Differences between Financial and Management Accounting Roles - Coursework Example

1. Differences between Financial and Management Accounting Roles Introduction Although both financial accounting and management accounting involve preparation and analysis of accounting and financial data and information there exist certain differences in the application of these two fields. Differences may be found in the users who need the information, types of information presented under both fields regulatory controls and periodicity in reporting. The details are: People using the Information There are two different groups of people that use financial accounting and management accounting data and information. External stakeholders of the company like investors and creditors generally are interested in the financial accounting information. On the other hand management accounting is expected to provide information for analysis and use by internal uses of an organization like the senior executives and managers. Nature and Types of Information Different data and financial data are required by different user groups. External users are more interested in the financial status of the company and they analyze the financial information presented with the general economic trend and the conditions of the industry in which the organization operates. Financial accounting makes information available on the financial transaction that have taken place in the past and this information is analyzed by the investors and creditors to assess overall performance of the company in which they have staked their funds. The internal users of the financial information require different types of information which they use to assess the internal performance of the company in various disciplines. The internal users also need non-financial information like the movements of competitors, levels of customer satisfaction which are assimilated and analyzed to help the growth of the company in the proper direction. As against the scope of financial accounting which deals more with historical data, management accounting deals with both past and present data. It also makes forecasts of future prospects of the organization and report there on. Regulatory Controls With a view to ensure the protection of the investing and other public who access the financial accounting information and rely on them, the financial accounting is made subject to the regulations of governing bodies like Financial Accounting Standards Board (FASB) and Public Company Accounting Oversight Board (PCAOB). In contrast the management accounting is not subject to any regulatory measures being presented by any agencies. The reason for absence of regulatory control is that management accounting prepares information only for the internal users and therefore is not subjected to any regulations. Since there is involvement of any public interest no need to protect the information has been felt. Periodicity of Reporting Financial accounting bases its reporting on the basis of historical data and therefore there is the necessity for making periodical reports. The financial reporting is done for different periodicity like monthly, quarterly, and annual reporting. Management accounting reports on the other hand are made for continuous periods so that the internal users would be able to evaluate the past and present performances of various functional divisions and departments. There may be some urgent needs of management accounting reports to evaluate a capital expenditure project or some other investment decisions. Forecasts about the future prospects and growth of business of the organization also need management accounting reports. Therefore there is the continuous need of the management accounting information by the internal users. (Edmonds et al, 2006) The differences in financial accounting and management accounting can be summarized in the following table: Criteria Financial Accounting Management Accounting Primary users External Internal Primary organization focus Whole organization Parts or subsections; specific areas Information characteristics Must be GAAP; based on historical data, monetary May be GAAP or non-GAAP Past, present and forecasted Both monetary and non-monetary Record keeping Mandatory Combination of formal and informal Overriding criteria Consistency, verifiability, uniformity, report fairly Situation relevant, Extensive use of estimates, flexibility, cost-benefit , serves management Source: http://www.tccd.edu/uploadedfiles/employees/380/courses/ACNT%202309/CHAPTER%2001.doc. 2. Concepts of Scorekeeping, Attention Directing and Problem Solving Activities As outlined in the theory, management accounting focuses on measuring and reporting on financial and non-financial information in order to enable the decision makers in the organization to follow the right course in solving complex business issues confronting the organization. In the process of discharging this measuring and reporting process the management accountants follow three distinct roles of problem solving, score keeping and attention directing. It is observed that different business decision because of the complexity of their nature, place emphasis on these three roles and it is for the management accountant to fulfill his reporting responsibility to meet the needs of the respective users. This also makes the three roles often overlap with each other and it is not so easy to distinguish these roles from each other. However on a broader perspective the three roles are explained below: Problem Solving Quite often managers of any organization are faced with the problem of making a decision with respect to investments in several alternative proposals. In those situations the managers need to compare the feasibility of the different proposals on the basis of the expected revenues and expected costs to be incurred on the individual proposals. With respect to providing the basic information needed to arrive at a correct decision in situations like this, management accounting takes the role of problem solving. Scorekeeping Under this role management accounting undertakes the responsibility of accumulating all the information and data and analyzes them in the form of reliable reports to the members of the organization. This role takes into account financial and non-financial information to make the people in the organization at all levels to realize the levels of their performance in their respective functional areas. Attention Directing The function of this role of management accounting is to serve as an enabler to the managers to get their focus diverted in unified direction of organizational success. This role identifies and presents opportunities and problems and make managers think of the direction they need to adopt to be successful. It must be noted this role encompasses all available opportunities that will result in enhancing the value of the organization. It does not stop with identifying the opportunities for cost reduction alone. (Horngren et al, 2002) In general the management accountants assume these three roles differently in the discharge of their planning and control decision making functions. For strategic and planning decisions the problem solving role provides immense help. The other roles of score keeping and attention directing enable the management accountants in situations of taking control decisions in the organization. Necessary feedbacks can be obtained from the scorekeeping and attention directing functions to have suitable revisions in planning decisions by reverting to problem solving role. 3. Work of Management Accountant and Benefits to the Business Effective strategic decisions in all the functional areas of an organization enhance the competitive ability of the organization. In addition it also creates value for the customers and lead to increased earnings for the investors. Managers and senior executives of the company are left with the obligation of deciding between implementing different strategies for the development of the business. It is the job of the management accountant to provide these managers and executives with the necessary inputs in the form of financial and non-financial information on which the managers can base their strategic decisions. Traditionally the role of the accountants was perceived to include just collecting and reporting of financial information for the past period. (Chapter 1) But with the change in times the role of the management accountant has taken new dimensions. This is evident from the fact that in most of the companies presently the management accountants work closely with other functional managers in devising and implementing various strategic decisions and plans. The management accountant is having a number of tools that he may make use of in fulfilling the functions entrusted to him under different business scenarios. Since the job of the management accountant in most cases is to report on the opportunities for enhancement in revenue and reduction of costs, the first job any newly joined management accountant should do is to check and report on the classification of costs into various elements like fixed costs, variable costs and semi-variable costs. In fact product and process costing is one of the important roles of the management accountant. The management accountant has the duty to report on any of the findings on the irrelevancy of the existing costing system. It is a fundamental lesson that any faulty costing system will lead to improper pricing and would lead to loss situations for the organization. At the same time as a new management accountant he should make a thorough review of the existing systems of inventory control and suggest suitable alternative proposals for bringing an effective control on the inventory costs. Another area where the new management accountant has to concentrate is on the expense side of the organization to ensure that there are established systems of control. Simple budgetary control system is an example where the management accountant can find suitable ways of improving upon the cost control measures. Existence of an effective budgetary control systems coupled with periodic comparison of the budgets with the actual and reporting variance analysis should be verified by the management accountant. In the absence of the budgetary control system the new management accountant should make it a point to draw one with the help of the financial accountant and other functional managers. This is an important step in the process of expense control and this also serves to measure the performance of the individual divisional managers. The management accountant by establishing the budgetary control can fix the responsibility for cost reduction on the divisional managers. As the management accountant of the company he can consider the possibility of introducing 'Activity Based Costing' system if he thinks it is feasible to do so for a proper and effective allocation of overhead expenses over different activities. References Chapter 1 'The Accountant's Role in the Organization' viewed December 5 2008 http://www.tccd.edu/uploadedfiles/employees/380/courses/ACNT%202309/CHAPTER%2001.doc Edmonds, C., Edmonds, T., Olds, P., & Schneider, N. (2006) "Fundamental Managerial Accounting Concept" 3rd Ed New York: McGraw-Hill Irwin. Horngren Charles, Foster George, & Datar M Srikant (2002) 'Cost Accounting a managerial emphasis' Prentice Hall of India Pvt Ltd New Delhi India Read More