Discussion on any three specialized branches of accounting

1. 1 Introduction: Accounting is a very interesting field. Accountancy is the science of recording classifying and summarizing transactions so that relation with outsiders is exactly determined and result of operation during a particular period can be calculated and the financial position as the end of the period may be shown. There are many specialized branches of accounting. In our assignment we discuss only three specialized branches of accounting. They are cost accounting, managerial accounting and human resource accounting.

In the case of cost accounting cost calculations are done keeping historical and estimated costs cost accounting and the process calculating costs vary accounting to nature of business manufacturing activity or operating activities. Managerial accounting applies to all types of businesses–service, merchandising and manufacturing. Managerial accounting deals with the needs of the management rather than strict compliance with generally accepted accounting principles. It involves budgeting and forecasting, financial analysis, cost analysis, evaluation of business decisions, and similar areas.

Human resource accounting is an extension of the Accounting principles of matching the costs and revenues and of organizing data to communicate relevant information. The Quantification of the value of Human resources helps the management to cope up with the changes in its quantum and quality so that equilibrium can be achieved in between the required resources and the prove. Human Resource Accounting provides useful information to the management. 1. 2 Objectives: (1) To know about the three specialized braches of accounting. (2) To know about their importance. (3) To know about their limitations.

(4) To know about their effect in decision making. 1. 3 Limitations: (1) Lack of accounting knowledge. (2) Lack of information (3) Shortage of time 2. 1. 1Cost Accounting: Cost accounting is the accounting of the cost. It is made of two words- Cost and Accounting. The term cost denotes the total of all expenditures involved in the process of production. Thus, it covers the costs involved in the production and the cost involved while receiving it. Accounting, on the other hand, collects and maintains financial records of each income and expenditure and make avail of such information to the concerned officials.

Thus, cost accounting is a practice and process of cost which determines the profitability of a business concern by controlling the cost with the application of accounting principle, process and rules. Cost accounting includes the presentation of the information derived there from for purposes of managerial decision making. Thus, cost accounting is an arts as well as science. It is science because it is a body of systematic knowledge having certain principles. It is an art as it requires the ability and skill with which a cost accountant is able to apply the principles of cost accounting in various managerial problems.

According to W. W. Bigg - “Cost accounting is the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted. ” According to R. N. Carter, “Cost accounting is a system of recording in accounts the materials used and labor employed in the manufacture of a certain commodity or on a particular job. ” Thus, cost accounting is considered as an art as well as science.

It is also a prime part of accounting system which records systematically the cost involved in raw materials and labor used in the process of production and the same time determines the total cost and unit cost of product, the process of recording classifying and analyzing of cost is the cost accounting. 2. 1. 2 Importance of Cost Accounting: Management of business concerns expects from Cost Accounting detailed cost information in respect of its operations to equip their executives with relevant information required for planning, scheduling, controlling and decision making.

To be more specific, management expects from cost accounting information and reports to help them in the discharge of the following functions: (a) Control of material cost: Cost of material usually constitutes a substantial portion of the total cost of a product. Therefore, it is necessary to control it as far as possible. Such a control may be exercised by- (i) Ensuring un-interrupted supply of material and spares for production. (ii) By avoiding excessive locking up of funds/capital in stocks of materials and stores. (iii) Also by the use of techniques like value analysis, standardization etc. to control material cost.

(b) Control of labour cost: It can be controlled if workers complete their work within the standard time limit. Reduction of labour turnover and idle time to help us, to control labour cost. (c) Control of overheads:Overheads consists of indirect expenses which are incurred in the factory, office and sales department; they are part of production and sales cost. Such expenses may be controlled by keeping a strict check over them. (d) Measuring efficiency: For measuring efficiency, Cost Accounting department should provide information about standards and actual performance of the concerned activity.

(e) Budgeting: Now-a-days detailed estimates in terms of quantities and amounts at* drawn up before the start of each activity. This is done to ensure that a practicable course of action can be chalked out and the actual performance corresponds with the estimated or budgeted performance. The preparation of the budget is the function of Costing Department. (f) Price determination: Cost accounts should provide information, which enables the management to fix remunerative selling prices for various items of products and services in different circumstances.

(g) Curtailment of loss during the off-season: Cost Accounting can also provide information, which may enable reduction of overhead, by utilizing idle capacity during the off-season or by lengthening the season. (h) Expansion: Cost Accounts may provide estimates of production of various levels on the basis of which the management may be able to formulate its approach to expansion. (i) Arriving at decisions: Most of the decisions in a business undertaking involve correct statements of the likely effect on profits. Cost Accounts are of vital help in this respect.

In fact, without proper cost accounting, decision would be like taking a jump in the dark, such as when production of a product is stopped. 2. 1. 3 Limitations of Cost accounting: Cost Accounting is not an exact science like other branches of accounting but is an art which has developed through theories and accounting practices based on common sense and reasoning. These practices are changing with time. There is no stereotyped system of cost accounting applicable to all industries. It lacks uniform procedure. Concepts, methods and techniques of cost accounting understood and applied differently by different industries.

It is used only by big enterprises. The limitations of cost accounting are as follows: 1. The system is more complex: Cost accounting needs to identify the different types of expenses and allocation of expenses is considered as a complicated system of accounting. It needs different forms and formulas to collect the data and preparing the reports. Also it requires number of steps in ascertaining such details. So it involves a more complex system. More complex and complicated system of cost accounting is one of the limitations facing by the cost accounting. 2. It is expensive:

In installing and maintaining cost accounting system requires more man power and resources. More analysis, allocation and absorption of overheads requires considerable amount of additional work. If the expenses incurred in ascertaining the cost is more than what is derived from it, then the process of cost accounting is meaningless. In short, the expenses of cost accounting should not be more than the profit derived from cost accounting. Many companies do not adopt cost accounting owing the fact that it is more expensive and not economical. 3. Inapplicability of costing method and technique:

Technique and methods of cost accounting differ from organization to organization. One standard method is not adequate for all the requirement of different organizations. It depends on the nature of business and the type of service/product manufactured by the firm. If wrong technique or method is used, it will affect the result. So inapplicability of same costing method and technique is the one of the main limitation of cost accounting. 4. Not suitable for small scale units: One of the limitations faced by the cost accounting in installing it in all types of business is that it is not applicable to small scale units.

Through the traditional accounting, small scale units can control the cost effectively. 5. Lack of Accuracy: Use of notional cost such as standard cost, estimated cost etc. would not bring out the actual cost of the product. So the cost accounting lacks the accuracy of its results. 6. Lacks social Accounting: Social accounting is outside the scope of cost accounts. Cost accounting fails to take into account the social obligation of the business. 7. Need preparation of frequent reconciliation to verify accuracy: Results shown by cost accounts differ from those of financial accounts.

Preparation of reconciliation statements to verify the accuracy is frequently required. This leads to unnecessary increase in workload. 8. Duplication of Work: Many industrial units function effectively and control the cost effectively with the financial accounting. Preparing cost accounting is unnecessary for them and it involves duplication of accounting work. 9. Use of Secondary Data: Cost accounting depends on financial statements for a lot of information. Any errors or short coming in the information will affect the results. 10. Lack of cooperation of employees: Cost accounting depends heavily on the cooperation of employees concerned.

Lack of cooperation of employees will affect the overall performance of cost accounting. Non-cooperation or opposition from employees will affect the results. 11. Does not control Cost by itself: Cost accounting will not control the cost. It only brings out the possibility of areas which needs control. If the organization does not have an efficient management, the reports and results brought out by the cost accountant is useless. So cost accounting will not control the cost by itself. It needs an effective and efficient management to use it. 12. It is based on estimation and previous data:

Most of the data used by a cost accountant is based on estimation of indirect costs, assumptions and previous data. Not using the actual data and costs is the limitation of cost accounting. 13. It only brings out the cost of goods or services: To find out the operational results, we need to depend on financial accounting. Cost accounting will not bring forth the financial status of the company. 14. It serves the information need of the management: We cannot depend on cost accounting for the financial information required by the shareholders, creditors, employees and the society at large.

It only serves the requirement of information needed by the management. 15. Not useful for determining the tax liabilities: We cannot treat cost accounting as a basis for determining the tax liabilities of the business. Financial accounting is required for the determination of tax liabilities. 2. 1. 4 Cost Accountings effect on decision making: Managers make decisions that govern how a company reaches its goals. Many of these goals have financial aspects, such as revenue and profit targets. The level of costs included in such decisions has a major impact on the finances of the company.

Reliable reporting of actual costs, accurate estimation of projected costs and the appropriate integration of such costs in managerial decisions is a key component of business operations that meet their targets and further the goals of the company. Relevant Costs: Typical managerial decision making selects one of two or more alternatives. Costs that remain the same no matter which alternative the manager chooses are not relevant to the decision. In a cost-based decision on out-sourcing, a manager has to consider the cost of the subcontract and the savings in-house.

For example, if the company still has to pay the full rent despite having fewer employees, the rent is not a relevant cost. If the company can move to a smaller location and pay less rent, the rent becomes relevant. Fixed Costs: The type of cost impacts a manager's decision making. Fixed costs are totals that remain the same independently of the volume of production. Higher production levels result in a reduced cost-per-unit as far as fixed costs are concerned. Typical fixed costs are facility related, such as heating and insurance.

They are important for managerial decisions regarding optimal production levels because they influence the product cost and, through the cost, the pricing and profit levels. Variable Costs: A type of cost with a different impact on managerial decisions is the variable cost. Variable costs stay the same on a cost-per-unit basis, but their totals increase with the volume of production. Typical variable costs are materials used in production and direct labour to make the products. Variable costs are important for overall company budget decisions and planning for financing.

Managers add variable costs as per-unit-costs times’ production volume to fixed costs to determine total production costs. Step Costs: Step costs are a combination of fixed and variable costs that a manager has to consider to avoid major discrepancies in cost calculations. They act as fixed costs up to a certain limit and then change to a new value. Typical step costs are those associated with machine capacity or batch processing. If production volume exceeds certain limits, costs rise substantially to a new, higher level as the company needs an additional machine or has to produce an additional batch.

The importance of including step costing in managerial decision making is to either avoid exceeding step limits or to include the relevant higher costs. 2. 2. 1 Management or Managerial Accounting: Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. Managerial accounting information provides data-driven input to these decisions, which can improve decision-making over the long term.

Small business managers can leverage this powerful tool to help make their business more successful by understanding how management accounting benefits common business decision contexts. According to the Institute of Management Accountants (IMA): "Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy".

The Institute of Certified Management Accountants (ICMA) states "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking". Management accountants therefore are seen as the "value-creators" amongst the accountants.

They are much more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and compliance (score keeping) aspects of the profession. Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc. 2. 2.

2 Importance of Management or Managerial Accounting: The main aim of managerial accounting is toimprove the efficiency and quality of operationsby providing program owners and all others with suitable and applicable cost based performance information to permit for nonstop improvement in distributing the output to outcome the stockholders. Managerial accounting has been developed and used with all from the beginning times to help all the directors to understand the costs of running a project.

Modern managerial accounting is created during the industrial revolution during the difficulties of running a large scale business which show the way to the development of scheme for recording and checking costs to help business proprietors and managers to finalize and make conclusions. So, to conclude, for any business unit starting from the smallest business activity to the largest multinational business to be succeeded requires the use of managerial accounting concept and practices. This accounting provides data to owners for preparation and scheming of rating products and services for customers too.

The main focus of managerial accounting is to help the managers for making better decisions. Because of all these reasons, businesses and organizations hire on managerial accountants and thereby, they are becoming integral persons of decision making teams instead of just data providers. 2. 2. 3 Limitations of Management or Managerial Accounting: Though management accounting is helpful tool to the management as it provides information for planning, controlling and decision making, still its effectiveness is limited by a number of reasons. Some of the limitations of management accounting are as follows: 1.

Based On Accounting Information: Management accounting is based on data and information provided by financial accounting and cost accounting. As such the correctness and effectiveness of managerial decisions will depend upon the quality of data provided by cost and financial accounts. So, effectiveness of management account is limited to the reliability of sources of information.

2. Lack of Knowledge: The use of management accounting requires the knowledge of number of related subjects. Deficiency in knowledge in related subjects like accounting principles, statistics, economics, principle of management etc. will limit the use of management accounting. 3. Intensive Decisions: Decision taking based on management accounting that provide scientific analysis of various situations will be time consuming one. As such management may avoid systematic procedures for taking decision and arrive at decision using intuitive. And intuitive limit the usefulness of management accounting. 4. Management Accounting Is Only A Tool: The tools and techniques of management accounting provide only information and not decisions. Decisions are to be taken by the management and implementations of decisions are also done by management.

5. Evolutionary Stage: Management accounting is still in a development stage and has not yet reached a final stage. The techniques and tools used by this system give varying and differing results. It is still named as internal accounting and/ or operational accounting. 6. Personal Prejudices and Bias: The interpretation of financial information may differ from person to person depending upon the capability of the interpreter. Analysis and interpretation of data and information may be influenced by personal basis. As such, the objectivity of decision may be affected by personal prejudices and bias.

7. Psychological Resistance: Changes in traditional accounting practices and organizational set up are required to install the management accounting system. It calls for a rearrangement of the personnel and their activities and framing of new rules and regulations which generally may not be liked by the people involved. 8. Persistent efforts: The conclusions draws by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas. 9.

Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers both monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the conclusions obtained through it. 10. Top-heavy structure: The installation of management accounting system requires heavy costs on account of an elaborate organization and numerous rules and regulations. It can, therefore, be adopted only by big concerns. 11. Opposition to change: Management accounting demands a break away from traditional accounting practices.

It calls for a rearrangement of the personnel and their activities, which is generally not like by the people involved. 2. 2. 4 Managerial Accountings effect on decision making: Small business owners are faced with countless decisions every business day. Managerial accounting information provides data-driven input to these decisions, which can improve decision-making over the long term. Small business managers can leverage this powerful tool to help make their business more successful by understanding how management accounting benefits common business decision contexts. Relevant Cost Analysis:

Managerial accounting information is used by company management to determine what should be sold and how to sell it. For example, a small business owner may be unsure where he should focus his marketing efforts. To evaluate this decision, an accounting manager could examine the costs that differ between advertising alternatives for each product, ignoring common costs. This process is known as relevant cost analysis and is a technique that is taught in basic managerial accounting courses. The same process can be used to determine whether to add product lines or discontinue operations. Activity-based Costing Techniques:

Once the company has determined what products to sell, the business needs to determine to whom they should sell the products. By using activity-based costing techniques, small business management can determine the activities required to produce and service a product line. Embedded in this information is the cost of customers. Deciding which customers are more or less profitable allows the business owner to focus advertising toward the consumers who are the most profitable. Make or Buy Analysis: A primary use of managerial accounting information is to provide information used in manufacturing.

For example, a small business owner may be considering whether to make or buy a component needed to manufacture the company's primary product. By completing a make or buy analysis, she can determine which choice is more profitable. While this technique is certainly useful, small business owners should only use these analyses as a factor in the decision. There could be other non-financial metrics that are important to consider that would not be part of the analysis. Utilizing the Data: Managerial accounting information provides a data-driven look at how to grow a small business.

Budgeting, financial statement projections and balanced scorecards are just a few examples of how managerial accounting information is used to provide information to help management guide the future of a company. By focusing on this data, managers can make decisions that aim for continuous improvement and are justifiable based on intelligent analysis of the company data, as opposed to gut feelings. Information: Accounting management is usually referred to as managerial accounting or cost accounting. The main role of accounting managers is to analyze the financial information of a company and to make future decisions for the company.

All the decisions accounting managers make are for internal company use only. The information they provide is not given to outside sources at all; it is strictly for upper-level management and owners of the company. The information they provide is used only to increase a company's profitability. Revenues: One of the main roles of accounting managers is to study the revenues of a company. Studying the revenues consists of examining all sources of revenues and looking for ways to increase them. Accounting managers try to make decisions the company can implement that will increase overall revenues.

This includes ways of increasing sales and other ways of increasing revenues such as renting out extra space. Expenses: Expenses in a business need to be controlled and monitored. One way company increases profitability is by eliminating or decreasing unnecessary expenses. Management accountants examine all expenses and look for ways to decrease them. Often this involves cost accounting, which is a process of calculating production costs of goods, and finding the most efficient way of making them and the most efficient quantity they should make at a time.

Decisions: With the revenues and expenses analyzed, accounting managers determine what parts of the company are working well and what needs to be changed. This is where the managers make decisions and they give this information to those above them who will implement the ideas they have. Budgets and Forecasting: Another role of accounting managers is determining a budget and forecasting future plans and goals. With the information they've analyzed, part of their job is to create a realistic budget for the company to follow.

They also forecast future ideas for increased growth within the company. 2. 3. 1 Human resource Accounting: Generally we can say that, Human Resource Accounting (HRA) is the process of assigning, budgeting, and reporting the cost of human resources incurred in an organization, including wages and salaries and training expenses. In other words, Human Resource Accounting is the process of identifying and reporting the Investments made in the Human Resources of an Organization that are presently not accounted for in the conventional accounting practices.

In simple terms, it is an extension of the Accounting Principles of matching the costs and revenues and of organizing data to communicate relevant information. The Quantification of the value of Human Resources helps the management to cope up with the changes in its quantum and quality so that equilibrium can be achieved in between the required resources and the provided information. The American Accounting Association’s Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as “the process of identifying and measuring data about human resources and communicating this information to interested parties”.

HRA, thus, not only involves measurement of all the costs/ investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an organization. Flamholtz (1971) too has offered a similar definition for HRA. They define HRA as “the measurement and reporting of the cost and value of people in organizational resources”. At last, we can say that, Human Resource Accounting is the process of assigning, budgeting, and reporting the cost of human resources incurred in an organization, including wages and salaries and training expenses.

It’s the activity of knowing the cost invested for employees towards their recruitment, training them, payment of salaries & other benefits paid and in return knowing their contribution to organization towards its profitability. 2. 3. 2 Importance of Human Resource Accounting: Human Resource Accounting provides useful information to the management, financial analysts and employees as stated below:- Human Resource Accounting helps the management in Employment and utilization of Human Resources.

It helps in deciding transfers, promotion, training and retrenchment of human resources. It provides a basis for the planning of physical assets via human resources. It helps in evaluating the expenditure incurred for imparting further education and training of employees in terms of the benefits derived by the firm. It helps to identify the causes of high labor turnover at various levels and taking preventive measures to contain it. It helps in locating the real cause for low return on investment, like improper or under-utilization of physical assets or human resources or both.

It helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through the most averse and unfavorable circumstances. It provides valuable information for persons interested in making long term investments in the firm. It helps the employees in improving their performance and bargaining power. It makes each employee understand his contribution towards the betterment of the firm via the expenditure incurred by the firm on him. 2. 3. 3 Limitations of Human Resource Accounting:

Human Resource Accounting is the accounting methods, systems, and techniques, which coupled with special knowledge and ability, assist personnel management in the valuation of personnel in their knowledge, ability and motivation in the same organization as well as from organization to organization. It means that some employees become a liability instead of becoming a human resource. HRA facilitates decision making about the personnel i. e. either to keep or to dispense with their services or to provide mega-training. There are many limitations which make the management reluctant to introduce HRA.

Some of the Attributes are:- 1. There is no proper clear cut and specific procedure or guidelines for finding costs and value of human resources of an organization. The systems which are being adopted have certain drawbacks. 2. The period of existence of Human Resource is uncertain and hence valuing them under uncertainty in future seems to be unrealistic. 3. The much needed empirical evidence is yet to be found to support the hypothesis that HRA as a tool of management facilitates better and effective management of human Resources. 4.

As human resources are incapable of being owned, retained, and utilized, unlike the physical assets, there is a problem for the management to treat them as assets in the strict sense. 5. There is a constant fear of opposition from the trade unions as placing a value on employees would make them claim rewards and compensations based on such valuations. 6. In spite of all its significance and necessity, the Tax Laws don’t recognize human beings as assets. 7. There is no universally accepted method of the valuation of Human Resources. 2. 3. 4 Human Resource Accountings effect on decision making:

The effect of human resource investments as well as other decisions and management styles are now represented as a human resource condition precedent to the ultimate productivity or effectiveness of the organization. HRA is not useful to the management alone in achieving its economic goals. It could also be the source of important information for investment decision purposes. The inclusion of appropriate human resource data in published financial statements would, in all likelihood, make such statements for more meaningful in predicting future performance which is, of course, the principal concern of investors (Jawaharlal Lal, 2009).

When managers go through the process of HRA measurement treating human resources as capital assets, they are more likely to make decisions that treat the company's employees as long-term investments of the company. Flamholtz (1976) describes the HRA paradigm in terms of the "psycho-technical systems" (PTS) approach to organizational measurement. According to the PTS approach, the two functions of measurement are: first, process functions in the process of measurement and second, numerical information from the numbers themselves.

Whereas one role of HRA is to provide numerical measures, an even more important role is the measurement process itself. The HRA measurement process as a dual function attempts to increase recognition that human capital is paramount to the organization's short and long-term productivity and growth. When managers go through the process of measuring human resources, they are more likely to focus on the human side of the organization and are more likely to consider human resources as valuable organizational resources who should be managed as such.

These are also the effects which are necessary in decision making- Employment and utilization of Human Resources. Information for persons interested in making long term investments in the firm. Locating the real cause for low return on investment. Planning of physical assets via human resources. Deciding transfers, promotion, training and retrenchment of human resources. 3. 1 Findings: 1. From our assignment we find the specialized branches of accounting. 2. This assignment helps us to know about the importance and limitations of cost management and human resource accounting. 3.

From this assignment we also find how cost, management and human resource accounting effect in decision making. 3. 2 Recommendation: 1. If we want to apply cost accounting in all business related sectors this system should be simple. 2. we think cooperation of employees is necessary for the overall performance of cost accounting. 3. cost accounting should not be expensive. 4. Management accounting knowledge should be broader. 5. We think proper clear cut and specific procedure or guidelines should be created for finding costs and value of human resources of an organization. 6.

Universally accepted method should be created for the valuation of Human Resources. 3. 3 Conclusion: Cost accounting is not an exact science like other branches of accounting but is an art which has developed through theories and accounting practices based on common sense and reasoning. Management accounting is helpful tool to the management as it provides information for planning, controlling and decision making, and the main aim of managerial accounting is to improve the efficiency and the process which provides useful information to the management, financial analysts and employees.

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