Define the relevance of management accounting. .

Further discuss which technique/methods of

financial accounting and cost accounting, the management accounting uses for developing
information that facilitates management decision making?

What Is Management Accounting?

The process of creating organization goals by identifying, measuring, analyzing, interpreting and
communicating information to managers is call management or managerial accounting.

Management accounting focuses on all accounting aimed at informing management about

operational business metrics. It uses information relating to costs of products or services purchased
by the company. Budgets are often used to quantify the decisions made in operational planning.
Management accountants use performance reports to note variances between actual results from
budgets.

The main difference between management accounting and financial accounting is financial
accounting is the collection of accounting data to create financial statements, while management
accounting is the internal processing used to account for business transactions.

Relevance of Management Accounting?

Management accounting is the process of preparing reports about business operations that help
managers make short-term and long-term decisions. It helps a business pursue its goals by
identifying, measuring, analyzing, interpreting and communicating information to managers. The
main functions of management accounting include:

1.  HELPING FORECAST THE FUTURE

Forecasting helps decision to made and answers questions like: Should a company invest more in
equipment? Should it diversify into different markets and regions? Should it buy another company?

Management accounting helps answer important questions that can forecast future trends in
business.

2.  HELPING IN MAKE-OR-BUY DECISIONS

Management accounting insights on cost and production availability are deciding factors in
purchasing choices. Data from managerial accounting empower decision-making at both an
operational and strategic level.

3.  FORECASTING CASH FLOWS

Estimating cash flows and the impact of cash flows on the business is essential. Considering where
the costs companies will incur in the future and where its revenue will come from can help a
business make its next moves. Management accounting involves creating budgets and trend chars
that manager use to decide how to allocate money and resources to generate the projected revenue
growth.

4.  HELPING UNDERSTAND PERFORMANCE VARIANCES

Performance discrepancies in business are variances between what was predicted and what was
achieved. Using analytical techniques, management accounting help management build on positive
variances and manager the negative ones.

5.  ANALYZING THE RATE OF RETURN

Knowing the rate of return (ROR) is essential to know before embarking on a project that requires a
lot of investments. Vital questions that can be answered through management accounting include. If
presented with two investment opportunities, how does a business choose the most profitable one?
In how many years will a company break even on a project? What are the cash flows estimated to
be?

What Is a Management Accounting System?

Internal management accounting systems are used to provide critical information to management to
be used in operational business decision-making. A manufacturing company might use these systems
to help in the costing and managing of their process. A hospital might use management accounting
systems to assist them in insurance billing and other in-house requirements.

These systems vary within the industries they are used within and allow for functionalities and
reports specific to that industry.

What Is the Role of Management Accounting?

Management accounting helps managers within a company make decisions.

Also known as cost accounting, management accounting is the process of identifying, analyzing,
interpreting and communicating information to managers to help achieve business goals.

The data collected encompasses all fields of accounting that informs the management of business
operations relating to the costs of products or services purchased by the company. Management
accountants use budgets to quantify the business’ plan of operations.

Performance reports are used to note the deviation of actual results compared what was budgeted.
discuss which technique/methods of financial accounting and cost accounting, the management
accounting uses for developing information that facilitates management decision making

o
Methods and Techniques of Costing

Methods of Costing:

Methods to be used for the ascertainment of cost of production differ from industry to industry. It

primarily depends on the manufacturing process and also on the methods of measuring the

departmental output and finished products.

Basically, there are two methods of costing (as per CIMA Terminology) viz.:

(i) Specific Order Costing (or Job/Terminal Costing) and

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(ii) Operation Costing (or Process or Period Costing.)

Specific Order Costing is the category of basic costing methods applicable where the work consists of

separate jobs, batches or contracts each of which is authorised by a specific order or contract. Job

costing, batch costing and contract costing are included in this category.

Operation Costing is the category of basic costing methods applicable where standardized goods or

services result from a sequence of repetitive and more or less continuous operations or process to

which costs are charged before being averaged over units produced during the period.

All these methods are discussed briefly as under:

1. Job Costing:

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Under this method, costs are collected and accumulated for each job, work order or project

separately. Each job can be separately identified; so it becomes essential to analyse the cost
according to each job. A job card is prepared for each job for cost accumulation. This method is

applicable to printers, machine tool manufacturers, foundries and general engineering workshops.

2. Contract Costing:

When the job is big and spread over long periods of time, the method of contract costing is used. A

separate account is kept for each individual contract. This method is used by builders, civil

engineering contractors, constructional and mechanical engineering firms etc.

3. Batch Costing:

This is an extension of job costing. A batch may represent a number of small orders passed through

the factory in batch. Each hatch is treated as a unit of cost and separately costed. The cost per unit is

determined by dividing the cost of the batch by the number of units produced in a batch. This

method is mainly applied in biscuits manufacture, garments manufacture and spare parts and

components manufacture.

4. Process Costing:

This is suitable for industries where production is continuous, manufacturing is carried on by distinct

and well defined processes, the finished products of one process becomes the raw material of the

subsequent process, different products with or without byproducts are produced simultaneously at

the same process and products produced during a particular process are exactly identical.

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As finished products are obtained at the end of each process, it will be necessary to ascertain not

only the cost of each process but also cost per unit at each process. A separate account is opened for

each process to which all expenditure incurred thereon is charged.

The cost per unit is obtained by averaging the expenditure incurred on the process during a certain

period. Hence, this is known as average costing. As the products are manufactured in a continuous

process, this is also known as continuous costing. Process costing is generally followed in Textile

Industries, Chemical Industries, Tanneries, Paper Manufacture etc.

5. One Operation (Unit or Output) Costing:

This is suitable for industries where manufacture is continuous and units are identical. This method

is applied in industries like mines, quarries, oil drilling, breweries, cement works, brick works etc. In

all these industries there is natural or standard unit of cost. For example, a barrel of beer in

breweries, a tonne of coal in collieries, one thousand of bricks in brickworks etc.

The object of this method is to ascertain the cost per unit of output and the cost of each item of such

cost. Here cost accounts take the form of cost sheets prepared for a definite period. The cost per

unit is determined by dividing the total expenditure incurred during a given period by the number of

units produced during that period.

6. Service (or Operating) Costing:

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This is suitable for industries which render services as distinct from those which manufacture goods.

This is applied in transport undertakings, power supply companies, municipal services, hospitals,

hotels etc. This method is used to ascertain the cost of services rendered.

There is usually a compound unit in such undertakings, e.g., tonne kilometre (transport

undertaking), kilowatt-hour (power supply) and patient day (hospitals).

7. Farm Costing:

It helps in calculation of total cost and per unit cost of various activities covered under farming.

Farming activities cover agriculture, horticulture, animal husbandry (i.e., rearing of live-stocks),

poultry farming, pisciculture (i.e., rearing of fish), dairy, sericulture (i.e. silkworm breeding),

nurseries for growing and selling of seedlings and plants and rearing of fruits and flowers.

Farm costing helps to improve the farming practices to reduce cost of production, to ascertain the

profit on each line of farming activity which ensures better control by management and to obtain

loans from banks and other financial institutions as they give loans on the basis of proper cost

accounting records.
8. (Multiple) Operation Costing:

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Multiple operation method of manufacture consists of a number of distinct operations. It refers to

conversion cost i.e., cost of converting the raw materials into finished goods. This method takes into

consideration the rejections in each operation for calculating input units and cost. The different

operations in machine screw are—stamps, knurl, thread and trim. The cost per unit is determined

with reference to final output.

9. Multiple Costing:

It represents the application of more than one method of costing in respect of the same product.

This is suitable for industries where a number of component parts are separately produced and

subsequently assembled into a final product. In such industries each component differs from the

others as to price, material used and process of manufacture undergone. So it will be necessary to

ascertain the cost of each component.

For this purpose, process costing may be applied. To ascertain the cost of the final product batch

costing may be applied. This method is used in factories manufacturing cycles, automobiles, engines,

radios, typewriters, aeroplanes and other complex products. This method has been dropped from

the latest CIMA Terminology.

 

Types or Techniques of Costing:

Following are the main types or techniques of costing for ascertaining costs:
1. Uniform Costing:

It is the use of same costing principles and/or practices by several undertakings for common control

or comparison of costs.

2. Marginal Costing:

It is the ascertainment of marginal cost by differentiating between fixed and variable cost. It is used

to ascertain the effect of changes in volume or type of output on profit.

3. Standard Costing:

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A comparison is made of the actual cost with a pre-arranged standard cost and the cost of any

deviation (called variances) is analysed by causes. This permits management to investigate the

reasons for these variances and to take suitable corrective action.

4. Historical Costing:

It is ascertainment of costs after they have been incurred. It aims at ascertaining costs actually

incurred on work done in the past. It has a limited utility, though comparisons of costs over different

periods may yield good results.

5. Direct Costing:

It is the practice of charging all direct costs, variable and some fixed costs relating to operations,

processes or products leaving all other costs to be written off against profits in which they arise.
6. Absorption Costing:

It is the practice of charging all costs, both variable and fixed to operations, processes or products.

This differs from marginal costing where fixed costs are excluded.

Any of the methods of costing like unit or output costing, service costing, process costing etc. can be

used under any techniques of costing

The following points highlight the top eleven techniques management accounting. The techniques
are: 1. Financial Planning 2. Analysis of Financial Statements 3. Historical Cost
Accounting 4. Standard Costing 5. Budgetary Control 6. Marginal Costing 7. Funds Flow
Statement 8. Cash Flow Statement 9. Decision Making 10. Revaluation Accounting 11. Statistical
and Graphical Techniques 12. Communicating.
Management Accounting: Technique # 1. Financial Planning:
Financial planning is the act of deciding in advance about the financial activities necessary for the
concern to achieve its primary objectives. It includes determining both long term and short term
financial objectives of the enterprise, formulating financial policies and developing the financial
procedure to achieve the objectives.

The role of financial policies cannot be emphasized to achieve the maximum return on the capital
employed. Financial policies may relate to the determination of the amount of capital required,
sources of funds, govern the determination and distribution of income, act as a guide in the use of
debt and equity capital and determination of the optimum level of investment in various assets.

Management Accounting: Technique # 2. Analysis of Financial Statements:

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The analysis is an attempt to determine the significance and meaning of the financial statement data
so that a forecast may be made of the prospects for future earnings, ability to pay interest and debt
maturities and profitability of a sound dividend policy.

The techniques of such analysis are comparative financial statements, trend analysis, cash funds flow
statements and ratio analysis. This analysis results in the presentation of information which will help
the business executives, investors and creditors.

Management Accounting: Technique # 3. Historical Cost Accounting:

The historical cost accounting provides past data to the management relating to the cost of each job,
process and department so that comparison may be made with the standard costs. Such comparison
may be helpful to the management for cost control and for future planning.

Management Accounting: Technique # 4. Standard Costing:

Standard costing is the establishment of standard costs under most efficient operating conditions,
comparison of actual with the standard, calculation and analysis of variance, in order to know the
reasons and to pinpoint the responsibility and to take remedial action so that adverse things may
not happen again. This aspect is necessary to have cost control.

Management Accounting: Technique # 5. Budgetary Control:

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The management accountant uses the tool of budgetary control for planning and control of the
various activities of the business. Budgetary control is an important technique of directing business
operations in a desired direction, i.e., achieves a satisfactory return on investment.

Management Accounting: Technique # 6. Marginal Costing:

The management accountant uses the technique of marginal costing, differential costing and break
even analysis for cost control, decision-making and profit maximisation.

Management Accounting: Technique # 7. Funds Flow Statement:

The management accountant uses the technique of funds flow statement in order to analyse the
changes in the financial position of a business enterprise between two dates. It tells wherefrom the
funds are coming in the business and how these are being used in the business. It helps a lot in
financial analysis and control, future guidance and comparative studies.

Management Accounting: Technique # 8. Cash Flow Statement:

A funds flow statement based on increase or decrease in working capital is very useful in long-range
financial planning. It is quite possible that there may be sufficient working capital as revealed by the
funds flow statement and still the company may be unable to meet its current liabilities as and when
they fall due. It may be due to an accumulation of inventories and an increase in trade debtors.

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In such a situation, a cash flow statement is more useful because it gives detailed information of
cash inflows and outflows. Cash flow statement is an important tool of cash control because it
summarises sources of cash inflows and uses of cash outflows of a firm during a particular period of
time, say a month or a year. It is very useful tool for liquidity analysis of the enterprise.
Management Accounting: Technique # 9. Decision Making:
Whenever there are different alternatives of doing a particular work, it becomes necessary to select
the best out of all alternatives. This requires decision on the part of the management. The
management accounting helps the management through the techniques of marginal costing, capital
budgeting, differential costing to select the best alternative which will maximise the profits of the
business.

Management Accounting: Technique # 10. Revaluation Accounting:

The management accountant, through this technique assures the maintenance and preservation of
the capital of the enterprise. It brings into account the impact of changes in the prices on the
preparation of the financial statements.

Management Accounting: Technique # 11. Statistical and Graphical Techniques:

The management accountant uses various statistical and graphical techniques in order to make the
information more meaningful and presentation of the same in such form so that it may help the
management in decision-making. The techniques used are Master Chart, Chart of Sales: and
Earnings, Investment Chart, Linear Programming, Statistical Quality Control, etc.

Management Accounting: Technique # 12. Communicating:

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The success or failure of the management is dependent on the fact, whether requisite information is
provided to the management in right form at the right time so as to enable them to carry out the
functions of planning, controlling and decision-making effectively.

The management accountant will prepare the necessary reports for providing information to the
different levels of management by proper selection of data to be presented, organisation of data
and selecting the appropriate method of reporting.