Management accounting report

Management accounting report 1
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
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
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.
Management accounting report 4
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
Management accounting report 5
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 is important for the management to
Management accounting report 6
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,
Management accounting report 7
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
Management accounting report 8
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
Management accounting report 9
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).
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.
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
Management accounting report 10
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
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
Development Conference Proceedings (No. 42).P.3

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