Question

Compare and contrast managerial accounting to financial accounting concerning who are the end users of the information, timeliness and accuracy of information, types of data contained in reports, and relevance. How will you use this in your career?There are three costs of a finished product; raw materials, direct labor and factory overhead. How do they flow through the manufacturing process and finally get assigned to the product? Compare and contrast product costs with period expenses.

Answer 1

1. Role and scope of financial accounting

· Used by external stakeholders like shareholders , bankers, lenders, tax authorities, stock exchanges, analysts, venture capitalists etc

· Reporting in accordance with reporting standards issued by external bodies

· Not used internally for decision making

· Reporting as per strict timeliness and with accuracy

· Compliance to various regulatory and tax authorities requirements

Role and scope of managerial accounting

· Used by internal stakeholders especially managers and management team

· No standardised format for reporting. Reports are customised and need based for each situation and decision involved

· 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

· Flexible budget performance reports which shows volume variance and flexible budget variance

· Customised reports for various operational and strategic decision making 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. The following is the flow of costs

· Direct material is accounted based on the material requisition slip for each job or requisition slip issued from each department

· Direct labor is accounted based on the time ticket maintained for each job or process. Time ticket has details of hours spent and hourly rate

· Manufacturing overheads is applied based on pre-determined overheads rate. The pre-determined overhead rate is computed at beginning of the year based on estimated overheads and estimated cost drivers like labor hours or machine hours.

· A work in process account is maintained for each job or process and completed work is transferred to finished goods at the end of each period.

· The cost of goods manufactured during the period is the cost assigned to completed units.

3. Product cost is the cost which is part of product manufactured. For example: Direct material, direct labor, variable manufacturing overheads and fixed manufacturing overheads. Product cost is used in inventory valuation and it defers the cost to the next period

Period cost is the cost which is charged to income statement. For example: selling, administration and marketing expenses are part of period cost.