BU5571 Management Accounting of Versus Financial Accounting

Question

Management accounting refers to a function of tracking internal cost for any business process that helps an organisation, firm or an individual in making decisions related to production, operation and investment in market.The role of the management accountant includes collecting, recording and reporting financial data from several units of an organisation, observing and analysing their budget and suggesting their funding and allocation. This includes estimation of the cost of raw material, labour, manufacturing, sales, advertising and the company's internal operation costs. (CIMA, 2015).

For cost control and performance measurement, costs and revenues must be traced to the individuals who are responsible for incurring them. This system is known as responsibility accounting. Responsibility accounting involves the creation of a responsibility centre Drury, 2015).

You are required to write a report on the role of management accounting, either as a function, or in the context of the person â€“ the management accountant. Your report must address the following:

a) Discuss the role of management accounting in an organisation (make comparisons to financial accounting).
b) 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.
c) Discuss the FIFO (First In First Out) and LIFO (Last In First Out) methods of inventory valuation making comparisons between them.
d) Discuss the concept responsibility accounting. Your discussion must include responsibility centres cost, revenue, profit and investment centres.

Answer

Introduction

This study deals with the concept on management accounting and explains the nature, source as well as purpose of management information in a business context (Suomala, Yrjänäinen and Lukka 2014). Addition to that, Management accounting refers to a function that is used for tracking the interior cost for any trade procedure and helps an association, firm that gets related with the production, operations as well as investment in market. The current segment explains the role of management accounting in a particular business association. Differences between management accounting and financial accounting are portrayed by taking various elements of differentiation and comparison. In the next segment, cost is defined and its classified based on function, type and behavior. FIFO and LIFO methods have been explained with proper justification while managing stock by any business organization (Simons 2013). The last segment explains responsibility centres and its types such as profit centre, revenue centre, investment centre and cost centre.

Role of management accounting in an organization

The role of management accountant is to gather evidence as well as account monetary data from a range of units in an organization (Renz 2016). They are responsible for observing and analyzing the budget as well as suggesting funding and allocation at the same time. This takes into consideration material, labor, advertising, manufacturing as well as sales and internal operation costs of the company. In a large corporation, each separation has a top accountant known as manager where management accounting conducts these divisions that comes under the management of the organizer. The main reason of management accounting in an association

is to hold up gung ho decision-making through collecting, processing as well as communicating information where the organization will plan, manage and assess the industry process and the given business plan. Management accountant has the aptitude to expand as well as use good organization secretarial that is actually essential for most of the persons such as business professionals, top-level executives, information technologists as well as operational and marketing managers (Tucker and D. Lowe 2014).

Management Accounting versus Financial Accounting

Basis of differentiation	Management Accounting	Financial accounting
Objectives	The main objective of management accounting is to guide managers with relevant information so that they can plan, set goals as well as evaluate the goals (Otley 2016)	The main purpose of financial secretarial is to disclose the final results of the commerce as well as monetary situation of business for a specified period (Fullerton, Kennedy and Widener 2014)
Is it optional?	Managerial secretarial reports are not lawfully necessary	It is officially necessary for preparing monetary secretarial reports as well as share with the investors
Segment reporting	Management accounting pertains to entity departments aligning with the whole association (Fullerton, Kennedy and Widener 2014)	Financial accounting pertains to the entire association where specific figures can be broken out for given materiality important commerce results (Otley and Emmanuel 2013)
Audience	The major focus of organization secretarial is to render information that is used by organization, employees and managers	The main focus of financial accounting is to provide information that is used by outside parties like shareholders as well as lenders
Information	Monetary information Company goal driven information	Monetary information Verifiable information
Rules	Managerial accounting reports are used within inside an organization where they are not topic to the legal necessities that monetary accounts are (Messner 2016).	Financial accounting rules are agreed by standards like GAAP and IFRS. There are various lawful requirements used by companies after following monetary accounting standards
Focus	The main focus of managerial accounting is on the present as well as future forecasts for a given period	The main focus of financial accounting is to evaluate reports based on previous years (Fullerton, Kennedy and Widener 2014)
Format	Informal format used based on department or company basis as and when required (Suomala, Yrjänäinen and Lukka 2014)	Specific format where various organization can be compared
Reporting frequency and duration	Daily Weekly Monthly	Annually Semi-annually Quarterly Yearly

Classification of costs

By function

Cost had been divided by its functions namely production cost and non-production cost.

Production

Production cost is those costs that represents the total manufacturing or product cost. Addition to that, production costs refers to the cost that is used by business at the time of manufacturing of goods as well as services. These costs take into consideration variety of expenses but not limited to labor, consumable manufacturing supplies as well as raw materials and overhead. Therefore, any taxes levied by the government or royalties are actually owed by natural resources that is extracted by companies and terms as production costs (Kaplan and Atkinson 2015).

Non-production

Non-production costs are those cost that takes into consideration prepared operating cost of the commerce and further alienated into types such as management cost, distribution cost and advertising cost. Non-productive costs of an organization are those costs that are not classified as manufacturing overhead (Fullerton, Kennedy and Widener 2014). This takes into consideration administration overheads, distribution overhead, selling overhead as well as research and development costs.

By type

Direct

Direct cost is a cost that can be accredited to the manufacture of exact goods as well as services. Some overhead costs can be straight qualified to a scheme and termed as direct costs (Fullerton, Kennedy and Widener 2014).

Indirect

Indirect costs are not openly answerable to a cost thing like a specific scheme, purpose and facility. This can be either fixed or variable in nature. This cost takes into consideration costs like reduction or managerial expenses that are hard to allocate for a exact product and termed as indirect costs (Fullerton, Kennedy and Widener 2013).

By behavior

Cost can be divided by its behavior namely fixed cost, variable cost and semi-variable costs.

Fixed Cost

Fixed cost is those cost that relates to time or period. Addition to that, fixed cost remains unchanged irrespective to production volume such as insurance and factory rent. Fixed cost depends upon the cost per unit that actually fluctuates based on production (Dekker 2016). There is inverse relationship between cost per unit and production if one increases then other decreases automatically.

Variable Cost

Variable cost is those cost that directly associates with unit. In other words, this unit increases or decreases in accordance with the volume of production (Cooper, Ezzamel and Qu 2017). Variable cost includes direct material and direct labor where changeable cost per unit remains steady irrespective of manufacture units.

Semi-variable

This cost is the combination of fixed cost and variable cost where detailed segment of the costs remainder fixed and the stability portion are variable.

FIFO versus LIFO

Points of Differentiation	FIFO (First-in first out)	LIFO (Last-in first out)
Definition	FIFO method is one of the inventory valuation technique where first received stock of goods are issued first and then the later (Contrafatto and Burns 2013)	LIFO method is one of the inventory valuation technique where last received stock of goods are issued first (Fullerton, Kennedy and Widener 2014)
Stock in hand	Latest stock representation	Oldest stock representation
Inflation	In case of inflationary condition, income tax portrays higher amount	Income tax portrays minimum amount where there is inflation present in the economy (Coad, Jack and Kholeif 2015)
Restrictions	No such restriction	IFRS does not recommend the use of LIFO for inventory valuation in case of accounting
Deflation	Reduced income tax that represents deflationary conditions	As far as deflation is concerned, large amount is income tax is represented
Current market price	Represents cost of unsold stock	Represents cost of goods sold
Implications	Factors Increasing prices Lower Material cost Higher Closing stock Decreasing prices Higher Material cost Lower Closing stock	Factors Increasing prices Higher Material cost Lower Closing stock Decreasing prices Lower Material cost Higher Closing stock

Both the methods known as LIFO and FIFO have its advantages and disadvantages. Among both the methods, LIFO methods do not inflate profits when the process of products is rising but there are complications in the particular method. It depends upon the irrational assumptions where LIFO method is not used in recent times because it handles the latest stock in hand first. This is actually unfair as earliest stock stands in the queue. (Christ and Burritt 2013). On the contrary, FIFO method is simple to understand and operate at the same time. This method portrays correct picture when there is fall in the price. Both the methods are still used in business organization based on the situation and nature of the stock. From the above differences, it can be easily understood that both the methods are unique in nature as well as different from one other in every aspects (Fullerton, Kennedy and Widener 2014).

Responsibility Accounting

Responsibility accounting is one of the coverage scheme that includes income, price as well as earnings information at the level of person managers who are directly accountable. The main intention is to render relevant information to those public who are able to judge the level of performance (Chenhall and Moers 2015). Therefore, responsibility accounting is one of the common used reporting systems that are applied in an organization where there is distribution of responsibility throughout the corporate hierarchy.

Responsibility centres

Responsibility center is one of the part or subunit of a company where managers have the authority as well as responsibility. Detailed information is provided for the company through presenting organizational chart in a logical way where sources are used for determining the responsibility centers (Suomala, Yrjänäinen and Lukka 2014). There are four types of accountability centers namely cost centre, profit centre, investment centre and revenue centre.

Cost Centre

Cost centre is one of the segments of an organization where managers are mostly accountable for the cost that is incurred in that particular section but not for revenues. In that case, accountability in a cost centre is restricted to cost (Fullerton, Kennedy and Widener 2014). It is the responsibility of the cost centre managers for controlling the entire price in that section of business but not over revenues. Cost centre is the most important forms of responsibility centres.

Revenue Centre

Revenue centre is one of the responsibility centres where the prime responsibility was to generate sales revenues. It is the responsibility of the revenue centre managers for controlling the expenses incurred by the marketing department. Revenue centre performance can be understood by making the comparisons between actual revenue and budgeted revenues.

Profit Centre

Profit centre is one of the responsibility centres where manager are responsible for both revenues as well as costs. It is the responsibility of the manager for taking decisions that affect both costs as well as revenues for the given subdivision or division. The main objective of income centres is to make profit within an organization where the profit centre managers takes into consideration both production as well as marketing of a product (Fullerton, Kennedy and Widener 2014).

Investment centres

Investment centres is one of the responsibility centres where the managers are responsible for both profits as well as investments at the same time. It is responsibility of speculation centre supervisor that has managed over revenues as well as operating cost and amount invested in the assets within an organization. In other words, they need to formulate recognition policy that has express influence on money owing compilation as well as record policy that determines the speculation in stock. The supervisor is responsible for managing a cost centre or profit centre (Suomala, Yrjänäinen and Lukka 2014).

Conclusion

From the above analysis, it is concluded that management accounting plays an important role in any business organization in terms of performance. From the above analysis, it is understood that management accountants are responsible for rendering information and involved in proper decision-making process. Financial accounting and management accounting are explained above based on their objectives, nature and scope. Cost is classified into various types that are explained above with proper justification. LIFO and FIFO method is explained in the study that will bring proper insights of information what stocks needs to used first and then the later. Therefore, responsibility centres is explained and further divided into cost centres, profit centres as well as investment centres and revenue centre.

Reference List

Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, pp.1-13.

Christ, K.L. and Burritt, R.L., 2013. Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production, 41, pp.163-173.

Coad, A., Jack, L. and Kholeif, A.O.R., 2015. Structuration theory: reflections on its further potential for management accounting research. Qualitative Research in Accounting & Management, 12(2), pp.153-171.

Contrafatto, M. and Burns, J., 2013. Social and environmental accounting, organisational change and management accounting: A processual view. Management Accounting Research, 24(4), pp.349-365.

Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research.

Dekker, H.C., 2016. On the boundaries between intrafirm and interfirm management accounting research. Management Accounting Research, 31, pp.86-99.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), pp.50-71.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), pp.414-428.

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

Messner, M., 2016. Does industry matter? How industry context shapes management accounting practice. Management Accounting Research, 31, pp.103-111.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

P. Tucker, B. and D. Lowe, A., 2014. Practitioners are from Mars; academics are from Venus? An investigation of the research-practice gap in management accounting.Accounting, Auditing & Accountability Journal,27(3), pp.394-425.

Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.

Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed.

Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A reflective analysis of conducting interventionist research in management accounting. Management Accounting Research, 25(4), pp.304-314.

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