Financial Accounting and Managerial Accounting Systems

Executive Summary

Although, both management accounting and financial accounting systems create and analyze the same financial information however, they differ in certain ways. For instance, the people who use the information differ. The procedures used to make their preparation differ as do the timeframes. Cost accounting is a different area of accounting that is concerned with the study of the costs of items and processes within an business. It’s a major element of managerial accounting because by using it, management also has the ability to make decisions. This paper examines the similarities and differences between these two.

Introduction

Management accounting is an accounting system that supplies the management with strategies that provide an organization with the necessary information for internal purposes such as decision-making and efficient management of resources within the company. Based on the Enotes website (2010) management accounting procedures management accounting give information to those who make decisions in a company. In contrast, the financial accounting procedures give information to users outside the company such as shareholders of the firm or government agencies as well as creditors of the firm. Accounting reports for management are typically created at any time; either daily or weekly, monthly, or even quarterly. When individuals within the organization determine how to manage their accounting practices Financial accounting methods should be in line with external standards, such as the international standards for financial accounting created by the financial accounting standards board (FASB). Cost accounting is frequently misunderstood as the management accounting. Cost accounting is the process of the determination of the cost of an activity, while management accounting is more than that to include a range of management disciplines, which contain financial data for internal decision-making. Cost accounting is considered to be a vital element in management accounting (Enotes website, 2010,).

The characteristics of management accounting procedures

According to the bottom website (2010) netTOM website (2010) states that management accounting procedures must follow the following requirements. They must be pertinent for their purpose, complete precise, clear, and clear for the manager, promptly communicating through the appropriate channels, cost-effective to implement and the amount can be controlled.

The importance of management accounting

Management accounting is a key component of the following roles inside a company:

Planning:

the data given by management accounting procedures is essential for the planning and budgeting process. This is because the data contains a variety of costs, such as price, product costs, and capital expenses.

Control:

The management is in the position to identify which actions are not in accordance with the plan based on the accounts provided from the accounting department of management (netTOM website in the netTOM website,).

Organization:

The management accountant can help strengthen the framework of the organization of the company by adjusting the accounting structure to fit the organization’s structure.

Motivation:

Managers and other staff are always motivated by budgets formulated by the management accountant.

Making decisions:

it is one of the main purposes of management accounting procedures. Through the gathering and analysis of the data, data reports the accountant presents to managers help in the process of making decisions (bottom website 2010,).

Similarities between management and financial accounting

Although the two fields share several differences, they also share several areas that are similar as outlined below.

  • Certification: both fields focus on the importance of certification. To be certified, they must pass the examinations related to every field of specialization. The certifications can be obtained in the forms of certified management accounting as well as certified public accounting (Ehoh website in 2010,).
  • Historical data review: Both systems create reports based on historical data reviews. For financial accounting, this can be used done for comparison purposes for the business in the current and past. For management accounting, it’s to assess the current performance of the company and to develop an economic forecast for to come in (show websites 2010).
  • Currency measurement: The measure used in the generation of reports under both methods is the currencies. The reports that are generated are later used to present tangible data to business owners and to show the financial status of the company. They may also be utilized to create and plan the budget for your company (how website, 2010,).
  • The terminology used in both accounting systems uses the same accounting terms. E.g. credit and debits are used within both systems in order to define the money that is paid out and the funds that come into the business (show website, 2010,).
  • Techniques: the accounting strategies employed by both systems are in essence similar. E.g. the method that is employed to determine the exact cost of the item (show website, 2010,).

There are differences between managerial and financial accounting

Although both financial accounting as well as management accounting provide information to the user to aid in making decisions, however, there are some distinctions between them that are outlined in the table below.

Financial accounting

Management Accounting

The information from the Financial Accounting system is used by outside partners of the company such as shareholders, creditors, and others.

Information derived from management accounting procedures is intended for internal use by the management of the organization.

Financial accounting reports offer details on how an organization’s finances are performing for a specific time frame and also on the financial situation of the company at the end of the report.

Management accounting statements are utilized for controlling and planning activities and are also used for decision-making within an organization.

It is required by the law for companies that are limited to making financial statements.

Management accounting statements do not meet any legal obligation.

Accounting statements for financials aren’t an end in themselves because they focus on the whole company, which is by aggregating revenues and costs from various departments.

Management accounting data should not be the end of an item but instead, aid in making decisions. Additionally, management accounting could help in focusing on specific areas, but not all departments.

In essence, a picture of the historical aspect of a previous operation is presented through the financial accounting processes.

In management accounting In management accounting, both the past of the present and the future planning tools are provided.

The financial accounting records must be kept for at least 12 months.

There is no limit on time for the management accounts.

The international accounting standards should be observed when making the preparation of accounting statements (financial accounts of different businesses are comparisons). I.e. generally acknowledged Accounting Principles must be followed (GAAP).

There aren’t any strict rules that govern the management accounting record-keeping process (no requirement to follow GAAP). The information is used by the managers of the company so there is no requirement for comparison.

A specific format defined by the IAS must be followed when preparing financial statements.

There is no specific accounting system for management and, therefore, there are no particular statements to be made.

The purpose of financial statements typically is financial in nature.

Management accounting data is not always associated with money. It could also be non-monetary.

(NetTOM website, 2010)

Different types of management accounting reports

As management accounting is an integral part of the planning toolkit You can access the following managerial reports in SAC:

Analysis of variance:

This is usually the basis for the typical, projections and the actual costs of an endeavor. One of the most crucial elements in the benchmark used by the company is the gap between the actual and standard costs, i.e. what it would cost to manufacture the same chip for two different manufacturers. The business can evaluate its plans using projections or estimates of variance analysis. By analyzing variance There is a specific area called bottleneck accounting which analyzes the cost-to-cost ratio and the variations caused by manufacturing bottlenecks (lovetoknow website 2010, 2010).

Cost analysis:

It is a kind of management accounting that analyzes the price of a product. It typically starts by finding out the costs of direct costs such as the cost of materials and labor. Other sophisticated methods of management accounting analyze indirect costs. They can include costs projection accounting as well as calculating the opportunity cost and overheads for facilities. These methods are primarily used to analyze different methods in which the company could have used the money (lovetoknow website, 2010,).

Costing based on activity:

This type of costing method examines the costs of certain activities using their cost instead of the product. Its benefit is that it permits an analysis of the interconnected components of a company. This method separates items into

  • Unit-level activities (production of a single unit).
  • Activities that are performed at the batch level (cost by batch).
  • Activities to sustain the product.
  • Activities to sustain the facility.

The above report indicates Normal Costing System Per Unite Costs Retrieved from: http://ivythesis.typepad.com/term_paper_topics/management_accounting_report/

The reports that are prepared for accounting on the profit performance of an organization may also include certain expected managerial accounting responsibilities. The illustration below was taken in the ABC System Profit Performance. ABC System Profit Performance. The following example illustrates the normal costing performance of the system’s profit.

ABC System Profit Performance report retrieved from: http://ivythesis.typepad.com/term_paper_topics/management_accounting_report/

Normal Costing System Profit Performance report retrieved from http://ivythesis.typepad.com/term_paper_topics/management_accounting_report/

A process in business like research development could be evaluated using or through total cost analysis or cycles cost analyses. This is due to the fact that both approaches examine the total costs that are involved in business activities. This is why both techniques are extremely important in making a determination of the profitability of a company (lovetoknow website 2010).

Return on investment is a kind of cost analysis that includes cost analysis in addition to calculating the direct return and also formulating the ratio (lovetoknow website, 2010,).

Projections: These include the forecasts for the future of the company including sales, demand expenses, expenditures, resources needed, and the number of employees. Projections are among the most difficult areas of management accounting due to the difficulties in making forecasts caused by consumer demand, inflation, and the cost of materials. Thus, they are based upon an extensive model.

Balanced scorecard: This usually comprises standard financial measures. These measures are based on the perspectives of the customer’s satisfaction, business processes innovativeness, as well as perspectives on learning (lovetoknow website, 2010,).

Digital dashboards: These are programs that are created as the dashboard of a car to display crucial business information. They give the necessary information in a single glance. With them, the boss can access the most recent information about the company’s business context (lovetoknow website, 2010,).

Conclusion

Financial accounting and management accounting are two main accounting techniques used by a variety of companies. However, despite their usage, they are completely different. While financial accounting is created within a specific amount of time and utilized by outside users and managers, managerial accounting is prepared by the management accountant for internal use by the management. There is no format specific to use, so there is no need to compare it with other companies. The similarities between them include mandatory certifications, the use of currencies, terminology that is used, and similar technology. Some examples of the managerial accounting reports that are available include variation analysis reports, cost study projections, return on investment along digital dashboard boards.

References

Ehow website, 2010: “Similarities of Financial and Managerial Accounting.” Retrieved on February 15, 2010 from: http://www.ehow.com/about_4853367_similarities-financial-managerial-accounting.html

Enotes website (2010). “Managerial Accounting.” Retrieved on February 15, 2010 from: http://www.enotes.com/biz-encyclopedia/managerial-accounting

Lovetoknow website. (2010). “Managerial Accounting.” Retrieved on February 15, 2010 from: http://business.lovetoknow.com/wiki/Managerial_Accounting

NetTOM website. (2010). “Financial and Management Accounting.” Retrieved on February 15, 2010 from: http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page11.htm

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