Though, financial accounting and managerial accounting systems prepare and analyze the same financial data, they also differ in some aspects. For example the users of the information are different. Also the procedures for their preparations differ including the time frames. Cost accounting is another sphere of accounting that deals with the analysis of costs of products and activities in an organization. It forms a substantial part of managerial accounting since through it, the management can also make decisions. This paper analyzes the similarities a swell as differences between the two.
Management accounting is and accounting system that provides the management with techniques that provide of an organization with information for purposes of internal use like decision making and effective control of the organization’s resources. According to Enotes website (2010), procedures in management accounting provide information for decision makers in a company. Contrary, financial accounting procedures provide information to external users like the shareholders of a firm, government agencies, and creditors to the firm. Management accounting reports are usually generated anytime; daily, weekly, monthly, or quarterly. While individuals in an organization decide management accounting methods, financial accounting techniques must conform to external standards like the international financial accounting standards developed by financial accounting standards board (FASB). Cost accounting is often confused with management accounting. Cost accounting involves determining the cost of an activity while management accounting goes beyond to combine multiple management disciplines that contain financial information for internal decision making. Therefore cost accounting can be said to a necessary component of management accounting (Enotes website, 2010).
Characteristics of management accounting procedures
According to netTOM website (2010), management accounting procedures should posses the following procedures. They should be; Relevant for the purpose, complete, accurate, clear and precise to the manager, timely, communicated through the appropriate channel, less costly to provide and the volume should be manageable.
The role of management accounting
Management accounting plays the following roles within an organization:
the information provided by management accounting procedures is vital in planning and budgeting processes. This is because such information contains various costs like pricing, product costs and capital expenditures.
the management is in a position to see which activities are not conforming to the plan from the reports provided by the management accounting (netTOM website, 2010).
the management accountant can reinforce the organizational framework of the organization by tailoring the accounting structure to the organizational structure.
the managers and other staff are always motivated by the budgets prepared by the management accountant.
this is one of the major functions of management accounting procedures. Through the collection and analysis of data, the reports he or she presents to the managers assist in decision making (netTOM website, 2010).
Similarities between financial accounting and management accounting
Despite the two fields having numerous differences, there also many areas of similarities as specified below;
Certification: both fields emphasize on certification. For one to be certified, he/she must pass the exams that are concerned in each field of specialization. Certifications come in form of certified management accounting and certified public accounting (Ehoh website, 2010).
Review of historical data: both systems prepare reports basing on historical data review. In financial accounting, this is for comparison purposes of the business between the present and the past, while for management accounting, it is for determining the current performance of the organization and to come up with a business financial forecast of the future (ehow website, 2010).
Measurement of the currency: the unit of measurement in generation of reports in the two systems is the currency. The reports generated are thereafter used to give tangible information to business owners or show the financial state of the business. They can also be used to plan and generate the budget for the business (ehow website, 2010).
Terminology used: both systems of accounting use similar accounting terminology. E.g. debits and credits are used in both systems to describe the money that goes out and the money that go in to the business respectively (ehow website, 2010).
Techniques: the accounting techniques employed by both the systems are basically the same. E.g. the technique that is used to determine the actual cost of the product (ehow website, 2010).
Differences between Financial and managerial accounting
Although both financial accounting and management accounting provide information to the user for decision making, there are various differences between the two as summarized in the table below.
Information from Financial accounting system is used by external parties to the organization like the creditors, shareholders etc
Information from management accounting procedures is for internal use by the organizational management.
Financial accounting reports provide information on financial performance of an organization over a given period of time and the state of affairs for the organization at the end of the period.
Management accounting reports are for planning and control activities and also for decision making in an organization.
It is compulsory according to the law for limited companies to prepare financial statements.
Management accounting reports have no legal requirement.
Financial accounting statements are an end to themselves as they dwell mainly on the whole organization aggregating costs and revenues from different departments.
Management accounting information can not be an end to a product but rather aid in decision making. Also management accounting may give focus to specific areas and not every department.
Essentially, a historical picture of a past operation is presented by financial accounting procedures.
In management accounting, both the historical past of the immediate past and a future tool for planning is given.
Financial accounting records should be provided for at least a period of 12 months.
There is no time limit for management accounting records.
The international accounting standards must be followed in the preparation of accounting statement (financial accounts of various companies can be compared). I.e. Generally accepted Accounting Principles must be followed (GAAP).
There are no strict rules to govern management accounting record preparation (no need to follow GAAP). The records are used by managers of the organization and therefore there is no need for comparison.
A specific format specified by the IAS is to be followed in the preparation for financial statements.
There is no specified management accounting format and therefore no specific statements should be produced.
The nature of financial statements most often is of financial nature.
Management accounting information not necessarily money related. It can also be non-monetary.
(NetTOM website, 2010)
Types of management accounting reports
Since management accounting is a vital part of the planning tool kit, you can find the following managerial reports within SAC:
– Variance analysis:
this usually determines the standard, projections and actual costs of an activity. One key element to the company’s benchmark is the difference between the actual and the standard costs, i.e. how much it can cost to produce the same computer chip by two different computer manufacturers. The organization can analyze its planning processes using the projections or estimate variance analysis. Through variance analysis, there is a special field called bottleneck accounting that examines the relative costs and the variances created through production bottlenecks (lovetoknow website, 2010).
– Cost analysis:
this is a type of managerial accounting that analyzes the exact cost of a product. This usually starts with finding out the cost of direct expenses like materials and labor. There are other sophisticated management accounting techniques that include analysis of indirect expenses. They include cost projection accounting, calculating opportunity costs and facility overheads. These techniques essentially analyze alternative ways in which the company could have invested the funds (lovetoknow website, 2010).
Activity based costing:
this type of costing technique analyzes the cost of activities basing on their cost rather than the product. Its advantage is that it allows for deeper analysis of the company’s interconnected parts. This method divides products into;
Unit- level activities (production of one unit).
Batch level activities (cost per batch).
Product sustaining activities.
Facility sustaining activities.
The above report indicates Normal Costing System Per Unite Costs Retrieved from: http://ivythesis.typepad.com/term_paper_topics/management_accounting_report/
Accounting reports prepared on profit performance for a company may also indicate some of the expected managerial accounting duties. The example below was drawn from ABC System Profit Performance. The example that follows indicates normal costing system profit performance.
ABC System Profit Performance report retrieved from: http://ivythesis.typepad.com/term_paper_topics/management_accounting_report/
Normal Costing System Profit Performance report retrieved from http://ivythesis.typepad.com/term_paper_topics/management_accounting_report/
A business process like research development can be examined by either total cost analysis and/or cycle cost analysis. This is because both methods analyze the total expenses involved in a business activity. Therefore the two methods are very important n determining the company’s profitability (lovetoknow website, 2010).
Return on investment: this is a type of cost analysis that includes cost analysis naturally while measuring the direct returns as well as calculating the ratio (lovetoknow website, 2010).
Projections: this include future estimate of the organization such as; demand, sales, expenses, necessary resources and the number of required employees. Projections form one of the most complicated areas of managerial accounting because of the difficulty ion predictions caused by inflation, consumer demand and material prices. Therefore, they are built on extensive modeling.
Balanced scorecard: this usually includes standard financial measures. These measures include on perspectives of the customer on satisfaction, business process, innovation and perspective on learning (lovetoknow website, 2010).
Digital dashboards: these are applications that are designed in the form of a car’s dashboard to display critical business information. They provide needed information fat just at a glance. Through them, the manager is able to see the latest data about the company in the company’s business contexts (lovetoknow website, 2010).
Management accounting and financial accounting are two major accounting systems used by various organizations. Despite their use, they are totally different. Whereas financial accounting is prepared after a certain period of time and used by external users, managerial accounting is prepared by the management accountant for internal use of the management and it has no specific format to be used hence no need for comparison with other organizations. The similarities of the two range from mandatory certifications, use of currency, terminology used to similar technology. Examples of managerial accounting reports available are the variance analysis, cost analysis, return on investment, projections and digital dash boards.
Ehow website, 2010: “Similarities of Financial and Managerial Accounting.” Retrieved on February 15, 2010 from: http://www.ehow.com/about_4853367_similarities-financial-managerial-accounting.html
Enotes website, (2010). “Managerial Accounting.” Retrieved on February 15, 2010 from: http://www.enotes.com/biz-encyclopedia/managerial-accounting
Lovetoknow website. (2010). “Managerial Accounting.” Retrieved on February 15, 2010 from: http://business.lovetoknow.com/wiki/Managerial_Accounting
NetTOM website. (2010). “Financial and Management Accounting.” Retrieved on February 15, 2010 from: http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page11.htm
Accountability Mechanisms in Volkswagen and Nike
“An ever evolving set of responsibilities (and accountabilities) for the functioning and welfare of individuals, society and the environment is entrusted to public sector organisations and private business enterprises.”
Using both positive and negative examples discuss the above statement.
Accountability is defined as “the fact or condition of being accountable; responsibility” (Oxford Dictionary, 2016). It is an essential part of all businesses both large and small. The power that one party has which enables them to demand accounts from another party is through various accountability mechanisms. This essay will examine how a small selection of said accountability mechanisms succeeded or failed in the cases of two large corporations – Volkswagen and Nike.
The environment is entrusted into the hands of businesses. A prime example of when this ‘trust’ was broken is the Volkswagen (“VW”) emissions scandal. In this case, the legal accountability mechanism failed miserably. Legal accountability is the obligation that companies have to the law. These accountabilities unlike some others e.g. market accountability are compulsory. The VW emissions scandal erupted on the 18th of September 2015 (Kollewe, 2015). The company was ordered to recall 482,000 cars in the US after the scandal was unveiled. Due to the deliberate – illegal – installation of a ‘defeat device’, VW could cheat emissions testing on several models and was cleared to sell them (Hotten, 2015). The ‘defeat device’ caused cars affected to excel under normal emissions testing conditions. Its purpose was to recognise test conditions – e.g. a locked steering wheel and a stationary test rig – and put the vehicles into a ‘safety’ mode which resulted in the cars emitting a significantly lower level of air pollutants than they would under normal driving conditions. The rigging of tests allowed VW to manufacture and sell thousands of cars that were advertised as being ‘revolutionary’ due their low emissions. The stark reality was that when tested out-with normal test conditions, “the engines emitted nitrogen oxide pollutants up to 40 times above what is allowed in the US” (Hotten, 2015). When the scandal broke, it was unveiled that 11 million cars worldwide could possibly be fitted with the device (Kollewe, 2015). What is questionable, is the fact that the company only suggested that 11m cars could ‘possibly’ be fitted with the device. One would think that they would know how many times they broke the law considering all the profits that they raked in. This resulted in the emitted pollution totalling almost 1 million tonnes per year (Lee and Vachon, 2016). “Roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture” (Mathiesen and Nelsen, 2016). VW did not take care of the environment here because although their deceit caused them to rake in profits, their carelessness and lack of consideration has resulted in a negative impact on the environment and society at large. In the case of this scandal, the legal accountability mechanism failed because although the law stated that cars could not emit more pollution than a set amount, VW used deceitful ways – ‘cunning’ practices – to bypass the law. Since the truth has been unveiled, VW has paid and will continue to pay dearly for their wrongdoings with lawsuits and continued legal action being taken against them.
Furthermore, legal accountability is not the only accountability mechanism that failed in relation to the VW scandal. Another one was market accountability, accountability to the output market in particular. The output market is where goods are sold and services are provided. This market is especially important as consumers in such markets can take their custom elsewhere in the event of a company’s wrongdoing. As such a large company, VW was trusted by millions of users all around the world. They bought their products because of their brand loyalty and belief. They were drawn in by the advertisements promoting “clean diesel” and gave up their hard-earned money in order to receive a product that unbeknownst to them was contributing astonishing amounts of pollution into the atmosphere (Jopson, McGee and Campbell, 2016). A study found that “US [VW] vehicles would have spewed between 10,392 and 41,571 tonnes of toxic gas into the air each yearâ€¦. If they had complied with EPA standards, they would have emitted just 1,039 tonnesâ€¦each year in total” (Mathiesen and Nelsen, 2016). The failure of market accountability is equally even more astonishing due to the astounding volumes of pollution that was emitted due to these ‘defeat devices’. Not only did VW show a lack of regard for the environment, but they also did not act responsibly with the trust bestowed onto them by the output market – society. The market penalized VW for its unsustainable behaviour with many customers taking their custom elsewhere. “Volkswagen faces a consumer backlash against its brand” (Lee and Vachon, 2016) and deservedly so. The VW scandal is a perfect example of the impact that both legal and market accountabilities can have on a company when they are ignored.
On the contrary, public reputational and market accountability succeeded in the case of Nike. The company began their ‘Reuse-a-shoe’ initiative in 1990 and since then have recycled more than “28 million pairs of shoes and 36,000 tons of scrap material into Nike Grind for use in more than 450,000 locations around the world” (Ekström, 2014). The material – Nike Grind- is created using the ‘slice-and-grind’ method. This meant that the shoes were sliced into three separate parts: rubber outsole, foam midsole and fibre upper. The three separate parts would then be ground and refined for use (Nike, 2016). The three different types of Nike Grind can then be used for different purposes, all for benefitting communities and society in general. What is remarkable is the fact that Nike saw an opportunity to make use of all the old trainers that were being incorrectly disposed of. By beginning this initiative, it is easy to see that Nike could build a strong brand loyalty. Consumers are always eager to support an initiative that will better the planet in any way, shape or form and Nike realised this and have succeeded.Â Nike’s Grind website states:
“Nike’s vision is that our products will be “closed loop”-that is, they will use the fewest possible materials and be assembled in ways that allow them to be readily recycled into new products. Our long term vision is to create a continuous loop without waste.” (Nike, 2016)
Nike has been very successful with this initiative and it shows that they care for the environments and the well-being of society as a whole. This point is derived from the fact that all the old trainers were being disposed of incorrectly and this led to an increase in landfill. Also, the burning of the rubber led to increased toxic gases being released into the atmosphere. Nike’s decision to begin the ‘Reuse-a-shoe’ initiative was a great one because it improved the regard with which the company was seen. In addition, their pledge to use “sustainable, long-lasting materials designed for professional level performance” has only further increased its popularity with millions of consumers around the world (Nike, 2016). Nike’s swift action to try and reduce the impact that their old products had on the environment worked in their favour as Nike Grind is now well established and continues to boost the Nike brand image.
In conclusion, yes, it is true that society and the environment is entrusted into the hands of public sector organisations and private business enterprises. These are regulated using accountability mechanisms. All companies are accountable in many ways. However, where VW failed in their legal, market and public reputational accountabilities due to their deceitful actions, Nike succeeded in their market and public reputational accountabilities by identifying and devising a way to fulfil its objectives whilst making a positive impact in many communities and society. While, VW fitted the ‘defeat device’ to cheat emissions testing and eventually make more profit, Nike’s outward thinking resulted in even more brand loyalty than they started out with. It simply demonstrates that accountability is an essential part of every organisation and when the accountability mechanisms fail, there are serious consequences.
Ekström, K.M. (2014) Waste management and sustainable consumption: Reflections on consumer waste. Pg 169-171. Available at: https://books.google.co.uk/books?id=GXLfBQAAQBAJ