Question

The implementation of a cost accounting system in an organization would be considerable. Determine what benefit in providing accounting information which will be useful for management purposes, and which will be instrumental in creating a more profitable and healthy company in the longer term.

1. Briefly describe the major differences between management accounting and financial accounting for the following: Is financial accounting or management accounting more useful to an operations manager? Why?
   1. Primary users
   2. Focus and emphasis
   3. Rules of measurement and reporting

Answer 1

Cost accounting is the accounting of cost incurred on the manufacturing of the products or delivering service in an organization. It is a much detailed costing which accounts for material cost, labor cost and overheads incurred in manufacturing process or delivering service. Cost accounting data is widely used by management for various decision making purpose. The folliwng are the benefits derived by management based on accounting information:

· It helps in product/service costing. The product costing consists of prime cost, conversion cost, total manufacturing cost and cost of goods sold.

· It helps in analysing cost component wise like direct material, direct labor and manufacturing overhead.

· It helps in calculating unit production/service cost

· It helps in product/service pricing and ensuring the profitablity targets on products/service are delivered.

· It helps in cost management through cost control and cost reduction. For example: Flexible budgeting performance reports, variance analysis

· It helps in analysing the profitablity of the products/services. For example Product wise profitablity, division wise profitablity,etc

· It helps in various decisions making like make vs. buy, acceptance of special order, sell at split off point or process further, Retain or replace equipment, etc

· Cost accounting techniques helps in giving optimal solutions for constraints faced by the firm. For example : Transportation, Linear programming, product mix decisions etc

· It helps in giving cost competiveness and attaining cost leadership status. For example : Total quality cost reports, Just in time analysis, Target costing, value chain analysis, etc

	Management Accounting	Financial Accounting
Operations Manager	More useful to Operations managers for taking decisions like Make vs. buy, acceptance of special order, etc	Not useful to Operations Manager in day to day decision making
Primary users	Not useful to primary users since they are concerned with understanding the financial position of the firm	More useful to Primary users since it gives statement of financial position of the firm
Focus and emphasis	The focus in on taking reliable decision making and assist managers in improving the operational and strategic performance	The focus is on external financial reporting in line with standards laid down and comply with regulatory requirements
Rules of measurement and reporting	No prescribed format of reporting. Reports are customised to help management in serving the decision making purpose	Financial accounting and reporting must be in line with accounting standards laid down by various bodies and regulatory formats. The reporting has to be done as per timeliness