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Management accounting is a procedure to maintain and prepare a report that is used by businesses to make sustained operations. It assists the business to make both short term and long term decisions along with pursuing adequate goals and objectives such as by identifying, analysing, interpreting and systematically communicating the information. It is a process to provide financial information and resources to the manager so that take an accurate decision according to the situation (Khosiev and et. al. (2019)). The report below is dependent on the many low-cost carriers such as Ryanair and Air Asia as in this regular offer of flight is provided to customers at low price. In this, it is considered that the nature of low-cost carriers and most of the costs are fixed in nature. The report below is comprised of cost accounting and management accounting, type of cost behaviour, the business decision in the context of the behaviour of cost of production.
Explain the main differences between cost accounting and management accounting.
Cost accounting is referred to as a branch of accounting that maintains aim towards generating suitable information so that working operations get control. It is used to view and maximise the profitable efficiency of an organisation thus it is also being known as controlled accounting. On the other hand, management accounting usually assists the business to plan and take preferred decision making thus it is also known as decision accounting (van Erp, Roozen & Vosselman, (2019)). The accounting system plays an essential role within an organisation as in thus internal management has been processed and it is also being with consideration of quantitative approach such as recording of data that is associated with money. Management accounting induces direct emphasis on both qualitative and quantitative data.
Cost accounting is a process of collecting, classifying, analysing and recording suitable information that is related to cost. In this suitable information is provided that is helpful for a manager to process effective decision making. It is comprised of three major cost elements as it is material (direct and indirect), overhead (production, selling, distribution and office and administration and many others as well) and labour (direct and indirect). The direct aim is to maintain track of the cost of production and towards fixed costs of an organisation.
Management accounting referred to the preparation of non-financial and financial information that is being used to manage suitable information for the business. In this suitable information is provided that is helpful to design and develop strategies, policies, forecasting plans, budgeting, evaluate the performance and making a comparison in between performance by business (Hariyati, Tjahjadi & Soewarno, (2019)).
BASIS OF COMPARISON
COST ACCOUNTING
MANAGEMENT ACCOUNTING
Meaning
It process recording, summarising and classifying of cost data of an organisation.
It is an accounting that is related to both financial and non-financial information that is provided to the manager.
Information Type
It is based on quantitative information.
It is based on quantitative and qualitative information.
Objective
The direct objective is based on the ascertainment of the cost of productions.
The suitable objective is dependent on the provision of information as the manager worked on setting a suitable goal and forecasting respective strategies (Raiborn, Kinney & Barfield, (2020)).
Scope
It is concerned concerning ascertainment, distribution, accounting prospect and allocation of cost.
Its effect and impart the aspect of cost.
Interdependency
It can be installed devoid of management accounting.
It cannot be installed devoid of cost accounting.
Recording
The record is related to both past and present data
It provides more stress towards the analysis of future prediction and projections
Planning
It is related to short-range planning
It is related to both short and long-range planning.
Cost and management accounting are an integrated part of accounting as it is helpful to ensure the smooth and efficient running of the business. As per concern of information, it is provided with respect of two entities and in this various analyses gets conducted. The cost accounting maintains aim towards reduction of extra expenditure, controlling various costs and eliminating unnecessary costs (Banerjee, 2021). On the other hand, management accounting is related to the aim of planning suitable policies, formulating strategies to set standardised goals and objectives etc.
Explain the different types of cost behaviour incurred in manufacturing a product.
Cost accounting is a process of accounting that is used to measure all the associated cost that is related to production and comprise fixed and variable cost. The purpose of cost accounting is being used to assist the management to take preferred decisions making and used to make optimised utilisation of operation that is dependent on effective cost management. There are different types of cost behaviour and it is incurred within the manufacturing of a product and it is as clearly explained below as:
Direct cost: It is related to the production of respective goods and services and comprised of raw material, distribution cost, labour and expenses and this cost advocate producing respective products. It is a cost that can be traced to a department, a project and a product (Chen, Kama & Lehavy, (2019)). For instance, Air Asia and Ryanair have a low-cost carrier and it is because they have organised the other basis as per the relevancy of certain budget. The direct cost is related to the overall wages paid to the worker, travelling cost along other machinery that is used to process the same.
Indirect cost: It is a cost or expense that is related to expenses that are unrelated to producing respective goods and services. It cannot be easily traced as a product, department, project and activity. For instance, the direct cost of Air Asia and Ryanair is associated with wheel, petrol, steel, seats, etc. On the other hand, electricity is being used to empower the service and it is related to indirect cost as it is used to process the work but didn’t trace as product as back in form of the electric bill.
Fixed cost: It is a cost that didn't vary concerning the adequate provision of goods and services as it produces for a shorter period of span. For example, Air Asia and Ryanair might have been supposed to lease a machine to perform certain production for two years. This company might pay $4,000 per month as to cover the lease but there is no matter that how many products and machines have been used to make or produce the same (Ballas, Naoum & Vlismas, 2020). The payment of lease is considered as a fixed cost and it always remains unchanged.
Variable cost: It is a cost that gets fluctuate as per the level of production output change and it is contrary to fixed cost. This type of cost get varies and depends on the number of products that are required to produce by the company. It is a cost that increases the production and advances the volume as well and it gets falls as per decrease in produced volume (Church, (2020)). For instance, the manufacturer of a product must have a package its product before shipping the product out of its stores. It is considered a variable cost because the cost of packaging cost gets increases, however, if the cost of production level decreases then the cost of the package also decreases.
Discuss how the business makes decisions of the various cost of production
The decision making of business is being used to require adequate knowledge and several concepts of cost. The different types of cost have various characteristics and consequently, it is used to review the business case and define the path to make a useful understanding of various concepts:
Fixed, variable and mixed cost: The fixed cost is based on rent and cost of building and it doesn't change the lockstep that is used with the level of activity. The variable cost is referred to as direct material and it changes the level of activity. These costs induce change within activity and it is considered as a mixed cost and it is essential for distinction. It is a suitable decision is taken and it alters the activity and not alters the cost. For instance, shuttering facility didn’t terminate the building of lease payment and it is fixed for a certain duration of lease.
By-product costs: The product gets an incidental by-product and in form of a production process such as sawdust at a mill (Das, & Islam (2019)). It isn't related to certain costs as in incurred the way in the result of the production of main product and the selling of by-product added profitable price and no price is to low.
Allocated cost: It is an overhead cost that is preferred with manufactured goods and it is due to the required accounting standards. There is no cause-and-effect in between the creation of an additional unit of production and the incurrence of additional overhead. Thus it assists to take a preferred decision to set a certain price for an additional unit.
CONCLUSION
It has been concluded from the above that management accounting is processed to maximise profit credibility along with the minimisation of losses. It is also being concerned with the effectual presentation of data and used to predict inconsistency in financial data so that management takes adequate decision making as per accordance. In addition, the management assures to make a preferred difference in between cost and management accounting it involves with reporting of financial transactions. Moreover, the different type of cost behaviour assists the business to examine various patterns such as fixed, mixed and variable patterns as it is relevant to sales and production control.
References
Books and Journals
Ballas, A., Naoum, V. C., & Vlismas, O. (2020). The Effect of Strategy on the Asymmetric Cost Behavior of SG&A Expenses. European Accounting Review, 1-39.
Banerjee, B. (2021). Cost accounting: Theory and practice. PHI Learning Pvt. Ltd..
Chen, J. V., Kama, I., & Lehavy, R. (2019). A contextual analysis of the impact of managerial expectations on asymmetric cost behavior. Review of Accounting Studies, 24(2), 665-693.
Church, A. H. (2020). Overhead-the cost of production preparedness. In The Contributions of Alexander Hamilton Church to Accounting and Management (pp. 182-185). Routledge.
Das, S. K., & Islam, S. (2019). Multi-Objective Supply Chain Inventory Model with Demand Dependent Purchase Cost and Production Rate Dependent Production Cost. Pakistan Journal of Statistics & Operation Research, 15(4).
Hariyati, H., Tjahjadi, B., & Soewarno, N. (2019). The mediating effect of intellectual capital, management accounting information systems, internal process performance, and customer performance. International journal of productivity and performance management.
Khosiev, B. N. and et. al. (2019). Development of a brand promotion strategy: management accounting and comprehensive analysis. Indo American Journal of Pharmaceutical Sciences, 6(5), 10060-10068.
Raiborn, C. A., Kinney, M. R., & Barfield, J. T. (2020). Cost Accounting Traditions & Innovations. South-Western College.
van Erp, W., Roozen, F., & Vosselman, E. (2019). The performativity of a management accounting and control system: Exploring the dynamic relational consequences of a design. Scandinavian Journal of Management, 35(4), 101077.
