Cost Accounting, Management Accounting and Financial Accounting

What is the meaning of Cost Accounting?

 

Cost accounting is the classification, recording and appropriate allocation of expenditure for    the determination of the cost of products or services, and for the presentation of suitability arranged data for the purpose of control and guidance of management. It is an internal reporting system that aims to assist the it primarily emphasizes on cost and deals with collection, analysis, interpretation and presentation for managerial decision making on various business problems.

§  Explain any five objective/functions of cost accounting.

Five objectives and functions of cost accounting are mentioned below:

1.      To ascertain cost: under cost accounting, costs are collected, classified and analyzed with the aim of finding out the total as well as per unit cost of goods, services, process, contract, etc.

2.      To analysis cost and loss: another objective of cost accounting is to analyze the cost of each activity. The analyze the cost is necessary to classify the cost into controllable or incontrollable , relevant or irrelevant, profitable or unprofitable ,etc.

Write any five important/advantage of cost accounting

§  The importance/advantage of cost accounting are presented below:

1.      Helps in controlling cost: cost accounting helps in controlling cost by applying some technique such as standard costing and budgetary control.

2.      Provide necessary cost information: it provide necessary cost information to the management for planning, implementing and controlling, the activities.

3.      Ascertains the total and per unit cost information: it ascertains the total and per unit cost of production of goods and services that helps to fix the selling price as well.

4.      Introduce cost reduction programmers: it helps to introduce and implement different cost reduction programmers.

5.      Disclosed the profitable and non -profitable activities: it discloses the profitable and non-profitable activities that enable management to decide to eliminate or contract unprofitable activities and expand or develop the profitable activities.

§  Enlist the scope of cost accounting

§   The scope of cost accounting can be enlisted as  follows:

1.      Cost classification

2.      Cost recording

3.      Cost allocation

4.      Cost determination

5.      Cost comparison

6.      Cost control

7.      Cost reporting

8.      Cost reduction

§  Discuss any five limitations of cost accounting.

§  Five limitations of cost accounting are as follows:

1.      Lack of uniformity: cost accounting lacks a uniform procedure. It is possible that two equally competent cost accountants may arrive at different results from the same information.

2.      Developing stage: cost accounting is in developing stage since its principles, concepts and conventions are not fully developed.

3.      Costly: there are many formalities which are to be observed by a small and medium size concern due to which the establishment and running costing system becomes more expensive.

4.      Ignorance of futuristic situation: the contribution of cost accounting for handling futuristic situation has not been much. For example, it has not evolved so far any tool for handling inflationary situation.

5.      Lack of double entry system: under cost accounting double entry is not adopted. So it does not enable to check the arithmetical accuracy of the transaction and locate the errors.

§  Write the meaning of management accounting.

Ø  Management accounting is one of the important branches of accounting. it is primary concerned with use of accounting data and information for planning, policy making, decision making and controlling. Its main focus is directed towards internal planning and control activities. In the words of T. lucey, “management accounting is primarily concern with the data gathering analysis, processing, interpreting and communication the resulting information foe use within the organization so that management can more effectively plan, make decision and control operations.

§  Write any five objectives/function/advantage of management accounting.

Ø  The main objective and function of management accounting are summarized as under:

1.      To help in formulating plans: it assists management in planning is based on facts are provided by past accounts on which forecast of future transaction is made.

2.      To help in  the interpretation of financial information: management accountant presents the accounting information in an intelligent and simple manner that will help the management in interpreting the financial data, evaluating alternative course of action available and guiding it in taking decision to have the most desired financial result.

3.      To help in controlling performance: management accounting helps in controlling the performance and take suitable actions in order to correct the adverse deviation by revising the budgets if needed.

4.      Helps in organizing: management accountant recommends the use of budgeting, responsibility accounting, cost control technique and internal financial control. These all needs the intensive study of the organization structure. In turn, they help to rationalize the organizational structure.

5.      Helps in solving business problem: management accounting provides accounting data to the management along with recommendation as to choose which alternative will be the best.

§  Enlist the scope of management accounting.

Ø  The scope of management accounting can be enlisted as follows:

1.      Continuance of intuitive decision- making: management accounting is supposed to eliminate the intuitive decision-making process of management and replace it with scientific decision-making.

2.      Broad-based scope: the scope of management accounting is wide and broad-based and this creates many difficulties in the implementation process.

3.      Mainly based on accounting: management accounting is mainly based on financial accounting and cost accounting therefore, the effectiveness of management accounting largely depends on the effectiveness of these accounting.

4.      Evolutionary stage: management accounting is a new disciple and a growing subject too. It is still in the infancy stage and undergoing evolutionary process. Naturally, it faces certain obstacles before achieving perfection and finality.

5.      Not an alternative to the management: management accounting is not an alternative to the management. It just helps the management to carry out its activities.

Ø  “Management accounting provides information for decision making”. Explain or, “management accounting is concerned with providing accounting information to the management accounting provides both monetary and non- monetary information” comment this statement.

Ø  The management of a firm is involved in making a number of decision to run a business properly and smoothly. To make decision, the management needs data and information. Management accounting collets monetary as well as non-monetary information and supplies the same to the management for planning, implementation and controlling. It collects information from financial accounting, cost accounting provide monetary information only but the management needs some non- monetary information as well. This need of management is fulfilled by management accounting.

Management accounting is more concerned with the interpretation of information to assist the management in planning, controlling, decision making and appraising performance. Explain.

§  Management accounting collects and analyzes information from financial and cost accounting. Besides these it also collects non -monetary and qualitative information from other sources. The main objective of collection and analysis of such information is to find out the deviations between the budgeted and actual performance and takes necessary actions if any deviation takes place. This types of analysis also assists to make the future plan of the organization. Under management accounting the responsibilities are assigned to each person, department and activity. The performance appraised is done in a regular basis to ensure that the responsibilities are properly information to the management to perform its different activities.

§  Business planning is one of the basic functions of management accounting explain.

 In an organization, the management carries out three major activities planning, directing and motivating, and controlling. Out of these activities planning is very important function. Planning is deciding in advance the future course of action. Planning requires information which is provided by management accounting. Management accounting also provides non- monetary and qualitative information to the management for enabling it for planning. In this way, business planning remains are one of the important function of management accounting. Its main focus is directed towards internal planning and control activities.

• Objective of management accounting are far wider than that of financial accounting. Explain or, management accounting is more than a shift from record keeping. Explain.

Ø  The development of accounting shows that financial accounting was evolved first followed by cost accounting and management accounting. Financial accounting is concerned with recording the day to day transactions for making the financial statement. Since, the information derived from financial accounting are used under management accounting is a shift from financial accounting but, scope of management accounting goes far beyond this. Financial accounting is historical in nature. In this way, management accounting follows wider perspective than financial accounting.

• Financial accounting is historical in nature whereas management accounting is futuristic in nature elaborate this statement.

Financial accounting is primarily concerned with keeping the record of the transaction for the purpose of ascertaining profit/loss as well as financial conditions of the business. Thus, it is historical in nature. It provides information about the profit/loss as well as financial conditions after they take place because of which financial accounting is also called post-mortem examination. Management accounting is more concerned with the collection of data and information from various sources for planning policy making, controlling, decision making, forecasting for future and attempt to reduce the risk and of the business so, it is futuristic in nature.

Ø  Different between financial and cost accounting.

The differences between financial accounting and cost accounting are mentioned in the        following table:

1. Purpose: the main objective of financial accounting is to ascertain the profit earned or loss suffered by a firm during a particulars period of time as well as financial position on a given date. But the main objective of cost accounting is to provide costing information to the management to facilitate planning, policy making and decision making.
2. Statutory obligation: financial accounting is a statutory obligation for a firm whereas cost accounting is not a statutory obligation.
3. Users: the users of financial accounting are external to the organization but the users of cost accounting are internal to the organization.
4. Pattern of analysis: financial accounting analysis the business affairs in totality whereas cost accounting analyses the business affairs product-wise, service wise, element wise or activity wise.
5. Cost control: financial accounting does not have any provision of cost control but cost accounting aims on controlling costs.

• Differentiate between cost accounting and management accounting:

Ø  The differences between cost and management accounting are presented below:

1.      Meaning: cost accounting is concerned with the recording of cost, ascertainment of cost of product and services and analysis of cost of product and services and analysis of cost. Management accounting is concerned with assisting the management in planning, decision making and controlling.

2.      Objective: the main objective of cost accounting is to ascertain, analysis and control of cost. But providing necessary information to the management is  the main objective of the management accounting.

3.      Nature: cost accounting is historical as well as futuristic in nature whereas management accounting is futuristic in nature.

4.      Data: cost accounting consider the quantitative figures only. Besides the quantitative figures, management accounting considers the qualitative aspects as well.

5.      Scope: the scope of cost accounting is comparatively narrow than management accounting.

• Differentiate between financial and management accounting.

Ø   The differences between financial accounting and management accounting are mentioned below:

1.      Users: financial accounting is more confined to prepare the account to meet the requirements of external parties. But management accounting provides information to the internal users.

2.      Methods: financial accounting is based on double entry system. But management accounting is not based on double entry system.

3.      Principle: financial accounting is based on GAAP. In addition to GAAP, management accounting is based on reality, forecasting and analysis.

4.      Measurement: in financial accounting only monetary transaction are recorded. But in management accounting certain non-monetary are also considered.

5.      Time span: Under financial accounting, the reports are generally prepared for a certain period of time whereas the repots under management accounting can be prepaid at any time as per requirement.