Question

1. What is the difference between Managerial Accounting and Financial Accounting and to what parties can each be provided to for their use?

2. Under what circumstances can Job Costing be used effectively to determine the resources used to produce the item sold and the profitability associated with it.

3. Can Job costing be used in the service industry as it is in the manufacturing industry? Provide examples of both if they can be. \

4. Why does management track the production costs if we expect those costs and the selling prices of the finished good to vary?

Answer 1

Ans 1- Management accounting is a field of accounting that analyzes and provides cost information to the internal management for the purposes of planning, controlling and decision making.

Management accounting refers to accounting information developed for managers within an organization. CIMA (Chartered Institute of Management Accountants) defines Management accounting as “Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that used by management to plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its resources”. This is the phase of accounting concerned with providing information to managers for use in planning and controlling operations and in decision making.

Managerial accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a company’s past performance is judged.

Because it is manager oriented, any study of managerial accounting must be preceded by some understanding of what managers do, the information managers need, and the general business environment.

Comparison chart

Financial Accounting versus Management Accounting comparison

Objectives

The main objectives of financial accounting are to disclose the end results of the business, and the financial condition of the business on a particular date.

The main objective of managerial accounting is to help management by providing information that is used to plan, set goals and evaluate these goals.

Audience

Financial accounting produces information that is used by external parties, such as shareholders and lenders.

Managerial accounting produces information that is used within an organization, by managers and employees.

Optional?

It is legally required to prepare financial accounting reports and share them with investors.

Managerial accounting reports are not legally required.

Segment reporting

Pertains to the entire organization. Certain figures may be broken out for materially significant business units.

Pertains to individual departments in addition to the entire organization.

Focus

Financial accounting focuses on history; reports on the prior quarter or year.

Managerial accounting focuses on the present and forecasts for the future.

Format

Financial accounts are reported in a specific format, so that different organizations can be easily compared.

Format is informal and is on a per department/company basis as needed in Management Accounting .

Rules

Rules in financial accounting are prescribed by standards such as GAAP or IFRS. There are legal requirements for companies to follow financial accounting standards.

Managerial accounting reports are only used internally within the organization; so they are not subject to the legal requirements that financial accounts are.

Financial accounting is primarily intended for external users (i.e., investors, creditors, etc.) and concerned with external financial reporting. It is: (1) highly regulated by FASB (Financial Accounting Standards Board), SEC (Securities and Exchange Commission); (2) mandatory for publicly traded companies; (3) historic in nature.

Managerial accounting is intended for internal users (i.e., managers); It is: (1) not highly regulated; (2) not mandatory but used when benefits exceed costs; (3) is future oriented.

Ans 2- Job order costing is a system of expense monitoring in which a business only creates products to fill customer/client orders. Employees complete job order cost sheets for each order and usually separate expenses into three main categories: direct material, direct labor and manufacturing overhead. Companies in many industries can use job order costing, though a variety of product offerings/services complicates the tracking of expenses.

Manufacturing Companies

Manufacturing companies incorporate job order costing as a means of controlling usage of raw materials, production equipment and labor hours. These businesses consider each customer order a separate job for the purposes of job order costing. Alternatively, manufacturers may group smaller value projects together under a single job heading. How manufacturers group jobs depends on the size of the company. For example, a small business manufacturer may consider any job valued over $1,000 as a single job, but they may group smaller customer orders together in blocks of $1,000 for costing purposes.

White Collar Businesses

Companies in the white collar sector of business, including law firms, accounting businesses and private investment companies, can utilize job order costing to manage individual client accounts. For example, accounting firms can consider each individual client a job. Firms complete job order cost sheets each business day, detailing how accountants are handling client accounts and how many hours a client's needs consume each day. This generates daily costs that businesses can use to measure how much money firms bring in each day versus the costs associated with job activities.

Medical Services Businesses

Medical services businesses, including hospitals, small doctor's offices and medical billing companies, can use job order costing to consider each patient or bill as an individual job. Record-keeping for job order costing in service industries, including the medical field, can be more complex than in other industries because these businesses offer a wide array of services, according to Accounting For Management, a business accounting information website. This requires medical service businesses and other service companies to keep detailed records of each specific job to determine costs correctly. For example, a doctor's office may order patients based on the purpose of visits and the cost of treatments administered.

Film Studios/Retail Companies

Retail companies, including clothing producers and retail outlets, employ job order costing to track sales of clothing by size, individual articles and broader styles. This allows retail companies and other businesses to track expenses to create a variety of job order cost models to show how costs vary from product to product. Businesses in the entertainment industry, including film studios, can create separate job order cost sheets for each film the studios create. Job order cost sheets for film companies contain actor salaries, director payments and crew wages as direct labor costs. Direct material costs can include props, costumes, utility costs for sound stages and set design fees.

Ans 3- Yes it can be used in both industry as explained in above example. In which manufacturing as well as medical services are quoted for using job costing. Though it will be complicated for service undustry but if it can manage it can use. Once again I am explaining with same example

Manufacturing Companies

Manufacturing companies incorporate job order costing as a means of controlling usage of raw materials, production equipment and labor hours. These businesses consider each customer order a separate job for the purposes of job order costing. Alternatively, manufacturers may group smaller value projects together under a single job heading. How manufacturers group jobs depends on the size of the company. For example, a small business manufacturer may consider any job valued over $1,000 as a single job, but they may group smaller customer orders together in blocks of $1,000 for costing purposes.

Medical Services Businesses

Medical services businesses, including hospitals, small doctor's offices and medical billing companies, can use job order costing to consider each patient or bill as an individual job. Record-keeping for job order costing in service industries, including the medical field, can be more complex than in other industries because these businesses offer a wide array of services, according to Accounting For Management, a business accounting information website. This requires medical service businesses and other service companies to keep detailed records of each specific job to determine costs correctly. For example, a doctor's office may order patients based on the purpose of visits and the cost of treatments administered.