Question 1 (a)
Management accounting as an extension of the managerial aspects of cost accounting; cost and management accounting distinguished
9 marks
- Time to write
- About 18 minutes
Question
Question 1 (a) · 9 marks"Management accounting extends the managerial aspects of cost accounting." Explain this statement, and clearly distinguish management accounting from cost accounting.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- ExplainTie the answer to the quoted statement: say what it means first, and come back to it at the end.
- distinguishSet the differences out in a table, basis by basis, not as two separate essays.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Explanation of the statement 4 marks 7 min
- 2 Distinction between cost and management accounting 5 marks 9 min
- Check: every ask answered, key terms underlined 1 min
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.
Try it first. About 18 minutes for 9 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Cost accounting records, classifies, allocates and analyses costs so as to find the cost of products, jobs, processes and services, and to control cost. Much of this work is already managerial: standard costs, budgets, variance analysis and marginal costing are used to plan and control operations. Management accounting takes these managerial aspects of cost accounting and carries them further, so that accounting information serves every management function: planning, organising, directing, controlling and, above all, decision making.
1The year closed, the ledgers tally what WAS: the financial accounts.
Financial accountingFinancial accounting asks what the result of the year was
2On the factory floor, she weighs and prices each batch: what it COSTS.
Cost accountingCost accounting asks what each product or activity cost
3In the boardroom, the reports turn into the next move: what SHOULD be done.
Management accountingManagement accounting asks what should be done next
- It builds on cost data. Most management-accounting techniques, budgetary control, standard costing, marginal costing, break-even analysis, relevant costing for decisions, use cost information as their raw material.
- It widens the scope. Besides cost data it uses financial accounting data (profitability, liquidity, funds), statistical and economic data, and non-financial information such as customer satisfaction and quality.
- It looks forward. Cost accounting largely ascertains what a product did cost; management accounting uses costs to decide what should be done: which product to make, what price to quote, whether to make or buy.
- It serves top management. Cost reports go mainly to operating managers; management accounting serves the whole organisation, including the board, with summarised, decision-oriented reports.
- It brings in behavioural and organisational aspects. Responsibility accounting and performance reports link cost information to the managers who can act on it, which goes beyond the costing of products.
So the statement is right in describing management accounting as an extension: it starts where the managerial use of cost accounting starts, and extends it into a complete information system for management.
Cost accounting and management accounting distinguished
| Basis | Cost accounting | Management accounting |
|---|---|---|
| Objective | Ascertainment and control of cost | Providing information for planning, control and decision making |
| Scope | Narrower: cost data only | Wider: cost, financial and non-financial data |
| Nature of data | Mainly historical, with some standards and estimates | Mainly future-oriented: forecasts, budgets, projections |
| Techniques | Costing methods, cost sheets, standard costing, marginal costing | Uses cost techniques plus ratio and fund analysis, budgeting, decision models, responsibility accounting |
| Users | Mainly operating and middle managers | All levels of management, especially top management |
| Statutory requirement | The Central Government can require prescribed classes of companies to keep cost records (consulting the regulator first for a company under a special Act), and can direct a cost audit for those above a prescribed net worth or turnover; that audit is done by a cost accountant whom the Board appoints, who may not be the company's section 139 auditor and must follow the cost auditing standards (Companies Act, 2013, s. 148(1)-(3); Cost Records and Audit Rules, 2014) | Not required by law; adopted voluntarily |
| Dependence | Can be installed without management accounting | Draws heavily on cost data, though it also uses financial and non-financial information |
| Reports | Detailed cost statements | Summarised, purpose-built reports for decisions |
Cost accounting is the foundation; management accounting is the structure built on it. Management accounting extends the managerial uses of cost information and joins them with other data to help management plan, control and decide.
Where the 9 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Explanation of the statement | 4 |
| 2 | Distinction between cost and management accounting | 5 |
| Total | 9 |
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