Management vs. Cost Accounting

Management Accounting vs. Cost Accounting

• Management accounting focuses on internal users, such as managers and business owners.
• Cost accounting is a specific aspect of management accounting, focusing on the collection and analysis of cost data.

What Are Direct Costs?

• Direct costs are essential components directly traceable to a finished product.
• Examples include raw materials, labor directly involved in production, and manufacturing supplies.

Direct Materials

• Direct materials are the raw components that are physically incorporated into a finished product.
• These materials directly impact the cost of goods sold in manufacturing.

Factory Overhead

• Factory overhead encompasses general production costs not directly traceable to specific products.
• Examples include rent for factory space, utilities for manufacturing facilities, and wages for factory supervisors.

Gross Profit Computation

• Gross profit is calculated by subtracting the cost of goods sold from sales revenue.
• Operating expenses are then deducted from gross profit to determine operating income (earnings before taxes).

Operating Expenses Examples

• Rent or lease payments for office space
• Salaries and wages for administrative staff, including benefits
• Utilities for office or non-manufacturing facilities
• Marketing and advertising costs
• Office supplies
• Legal, consultation, and professional fees

Operating Income

• Operating income represents the profit a business generates from its core operations after paying for direct and indirect costs.

Taxes for Micro, Small, and Medium Enterprises (MSMEs)

• Percentage tax applies to businesses with annual gross sales not exceeding PHP 3 million.
• The percentage tax rate is 3% on gross sales or receipts.
• Businesses exceeding PHP 3 million in annual gross sales must register for value-added tax (VAT).
• The VAT rate is 12% on sales of goods, services, and imports.

Net Income

• Net income is what remains after deducting all expenses, including taxes, from sales revenue.
• If net income is positive, the business made a profit.
• If net income is negative, the business incurred a loss.

Cost Management Practices

• Expense Tracking and Analysis: Continuous monitoring of manufacturing costs and operating expenses is paramount.
• Automation: Implementing technology and automation tools can reduce manual labor costs and improve efficiency.
• Supplier Negotiation: Seeking better terms with suppliers, such as discounts, can reduce a company's expenses.
• Supplier Diversification: Utilizing multiple suppliers helps ensure competitive pricing and reduces the risk of dependence on a single source.
• Sustainability Practices: Adopting environmentally friendly practices can reduce long-term costs.
• Minimizing Packaging Costs: Evaluating and minimizing packaging requirements while prioritizing product quality can lead to cost savings.

Final Reminders

• Increasing selling prices can deter customers and may not be a viable strategy for all businesses.
• Excessive cost reduction can compromise product and service quality and negatively impact employee and supplier relationships.

This quiz explores the differences between management accounting and cost accounting. It covers topics such as direct costs, direct materials, factory overhead, and gross profit computation. Perfect for students looking to understand these essential accounting concepts.