Question

1. Identify the role and scope of financial and managerial accounting and the use of accounting information in the decision making process of managers.

2. Define operational and capital budgeting, and explain its role in planning, control, and decision making.

Answer 1

1. Role and scope of financial accounting

· Used by external stakeholders like shareholders , bankers, lenders, tax authorities, etc

· Reporting in accordance with reporting standards

· Not used internally for decision making

· Reporting as per timeliness

· Compliance to regulatory requirements

Role and scope of financial accounting

· Used by internal stakeholders especially managers and management team

· No standardised format for reporting. Reports are customised and need based

· Used regularly for decision making

· No timeline in reporting

· No external authorities requirements

Management accounting is use of cost accounting information for key day to day decision making in the organisation. The users of management accounting are mainly the division and department managers. Management accounting is mainly used for internal purpose and it is used for decision making in business operations.

Examples of internal accounting reports that are used in internal decision making

· Segmented income statement of Products lines, service lines, division, departments or customer wise

· Cost volume profit analysis at different levels of activity levels

· Variable Costing Income statement

· Overhead allocation reports of different departments.

· Flexible budget performance reports which shows activity variance and revenue and spending variance

· Customised reports like make vs. buy, sell or process further, acceptance of special order, continue or discontinue divisions or product lines,

· Variance analysis reports containing sales variance, material variance, labor variance, variable overheads variance and fixed overheads variance analysis

2. Operational budgets refer to the budgets for operational expenditure like material purchase, direct labor cost, manufacturing overheads and selling and administrative overheads.

Capital budgeting refers to the budgets for long term investments by the firm in capital assets. They are long term in nature and decisions are generally irreversible in nature.

Role of Operational and Capital budgeting

· They help in Master budget preparation at the beginning of the year

· They help in cost management through cost control and cost reduction. Expenditure is tracked as per budget to ensure there is no over spend and is controlled

· They helps in performance appraisal of employees at the end of the year based on actual performance

· They helps in achieving long term strategic objectives of the firm by ensuring budgets are implemented in all departments

· They bring a sense of accountability and responsibility in various divisions and departments

· They enhance the cost competitiveness of the firm by budgetary controls.

· The help in decision making like product costing and pricing, new product launch, investment evaluation, etc