Introduction to Management Accounting Terms and Examples

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Introduction to Management Accounting Terms and examples

Accounting is the process of analyzing and recording transactions for the purpose of preparing reports for statutory reporting, decision making and control.  
Types of accounting

Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, receipts and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually performed by an accountant. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper  

 
Financial accounting
Reporting of the financial position and performance of a firm through financial statements issued to external users on a periodic basis.

 
Management accounting
Management accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information for the pursuit of an organization's goals. This is also known as "cost accounting."

 
The differences between management accounting and financial accounting include: 1. Management accounting provides information to people within an organisation while financial accounting is mainly for those outside it, such as shareholders 1. Financial accounting is required by law while management accounting is not. Specific standards and formats may be required for statutory accounts such as International Financial Reporting Standards. 1. Financial accounting covers the entire organisation while management accounting may be concerned with particular products or cost centres.  

 
Taxation accounting
Accounting methods that focus on taxes rather than the appearance of public financial statements. Tax accounting is governed by the country's taxation laws which dictates the specific rules that companies and individuals must follow when preparing their tax returns. Tax principles often differ from Generally Accepted Accounting Principles.

Management accounting compared with Financial Accounting

Area| Financial Accounting| Management Accounting|
Purpose| To prepare financial statements based on historic financial information for stakeholder use.| To prepare reports for management using both historic financial and non-financial information for decision making and planning.| Content | Historic financial information| Historic financial and non-financial information with futuristic projections.| Format| Must be presented in accordance with the financial reporting framework i.e. International Financial Reporting Standards (IFRSs).| No specific format. Reports are left up to management’s discretion.| Users| Stakeholders – Internal and External users.| Management only.| Timing| Usually prepared annually or quarterly – statutory requirement.| No specific timing. Up to management’s discretion for proper decision making and control.|

Cost
An amount that has to be paid or given up in order to get something. In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service.

Cost center
A cost center is part of an organization that does not produce direct profit and adds to the cost of running a company. Examples of cost centers include research and development departments, marketing departments, help desks and customer service/contact centers.

Cost classification
There are a number of different ways that we can classify costs:

• by behavior: How do costs fluctuate in response to changes in the volume of production inputs (e.g., direct labor hours, board feet of lumber used) or production outputs (e.g., number of chairs produced)?  

• by function: Costs incurred as part of the manufacturing or production process are charged to inventory and then written off as part of cost of...
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