Management accounting is those areas of accounting concerned with financial planning, principally through the interpretation and use of financial data for important management of the business. The role of accounting is to provide relevant information, which will assist management with decision-making, planning economic performance, controlling costs and improving profitability. However, note that the information generated by the management accounting function is just one component part of the decision-making process. It is not the ‘be all and end all’; it must be used in conjunction with other data.
The aim of management accounting is to provide management with information, which will help them to:
* Achieve their objectives/goals.
* Formulate policy.
* Monitor and assess performance.
* Appreciate the financial implications of changes in the internal and external environment in which the organization operates.
* Plan for the future.
* Make comparisons between alternative scenarios.
* Manage more efficiently the scarce resources, which are at their disposal.
* Control the day-to-day operations.
* Focus their attention on specific issues, which really need their consideration.
* Solve a variety of problems, e.g. investment decisions.
* Take account of behavioral factors.
Differing from financial accounting, the focus of management accounting is usually on the information at a more details level, on results for any products and on costs for particular productive operations. Understanding the role of management accounting requires an appreciation of what is involved in management and the kinds of decision that management is faced with.
The objective of the management accounting system is to provide the best information for assessments of the amounts, timing and uncertainty of cash flows to the business from each alternative course of action available to the business.
The purpose of management accounting involves identifying the types of decision needed in management accounting in order to provide useful information for managers.
The main types of decision include:
* Output decision-These are decisions on what types of goods or services should be supplied, at what prices and in what quantities.
* Input decision-These are decisions on how the outputs should be produced, i.e. the allocation of quantities used in raw materials, labour etc.
I think that these two types of decisions are inter-connected, because the cost of resources to produce goods and provide services is relevant to decisions on the best production output and best pricing strategy required.
Management Accounting is internal accounts, which do not have to be published, as they stay private within the business.
In conclusion, management accounting ensures the transformation process from inputs, through the production process to output is viable, and it plays a principal role in Business decision-making. Management accounting is the process of identifying; measuring, accumulating, analyzing, preparing, interpreting and communicating information that helps managers fulfill organization objectives. Accounting responds to the need for quantitative financial information. It is interpreted as a language of economic activity. The purpose of accounting is ultimately to assist someone to make decisions by the accumulation of all accounting information. The information to be provided by the accounting system depends on who is making the decisions and for what purpose
What is financial Accounting?
Financial accounts are concerned with classifying, measuring and recording the transactions of a business, at the end of a period (typically a year).
Financial accounts are geared towards external users of accounting information. To answer their needs, financial accountants draw up the profit and loss account, balance sheet and cash flow forecasts.
Every UK Company registered under the Companies Act is required to prepare a set of accounts that give a true and fair view of its profit or loss for the year and of its state of affairs at the year-end. Annual accounts for Companies Act purposes generally include:
– A directors’ report
– An audit report
– A profit and loss account
– A balance sheet
– A statement of total recognised gains and losses
– A cash flow statement
– Notes to the accounts
Types of Costs
There are three types of costs Jones Compact Cars have within their business. These are Variable costs, fixed costs and semi-variable costs.
A Variable cost is costs, which, rise as output rises. These could be raw material as the more the output Jones Compact Cars produce, the more raw materials will be required.
Also direct labour can also be variable costs, for example during Christmas there are high demands for products such as compact cars and so direct labour may need to be employed to keep up with demand.
Another type of cost is Semi-Variable costs, which are costs, which consists of both fixed and variable elements.
This is because they are not entirely fixed or variable costs. Labour is a good example.
If Jones Compact Cars employees a member of staff on a permanent basis, no matter what level of output, this is a fixed cost. If this member of staff is asked to work overtime at nights and weekends to cope with extra production levels, then the extra cost is variable. Such labour costs can be identified as Semi-Variable costs.
Another example could be the cost of telephone charges. This often consists of a fixed or “standing charge” plus an extra rate, which varies according to the number of calls.
Fixed costs are cost, which are fixed in the short run and don’t vary according to output. Examples might be rent, insurance, heating bills, depreciation and business rates, as well as capital costs such as factories and machinery.
These costs remain the same whether Jones Compact Cars produces nothing or is working at full capacity. For example, Mr. Jones must pay rent even if his business is shut for 2 week holiday period and nothing is produced.