Management Accounting Concepts

Differences Between Financial and Management Accounting (STATEMENTS)

Financial accounting produces general-purpose financial reports, while management accounting creates specific purpose reports.

Level of Detail

Financial accounting offers a broad overview with aggregated information, whereas management accounting provides considerable detail to aid specific decisions.

Restrictions

Financial accounting is subject to legal and accounting regulations, but management accounting is for internal use only, with no restrictions on report form and content.

Reporting Interval

Financial accounting reports mostly on an annual basis, while management accounting reports are produced frequently as required by managers.

Time Horizon

Financial accounting is backward-looking, whereas management accounting focuses on expected future performance.

Range of Information

Financial accounting quantifies information in monetary terms, while management accounting may include non-financial matters.

Direct Costs

Costs that can be traced to a single cost object. Examples include direct materials used and direct labor.

Indirect Costs

Costs that cannot be traced to a single cost object. Examples include factory rent and factory supervisor's salary.

Fixed Costs

Costs that remain constant regardless of changes in activity within the relevant range.

Variable Costs

Costs that change in proportion to activity.

Period Costs

Costs that are expensed in the period they are incurred and are not included in the cost of products. Examples include marketing expense, administrative expense, and shipping charges.

Product Costs

Costs included in the calculation of cost of goods sold/manufactured and included in inventories. Examples include direct materials used, direct labor, factory rent, equipment depreciation, and factory supervisor's salary.

Prime Cost

Direct materials plus direct labor.

Conversion Cost

Direct labor plus manufacturing overhead.

Overhead Cost

Production costs that are not directly traceable.

Planning

Setting annual targets using historical data and market analysis.

Controlling

Reviewing expenditure reports against budgets and addressing discrepancies, or assessing the effectiveness of a marketing campaign by comparing actual sales growth to planned objectives.

Decision-Making

Evaluating potential costs and revenue to determine the financial viability of adding a new product line.

Characteristics of Management Accounting

Limited rules, detailed information about segments, future-oriented, internal evaluation, internal focus, broad, multi-disciplinary.