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Difference Between Financial Accounting and Management Accounting

Difference between Financial Accounting and Management Accounting and also definition of Mixed cost, fixed cost

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1K views3 pages

Difference Between Financial Accounting and Management Accounting

Difference between Financial Accounting and Management Accounting and also definition of Mixed cost, fixed cost

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Difference between Financial Accounting and Management Accounting

BASIS FOR
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

Meaning Financial Accounting is an accounting The accounting system, which provides


system that focuses on the preparation relevant information to the managers to
of financial statement of an make policies, plans and strategies for
organization to provide the financial running the business effectively, is known
information to the interested parties. as Management Accounting.

Is is Yes No
compulsory?

Information Monetary information only. Monetary and non-monetary information

Objective To provide financial information to To assist the management in planning and


outsiders. decision making process by providing
detailed information on various matters.

Format Specified Not specified

Time Frame Financial Statements are prepared at The reports are prepared as per the need
the end of the accounting period, which and requirements of the organization.
is usually one year.

User Internal and external parties Only internal management.

Reports Summarized Reports about the Complete and Detailed reports regarding
financial position of the organization various information.

Publishing and Required to be published and audited Neither published nor audited by statutory
auditing by statutory auditors auditors.

Definition of Management Accounting

Management Accounting, also known as Managerial Accounting is the accounting for managers
which helps the management of the organization to formulate policies and forecasting,
planning and controlling the day to day business operations of the organization. Both the
quantitative and qualitative information are captured and analyzed by the management
accounting.
Definition of Financial Accounting
Financial Accounting is an accounting system, which is concerned with the preparation of
financial statement for the outside parties like creditors, shareholders, investors, suppliers,
lenders, customers, etc. It is the purest form of accounting in which proper record keeping and
reporting of financial data are done, to provide relevant and material information to its users.
Fixed Costs: A cost that is not immediately affected by changes in
the cost driver. Activities that affect costs are often called cost driver.
A fixed cost is that which tends to remain unchanged despite often
wide changes in output or activity. On a per unit basis, a fixed cost
varies inversely with changes in the level of activity. This means that
the per unit fixed cost decreases with increase in the activity level,
and increases with decrease in the activity level. The rent of
buildings of an organization, supervisor’s salaries, taxes on real
estate, maintenance and repairs of buildings and grounds,
depreciation (other than that computed under the units of production
method), insurance are good examples of fixed costs. Fixed costs are
sometimes termed as "capacity cost" because fixed costs are
generally incurred to create facilities

Variable Costs: A cost that changes in direct proportion to changes


in the cost driver. A cost that varies in total in direct proportion to
changes in activity levels, a variable cost must be a constant amount
per unit. The cost of raw materials, wages, sales commission, use of
machine on rental basis are the good examples of variable costs.
Thus, as activity changes, total variable cost increases or decreases
proportionately with the activity changes, but unit variable cost
remains the same.
Mixed Cost: A mixed cost is a semi-variable cost (sometimes known as
a semi-fixed cost) that has both a fixed and variable element to it. So a
mixed cost has both a variable and a fixed component. On a per unit
basis, a mixed cost does not fluctuate in direct proportion with changes
in activity nor remains constant with changes in activity. Telephone cost
is an example of a mixed or semi-variable cost. This is so because it has
a fixed rental charge and a varaiable cost per unit of telephone time used
per call. This means that the total telephone cost is a mixture of fixed and
variable costs. Another good example of a mixed cost is electricity that is
computed as a flat charge (the fixed component) for basic service plus a
stated rate for each kilowatt-hour of electricity used (the variable
component).
Methods of Analysisng Mixed Costs
The following are the methods used to separate fixed and variable parts
of mixed costs:
(a) Scatter Diagram
(b) High-Low Method
(c) Regression Method
(d) Miscellaneous methods: account analysis and engineering approach

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