An Interface Between Financial Accounting and Cost & Management Accounting and Some Concepts of Strategic Cost Management Assignment

An Interface Between Financial Accounting and Cost & Management Accounting and Some Concepts of Strategic Cost Management Assignment Words: 1941

Introduction: The basic objective of accounting is to provide information that is useful in making business and economic decisions. What makes accounting information useful for decision-making? The answer is however the accounting information confirms to the qualities that should be possessed by the financial and cost & Managerial reporting. In view and addition to this, the importance of strategic cost management and costing techniques like Activity based costing should not be underestimated.

This implies that organization should be installing appropriate framework of strategic cost management to reduce its costs in key areas on which the success of organization is heavily dependent. Objective of the study: The Project is presented with the following objectives: 1. To understand the various interfaces between financial accounting and Cost & management accounting 2. To understand the concept & significance of Strategic Management Programme. 3. To understand the basic idea and concepts of managerial accounting. Main branches of accounting: 0 Financial Accounting Financial accounting is relating to record all financial activity.

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These activities are related to business. Because of area of business is increasing day by day so the area of financial accounting is also increasing. Every day a new type of business is started. So daily accountant invents a new journal entry. Accountant will take the help of financial accounting with new thinking of result. So a new chapter of financial accounting is included by us. 0 Cost Accounting If you want to increase your profit, then start to decrease your cost. What a dialogue, this is not a dialogue but this is the reality of today business. Every day an accountant invents new method of decreasing the cost.

All method of calculation of FIFO, LIFO, standard costing, variance calculation and making of cost budget is not the end of cost accounting but this is the starting of cost accounting. Internet cost reduction method is also a new mile stone in this direction. 0 Management Accounting One new manager will do work in the field of management accounting. He will utilize accounting information in new way. This is the real definition of management accounting. How to use accounting data and accounting education in the field of management so that we will carry our business at international level.

Ratio analysis , fund flow statements, cash flow statements , working capital management , capital budgeting , cost of capital calculation is just starting in this point. Differences between Financial and Cost & management Accounting: The differences between Financial and Cost & management accounting are discussed below under respective heads: 1. Definition: Financial Accounting is the process of summarizing financial data taken from an organization’s accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization.

It is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. The terminology of Cost Accounting published by the Institute of Cost and Management Accountants of England defines Cost Accounting as “the process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs” . Purpose: ? Financial accounting serves following purposes: The fundamental need for Financial accounting is to reduce principal-agent problem by measuring and monitoring agents’ performance and reporting the results to interested users. Provision of information used by management of a business entity for decision making, planning and performance evaluation for meeting regulatory requirements. Financial accounting is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company.

It is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. In a Nutshell, it is primarily for external purposes. ? Cost & management accounting serves the following purposes: The purpose of Cost & Management accounting is to enable management to get as for as possible the exact cost of goods manufactured or services rendered, to furnish necessary facts and figures for adequate and effective managerial control and to provide management data necessary to determine output and products that will result in most profitable operations.

The purpose of cost accounting is to assess the profitability of a product or services, a department or the organization. In a Nutshell, it is primarily for internal purposes. 3. Stock Valuation Principles: In financial accounting, stock or inventory is valued at cost or net realizable value (NRV) whichever is lower while in Cost accounting, inventory is valued at Cost. 4. Regulation: Financial Accountants follow GAAP (generally accepted accounting principles) set by professional bodies in each country, accounting concepts (as laid down by the Accounting Standards Board) plus statutory requirements of the Companies Acts.

While in Cost & management accounting it is tailored to suit the needs of the users or may follow CAS. and Standardization: Accounting standards of financial accounting is issued by the Institute of chartered accountants of India (ICAI) which is mandatory to follow and Accounting standards of Cost accounting is issued by The Institute of Cost and Works accountants of India (ICWAI) which is not mandatory to follow in preparation of accounting reports and statements. 5. Segments: Financial accounting reports refer to whole organization whereas Cost accounting focuses on small parts of organization. . Emphasis on the past and future: Financial accounting concerned with what has happened in past while Cost accounting is concerned with future and past information. 7. Item of Pure Finance: Matters of pure finance like interest, dividends rent receivable, profit or losses on sale of fixed assets, etc are included in Financial accounting. But these are Not included in Cost Accounting. 8. Notional expenses: Notional expenses like salary of proprietor where he works but does not charge a salary, etc are not included in Financial accounting which is to be considered in Cost accounting.

Strategic Cost Management: Introduction: Strategic cost management has become an essential area now days. While formulating the strategy for the accomplishment of organizational overall objectives, different cost driver should be clearly identified. In view of this, the importance of strategic cost management should not be underestimated. This implies that organization should be installing appropriate framework of strategic cost management to reduce its costs in key areas on which the success of organization is heavily dependent. Concept of Strategic Cost Management:

Trying to define strategic cost management requires looking at today’s leading organizations who are venturing in this area. Some of the processes are new and uncharted territory, so there’s no textbook to spell it out. Cost Management Defined: The Purchasing Handbook defines cost management as, “the establishment of programs that regularly analyze purchase requirements and suppliers to identify lowest total cost and maximize total value to the company. The development of a savings forecast by commodity is necessary to define budget parameters for building cost-of-goods structures. Strategic Cost Management: Strategic cost management can be defined as” scrutinizing every process within your organization, knocking down departmental barriers, understanding your suppliers’ business, and helping improve their processes” Strategic cost management not only leads to incremental performance improvement but also to transformational change across the value chain. Strategic costing is viewed as part of a larger business process to influence decisions on pricing and profitability across several dimensions: product, customer, region, and distribution channel Strategic Management Programme Steps:

SCM Programme includes following five steps. These steps can be detailed out as follows: [pic] 1. Focus: Focus state starts with reviewing the different strategies of the company. Reviewing the strategies will lead to clear identification of performance gaps and this will help to bridge the gap by improving targets already set beforehand. Modifying the targets will lead to developed plan of attack which will foster better internal communication within the organization. 2. Planning and Training: Planning plays a crucial role in implementing strategic cost management programme.

To implement the planning, a manager should gather very efficient team members and train them accordingly. Setting up of project management structure will facilitate the implementation of strategic cost management by clearly identifying the day to day activities, steering guidance and offering ad hoc assistance. 3. Fact Finding: This stage includes the tasks such as data gathering, conducting interview, developing benchmarks, conducting and customer surveys. 4. Analysis and Recommendations for changes: Analysis of activities plays a crucial role in ascertaining the cost of the company.

It can be done by various strategic cost management analytical tools viz. cost driver analysis, activity-based costing, selective business process reengineering etc. An action plan for proposed change should address the following questions what, who, when how aspects of the activities. 5. Implementation: In implementation stage the first task to be done is to define responsibilities and accountability of each individual and controlling i. e. monitoring and corrective action should be the taken at each stage of programme. And this is how the continuous improvement can be achieved.

The third, fourth and fifth sate in the above process indicates continuous improvement. Activity Based Costing: Activity Based Costing (ABC) is an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the organization without regard to the organizational structure. It is developed to provide more-accurate ways of assigning the costs of indirect and support resources to activities, bushiness processes, products, services, and customers. It is a tool for managers to help them plan and control business activities.

Concept of Activity Based Costing: An organization performs activities to do its business. These activities define the kind of business you are in: a ship owner has an activity to unpack boats; an accounting firm prepares tax returns; a manufacturer produces products; a council delivers services; a university teaches students. All activities consume resources. It is the consumption of these resources that adds to overhead costs. The basis of Activity Based Costing is: look at the activities required to produce the cost of the product or service. The activities consume resources and the cost of these can be calculated.

The amount of activity required for each product and service is determined, hence the real cost can be determined. The main purpose of this cost method is to identify all the directly attributable costs of a particular activity and then dispense those costs to each product to the extent that the product uses the activity. CONCLUSION: All above distinguishing features of Financial and Cost accounting boils down to conclude that Cost & management accounting is wide different from financial accounting. Both are significant in its own place as because in rder to supply financial information and analyse financial position and condition, financial accounting should be maintained whereas to determine exact cost of each and every product and after analyzing statements of costs, for supplying desirable managerial decision, cost and management accounting should be prepared. In order to perform these functions properly it is imperative for the cost accountant to be familiar with managerial problems and to understand fully what facts and figures should be collected and presented to the management for the effective and profitable solution of these problems.

In a Nutshell, Sub-field of accounting like financial and Cost & management accounting reports should be maintained and also for cost control, costing techniques likes strategic cost management and activity based costing should be adopted so that company incur minimum possible costs and for the supplement of various financial information and also cost statements. References: 1. www. vancechan. com/strategic-cost_management. html 2. www. indianmba. com 3. www. uakron. edu/uba/scm/issues. html

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An Interface Between Financial Accounting and Cost & Management Accounting and Some Concepts of Strategic Cost Management Assignment. (2020, Mar 15). Retrieved July 24, 2021, from