Characteristics Of Investment

Main features or characteristics of investment are as follows:

1. Risk Factor

Every investment contains certain portion of risk. It is a key feature of investment which refers to loss of principal, delay in payment of interest and capital etc. Most investors prefer to invest in less riskier securities.

2. Expectation Of Return

Return expectation is the main objective of investment. Investors expect regularity of high and consistent income for their capital.

3. Safety

Investors expect safety for their capital. They desire certainty of return and protection of their investment or principal amount.

4. Liquidity

Liquidity means easily sale or convert the capital or investment into cash without any loss. So, most investors prefer liquid investments. 

5. Marketability

It is another feature of investment that they are marketable. It means buying and selling or transferability of securities in the market. 

6. Stability Of Income

Investors invest their capital with high expectation of income. So, return on their investment should be adequate and stable.

Difference Between Direct Costs And Indirect Costs

Major differences between direct costs and indirect costs are as follows:

1. Meaning

Direct Cost: Costs associated directly with the production of specific products and can be easily identifiable.
Indirect Cost: Cost associated in the production process but cannot easily be identified.

2. Traceable 

Direct Cost: It can be easily traced and computed.
Indirect Cost: It cannot be identified and traced easily.

3. Per Unit Cost

Direct Cost: It can be calculated and converted into per unit cost of the product.
Indirect Cost: It cannot be converted into per unit cost.

4. Aggregate

Direct Cost: Aggregate or total direct cost is called prime cost.
Indirect Cost: Aggregate of total indirect cost is known as overheads.

5. Vary

Direct Cost: It varies or change proportionately according to the change in output.
Indirect Cost: It does not varies proportionately according to the output level.

6 Examples

Direct Cost: Direct materials cost, direct labor cost and other direct expenses.
Indirect Cost: Indirect materials cost, indirect labor cost and other indirect expenses.

Difference Between Variable Costs And Fixed Costs

Major differences between variable costs and fixed costs are as follows:


Variable Cost: Costs which increase or decrease with the change in output or activity.
Fixed Cost: Costs which don not increase or decrease with the change in volume or activity.

2. Nature

Variable Cost: It is influenced by the volume of production.
Fixed Cost: It influenced by the passage of time.

3. Behavior

Variable Cost: There may be no variable cost in the absence of production or activity.
Fixed Cost: It is always positive even if the production is stopped. 

4. Relation With Output

Variable Cost: It is directly related with the activity or production of the firm.
Fixed Cost: It is constant cost, so it does not have any relation with productivity of the firm.

5. Controlling

Variable Cost: It is controllable cost so it can be controlled by managerial decision.
Fixed Cost: Fixed costs cannot be controlled easily by managerial decisions.

Meaning And Characteristics Of Variable Costs And Fixed Costs

Variable Costs

The variable costs that vary or change in the direct proportion to and in the same direction as the change in the volume of activity or output are called direct variable costs. These variable costs directly increase or decrease with the change in the volume of output or activity. As a result, the higher the volume of output produced or activity performed, the higher is the total variable costs thereto, or vice versa. Some important characteristics of variable costs are as follows:

* Total variable costs behave (change or vary) proportionately with the change in the volume of activity or output.

* Unit variable costs remain unchanged or constant with the change in the volume of activity or output.

* Variable costs are controllable because they are influenced by managerial decisions.

Fixed Costs

The costs that remain fixed irrespective of the change in the volume of activity or output are called fixed costs. If any cost remains constant in total at any level of activity within the relevant range, it is called the fixed cost. Fixed cost do not vary or change with output or productive activity. They accrue primarily with the passage of time and therefore, they are time expenses. Fixed expenses are incurred by the holding of assets and other factors of production. Therefore, fixed expenses are also called capacity costs. Some characteristics of fixed costs are as follows:

* Fixed costs do not change or stay constant at any level of output.

* Per unit fixed costs decrease if volume of output is increased and vice versa.

* Generally fixed costs are uncontrollable costs. They can not be influenced by managerial decisions.

Limitations Of Financial Accounting

Major drawbacks or limitations of financial accounting can be expressed as follows:

1. No Provision For Cost Information

Financial accounting does not provide detailed cost information of units, departments, and processes, which are vital for the firm's performance evaluation.

2. No Segregation Of Cost

Financial accounting does not segregate costs in terms of their behavior, nor does it make classification in terms of nature of cost such as such as direct and indirect costs. Segregation of cost by nature and behavior are necessary for controlling costs and identifying responsibilities thereof.

3. No Price Determination

Pricing of products and services under financial accounting system is virtually not possible.

4. No Provision For Standards

Effective use of materials, labor and overheads normally requires a system of standards. Financial accounting does not provide an appropriate system of standards needed for the performance evaluation of workers and operations.

5. No Cost Control

Financial accounting does not have cost control mechanism for controlling material and labor costs.

6. No Reporting On Losses

Financial accounting does not explain the losses arising because of stoppage of production and idle plant condition.

7. No Provision For Feed Forward

Financial accounting is based on historical data and it is therefore not possible to make feed forward of relevant information needed for most managerial decision making.

Advantages Of Financial Accounting

Major benefits of financial accounting can be studied as follows:

1. Ascertaining And Analyzing Profit Or Loss

Financial accounting ascertains the profit or loss of a business for a certain period. It also identifies and analyzes the reasons for the ascertained profit or loss to take a necessary action to enhance profit or reduce loss in the future.

2. Revealing Financial Position Of The Firm

Financial accounting reveals the financial position of the firm as at the end of the accounting period and analyzes the reasons thereof.

3. Follow-up For Debt Collection

Financial accounting provides the list of debtors and the amounts due on them. Therefore, it helps to follow-up the collection from debtors to minimize bad debts.

4. Arrangement For Prompt Payment

Financial accounting provides the list of creditors and the amounts due to them. Therefore, it helps to timely arrange for the amount payable to them.

5. Reporting On Past And Present

Financial accounting reports to the concerned users of the financial information about the past and present situation and future prospect of the firm.

Objectives Of Financial Accounting

Main objectives of financial accounting can be described as follows:

1.Systematic Recording Of Financial Transactions

Since human memory is short, systematic recording of financial transactions that took place in the past is essential. Therefore, one important objective of financial is to maintain systematic and permanent records of the financial transactions in a set of books called journal and ledger.

2. Revealing The Financial Position Of The Firm

The soundness of financial position of a firm ensures its survival and growth. Therefore financial accounting aims at revealing the soundness of its financial position by preparing the balance sheet.

3. Ascertaining The Result Of Business Operations

Profit is the main motive of every business firm. That is the result of its operations carried on throughout a financial year. Therefore, another important objective of financial accounting is to ascertain the result of business operations in terms of profit or loss by preparing income statement of the firm.

4. Reporting Past Performance And Future Prospect

The shareholders of the firm want to ensure security and growth in the value of their investment. Therefore, financial accounting seeks to report to the shareholders about the firm's past performances and future prospect.

Limitations Of Cost Accounting

Major drawbacks or limitations of cost accounting system are as follows:

1. No Fixed Principles

Cost accounting does not follow fixed procedure and principles. Most business organizations practice cost accounting on presumed notions.

2. Very Expensive

It requires more resources, manpower and money to maintain proper cost accounting system in the organization. Small business business firms cannot maintain this system of accounting.

3. Exclusion Of Financial Items

Income and expenses of purely financial character are avoided by cost accounting system. So, profit and loss account does not show actual profit or loss of the firm.

4. Complex System

Complexity is another main drawback of cost accounting system. Due to various types of expenses, rules, number of steps and procedure it is very complex accounting system.

5. Lack Of Accuracy

It ignores proper principles and procedure. So, data obtained by cost accounting may not be accurate and verifiable. 

6. May Not Assist In Decision Making

Cost accounting system provides only past cost data and information to the management. So, it may not be useful in decision making for future purpose. Delay in data and information also hampers in the decision making process.

7. Dependent

Cost accounting cannot perform well without the support of other accounting system. So, it is dependent with other branches of accounting system.

8. Not Suitable For All Types Of Business

It is expensive and complex method of accounting system. So, small business prefers traditional accounting system rather than cost accounting system.

Advantages Of Cost Accounting

Main benefits or advantages of cost accounting can be described as follows:

1. Price Determination

Cost accounting plays a key role in price determination of the product. It helps determine optimum selling price of the product by ascertaining the cost of production.

2. Wastage Control

Cost accounting is very helpful in wastage control. It maintains proper accounting of raw materials and labor by which management can easily control the wastage of materials and supplies.

3. Cost Control

Cost accounting assists in controlling production costs as well as process cost, job costs and administrative costs. It uses advance method of production to reduce cost of production.

4. Optimum Efficiency

Cost accounting assures optimum efficiency of operation on the basis of standard costing and budgetary control.

5. Assists In Decision Making

Cost accounting helps the management to take various decision regarding production and future planning. Management can make proper decision with the help of cost data and other information provided by cost accounting.

Importance Of Management Accounting

Need and importance of management accounting can be described as follows:

1. Goal Determination

Management accounting determines specific goals and objectives of the business organization. It sets future targets of the organization.

2. Planning

Proper planning is necessary to achieve business goals and objectives. Management accounting helps to make plans and policies through which desired goals can be achieved or targets can be meet.

3. Controlling

Effective controlling system is needed to achieve desired business targets and objectives. Management accounting applies variance analysis technique to compare actual result with desired or standard performance. Corrective actions are taken if variation found between actual performance and the standard set by the organization.  

4. Increase Efficiency

Management accounting helps to increase business efficiency and productivity by setting targets to different sections and departments. Their efficiency is regularly measured by using different tools and techniques.

5. Maximization of Profit

Management accounting helps to maximize profit by reducing wastage and controlling excess expenses. It tries to improve productivity and efficiency in minimum cost.

Difference Between Cost Accounting And Management Accounting

Major differences between cost accounting and management accounting are as follows:

1. Meaning

Cost Accounting: Process of collecting, tracking, analyzing and ascertaining the cost of the product. It provides cost data regarding the product.
Management Accounting: It Provides financial and non financial data or information to the top level management.

2. Information

Cost Accounting: It provides quantitative (which can be measured in monetary term) information about the product or services.
Management Accounting: It deals with both quantitative and qualitative (cannot be measured in monetary term) information and data.

3. Objective

Cost Accounting: To track the cost data and to help the management in cost control and cost reduction process.

Management Accounting: It helps the management in future planning, policy making, coordinating and controlling by providing financial and non-financial information.

4. Scope

Cost Accounting: It only deals with the cost data. So, its scope is not wide.
Management Accounting: It has a wider scope than cost accounting. It deals with financial and non-financial data. It also deals with financial accounting, economics and mathematics also.

5. Nature

Cost Accounting: It deals with past and present cost data.
Management Accounting: It focuses on present data as well as future plan and projection.

6. Interdependancy

Cost Accounting: It can be practiced without the help of management accounting.
Management Accounting: In the absence of cost accounting management accounting cannot be practical.

7. Procedure

Cost Accounting: It follows specific rules, technique and procedure.
Management Accounting: It does not follow any specific rules and procedure.

8. Planning

Cost Accounting: It focuses on short term planning.
Management Accounting: It stresses on both short term planning and long term planning.

Objectives Of Cost Accounting

Main objectives of cost accounting can be described as follows:

1. Ascertainment Of Cost

This is the key objective of cost accounting to track and analyze the per unit cost of the product produced by the company. It helps to ascertain cost of each activity such as process, operation, job etc.

2. Fix Selling Price

Cost accounting provides base for determination of selling price of company's product by ascertaining the cost of each product. It helps the management to fix the selling price of products and services.

3. Cost Control

Cost accounting helps the organization to control the cost of production by taking necessary steps to reduce wastage of materials, time and expense while carrying out the operation.

4. Assisting In Decision Making

Cost accounting helps management in decision making such as make or buy decision, drop or continue decision, future expansion policies etc. It helps to make a choice out of two or more courses of action. 

5. Ascertainment Of Profit

Cost accounting helps in tracking and ascertaining profitability of the product by preparing profit and loss account and balance sheet periodically.

6. Formulating Policies

Cost accounting plays important role to formulate policies of the organization. It provides necessary information and data to the top level management which are essential for framing marketing policies of the company.

7. Basis Of Financial Statement

Cost accounting is the foundation for the preparation of different financial statements (profit and loss account, balance sheet, trial balance etc.) of the company.