Unit 1 Section 1

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COST AND MANAGEMENT Unit 1, section 1: Cost Accounting,

COST ACCOUNTING, Management Accounting


MANAGEMENT and Financial
ACCOUNTING AND
UNIT 1 SECTION
ACCOUNTING 1
Accounting
FINANCIAL ACCOUNTING

Welcome to the first Section of Unit 1 and of whole module. In this Section,
we will be covering

By the end of this Section, you will be expected to be able to:


 explain the role of accounting as a communication tool
 define cost accounting, management accounting, and financial
accounting
 explain the relationship between cost accounting and management, and
management accounting and financial accounting
 explain the differences between management accounting and financial
accounting

Accounting as a communication tool


Accounting is concerned with collecting, analysing and communicating
information (both financial and non-financial) to permit informed judgment
and decisions by users of the information. Thus, accounting is not only
concerned with financial information (for example, cost of goods and
services) but also non-financial information ranging from product or service
quality to the environmental impact of the entity’s operations. The main
focus of accounting is to provide information about an organisation to
enable interested parties make informed decisions about the entity.

Users of accounting information can broadly be categorised into two,


namely internal users and external users. Internal users are within the
organisation and include employees and managers. External users are
outside the organisation and include shareholders, potential investors,
creditors, customers, suppliers, and government agencies.

The accounting information required by these users have been summarised


in the table below.
User Information Requirement
Employees Information on the ability of the firm to pay
competitive wages and salaries and avoid
redundancies
Managers Information that will assist in planning, directing and
controlling the organisation, e.g. information on costs,
selling prices, demand, competitive position, and
profitability
Shareholders Information on the value of their investment and
dividends
Potential Information on risk associated with investing in the
investors organisation and the potential returns
Creditors Information on the ability of the firm to meet its
financial obligations
Customers Information on price, quality, and delivery periods

14 UEW/IEDE
Unit 1, section 1: Cost Accounting, Management Accounting and Financial COST AND MANAGEMENT
Accounting ACCOUNTING

Suppliers Information on consumption rate and inventory levels


Government Information that will assist in determining
agencies government revenue and policies to manage the
economy, e.g. information on performance of
companies and profits subject to taxation

There are three branches of accounting that reflect the information needs of
the various users of accounting information, namely cost accounting,
management accounting, and financial accounting.

Defining cost accounting, management accounting, and financial


accounting
The Chartered Institute of Management Accounting (CIMA) defines cost
accounting as the application of accounting and costing principles, methods
and techniques in the ascertainment of cost and the analysis of savings and
or excesses as compared with previous experience or standard. Thus, cost
accounting is mainly concerned with establishing standard and budgeted
costs, measuring actual costs, and analysing variances by comparing actual
costs with standard and budgeted costs.

Management accounting is defined as "the process of identification,


measurement, accumulation, analysis, preparation, interpretation and
communication of information used by management to plan, evaluate and
control within an entity and to assure appropriate use of and accountability
for its resources" (CIMA Official Terminology). The focus of management
accounting, therefore, is to enhance management decision making by
providing them with relevant information.

Financial accounting is the process of recording, summarizing and reporting


the myriad of transactions from a business, so as to provide an accurate
picture of its financial position and performance to external users of
financial information. The primary objective of financial accounting is the
preparation of financial statements - including the balance sheet, income
statement and cash flow statement - that encapsulates the company's
operating performance over a particular period, and financial position at a
specific point in time.

Relationship between cost accounting and management accounting


It is clear from the definitions above that cost accounting is closely related
to management accounting as both focus on internal users of accounting
information, specifically managers. Moreover, the cost information needed
for management accounting purposes is supplied by the cost accounting
system. However, while cost accounting focuses on financial information
(costs), management accounting uses a wide array of information (both
financial and non-financial).

UEW/IEDE 15
COST AND MANAGEMENT Unit 1, section 1: Cost Accounting, Management Accounting and Financial
ACCOUNTING Accounting

Relationship between management accounting and financial


accounting
As noted before, financial accounting is concerned with providing
information to external users on the performance of the organisation, its
financial position and cash flows. The organisational performance, financial
position and cash flows result from management decisions influenced by
management accounting information. Therefore, managing accounting
informs the decisions made by managers – for example, introduction of new
product/service, investment in projects, appropriate source of funding to
use, etc. – whiles financial accounting reports on them outcome of those
decisions to external users of accounting information.

Differences between management accounting and financial


accounting
The main areas of difference between management accounting and financial
accounting are as follows.
 Nature of reports produced. Financial accounting reports are general-
purpose, that is, they contain financial information that will be useful for
a broad range of users. On the other hand, management accounting
reports are often specific-purpose, that is, they are designed with a
particular decision in mind and/or for a particular manager.
 Level of detail. Information provided in financial accounting reports are
aggregated and detail is often lost. However, management accounting
reports provide managers with considerable detail.
 Regulations. Financial accounting reports are generally subject to
accounting regulations by government and accountancy bodies. On the
other hand, management accounting reports are not subject to such
external regulations.
 Report format. Financial accounting reports are produced with standard
content and format as required by regulation. On the other hand,
management accounting reports are tailored to the specific needs of
particular managers and have no regulation concerning the form and
content.
 Reporting interval. Financial accounting reports are produced on an
annual basis, though some large companies produce half-yearly and
quarterly ones. However, management accounting reports may be
produced as frequently as required by managers.
 Time dimension. Financial accounting reports what has happened in the
past in the organisation, whereas management accounting reports both
past information and future information.
 Range and quality of information. Financial accounting reports
concentrate on information that can be quantified in monetary terms. On
the other hand, management accounting information of financial nature,
but is also more likely to produce reports than contain information of
non-financial nature, such as physical volume of inventories, number of
new products launched, and physical output per employee.

16 UEW/IEDE
Unit 1, section 1: Cost Accounting, Management Accounting and Financial COST AND MANAGEMENT
Accounting ACCOUNTING

The distinction between management accounting and financial accounting


clearly reflects the differences between the information needs of managers
as internal users and other external users of accounting information.

In this module, we will concentrate on management accounting.

Accounting aims at communicating information (both financial and non-


financial) to permit informed judgment and decisions by users of the
information.

Users of accounting information can broadly be categorised into two,


namely internal users and external users. Internal users include employees
and managers. External include shareholders, potential investors, creditors,
customers, suppliers, and government agencies.

There are three branches of accounting reflecting the information needs of


users of accounting information, namely cost accounting, management
accounting, and financial accounting.

The main areas of difference between management accounting and financial


accounting are: nature of reports produced, level of detail, regulations,
report format, reporting interval, time dimension, and range and quality of
information.

UEW/IEDE 17

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