Management Accounting Report

Management accounting report 1

THE NAME OF THE SCHOOL (UNIVERSITY) MANAGEMENT ACCOUNTING REPORT

The Name of the Class (Course)

Professor (Tutor)

The Name of the School (University)

The City and State where it is located

The Date

Management accounting report 2

Summary

The report will take a management perspective with the forsat part focusing on the

diffrence between management and financial accounting.The second part will focus on the need

for cost classification based on functions,behavior,relevance and functions.The following part

will look at operational budgets and analytically discuss the benefits of preparing such budgets.

Lastly the report will analyse the use of standard costing as a decision making tool.

Management accounting report 3

Introduction

Management accounting differs from financial accounting from various perspectives.

The different points of view from how the two branches of accounting differ and compare will

form the first part of this report. The need to categorize costs regarding types of costs, the way

the costs behave under different circumstances, and the functions and relevance of various costs

will also be analyzed in the report. The different types of operational budgets and the

accompanying benefits will also be part of the report. The report will also examine how standard

costing can be used as a decision-making tool. All the subtopics will be approached from a

management perspective to improve efficiency and decision making.

Question one

Difference between management and financial accounting

Management accounting differs from financial accounting regarding applicability, need,

objectives, segment reporting, focus, and users. Management accounting provides accounting

information whose potential user is the management. On the other hand, financial accounting

information is mostly consumed by users like, government, shareholders, customers and others

who are somehow external to the organization .The objective of preparing management

accounting report emanates as a result of better decision making and provision of necessary

information to enable the managers determine profit levels of all the departments and cost

centers(Drury, 2013p. 12). Financial accounting information is only required to abide by the

company laws and at the same time enlighten the shareholders, customers and competitors about

the profit levels that the organization achieved in a particular financial year.

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Management accounting reports are not mandatory as compared to financial report

which must be prepared every year as they are one of legal requirement. As per the company

law, the organization must make its financial accounting report which must be prepared as per

the accounting and reporting standards and presented in a particular format for easy comparison

with other firms. The report must be presented to shareholders and other external users like

creditors to enable them to make informed decisions. However, management accounting is not a

legal requirement; organizations have the option of not preparing management accounting

reports. The format for management accounting report is also informal. Additionally, the

company management uses the accounting system which it will best understand and easily

determine the profit margins and other important features that touch on the management of the

organization. The reporting frequency of financial accounting is annual, semiannually or

quarterly, the reporting frequency of management accounting reports is not defined as it is on

when required basis.

Management accounting also differs from financial accounting as per the types of reports

presented. While financial accounting focuses on financial statements like statement of financial

affairs, profit and loss accounts, management accounting places a lot of its focus on cost

behavior, break-even analysis and budgets. The segment reporting for financial reporting covers

the whole organization. However, there are figures which might be required to be broken out to

cater for materially insignificant business units. Management accounting, on the other hand,

gives information that pertains to individual units or departments instead of focusing on the

whole organization. The information presented in a financial accounting report is most of the

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times monetary and also verifiable while that prepared in a management accounting report is

mostly Monetary as well as company goal was driven.

Question two

Need for classifying costs by types, behavior, functions, and relevance.

It is important to classify costs regarding types, behavior, functions and relevance to

efficiently determine the cost of various products and profits realized by cost centers. The

initiative also helps in identifying the profitable products, areas as well as activity/capacity

levels. In the same way, planning and controlling become easy as the management comes up

with informed plans on how to carry out the operations of the firm. Therefore costs ought to be

classified regarding functions, types, behaviors and relevance.

Cost classification regarding type falls into various categories like variable cost, direct,

indirect, fixed cost, and operating(Kaplan and Atkinson,2015 p. 33).The classification is

important as it enables the management to understand the various types of costs that the firm is

incurring in a deeper way and therefore help in analyzing the costs.

Fixed costs refer to those costs whose value does not change despite the level of the

firm's operations. Such kind of costs remains the same throughout a particular period. Direct

costs include salary to permanent employees, factory rent among others. Fixed costs are even

incurred when the firm is at zero production. Variable costs are those type of costs whose

magnitude directly varies with the production level of the firm. Under variable costs, the higher

the production/operational level of a firm the higher the variable costs incurred. At zero level of

production, there are no variable costs incurred.it is important for the management to

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differentiate between variable costs and fixed costs so as to come up with ways of doing away

with unnecessary costs and also to increase the firm's efficiency.

Direct costs are those costs which can be directly linked to the production of a certain

product while indirect costs cannot be associated with the production of any product. The

management needs to differentiate between the two costs to effectively determine the

profitability of products / services that the various cost centers are dealing with. Operational

costs refer to costs which have a direct relation to the operations of a firm.It is important to

classify these costs so that the management can clearly understand the costs incurred as a result

of ongoing operations as such kind of costs include business overheads(Ellisonet al 2015p. 40).

Costs classified regarding behaviors show how the total production is affected by

fluctuations in the level of the firm's operations or the level of production. The level of activity

refers to the magnitude of activities or even the number of operations carried out in the firm. The

basic principle when categorizing costs regarding how their behavior and production level is that

costs rise when the level of activity rises. However, there are those costs which remain the same

despite the level of activity. It is, therefore, prudent for the firm to classify these costs as per the

attributed behavior so as to effectively determine the overall profitability of all products and cost

centers. The classification results into various costs like fixed costs, variable costs and semi-

fixed costs. Costs classified regarding functionality falls into production costs and administration

cost.Other costs include: finance cost, selling and distribution cost. The classification is

important as it enables the management to determine the value of cost involved in various stages

of production or operation like production, selling, and distribution among others(Rebane, et al,

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2016p. 3). Relevance costs refer to how important costs are. The classification results into

various types of costs like opportunity costs sunk costs, differential costs and out of pocket costs.

The classification helps in determining those costs which are influential when determining the

profit margin and therefore being given high priority.

Question three

Types of operational budgets

Operational budgets refer to budgets prepared to indicate the expenses and costs incurred

in different types of operations that the firm carries out. Such kind of budgets include: cash

budget ,sales budget, direct material budget, production budget, direct labor budget, , fixed

overhead budget and variable overhead budget. Each of the budgets aforementioned is important

to the management as they help in decision making.

The cash budget is an estimate of all the cash inflows and out flows in an organization

over a given period. Benefits of preparing a cash budget include the ability to identify whether a

firm has enough cash or liquidity to go on with operations. Cash budget also helps in comparing

the receivables with spending and therefore identifying those operations which were not

profitable(Turner, 2016p.31). The sales budget is an estimate of the sales that the company

forecasts to make in a certain period and an accompanying estimate of the earnings or profit

expected from the forecasted sales. A company is required to prepare a sales budget in order to

figure out how resources will be distributed for the forecasted sales to be achieved. The sales

budget also indicates how much profit is expected in a financial year and therefore helping the

managers to effectively set sales targets and also inform the management whether their goals are

achievable.

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A production budget helps in calculating the number of units of products that ought to be

manufactured and sold to achieve a given profit margin.The production budget directly relates to

the sale forecast as well as the planned amount of inventory to keep as safety stock and in a case

of unexpected fluctuation in demand. It is, therefore, important to prepare production budget to

enable the management figure out how much stock is needed and how to meet the production

level set within a certain period. The direct material budget shows both beginning and ending

stock value. The value of direct material required for production and the value of the material

that should be purchased and the accompanying cost in a given period of time. The direct

material budget also forms part of the master budget. The direct material budget must be

prepared to identify the cost of materials that will be used in production process.

The direct labor budget is prepared to show the value of direct labor cost and the labor

hours that are needed in production. The budget, therefore, assist the management to effectively

plan for the firm's labor requirements and the corresponding costs. The variable overhead budget

shows all the manufacturing costs except the costs of direct materials as well as direct labor and

therefore helping management determine the cost of goods sold. The fixed overhead budget is

prepared to show all the fixed cost incurred in a production process and therefore helping in

identification and evaluation of fixed variable costs in a manufacturing process.

Question four

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Standard costing

Standard costing is useful in helping the management to improve costs. Cost

improvement is normally conducted through controlling all the cost that are incurred during

operations .The control also helps in determining the profit margins and consequently firm

profitability. Stock valuation is also made simpler as both new and purchased stock is easily

assigned to various cost centers and periods. The ultimate result of this process is easy

determination of product prices as the profit; margin is easily identified and therefore leading to

better decions (Kaplan and Anderson 2013p. 101).

Conclusion

Management and financial accouting are two distinct areas of accounting and should

always be treated as such from any management perpsecitive.Costs should also be clasifed into

various categories based on relevance,behavior and functionality for informed decision making

and computation of profit margins.Additionally operational budget are an important item in

Planning and controlling of costs for better profits forecasting and evaluation of firms

goals.Finally standard costing helps in cost control and improvement leading to beter decision

making.Standard costing is therefore an important decision making tool which should be

emabraced by all organisations.

Recomendations

The management must make use of both financial and management accounting reports

for imporved decision making.Both reports must also be prepared as per the generally accepted

principles and formats.Costs should be classified by types, behavior, functions, and relevance to

enable management easily calculate the profit margin assist in decision making.Operational

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budgets are vital for planning and forecasting.Standard costing should always be applied to

control and improve costing method because it is an important decision making tool.

Management accounting report 11

Bibliographies

DRURY, C.M., 2013. Management and cost accounting. Springer.P .12

Ellison, S.F., Snyder, C.M. and Zhang, H., 2015. Costs of Managerial Attention and Activity as a

Source of Sticky Prices: Structural Estimates from an Online Market. Mimeo, Massachusetts

Institute of Technology.P. 40

Kaplan, R. and Anderson, S.R., 2013. Time-driven activity-based costing: a simpler and more

powerful path to higher profits. Harvard business press.P .101

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.P33

Turner, J.A., 2016. Net Operating Working Capital, Capital Budgeting, And Cash Budgets: A

Teaching Example. American Journal of Business Education (Online), 9(1), p.31.

Rebane, M., Parts, V. and Värnik, R., 2016, April. CALCULATION OF PRODUCT COST IN

DAIRY FARMING: EXAMPLES FROM ESTONIA. In Economic Science for Rural

Development Conference Proceedings (No. 42).P.3

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