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Cost Management

Cost Management

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Published by: ✬ SHANZA MALIK ✬ on Oct 14, 2011
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CHAPTER 1: MANAGEMENT ACCOUNTINGIntroduction:
Accounting may be broadly classified into two categories accounting which ismeant to serve all parties external to the operating responsibility of the firms and theaccounting which is designed to serve internal parties who take care of the operational needsof the firm. The first category which is conventionally referred to as financial accounting,looks to the interest of those who have primarily a financial stake in the organization’s affairs – creditors, investors, employees etc. On the other hand the second category of accounting is primarily concerned with providing information relating to the conduct of the various aspectsof a business like cost or profit associated with some portions of business operations to theinternal parties viz., management. This category of accounting is called as Managementaccounting.In order to perform the primary task of decision making managers of businessenterprises need information about the past, present and future in the functional areas of management such as personnel, finance, marketing and production. Right decision makinghas to be based on quantitative and qualitative information. The management thus constantlyneeds accounting information to base its decisions upon. Thus management accounting provides the information needed by management personnel.
Definition:
The Institute of Chartered Accountants of England has defined managementaccounting as: “Any form of accounting which enables a business to be conducted moreefficiently can be regarded as Management Accounting”.As per American Accounting Association, “Management Accounting includes themethods and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances.As per Institute of Chartered Accountants of India, “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have cometo be known as management accounting”.The Chartered Institute of Management Accounts (UK) defines managementaccounting as under:“Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for:1.Formulating strategy2.Planning and controlling activities3.Decision making4.Optimizing the use of resources5.Disclosures to shareholders and others external to the entity6.Disclosure to employees7.Safeguarding assets.
Nature of management accounting:
Managerial personnel are entrusted with authority and responsibility of operating businessactivities. Management accounting provides information to the personnel are entrusted withauthority and responsibility of operating business activities. Management accounting provides information to the managerial personnel at three levels of management viz., top,middle and lower levels of management. It provides the management with the tools for ananalysis of its administrative action that can lay suitable emphasis on the possible alternativesin terms of costs, prices and profits. The decisions made by management are based on
 
quantitative information and common sense, foresight, knowledge and experience.Management accounting includes financial accounting information and raw material fromseveral other disciplines such as costing, statistics, mathematics, political science, sociology, psychology, management economics, law etc. With all these data he can ensure optimumutilization of all the resources including employees by maintaining sound morale of theemployees, maximization of output and minimization of inputs, analyze the managerialquestions in terms of costs, revenues, profits and growth. It is thus a highly personalizedservice with the help of which management can explore and exploit business opportunitiesand take sound and correct decisions. It is not a precise science as it uses its own conventionsrather than standardized principles. Therefore the inferences drawn from the facts provided,depends on the skill, judgment and common sense of different management accountants.Thus it is said that management accounting serves as a management information systemwhich enables the effective management of an enterprise.
Scope of management accounting:
Management accounting is a wide and diverse subject. As stated earlier it includes various branches of knowledge such as psychology, sociology, economics, laws, political science,mathematics, statistics, finanacial accounting, cost accounting etc. It is thus very difficult todefine its scope, as it is a dynamic and ever growing discipline of knowledge. The importanttechniques and systems used by management accounting are briefly stated below.a.Historical cost accounting: Maintenance of books of cost accounting enables toknow the actual costs incurred by the firm. b.Standard costing: The standard costs laid down by experts are compared with thenatural costs in order to know the deviationsc.Marginal costing: The costs are divided into fixed and variable costs which help ismaking vital decisions.d.Decision accounting: Decisions are made after studying the impact of decisions interms of costs, resource, profits, growth etc.e.Budgetary control: It is a system of controlling the cost with the help of budgets.f.Control accounting: It includes the techniques such as standard costing, budgetarycontrol, control reports, internal check, internal audit and reports.g.Revaluation accounting: It is based on current costs to ensure that the investmentis intact and profits from investment are kept in mind.h.Financial planning & policies: It consists of raising the long term and short termfinance and invest it on optimum basis and enhance the profitability of the firm.i.Capital expenditure: The large amounts of future capital expenditure and future profits are analysed to take important decisions. j.Break even analysis: This is an important technique which is used to analyse the behavior of costs viz., fixed and marginal costs, indicating the level of activity atwhich the total costs would equal the total revenue and also the margin of safety.k.Inter-period comparison: It is a technique of comparing the present performancewith the past performance.l.Techniques of forecasting: Some techniques like decision tree, probability andsensitivity analysis are used by management accountants for forecasting whichforms a base for planning.m.Operations research: It consists of statistical and mathematical techniques that areincreasingly used in decision making process.n.Statistics: The statistical techniques used by management accountant arecorrelation, regression, probability, time series, standard deviation, linear  programming, control charts etc.
 
o.Other techniques: Other techniques employed are: Financial reporting, data processing, project management and appraisal, management audit, efficiencyaudit, cost audit, performance budgeting, tax planning, social accounting & audit,human resource accounting, responsibility accounting and divisional performance.
Functions of management accounting:
1.Modification of data: The management accounting system modifies the data furnished by financial accounting to serve the managerial needs in such a way that the processof classification and combination which enables to retain similarities withouteliminating dissimilarities.2.Validating the data: To make reliable decisions valid data should be made available tomanagers. The effectiveness of managerial function depends too much upon theaccuracy and adequacy of the data. It is the function of management accounting to present before the management the required data with some sort of reasonableaccuracy and it need not be with perfect accuracy.3.Analysis and interpretation of data: Though management accounting is concernedwith recording of business transactions, the analysis and interpretation of such data, inanalyzing and interpreting the data lies the essence of management accounting. Todischarge this function management accounting uses a number of tools like Marginalcosting, budgeting, standard costing etc.4.Communicating the data: The collected and interpreted data must be communicated tothose who are interested in it or to whom it has some meaning. Otherwise these datamay not yield any meaningful result and the whole process of collecting, validatingand interpreting would amount to be a futile exercise. The communication of the datashould be done within a reasonable time. Data delayed is decision delayed and adelayed decision may delay the prosperity of its concern. To accomplish this functionof management accounting several reports and statements are being used.
Functions of a management accountant:
Although it is understood that all the functions of management accounting are to be performed by the management accountant, the followingmay be said to be the important role of the management accountant in the management of acompany.1.Collection of data: The management accountant has to collect data about the problems faced by the management through primary and secondary sources.2.Analysis of data: After the collection of data, the management accountant has toanalyse it for the purpose of interpretation using various tools and techniques.3.Presentation of data: The management accountant is required to present the data tothe management in columns and rows to facilitate proper understanding.4.Planning: The management accountant assists the management in long range planning as well as in formulation of policies of the organisation.5.Controlling: The management accountant follows different techniques likestandard costing, budgetary control etc to ensure adequate control foimplementation of plans and achievement of objectives.6.Reporting: Reporting being a very important function of a managementaccountant, he has to prepare different types of reports periodically andcommunicated to the concerned departments to meet the requirements at differentlevels of management for necessary action.7.Co-ordinating: The management accountant has to co-ordinate the variousactivities of the organization for the preparation of master budget and other suchactivities.

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