What is sunk cost and opportunity cost?

Why management accountants implement management accounting system in the organization. Give 10
logical reasons.

Define the following terms with respect to Management Accounting.

Accountability

Management accounting presents information measuring the achievement of the objectives of an

organization and appraising the conduct of its internal affairs in that process. In order that further
action necessary can be taken, based on this information, it is necessary at all times to identify
the responsibilities and key result areas of the individuals within the organization

Responsibilities of target achieved

Mgt accounting lays great emphasis on accountability through effective performance

measurement. By setting targets for strategic business units as well as for deptts, mgt
accounting assists in assignment of responsibility for the achievement of business targets
by individual managers. Responsibility accounting is achieved by appraising the
performance of managers responsible for their business units while giving due
consideration for factors not within their control or influence.

Relevancy

Management accounting must ensure that flexibility is maintained in assembling and interpreting
information. This facilitates the exploration and presentation, in a clear, understandable and
timely manner, of as many alternatives as are necessary for impartial and confident decisions to
be taken. The process is essentially forward looking and dynamic. Therefore, the information
must satisfy the criteria of being applicable and appropriate.

Relevant information for decision making

Relevancy: Mgt accounting is concerned with the provision and use of accounting
information to managers within the organization. Investment decisions rely on the
relevant accounting information. Investment planning is almost impossible without a
thorough understanding of of relevant accounting information. Management accounting
helps in manufacturers in choosing best alternative course of action.

Q1 what are the 7 E's of management accountant?

 • Economy: Spend less (not spending Rs.2 when the same thing can be bought for Re.1)
• Efficiency: Spend well and avoid waste
• Effectiveness: Spend wisely and add value
• Environment: Being environment friendly
• Equity: Due share of success to be given to all
• Ethics: Divine values
• Efficacy: Goal congruence

Q2 what are the classification of cost according to functions?

• Classification according to function:

• Manufacturing Cost: Also named “Production Cost” or “factory cost”. This is the
cost of the sequence of operations which begins with supplying materials, labor and
services and ends with completion of production.

• Administration Cost: This is general administrative cost and includes all expenditure
incurred in formulating the policy, directing the organization and controlling the
operations of an undertaking, which is not directly related to production, selling and
distributions, research and development activity of function.

• Selling & distribution costs: Selling cost is the cost of seeking to create and stimulating
demand and securing orders.

Distribution cost is the cost of sequence of operations which begins with making the packed
product available for dispatch and ends with making the re-conditioned returned empty
package for re-use.

• Financial Cost: It includes Interest/mark-up, bank charges and various fees paid to
lenders for borrowing funds.

• Research and development cost: Research cost is the cost of searching new or
improved products or methods. It includes the cost incurred at Pre-production stage
which is the core focus of Life Cycle Costing.

Q10 Write three limitation of standard costing

Part-(a)

1. The system may not be appropriate to every business.

2. The staff may not be capable of operating the system.

3. A business may not be able to keep standards up-to date. In other words, a business may
not revise standards to keep pace with the frequent changes in manufacturing conditions.
 4. Inaccurate and unreliable standards cause misleading results and thus may not enjoy the
confidence of the users of the system.

5. Operation of the standard costing system is a costly affair and small firms cannot afford
it.

6. Standard costing is expensive and unsuitable in job order industries manufacturing non-
standardized products.

7. Revision of Standard is very expensive.

The main limitations of standard costing in the modern business environment are as follows:

The business environment in the past was more stable whereas the modern business environment
is more dynamic and subject to change. As a result if a business environment is continuously
changing standard costing is not a suitable method because standards cannot be established for a
reasonable period of time.

• The focus of the modern business environment is on improving quality and

customer care whereas the environment in the past was focused on minimizing cost.

• The life cycle of products in the modern business environment is shorter and therefore
standards become quickly out of date.

• The increase in automation in the modern business environment has resulted in less
emphasis on labour cost variances.

Part-(b)

Briefly explain three factors that should be considered before deciding to investigate a
variance.

The benefit of investigating a variance should never exceed the cost of investigation. However
this can be difficult to ascertain and therefore a manager should decide to investigate a variance
based on the following:

Size

Criteria will be laid down which state that variances which are of a certain amount or
percentage will be investigated. This is an extremely simple method to apply but the cut
off values can be subjective.

Controllable / Uncontrollable
 There is little point in investigating a variance if it is uncontrollable. The cost in this
situation would outweigh the benefits of investigation since there would be no benefit
obtained.

Interrelationships

An adverse variance in one part of the business may result in a favorable variance
elsewhere.

These interdependencies must be considered when deciding on investigation. For

example a favorable labor rate variance may result in an adverse efficiency variance
where less skilled workers are employed, costing less, as a result the workers take longer
to do the job and an adverse efficiency variance arises.

If a company sets an ideal standard this will usually lead to adverse variances The
manager will need to decide at what size of adverse variance an investigation should take
place on such variances.

Q11: why management want to implement / Install management accounting system?

Implementation

Management accounting, therefore, is an integral part of organization process. It provides

information essential for:

 Controlling the current activities of an organization

 Planning its future strategies, tactics and operations
 Optimizing the use of its resources
 Measuring and evaluating performance
 Reducing subjectivity in the decision making process and
 Improving internal and external communication

OR

 Suggesting ways and means to add more value

 Involvement in facilitating change processes in the organization
 Being a business advisor and not just a “corporate policeman”. Complete understanding
of organizational strategy, helping to solve problems and functioning as an effective
member of cross-functional teams.
 Being pro-active by following Feed forward control (i.e. forecasting of differences
between actual and planned outcomes, and the implementation of action, before the event,
to avoid such differences.
 Being able to address not only real concerns but also the perceived concerns, described to
include timeliness and trustworthiness.
 Fully participating in members of the Management team, playing pivotal role in
achievement of business objectives by expertise and diversified knowledge.
 Playing effective role in Project Management
 Preparing cash flow on the basis of realistic assumptions to determine debt-servicing
capability.
 Monitoring of growth initiatives and planning
 Conducting SWOT Analysis
 Strengthening the role as Cost auditor
 Assisting the government in developing audit process for income tax and sales tax.

Installation

The following factors to be considered before installing a management accounting system

1. Primarily investigations should be made relating to the technical aspects of the business.
For instance, the nature of the product and methods of production will determine the type
of management system to be applied.
2. The organization structure of the business should be studied to ascertain the scope of
authority of each executive. The existing organization should be disturbed as little as is
advisable after full consideration.
3. The methods of purchase storage and issue of materials should be examined and modified
as per the requirements.
4. The existing method of remunerating labor should be examined for the purpose of
introducing any incentive plans.
5. Forms and accounting records should be designed so as to involve minimum clerical
labor and expenditure.
6. The size and layout of the factory should be studied.
7. The system should be effective in cost control and cost reduction.
8. Management system should be simple and easy to operate. Unnecessary details should be
avoided.
9. The installation and operation of system should be economical.
10. The system should be introduced gradually.
11. Effective internal control system.

Characteristics of an ideal management accounting system

1. Suitability to the business

2. Simplicity
3. Flexibility
4. Economical
5. Comparability
6. Capacity of presenting information at the desired time.
7. Minimum changes in the existing setup.
8. Uniformity of forms
9. Minimum clerical work.
 10. Efficiency system
11. Adequate wage procedure
12. Departmentalization of expenses.
13. Reconciliation of management and financial accounts
14. Duties and responsibilities of the cost accountant.

1. Discuss the logical reasons for which Management Accountant endorse to install Management
Accounting System in the organization?

The purpose of management accounting in the organization is to support competitive decision

making by collecting, processing, and communicating information that helps management plan,
control, and evaluate business processes and company strategy. The interesting thing about
management accounting is that it is rare to find an individual within a company with the title of
“management accountant.” Often many individuals function as accountants within the
organization, but these individuals typically operate as financial accountants, costs accountants,
tax accountants, or internal auditors. However, the ability to develop and use good management
accounting (which covers a lot more ground than the product costing done by cost accountants)
is actually an important ability for many individuals, including finance professionals, operational
and marketing managers, top-level executives, and information technologists.

Generally, in a very large company, each division has a top accountant called the controller, and
much of the management accounting that is done in these divisions comes under the leadership
of the controller. On the other hand, the controller usually reports to the vice president of
finance for the division who, in turn, reports to the division’s president and/or overall chief
financial officer (CFO). All of these individuals are responsible for the flow of good accounting
information that supports the planning, control, and evaluation work that takes place within the
organization.

Management accounting plays a key role in organizations today. The top accountant in most
organizations is the controller. All accounting functions report to this individual, including the
cost accountants, the financial and tax accountants, the internal auditors, and systems support
personnel. Though much management accounting originates within these positions, all decision
makers in the organization must understand how to create and use good management accounting
information. Management accounting is also being significantly affected by dramatic
improvements in computer technology. Today’s technology allows management to track
performance information that goes beyond the cost-based information of historic general ledger
systems. Good management accounting involves a responsibility to manage a wide variety of
critical information.

That’s why which Management Accountant endorses to install Management Accounting System
in the organization?

Why Job order costing is important and how it is different from other costing methods?
Job costing relates to a costing system that is required in organizations where each unit or batch
of output of a product or service is unique. This creates the need for the cost of each unit to be
calculated separately. The term ‘job’ thus relates to each unique unit or batch of output the nature
of job which determines the department through which it is to be processed.

Job costing is applied to such activities as printing work, motor car repair, machine tools, general
engineering, and audit firms.

The special features of production using job costing are:

a) Production is against customer’s orders and not for stocks.

b) Each job has its own characteristics and requires special attention

c) The flow of production is not uniform from one department to another. It is the nature of job
which determines the department through which it is to be processed.

Job costing is applied to such activities as printing work, motor car repair, machine tools, general
engineering, and audit firms.

Point of difference Process Costing Job Order Costing

Products Identical all are same Specific, identified separately
Production Continuous for stock As and when required
Customer General Public Specific
Design, quality Standardized substitutes are According to customer
available specifications and
requirements
Operation Through various processes a Usually site based, work
product moves from one normally remain stationary
department to another
Input / Output Output of one process Job started ,completed and
becomes the input of other handed over to customer
process
Losses Normal loss/abnormal loss Hardly a loss arise
and gains arise
By Products, Joint Different products from the No by or joint products arise
products same process
Work in process A complicated procedure to Easy to determine the value
value the work-in-process of work-in-process
Reports Process account, supported Job Cost Sheet
by production, cost and
evaluation statement
Profit Calculated for the Co. For each job
 Job Order Costing Vs. Process Costing
Job Order Costing Process Costing
• Products identified separately • Products identical
• Production as needed • Production continuous for stock
• Specific Customer • Customer general public
• Design & Quality as per requirement • Standardized substitutes are available
• Job started, completed and handed • Output of one process becomes the
over to customer input of other
• Losses hardly arise • Normal loss/abnormal loss

Process Costing: Process costing relates to those situations where masses of identical units are
produced and it is unnecessary to assign costs to individual units of output. An input of material
passes through a number of processes before it reaches to finished goods store room. The output
of one process may become the input of other process.

Industries where process costing is applied:

 Furniture Industry
 Meat Industry
 Chemical Industry
 Oil refinery
 Steel industries
 Dairy industries
 Brewery

Characteristics of Process Costing:

1. Production of unit cannot be separately identified in process costing whereas in job order or
batch costing the production unit retain its identity. Unit cost has to be based on the average
cost of the process.

2. The completed unit (output) of one process becomes the input of the next process unless it
reaches to final process and then to finished goods.

3. In the course of processing, several different main products (joint products) and by products
may arise.

4. The physical quantity of output of a process may be less than the input of quantity. This can
be due to the nature of process evaporation or reaction etc.
 5. For cost purposes, each process constitutes a cost centre and the cost per unit is arrived at by
dividing total cost of the cost centre by the number of units of output.

Q16 Differentiate between Financial Accounting & Management Accounting with

reference to following factors;
a. Purpose
b. Period of Reporting
c. Audit
d. Statutory Requirements
e. International Standards

Financial Accounting Management Accounting

The main purpose of Financial
Accounting The main purpose of management
is to prepare profit and loss account accounting is to provide detailed
and information.
Purpose balance sheet.
Management Reporting is a
Financial Statements are prepared continuous process that may be
periodically, usually on an annual daily, monthly, as required by
Reporting Period basis. management.
There is no such audit
requirements. Cost audit concept
There is an audit requirement of is
financial getting importance in some
Audit statements. countries.
These accounts have to be prepared
Statutory according to the legal requirements of Maintenance of these accounts is
Requirement Companies Acts. voluntary.
There are few guidelines issued
by
International There are international accounting MAC(Management Accounting
Standards standards to be followed. Committee).
6.

Q:2

Write different scenario in which you show that how job order costing is more
suitable than process costing or vice versa.
Write the classification of cost according to functions?

Explain the scenario which differentiate job order costing from process costing and vice versa
1. Discuss the logical reasons for which Management Accountant endorse to install Management
Accounting System in the organisation?

2. Briefly discuss the classification of cost with respect to their functions.

a. Briefly explain any three limitations of standard costing in the modern business
environment. (2.5 Marks)

b. Briefly explain any three factors that should be considered before deciding to investigate
a variance. (2.5 Marks)