Question

A student planning a management wondered why it was important to learn cost and management accounting. How would you respond? Give examples to support your point of view. career in business some

Answer 1

The ultimate aim of every business entity is to earn optimum profit with the optimum use of available resources. The crucial point that every entrepreneur come across during the business is the decision making situations. This is where the importance of Cost and Management accounting lies. The main purpose of Cost and management accounting is to facilitate decision making.

"Management accounting as analysing information to advise business strategy and drive sustainable business success". It provides the information to management so that planning, organizing, directing and controlling of business operations can be done in an orderly manner. Cost accounting is a subset of management accounting.

Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs." its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

The importance of both of the accounting stream are clear from its definition itself.

These are branches of accounting and had been developed due to limitations of financial accounting. It is an indispensable discipline for corporate management, as the information collected and presented to management based on cost and management accounting techniques helps management to solve not only specific problems but also guides them in decision making.

Lets go through the benefit of cost accounting:

The benefit of Cost accounting to the Management are:

1. Helps to fix the price with the use of different pricing stratergies.Eg- Cost plus pricing, Competitive Pricing ,Price skimming etc

2. Helps to make estimate for making tenders.

3. Helps to distinguish the profitable and non-profitable activities.Eg- Use of Activity Based Costing.

4. Helps to minimise the waste. Eg- Breakeven analysis.

5. Facilitates inventory control etc.,

6. Various budgets are prepared, showing cost, revenue, profit, production capacity and efficiency of plant and machinery, as well as the efficiency of workers.

Cost accounting not only helps the management but third parties are also receiving the benefit of cost accounting records.

· The investors , bankers financiers and creditors can use the cost records for making judgement regarding the profitability and the future prospectus of the entity.

· As incentive plans and bonus plans formulated by reviewing the cost records and employees, employees are also benefited.

· An efficient system of costing brings prosperity to the business enterprise which in turn results in stepping up of the government revenue. Control of costs, elimination of wastages and inefficiencies led to the progress of the industry and, in consequence of the nation as a whole.

Some of the advantages of Management Accounting are:

1. Reporting to management regarding the latest position of the entity.

2. Management accounting aid in the decision-making by providing information analysed using costing techniques like differential costing, absorption costing, marginal costing etc.

3. Helps in coordinating the organization by applying thorough functional budgeting and providing reports of the same to the management on a regular basis.

4. Management accounting controls the overall performance of the company.

5. Management accounting helps to set the target and analyse the same on a time to time basis.

So it can be concluded that Cost accounting and Management accounting are more like a self-realization and self-evaluation of a company performed by the management to locate both the flaws and strength which helps to make corrective measures to improve the overall performance of the company.