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It compiles only the data from balance sheet and profit and loss, which is relevant and useful. 2. It is concerned with data not decisions. It can inform but not prescribe. 3. It deals with future. It is a kind of planning for the future because decisions are taken for future course of action. 4. It examines the cause and effect of relationship. Normally, a profit and loss account will show the amount of profit or loss for the year but does not tell us the reasons for it. Management accounting studies the causes of profit or losses. 5. It does not follow rigid rules and formats like financial accounting. The necessary info is provided in the shape of various statements or reports in order to meet the needs of the management. Objectives of Management Accounting: 1. To help the management in promoting efficiency. 2. To finalize budgets covering all functions of a business. 3. To study the actual performance with plan for identifying deviations and their causes. 4. To analyze financial statements to enable the management to formulate future policies. 5. To help the management at frequent intervals by providing operating statements and short-term financial statements. 6. To arrange for the systematic allocation of responsibilities for the implementation of plans and budgets. 7. To provide a suitable organization for discharging the responsibilities. Scope of Management Accounting: 1. Financial accounting: Related to the recording of business transactions including income, expenditure, inventory movement, assets, liabilities, cash receipts, etc. 2. Cost accounting: Costing is a branch of accounting. It is the process of and technique of ascertaining costs. It includes standard costing, marginal costing, differential and opportunity cost analysis. 3. Budgeting and forecasting: Covers budgetary control 4. It reports financial results to the management 5. It provides statistical data to various departments. Functions of Management Accounting: 1. It assists in planning and formulating future policies. 2. It helps to interpret and analyze the financial information. 3. It controls and monitors performance. 4. It helps to organize various functions of an organization. 5. It offers solution for strategic business problems. 6. It coordinates various departmental operations. 7. It motivates employees. Functions of management Accountant: 1. Collection of data
Material Mix Variance can be derived as follows: MMV = Standard Rate (Revised Standard Quantity – Actual Quantity) . 6. Decision making Standard costing What is Material Cost Variance? What are its sub-divisions? Material Cost Variance or Material Total Variance is the Variance in material cost actually incurred on material and the material cost estimated on material. then it is due to the change in consumption of material. then it is due to the difference in the rate at which material is consumed.2. then it is due to the change in consumption of material. if there is a change in the total cost. Material Usage Variance can be derived as follows: MUV = Standard Rate (Standard Quantity – Actual Quantity) What is Material Usage Variance? What are its sub-divisions? Material Usage Variance is the variance in the usage of material in actual production and the estimated usage of material. even if there is no change in the rate of material. Reporting: He reports to the management and advises them on future decisions. Thus. Revised Standard Quantity is the Actual Quantity of Material divided in the standard raw material ratio. 5. if there is a change in the total cost. Presentation of data 4. Thus. Coordinating: preparation of master budget 8. Material Usage Variance can be derived as follows: MUV = Standard Rate (Standard Quantity – Actual Quantity) Material Usage Variance can be further sub-divided into: a) Material Mix Variance: The difference between actual quantity of material and revised standard quantity of material is the Material Mix Variance. even if there is no change in the rate of material. if there is a difference in the total cost. 7. Controlling: Examines the performance against the set standard and reports it to the management. Thus. Material Cost Variance can be derived as follows: MCV = (Standard Quantity x Standard Rate) – (Actual Quantity x Actual Rate) Material Cost Variance can be sub-divided as follows: a) Material Rate Variance or Material Price Variance is the variance in the rate or price of material actually spent and the material rate/price estimated. Analysis 3. even if there is no change in quantity consumed. Material Rate Variance can be derived as follows: MRV = Actual Quantity (Standard Price – Actual Price) b) Material Usage Variance is the variance in the usage of material in actual production and the estimated usage of material. Planning: A management accountant plans the entire accounting functions.
tk) Marginal Costing What is Marginal Costing? Why is it calculated? The marginal cost of a product is defined as the change in cost that occurs when the volume of output is increased or reduced by one unit. They are as follows: Input Method: MYV = (Standard Input – Actual Input) x Average Cost / unit Output Method: MYV = (Actual Output – Standard Output) x Total Cost / unit (Note: Labour Variances can be answered in the same manner as Material Variances. Marginal costing is used to assess whether it is financially feasible to increase manufacturing volume or to calculate the effect of reducing volume. Break Even Point is the level of sales required to reach a position of no profit. The organisation starts earning profit when the sales cross the Break Even Point. Margin of Safety can be derived as follows: Margin of Safety = Actual Sales – Break even Sales Margin of Safety (in cash) = Profit / P/V Ratio . There are two methods of calculating Material Yield Variance. The positive difference between the operating sales volume and the break even volume is known as the margin of safety. It can be calculated as follows: BEP in units = Fixed Cost / Contribution per unit BEP in cash = Fixed Cost / P. Incase of any doubt or query. It can be calculated either in cash or in units.sigmaforum. the safer the organization is from a loss making situation. They occur and do not change if manufacturing volume changes. please put your queries on: www. It is based on variable costs because fixed costs are fixed. Following factors are calculated on the basis of marginal costing: => production planning => pricing => make or buy => close-down => accept or reject => dropping a production line => accepting additional order Write a note on Break Even Point. the contribution is just sufficient to cover the fixed cost. no loss.V.b) Material Yield Variance: The difference between the actual output and the standard expected output is the Material Yield Variance. At Break Even Point. Ratio BEP in terms of capacity utilization = BEP in units / Total capacity x 100 Explain the concept of Margin of Safety. Break Even Point can be calculated either in terms of units or in terms of cash or in terms of capacity utilization. The larger the difference. perhaps due to a decline in the market.
In such cases. Profit = Estimated Profit x Cash Received___ x Cost incurred to date Total Contract Price Total estimated cost Explain the terms: Contractor: A party who agrees to provide supplies or services in accordance with a valid and legal contract. A contractor executes the work. these resources become limiting factor. Profit = Estimated Profit x Cost incurred to date Total estimated cost 3. A contractee gives the contract. Retention Money: It refers to that part of the contract amount which is certified but not . processes and departments. Contract Costing What are the various methods of calculating profits on almost completion of contract? When the contract is almost at the stage of completion. Running Bill: It is a bill raised by the contractor for periodical payments. we can calculate contribution per unit of limiting factor and the product which offers more contribution per unit of limiting factor is to be treated as more profitable product and the product priority order is to be accordingly calculated. The four methods are as follows: 1.Margin of Safety (in units) = Profit / Contribution/unit What is Profit/Volume Ratio? Profit-Volume Ratio expresses the relationship between contribution and sales. then the product which gives more contribution per unit may not give more amount of total contribution because. It indicates the relative profitability of diff products. profit can be calculated in four ways. If there are limiting factors. Contractee: A party who orders supplies or services in accordance with a valid and legal contract. it may not make more profitable use of limited resources. Profit = Estimated Profit x Cash Received___ Total Contract Price 4. It is upon the company to adopt any of the four methods. Profit = Estimated Profit x Work Certified___ Total Contract Price 2. Formulae: P/V ratio = S – V/ S X 100 = Cont / Sales X 100 = Change in profit or loss / Change in sales Short note on :Limiting factor Whenever some resources required for products and are not adequately available.
break down of machinery. all the stock of a company needs to be assessed. Abnormal Loss: It is the part of the process loss caused due to abnormal circumstances in the factory. Work Certified: It refers to that part of the running bill. it would be inclusive of profits.12000 Total Cost incurred .24000 Sales . Abnormal loss occurs in addition to normal loss.g. Process Costing Write a note on “Inter process profits”.: Process I: Cost.200 Value of Closing Stock .12000 Process II: Inputs from Process I . which is rejected by the architect of the contractee. Normal loss: It is part of process cost which is caused under normal circumstances. scrap loss.2000 Transferred Price. The units of production are calculated according to the percentage of completion of . It is avoidable and controllable by mgmt. Escalation Clause: Escalation clause is a provision of a contract which calls for an increase in contract price in the event of an increase in certain costs beyond a certain percentage and viceversa.21600 Closing Stock . Basic Rate Concept: Basic Rate concept refers to the method in which a fixed rate is maintained for the raw materials throughout the contract irrespective of the fluctuations in the market price of the material. which is approved by the architect of the contractee.10000 Profit. For Ex. All the partially completed units are valued through the method of equivalent production. It may have scrap value. While transferring the outputs of one process to another. It is always valued at cost. But. It is inevitable. Work Uncertified: It refers to that part of the running bill. This is to get the actual cost of finished product as. pilferage. labour strike. E. at the end of an accounting period.12000 Additional Processing cost. if the company would have bought the inputs for the next process. weight loss. this inter process profit has to be excluded in order to get the real valuation of closing stock.paid. Example. Normal loss is calculated at a certain % of input in unit in respective process.2400 Inter-process profit of P-I .2200 What is equivalent production? At the end of a financial period. the company might add some amount of profits to it.
This is done by comparing the planned values (in the budget) with the actual values as they occur during the year.processing on the partially completed units. Budgetary Control What is Budgetary Control? What are the steps involved in Budgetary Control? Budgetary control is the management process of using budgets to monitor and control the performance of the organization. For example. Establishment of Budgets: Targets are fixed for each function relating to the responsibilities of individual executives. 4. of the policy to be pursued during that period for the purpose of attaining a given objective. Comparison of actual performance with budgeted performance to detect deviation. Analysis of the causes of variations and reporting What are the uses of diff budgets? => It serves a declaration of policies => Defines the objectives/ targets for executives. two units that are 50 percent complete are the equivalent of one unit fully completed. => Means of coordination of activities => Means of communication => Facilitates centralised control => Helps in planning activities . The following steps are involved in Budgetary Control: 1. A budget has been defined as a financial and quantitative statement prepared and approved prior to a defined period of time. Measurement of actual performance. 3. 2. at all levels.