MANAGEMENT ACCOUNTING
Introduction
Management and financial accounting provide platforms for an organization management to provide informed decision and policies. Organization management uses the budget as the accounting tool in formulation of policies and allocation of resources in different activities. Accounting encompasses the entire body of knowledge that deals with recording and keeping of all financial transactions. It entails identification, recording, classification, verification, and communication of financial information relating to the resources of the organization. On the other hand, financial accounting is a subset of accounting and is concerned with the use of financial data to measure economic performance of the organization. The study focuses on the management and financial accounting and expounding on objectives of the budget in an organization. The study will also provide the need of using variance analysis in organization management and highlighting the different examples of variance.
Management accounting is defined as the provision of decision making that involve both financial and nonfinancial matters. It covers management decision-making through the provision of financial data to advise organizations on development . Management accounting assists in the formulation and implementation of a viable strategy for an organization. The management makes the decisions that suit the organization in developing strategies that seek to improve performance.
Financial accounting covers summary, analysis and reporting of financial data and transactions. It consists of preparation of the financial reports and statements that are made available to the management and other stakeholders for decision-making . It assists the organization in monitoring and controlling inflows and outflows, and preparation of financial reports such as income statement and balance sheets that are used by the stakeholders.
The latest software of management and financial accounting helps in boosting operations and performance. It speeds up the analysis of information and ensures the accuracy of both financial and management accounting. Additionally, it simplifies the accounting role and reduces the time spent in the analysis of information and generation of financial statements and records. Therefore, it is efficient, effective and reliable in the generation of results for various uses.
Cost classification and evaluation
Different classifications of organizational cost include the following;
If the production volume is high, the cost of production also increases and vice versa. The examples of variable cost include production cost, processing and distribution cost. Semi-variable costs are costs that are both fixed and variable in nature. These costs are partly variable and partly fixed depending on the market situation and bargaining power of the organization.
These types of classification of costs help in organization management and decision-making. It is essential for the organization to consider a variety of costs while developing strategies and policies.
Discussing the objectives of preparing budgets
The objectives of preparing budgets to include;
Planning: The management is supposed to have a detailed plan that facilitates the implementation of both long-term and strategic plans. The budgeting process assists the management in planning for the future operations, ensuring the existing strategic plans are refined and, enabling the managers in responding to the rising and changing issues. Budgets encourage the management in anticipating any arising problems and ensuring the managers provides reasonable decisions and policies.
Co-ordination: Budgets facilitate coordination that allows different actions of the organization to be consolidated into a common plan. This compels the management in examining the relationship among the organizational branches when making decisions and policies in conflict identification and resolutions . These conflicts solved by budgeting include manufacturing setting whereby the purchasing managers are buying in bulk to get large discounts and production managers are avoiding large stock levels. With the help of budget, the organization management is in a position of reconciling all the differences that are experienced.
Communication: in ensuring budgetary compliance, all the management arms in the organization are supposed to have a clear understanding of their roles. This helps in budget implementation and improves the accountability of managers for their decisions. Senior managers use budgets in communicating the organizational objectives down the management chain and ensuring the juniors are well coordinated to attain organization objectives . The budget preparation procedure and action improve communication among different stakeholders in the organization. Participation in budget preparation and the setting is usually extended to the subordinates in influencing the figures regarding targets.
Motivation: existing budget provides motivation to the management to perform and achieve the set objectives. The standards set during budget preparation motivate the managers to improve their performance. Therefore, it is important to involve managers in the budget setting process to have a full understanding of budget as a tool to manage their departments.
Control: organization management uses the budgets in controlling all the activities being undertaken. In different departments, managers use the budget as the tool to control departmental activities. Through the analysis of variance, the managers can identify costs that do not conform to the organizational long- term plan and hence performing appropriate alterations. Furthermore, the management identifies inefficiencies easily and hence performing budget deviation.
Budgets act as controlling mechanism for the organizational resources by ensuring they are properly utilized. This is done by comparing measured resources at a given period with the budgetary expectation to the specific period. The management uses this controlling mechanism to all measurable resources and organization activities to improve the performance and productivity.
Through the budgetary control, the management highlights variations that arise from expected outcome and take appropriate remedial actions. This is a constant monitoring process that is accompanied by continued updating and amendment through operational feedback from departmental managers.
Evaluation: using the budget as an effective tool, it enlightens and informs management on organization performance regarding meeting the budgetary target. The managers are able to set policies that aim in meeting their targets.
Providing examples for operational budgets
Operational budget entails a detailed plan for estimating the organization expected income by deducting estimated expenses in a short-term period, preferable one year. It is a combination of known expenses, the estimated future costs and expected yearly income .
Operational budgets entail planning for known and forecasted cost, expenses, and income, which usually takes place before the beginning of an accounting period. It involves estimating the expenses and revenues expected by the organization in the course of a given financial year. The examples of operational budgets include sales, manufacturing or production, administration, overheads, and labor budgets.
Standard Costing and Variance Analysis
Standard costing is defined as the process of replacing or substituting actual cost with expected cost in accounting statement and then recording the periodic variances. This variance is obtained from the difference between expected and actual costs. Variance analysis is considered as an important segment in standard cost accounting whereby it breaks all the variations existing between actual cost and standard costs. These variances are obtained from diverse components such as material cost variation, production cost variation and labor cost variation . This helps the management in understanding the reasons for having different costs from the expected or planned and taking appropriate actions.
In management accounting, variance analysis provides the difference between budget, plan or standard costs and the amount of actual outcome in both costs and revenues. Variance concept is intrinsically connected to the planned and actual outcome. The analysis helps in the determination of the existing differences and connecting to the organization performance and productivity.
Types of variance
Two categories are used to define types of variance: effect and nature of underlying amount.
Under the effect of variance, favorable variance, and adverse variance are experienced. Favorable Variance is provided or achieved when the actual results are indicated to be better than the expected outcome, and it is denoted by letter F. On the other hand, the adverse variance is described when the actual outcome worsens than the actual plan or results. It is also known as unfavorable variance and denoted by letter (U) or (A).
Under the nature of underlying amount, the user of the variances information helps in determining the type of the variance. There are three categories of variances: variable cost, fixed production overhead, and sales variances. Under the variable cost, variance is subdivided into the direct material, direct labor, and variable production variances.
Variance Analysis and management accounting
In management accounting, variance analysis is used as the budgetary control as it helps in evaluating the organization’s performance. Managers consider the difference regarding budgeted, planned and standard amount from the actual outcome or amount incurred. The variance analysis explains the difference between actual costs and standard costs that are experienced and allowing good output . The difference in material costs is subdivided into the prices of material and material usage variances. Prices of material variances entail the difference between the budgeted cost of material and the actual cost while material usage variance entails the difference between the budgeted amount of material to be used and the actual amount of material used in the production. For example, suppose that 500 units of materials are allocated $ 2000 but they cost $ 1200, there will be a favorable price of material variance. However, if only 350units are used in production, there will be an adverse material usage variance of 150 units. Rate and efficiency variances can be obtained from the actual direct labor and standard direct labor costs. Furthermore, the difference that exists in manufacturing overhead is categorized into spending, efficiency plus the efficiency variances. Variance analysis provides management with appropriate managerial information to understand and realize the present or current costs and hence taking control measures for future costs.
Organization management requires clear variance information in focusing on the future production and performance o the institution. Every department has to consider the budgetary allocation and perform the variance analysis to control production costs. The management depends on the variance outcomes in making informed decisions regarding developments . The budget process tends to guide the management in policy development and allocation of resources depending on expected output. Therefore, it is essential for the managers to understand the application of variance analysis and incorporate it into decision-making and policy development.
Conclusion
Management accounting depends on financial accounting in analyzing the organization performance, productivity, and decision-making. The organizational management has the role of using appropriate mechanisms in managing all the activities being undertaken by the organization and ensuring they meet standards and set targets. Budget is the management tool that helps in analysis and resources allocation within the departments depending on the activities of the organization. Departmental managers are supposed to use the departmental budgets allocation in achieving their set targets in production and performance improvement. The objective of the budget is to ensure proper planning and control of the resources within the stipulated platforms. Furthermore, budgets tend to motivate the managers and employees in working toward achievement of the obligations and set targets as they take part in the budget preparation process. Standard costs and variance analysis provide higher understanding of the expected outcome whereby the managers use variances to achieve the actual results. Favorable Variance provides positive results and hence actual outcome surpasses expected outcome. Therefore, managerial accounting is a broad discipline that equips organization management with required skills and expertise in decision-making and policy formulation on the organization interest. Furthermore, managerial accounting contributes to improving in organizational productivity and performance in both short and long run.
Bibliography
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