Managerial & Financial accounting

Advance e Cost And Managements M.com (F13)
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Financial accounting
Financial accounting (or financial accountancy) is the field of accounting concerned with the
summary, analysis and reporting of financial transactions pertaining to a business. This involves
the preparation of financial statements available for public consumption.
Cost accounting
The recording of all the costs incurred in a business in a way that can be used to improve its
management.
Managerial accounting
The process of identifying, measuring, analyzing, interpreting, and communicating information
for the pursuit of an organization's goals.
This is also known as "cost accounting."
Accounting has been called the language of business and is used in many different situations.
Cost accounting is used to streamline manufacturing operations. Managerial accounting is used
to compile data necessary for sound management decisions. Financial accounting is used to
report the financial result of a company's operations. Public companies are required to report
their results to the public, while private companies report to their owners. In either case,
accounting creates financial statements for analysis.
Financial accounting
Users of the Financial Statements
The users of financial information are essentially divided into two groups:
(1) Internal Users
(2) External Users.
Internal Users:
(a) Owner or owners:
The owner or owner’s invests capital in the business with a view to earning profit they always
keep their waterfowl eyes on earning of capital invested.
(b) Managers:
The managers use various information of financial statements for policy formulation, planning,
co-coordinating and communication.
(c) Employees:
The employees for the sake of ensuring their job securities keep constant watch on financial
statement and nature of financial changes. They also keep observing the profit earning capacity
of the business.

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External Users:
The external users of accounting information are many in number. They are stated below:
(a) Investors:
The investors take decision after careful study before investment the investors are to depend on
necessary accounting information to know where the investment is profitable or where it is not
and to take decision in the regard.
(b) Loan givers and creditors:
The Capital supplies by the owners of the business concerned are not sufficient in many cases for
running the business successfully. In that case the business concern is to depend upon loan
ginners and creditors, Bank, industrial bank and insurance companies are included in loan giving
organizations.
(c) Tax authority:
Actual information is needed to know whether fixation of tax has been proper or not. Tax infixed
depending upon profit of the organization and VAT or current tax is determined on the basis of
trading.
(d) Regulatory agency:
Regulatory agencies like register of joint stock Company, stock exchange authority asks for
necessary information from the companies concerned to know if the joint stock company will run
as per specific lows.
(e) Consumers:
With the help of proper management depending on accurate accounting system production cost
and transport cost may be minimized and at the same time the qualitative standard of
commodities can be improved. For this reason consumers remain interested to know whether in a
business concern accounting system prevails or not.
(f) Researchers and economist:
Researchers and economist want to know accounting information for finding out or innovating
any system relating to a particular business concern and for economic plan.
(g) Unions:
Labor unions use financial information to judge whether employee wage rates and benefit
packages are fair.
(h) Brokers and Analysts:
Brokers and analysts are often potential investors that use financial information about companies
to chart performance trends and growth rates. These external users create reports that influence
current investor’s opinions and actions.
(i) Press:
Finally, the last main external user is the press. Although the press doesn't use financial
information for its decision bases, it does report on the financial information of companies.

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Uses of cost accounting
1. Helps in Ascertainment of Cost
Cost Accounting helps in the ascertainment of cost of each product, process, job, contract,
activity etc. by using different methods of costing such as Job Costing and Process Costing.
2. Helps in Control of Cost
It helps in the control of material costs, labor costs and overheads by using different techniques
of control such as Standard Costing and Budgetary Control.
3. Helps in Decision making
It helps the management in making various decisions such as –
(a) Whether to make or buy a component
(b) Whether to retain or replace an existing machine
(c) Whether to process further or not
(d) Whether to shut down or continue operations
(e) Whether to accept orders below cost or not
(f) Whether to expand or not
(g) How much reduction in the selling price should be made in case of depression?
4. Helps in fixing Selling Prices
It helps the management in fixing selling prices of products or services by providing detailed
cost information.
5. Helps in Inventory Control
It helps in inventory by using various techniques such as ABC analysis, Economic Order
Quantity, Stock levels, Perpetual Inventory system and Continuous Stock Taking, Inventory
Turnover Ratio etc.
6. Helps in Cost reduction:
It helps in the introduction of cost reduction programmed and finding out new and improved
method to reduce costs.
7. Helps in measurements of Efficiency:
It helps in measurements of efficiency of operations through establishment of standards and
variance analysis.
8. Helps in preparation of Budgets:
It helps in the preparation of various budgets such as Sales Budget, Production Budget, Purchase
Budget, Man-Power Budget, Overheads budget.
9. Helps in identifying Unprofitable Activities:
It helps in identifying unprofitable activities so that the necessary correction action may be taken.

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10. Helps in identifying Material Losses:
It helps in identifying material losses such as wastage, scrap, spoilage and defective through
report on material losses so that the necessary corrective action may be taken.
11. Helps in identifying Idle Time and Labor Turnover:
It helps in identifying idle time and labor turnover through the report on idle time and labor
turnover so that the necessary corrective action may be taken.
12. Helps in identifying Idle Capacity:
It helps in identifying idle capacity so that the necessary corrective action may be taken.
13. Helps in improving Productivity:
It helps in improving productivity of materials and labor.
14. Helps in Cost Comparison:
It helps in Cost Comparisons such as –
(a) Comparison with Standard Figures:
Comparison of actual figures with standard of budgeted figures for the same period and the same
firm;
(b) Intra-firm Comparison:
Comparison of actual figures of one period with those of another period for the same firm;
(c) Inter-firm Comparison:
Comparison of actual figures of one firm with those of another standard firm belonging to the
same industry; and
(d) Pattern Comparison:
Comparison of actual figures of one firm with those of industry to which the firm belongs.
15. Helps in checking the accuracy of financial accounts:
It helps in checking the accuracy of financial accounts with the help of reconciliation statement
prepared to reconcile the profit as per cost accounts with the profit as per financial accounts.
Users of Managerial Accounting
Sales Managers
Sales managers work with managerial accountants to determine the impact of various pricing
decisions, to create a sales budget and to evaluate unique business opportunities. Sales managers
negotiate with customers regarding sales volumes and pricing options.
Production Managers
Production managers use labor reports, material reports and variance reports created by
managerial accountants. Production managers oversee the labor hours, including overtime hours,
spent with each production run.

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Senior Management
Senior management works with managerial accountants to learn the financial implications of
various actions being considered and to receive ad hoc information. Senior management spends
time considering the direction of the company.
Employees
Employees work with managerial accountants to maintain their own responsibilities. For
example, an employee running a machine might need to know the production levels for each of
his shifts to ensure he meets a quota. The managerial accountant can provide production quantity
information for the employee.
Comparisonchart
Financial Accounting Management Accounting
External vs.
Internal
A financial accounting system produces
information that is used by parties
external to the organization, such as
shareholders, bank and creditors.
A management accounting system
produces information that is used
within an organization, by managers
and employees.
Segment
reporting
Pertains to the entire organization or
materially significant business units.
May pertain to smaller business units
or individual departments, in addition
to the entire organization.
Focus
Financial accounting focuses on history. Management accounting focuses on
future & present.
Format
Financial accounts are supposed to be in
accordance with a specific format, so that
financial accounts of different
organizations can be easily compared.
(Formal recordkeeping)
No specific format is designed for
management accounting systems.
(Formal and informal recordkeeping)
Planning and
control
Financial accounting helps in making
investment decisions, and in credit rating.
Management accounting helps
management to record, plan and
control activities to aid decision-
making process.
Information
Quantitative and monetary Quantitative and qualitative; Monetary
and non-monetary

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Financial Accounting Management Accounting
Users
Financial accounting reports are primarily
used by external users, such as
shareholders, bank and creditors.
Management accounting reports are
exclusively used by internal user’s viz.
managers and employees.
Reporting
frequency and
duration
Well-defined - annually, semi-annually,
quarterly. (Verifiable)
As needed - daily, weekly, monthly.
Optional
Preparing financial accounting reports are
mandatory especially for limited
companies.
There are no legal requirements to
prepare reports on management
accounting.
Objectives
The main objectives of financial
accounting are :I) to disclose the end
results of the business, and ii) to depict
the financial condition of the business on
a particular date.
The main objectives of Management
Accounting are to help management
by providing information that used by
management to plan, evaluate, and
control.
Legal/rules
Drafted according to GAAP - General
Accepted Accounting Procedure.
Drafted according to management
suitability.
Accounting
process
Follows a full process of recording,
classifying, and summarizing for the
purpose of analysis and interpretation of
the financial information.
Cost accounts are not preserved under
Management Accounting. The
necessary data from financial
statements and cost ledgers are
analyzed.
Strategy & Management Accounting
Strategic decision
Strategic decision making, or strategic planning, describes the process of creating a company's
mission and objectives and deciding upon the courses of action a company should pursue to
achieve those goals.
The strategic decision process begins with the introduction of a simple four-phase decision
making model.

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The elements of this model are:
 Decision Framing
 Information and Intelligence Gathering
 Coming to Conclusions
 Learning from Experience
There are two types of strategic approach:
 Emergent Strategy
 Deliberate Strategy
Deliberate strategy
It is process driven. Traditional calls for "strategic planning" indicate a desire for an analytic and
somewhat linear approach to strategy.
Emergent strategy
On the other hand, is characterized by recursive learning loops, as an organization sets about on a
course and then senses and reacts to opportunities that may not have been recognized at the
onset.
Management Accounting
Management accounting helps answer important questions such as:
Who are our most important customers, and how do we deliver value to them?
What substitute products exist in the marketplace, and how do they differ from our own?
What is our critical capability?
Will we have enough cash to support our strategy or will we need to seek additional sources?
Value chain analysis (VCA)
It is a process where a firm identifies its primary and support activities that add value to its final
product and then analyze these activities to reduce costs or increase differentiation.”
“Value chain represents the internal activities a firm engages in when transforming inputs into
outputs.
1) Primary Activities
Those that are directly concerned with creating and delivering a product (e.g. component
assembly);
2) Support Activities
This whilst they are not directly involved in production, may increase effectiveness or efficiency
(e.g. human resource management). It is rare for a business to undertake all primary and support
activities.

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Primary Activities
Primary value chain activities include:
Primary Activity Description
Inbound logistics
All those activities concerned with receiving and storing externally sourced
materials
Operations
The manufacture of products and services - the way in which
resource inputs (e.g. materials) are converted to outputs (e.g. products)
Outbound
logistics
All those activities associated with getting finished goods and services to buyers
Marketing and
sales
Essentially an information activity - informing buyers and consumers about
products and services (benefits, use, price etc.)
Service
All those activities associated with maintaining product performance after the
product has been sold
Support Activities
Support activities include:
Secondary
Activity
Description
Procurement
This concerns how resources are acquired for a business (e.g. sourcing and
negotiating with materials suppliers)
Human Resource
Management
Those activities concerned with recruiting, developing, motivating and
rewarding the workforce of a business
Technology
Development
Activities concerned with managing information processing and the
development and protection of "knowledge" in a business
Infrastructure
Concerned with a wide range of support systems and functions such as finance,
planning, quality control and general senior management

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Supply chain analysis
Supply chain analysis consists in a quantitative analysis of inputs and outputs between firms,
prices and value added along a supply chain through agent accounts. These inputs and outputs
can be expressed in physical flows of material and services needed to manufacture a final
product as well as in their monetary equivalents.
Key success factors
The combination of important facts that is required in order to accomplish one or more desirable
business goals.
Factors:
Product Development
Whether you sell a tangible product or a service, if you do not keep up with the changes in your
marketplace as dictated by your customers, you cannot survive.

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Cash Management
In any industry, with any company, one of the main keys to success is managing your cash flow
properly. Maintain open lines of communication to potential investors and lenders at all times.
The ability to manage your business so you have cash on hand can also help you get financing.
When lenders see that you are able to balance your books and maintain a profit, they are more
likely to approve your financing. Cash on hand is also important for those times when you
cannot get approved for financing but need operating capital right away. Learn to manage your
cash to help your company survive and prosper.
People
Those who make up the organization.
Purpose
A reason for organizing and working together
Processes
Activities which the people undertake to fulfill their purpose
Physical Resources
A place to work, the right equipment, money to pay the bills and the people who work there.
Customers
People outside the organization who are willing to pay money in return for the products and
services the organization provides; for government organizations taxpayers are the customers;
many nonprofits depend on contributions from donors who believe in the value of what the
organization is doing.
Managing and developing people
People today want some direction and structure, but they also want freedom and encouragement
to develop their skills and knowledge.
Strategic focus
In today’s rapidly changing world, it’s not just enough to have a purpose for existing. Leaders
have to focus the organization’s resources on the greatest opportunities, which shift with each
new day.
Operations, or what people do all day - What the people in your organization do day in and day
out to create value for customers, to earn or justify income, strongly determines whether you
succeed or fail.
Quality
Maintain the quality of product. Also increase it.
Time
Do the work on time.
Innovation
Bring innovation in the product and services.

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Decision-making
Decision-making is an essential skill for operational team leaders. Applying a systematic method
to solve problems is critical to team performance and the safety of operations. Team members
share the responsibility for solving problems by contributing timely and valuable information to
the team leader.
Decide model
Structured Decision Making
D Detect change
E Estimate significance of change
I Identify options
C Choose outcome
D Do best option
E Evaluate results
StepsofDecisionMakingProcess
Following are the important steps of the decision making process. Each step may be supported
by different tools and techniques.
Step 1: Identification of the purpose of the decision
In this step, the problem is thoroughly analyzed. There are a couple of questions one should ask
when it comes to identifying the purpose of the decision.
What exactly is the problem?
Why the problem should be solved?
Who are the affected parties of the problem?
Does the problem have a deadline or a specific time-line?
Step 2: Information gathering.
In the process of solving the problem, you will have to gather as much as information related to
the factors and stakeholders involved in the problem. For the process of information gathering,
tools such as 'Check Sheets' can be effectively used.
Step 3: Principles for judging the alternatives
In this step, the baseline criteria for judging the alternatives should be set up. When it comes to
defining the criteria, organizational goals as well as the corporate culture should be taken into
consideration.
Step 4: Brainstorm and analyze the different choices
For this step, brainstorming to list down all the ideas is the best option. Before the idea
generation step, it is vital to understand the causes of the problem and prioritization of causes.

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Step 5: Evaluation of alternatives
Use your judgment principles and decision-making criteria to evaluate each alternative. In this
step, experience and effectiveness of the judgment principles come into play. You need to
compare each alternative for their positives and negatives.
Step 6: Select the best alternative
Once you go through from Step 1 to Step 5, this step is easy. In addition, the selection of the best
alternative is an informed decision since you have already followed a methodology to derive and
select the best alternative.
Step 7: Execute the decision
Convert your decision into a plan or a sequence of activities. Execute your plan by yourself or
with the help of subordinates.
Step 8: Evaluate the results
Evaluate the outcome of your decision. See whether there is anything you should learn and then
correct in future decision making. This is one of the best practices that will improve your
decision-making skills.
Planning & Controlling related with decision making
Planning
How do organizations formalize their strategic plans?
Control
How do organizations assess the implementation of their plans?

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Management Accounting Guidelines
 Cost – benefit approach is commonly used: benefits generally must exceed costs as a basic
decision rule
 Behavioral Considerations – people should be involved in decisions
 Different definitions of cost may be used for different applications.
Job order costing
Job order costing or job costing is a system for assigning manufacturing costs to an individual
product or batches of products. Generally, the job order costing system is used only when the
products manufactured are sufficiently different from each other. (When products are identical or
nearly identical, the process costing system will likely be used.)
Job costing involves the following accounting activities:
 Materials. It accumulates the cost of components and then assigns these costs to a product or
project once the components are used.
 Labor. Employees charge their time to specific jobs, which are then assigned to the jobs based
on the labor cost of the employees.
 Overhead. It accumulates overhead costs in cost pools, and then allocates these costs to jobs.
Cost object.
In a job costing system, the cost object is a job. Sometimes a job consists of an individual
product, and sometimes it consists of a batch of products.
Cost pools
A cost pool is a group of individual costs that are accumulated for a particular purpose. In the
second stage, costs are allocated from the cost pool to individual jobs.
Allocation base
It is chosen to assign overhead costs to cost objects. If some portion of an overhead cost pool
varies with a cost driver, it can be used as the allocation base. For example, the cost of some
employee benefits varies with labor hours and labor costs.
Product Cost= Direct Material + Direct Labor + Factory Overhead
Cost-driver
It is a base used for allocation of costs to the cost pools (Ex. Number of machine hours, number of
labor, area occupied, number of engineering hours etc.).

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For Job costing four steps as follows.
1. Identify the relevant cost object.
In a job costing system, the cost object is a job. Sometimes a job consists of an individual
product, and sometimes it consists of a batch of products.
2. Identify one or more overhead cost pools and allocation bases.
Overhead costs are accumulated in one or more cost pools. Some organizations use a single
company-wide or plant wide cost pool for all fixed and variable overhead costs. Other
organizations use separate cost pools for fixed and variable overhead costs.
3. For each overhead cost pool, calculate an overhead allocation rate.
The allocation rate is the dollar amount per unit of allocation base used to allocate overhead to
each cost object. (In a job costing system, each job is a cost object.) If we know the total amount
of overhead cost and the total quantity of the allocation base, the actual overhead allocation
Rate is calculated as follows:
Actual allocation rate = Actual overhead cost / Actual quantity of allocation base
Alternatively, overhead may be allocated using an estimated allocation rate. To compute an
estimated rate for the next period, we estimate total overhead costs and the total quantity of the
allocation base, and then calculate the rate as follows:
Estimated allocation rate = Estimated overhead cost / Estimated quantity of allocation base
4. For each overhead cost pool, allocate costs to the cost object.
We allocate overhead costs by multiplying the overhead allocation rate times the quantity of the
allocation base used by each job.
Actual Costing
It uses the actual direct cost rates times the actual quantities of the direct-cost inputs in order to
trace direct costs to a cost object.
The following seven-step approach is used to assign actual costs to individual jobs:
1. Identify the chosen cost object(s).
2. Identify the direct costs of the job.
3. Select the cost -allocation base(s).
4. Identify the indirect costs associatedwith each cost-allocation base
5. Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the
job.
6. Compute the indirect costs allocated to the job.
7. Compute the cost of the job by adding all direct and indirect costs assigned to it.
Example
Swing Squeak (Sw&Sq) Limited manufactures various sporting goods.
Sw&Sq is planning to sell a batch of 25 special machines (Job 100) to Sweat & Groan Gym for
$104,800.

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The 7 steps:
Step 1: The cost object is Job 100.
Step 2: Identify the direct costs of Job 100.
• Direct material = $45,000
• Direct manufacturing labor = $14,000
Step 3: Select the cost-allocation base.
• S&S chose machines hours as the only allocation base for linking all indirect
Manufacturing costs to jobs.
Job 100 used 500 machine hours.
2,480 machine hours were used by all jobs.
Step 4: Identify the indirect costs.
Actual manufacturing overhead costs were $65,100.
Step 5: Compute the rate per unit.
Actual indirect cost rate is $65,100 ÷ 2,480 = $26.25 per machine hour.
Step 6: Compute the indirect costs allocated to the job.
$26.25 per machine hour × 500 hours = $13,125
Step 7: Compute the cost of Job
Direct materials $45,000
Direct labor 14,000
Factory overhead 13,125
Total $72,125

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