The Major Differences Between Financial And Management Accounting Accounting Essay

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Management or managerial accounting is used by managers to make decisions concerning the day-to-day operations of a business. It is based not on past performance, but on current and future trends, which does not allow for exact numbers. Because managers often have to make operation decisions in a short period of time in a fluctuating environment, management accounting relies heavily on forecasting of markets and trends.

Financial accounting is used to present the financial health of an organization to its external stakeholders. Board of directors, stockholders, financial institutions and other investors are the audience for financial accounting reports. Financial accounting presents a specific period of time in the past and enables the audience to see how the company has performed. Financial accounting reports must be filed on an annual basis, and for publically traded companies, the annual report must be made part of the public record.

The major differences between these two branches of accounting are:

Generally accepted accounting principles - Financial accounting is precise and must adhere to Generally Accepted Accounting Principles (GAAP), but management accounting is often more of a guess or estimate, since most managers do not have time for exact numbers when a decision needs to be made.

Focus on individual parts or segments of the business- Financial accounting is primarily concerned with reporting for the company as a whole. By contrast, managerial accounting forces much more on the parts, or segments, of a company

Report frequency- , managerial accounting places less emphasis on precision than does financial accounting. In addition, managerial accounting places considerable weight on non monitory data.

Time dimension-. Managerial accounting has a strong future orientation. In contrast, financial accounting primarily provides summaries of past financial transactions. These summaries may be useful in planning, but only to a point. But the future is not simply a reflection of what has happened in the past.

Legal requirements- Management accounting is not subject to legal requirements. It can use a variety of methods to enable managers to fulfill their responsibilities. Some of the tools available to the management accountant include historical costing, standard costing, budgetary control, marginal costing, cost/profit/volume relationships and ratios, uniform costing, interfere comparisons and capital investment appraisals. Management accounting information does not just involve money, labour hours; volumes of material and electricity consumed are also relevant.

Question 2:

Distinguish between the following:

Direct materials.

Direct materials are those materials which can be identified in the product and can be conveniently measured and directly charged to the product. Thus,  these materials directly enter the product and form a part of the finished product. Example of direct materials are Timber in cases of furniture making, Leather in case of shoe making, cotton in case of shirt making etc.

Indirect Materials

Indirect Material are those materials which cannot be conveniently identified & allocated to the cost centre or cost unit. It  does also not form part of the finished product. Example of indirect material are bottom in case of shirt making, Thread in case of shirt making, pin & paste in case of furniture making etc.

Direct Labour

Direct labor is a type of work that is directly associated with the production of a good or service. It includes only those who operate the machines or perform the tasks that result in the production of goods are included

Indirect Labour

This is the cost of personnel not directly involved in manufacturing the product, but whose cost forms part of the factory expenses.

Included in this are wages and salaries to factory supervisors, cleaners and security guards. Indirect labor is recorded separately from direct labor, and, just like indirect materials, falls under the category of overheads.

Manufacturing Overhead

This includes rent (on the factory building), insurance (for the factory building or factory machines), and water and electricity (specifically for the factory building).

Direct materials and direct labor taken together (direct materials plus direct labor) are known as the conversion costs of a product. A manufacturing business normally works out the costs for a unit of inventory by preparing a manufacturing cost statement. This is simply a statement of all the manufacturing costs.

Question 3


There are a number of ways to calculate inventory, but the two most popular are the last-in-first-out (LIFO) method and the first-in-first-out (FIFO) method. Under LIFO, the newest units in inventory are assumed to be sold first, so the cost of goods sold is based on the most recent inventory costs. Under FIFO, the oldest units are assumed to be sold first, so the cost of goods sold is based on historical inventory costs.

Weighted average method

When using the weighted average method, you divide the cost of goods available for sale by the number of units available for sale, which yields the weighted-average cost per unit. In this calculation, the cost of goods available for sale is the sum of beginning inventory and net purchases. You then use this weighted-average figure to assign a cost to both ending inventory and the cost of goods sold.

Question 4

Marginal costing 

may be defined as the technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making. It should be clearly understood that marginal costing is not a method of costing like process costing or job costing. Rather it is simply a method or technique of the analysis of cost information for the guidance of management which tries to find out an effect on profit due to changes in the volume of output.

Absorption costing

A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption costing uses the total direct costs and overhead costs associated with manufacturing a product as the cost base. Generally accepted accounting principles (GAAP) require absorption costing for external reporting.

Absorption costing is also known as "full absorption costing".