Question

Describe the differences between managerial and financial accounting. Include discussion on the differences as they relate to the primary users of the information and whether they are both required to follow the Generally Accepted Accounting Principles (GAAP).

Also include a discussion on the principal differences between activity-based costing (ABC) and traditional product costing?

Answer 1

Solution

A)There are a number of differences between financial and managerial accounting, which fall into the following categories:

• Aggregation. Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.

• Efficiency. Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.

• Proven information. Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

• Reporting focus. Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.

• Standards. Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.

B)

-Financial accountants reporting to external users are required to follow U.S. Generally Accepted Accounting Principles (U.S. GAAP), a set of accounting rules that requires consistency in recording and reporting financial information. ...

-Managerial accounting information need not conform with U.S. GAAP.

C)

Principal differences between activity-based costing (ABC) and traditional product costing are:

1) Activity based costing systems are more accurate than traditional costing systems. This is because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.

2) Traditional costing systems apply indirect costs to products based on a predetermined overhead rate.

Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs