom, N.S., 2014. Cost structure and sticky costs. Journal of management accounting research, 26(2), pp.91-116.

Bau, M., Schmidt, K., Koschinsky, A., Hein, J., Kuhn, T. and Usui, A., 2014. Discriminating between different genetic types of marine ferro-manganese crusts and nodules based on rare earth elements and yttrium. Chemical Geology, 381, pp.1-9.

Bolón-Canedo, V., Porto-Díaz, I., Sánchez-Maroño, N. and Alonso-Betanzos, A., 2014. A framework for cost-based feature selection. Pattern Recognition, 47(7), pp.2481-2489.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Egle, L., Zoboli, O., Thaler, S., Rechberger, H. and Zessner, M., 2014. The Austrian P budget as a basis for resource optimization. Resources, Conservation and Recycling, 83, pp.152-162.

Koochakpour, K. and Tarokh, M.J., 2016. Sales Budget Forecasting and Revision by Adaptive Network Fuzzy Base Inference System and Optimization Methods. Journal of Computer & Robotics, 9(1), pp.25-38.

Langkilde, T., Thawley, C.J. and Robbins, T.R., 2017. Behavioral Adaptations to Invasive Species: Benefits, Costs, and Mechanisms of Change. Advances in the Study of Behavior.

Mishan, E.J., 2015. Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.

Reis, R., 2015. Different types of central bank insolvency and the central role of seignorage (No. w21226). National Bureau of Economic Research.

Richardson, A.J., 2017. The Relationship between Management and Financial Accounting as Professions and Technologies of Practice.

Schmidt, B., 2015. Costs and benefits of friendly boards during mergers and acquisitions. Journal of Financial Economics, 117(2), pp.424-447.

Taipaleenmäki, J. and Ikäheimo, S., 2013. On the convergence of management accounting and financial accounting–the role of information technology in accounting change. International Journal of Accounting Information Systems, 14(4), pp.321-348.

Urick, A. and Bowers, A.J., 2014. What are the different types of principals across the United States? A latent class analysis of principal perception of leadership. Educational Administration Quarterly, 50(1), pp.96-134.