Question 1 (c)
How management accounting differs from cost accounting and financial accounting
9 marks
- Time to write
- About 18 minutes
Question
Question 1 (c) · 9 marksIn what way does Management Accounting differ from Cost Accounting and from Financial 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
- differ fromSet 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 Difference from financial accounting 4½ marks 8 min
- 2 Difference from cost accounting 4½ marks 8 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.
Financial accounting, cost accounting and management accounting are branches of accounting with different purposes. Financial accounting reports the results and position of the business to outsiders; cost accounting ascertains and controls costs; management accounting provides information for planning, control and 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
Management accounting and financial accounting
| Basis | Financial accounting | Management accounting |
|---|---|---|
| Users | Mainly external: shareholders, creditors, tax authorities, regulators | Internal: managers at all levels |
| Purpose | Reporting results and financial position | Planning, control and decision making |
| Time focus | Past transactions | Future, using past data |
| Compulsion | Required by company and tax law | Optional |
| Rules | Follows accounting standards and statutory formats | No set rules; whatever suits the purpose |
| Precision | Exact figures | Approximations and estimates are acceptable |
| Coverage | Business as a whole | Segments, products, departments as well as the whole |
| Periodicity | Usually annual or quarterly | As often as needed, even daily |
| Data | Monetary only | Monetary and non-monetary |
Management accounting and cost accounting
| Basis | Cost accounting | Management accounting |
|---|---|---|
| Objective | Ascertainment and control of cost | Providing information for all management decisions |
| Scope | Narrower: costs only | Wider: costs, revenues, finance, non-financial data |
| Base | Uses cost records | Uses cost and financial records and other information |
| Time focus | Historical and current, with standards | Mainly future |
| Techniques | Costing methods, standard and marginal costing | Also budgeting, ratio and fund analysis, decision models, responsibility accounting |
| Statutory requirement | The Central Government can require prescribed classes of companies to keep cost records and some to have them audited (Companies Act, 2013, s. 148) | Not required by law |
| Users | Mainly operating and middle management | All levels, especially top management |
The three systems are closely linked rather than separate. Financial accounting provides the basic records of transactions; cost accounting analyses those records by products, processes and departments and adds standards and cost behaviour; management accounting takes both, together with statistical and economic information, and turns them into reports and analyses for planning, control and decisions. For example, the cost of a product calculated by cost accounting, the sales and profit figures from financial accounting, and a market forecast are combined by management accounting to decide the price of a new product or whether to make or buy a component. Management accounting therefore depends on the other two for its data, while they gain their usefulness to managers through it.
Each answers a different question: financial accounting asks what the result of the year was, cost accounting asks what each product or activity cost, and management accounting asks what should be done next. Financial accounting looks outward and backward; cost accounting looks at costs; management accounting uses both, and more, to look forward and help management decide. The three systems complement each other.
Where the 9 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Difference from financial accounting | 4.5 |
| 2 | Difference from cost accounting | 4.5 |
| Total | 9 |
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