Management Accounting vs. Financial Accounting: Key Differences
4 Key Differences Between Management Accounting (MA) and Financial Accounting (FA)
Users
- MA: Internal users like managers and employees at all levels.
- FA: External stakeholders, creditors, banks, etc.
Regulations
- MA: No accounting standards or external rules to apply; generated to satisfy managers’ information needs.
- FA: Must follow accounting standards.
Source of Information
- MA: Both financial and non-financial data drawn from many sources, namely core accounting standards, market, customer, and economic data from external sources.
- FA: Exclusively internal data, transaction-based accounting.
Nature of the Information
- MA: Past, current, and future-oriented, made to suit specific needs of the managers.
- FA: Strictly past data which is reliable and verifiable.
Management Accounting Processes and Techniques
- Support the organization’s formulation and implementation of strategy.
- Improve the organization’s competitive advantage.
- Provide information to help manage resources through systems of planning and control.
- Estimate the costs of the organization’s output.
Traditional Versus Modern Approaches for the 4 Systems
Costing System
- Traditional: Estimates the costs of organizational units such as departments, and of products. They assume that production volume is the only factor that can cause costs to change.
- Modern: More detailed. They estimate the cost of individual activities performed in an organization. Activity-based costing understands that there are other factors besides production volume which can cause the costs to change.
Budgeting System
- Traditional: Estimate planned revenues and costs for organizational units, such as departments. Department budgets are then aggregated to obtain the budget for the overall organization.
- Modern: Activity-based budgeting, they budget according to activities performed.
Performance Measurement System
- Traditional: Provides measures of financial performance. They focus largely on controlling costs by reporting differences between budgeted and actual costs.
- Modern: Provides measures of performance across the whole range of critical success factors, such as quality, delivery, innovation, and sustainability, as well as financial performance. They look at performance outside of the company such as customers, competitors, and stakeholders. Focuses on managing sources of customer value and shareholder wealth.
Cost Management System
- Traditional: Provide information to help managers control costs by focusing on differences between actual costs and planned costs.
- Modern: Costs are analyzed to identify their real ‘root’ causes. It includes Activity-Based Management, customer profitability analysis, supplier cost analysis, business process re-engineering, life cycle management, and target costing.
Labor on-costs are additional labor-related costs that businesses have to incur to employ personnel, such as payroll tax, workers’ compensation insurance, and the employer’s superannuation contribution.
Direct Labor + Manufacturing Overheads = Conversion Costs
Direct Material + Direct Labor = Prime Costs