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Bishal Singh.
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Introduction
The term management accounting consists of two words management and accounting which
holds the concept that how accounting functions can be reoriented in order to fit within the
framework of management activity. In other words, management accounting is concerned with
providing information to the managers as it provides necessary information to the management
for discharging its functions i.e planning, organizing, directing, and controlling [ CITATION
Por081 \l 1033 ]. Thus, it is worth arguing that management accounting provides crucial data with
which the organizations are actually run. There are different types of management accounting
system such as-
Inventory management System- The process to track and control the flow of goods throughout
the entire supply chain and assimilating the optimum mobilization of company’s inventory.
Typically, inventory encompasses four stages raw materials, work-in-progress finished goods
and merchandise. Approaches of inventory management such as JIT(Just in time purchase),
MRP(Material Requirement Planning), Activity Base costing)ABC analysis , EOQ(Economic
order quantity) helps to reduce the risk of inventory, production overheads and improved cash
flow[ CITATION Sha05 \l 1033 ].
Cost Accounting System( Activity Costing System, Standard costing, normal, actual)- The
accounting system utilized by firms to estimate cost of the product for profitability analysis, cost
control and inventory valuation. A precise approximation of the cost of a product is vital to a
business venture majorly in the context of asserting profit [ CITATION Bat99 \l 1033 ].
Approximating the actual products' cost is vital for efficient and effective operation. Cost
accounting is the sort of accounting framework which targets capturing all the input costs
through balancing the production costs of each step in addition to fixed costs like depreciation.
Implementation of cost control techniques helps to minimize the cost of product or services
without compromising on quality since it aims at controlling the costs by using various
techniques such as standard costing, budgetary control, marginal costing, absorption costing,
operating costing and so on.
Price optimization refers to the utilization of quantitative analysis to the company to decide how
purchasers will respond to different cost for their merchandise and enterprises through various
channels. This framework is utilized to manipulate price of various resources and viably deciding
prices of different items at a time. The framework helps in deciding how demand will vary at
various value levels.
Advantages of budgeting
Disadvantages
Use of estimated figures- Budget relates to the future and involves forecasting and
estimation, which may not be accurate to the full extent. If the estimates are not
converted, the budget target may be useless.
The inefficiency on the part of any person involved in the organization is immediately
known which calls for corrective actions.
A budget lacks flexibility as Budgets are prepared after a lot of group work done by
different departments. The business executives treat the budgeted figures as the final
figures and stick to them.
It provides yardstick against which actual costs are compared to ascertain efficiency or
inefficiency of actual performance. Thus, standard cost helps in exercising cost control and
provides information, which is helpful in cost reduction. The standard costing helps in
determination of variance via comparing actual cost with standard costs variances are
determined. Analysis of variance will assist single out inefficiency and locate persons who are
responsible for unfavorable variances.
It is very difficult to establish standard costs of materials, labour and overheads. So, sometimes
inaccurate and out of date standards are set which do more harmful than any benefits as they
provides wrong yardsticks. This system is expensive so small concerns may not afford to bear
the costs. Establishment of standard costing requires high degree of technical skills.
It helps preparing realistic budget. Comparisons are realistic as the planned figures can be
compared against the actual.
It assists in smooth operation of business even in volatile situation and environment.
Costs can be easily ascertained at different levels of activity under this type of budget.
Since the costs are classified into variable, semi-variable and fixed under flexible budget,
the analysis and control of the costs are easier.
Disadvantages of flexible budgeting
A flexible budget assumes that there will not be change in working condition which is not
a realistic assumption. A flexible budget is meaningless when working conditions
change.
It does not make any adjustments that arise due to changes in production, sales and other
activities.
It does not provide any meaningful basis for comparison and control.
It helps the company to estimate which investment option would yield the best possible
return.
Capital budgeting decisions are for long-term and are majorly irreversible in nature.
Most of the times, these techniques are based on the estimations and assumptions as the
future would always remain uncertain.
ABC(Activity Based Costing) produces reliable and correct product cost data in case of
greater diversity among the products manufactured such as low-volume products, high-
volume products. Traditional costing system is likely to bring errors and approximation in
product cost determination due to using arbitrary apportionment and absorption
methods[ CITATION Kha03 \l 1033 ]. It helps greatly to improve managerial decision making.
Disadvantages of Activity Based Costing
ABC has numerous cost pools and multiple cost drivers and therefore can-be more complex
than traditional product costing systems. It can prove costly to manage ABC system. The
main costs and limitations of an ABC system are the measurements necessary to implement
it. ABC systems require management to estimate costs of activity pools and to identify and
measure cost drivers to serve as cost allocation bases[ CITATION koi13 \l 1033 ].
Management accountant has a major role to play in raising of funds and their application. He has
to decide about maintaining a proper mix between debt and equity. Raising of funds through debt
is cheaper because of tax benefits. However, it is risky as because interest on debt has to be paid
whether the firm earns adequate profits or not. Management accountant has, therefore, to
maintain an optimum capital structure and give due consideration to various cost of capital
theories, leverage and possibility of trading on equity.
The management accountant reveals the data in a clear and non-specialized way. This will help
the administration in deciding the monetary information, assessing elective approaches
accessible and controlling the administration in taking choices and having the most required
outcomes. The management accountant analyses accounts and prepares reports e.g., standard
costs, budgets, variance analysis and interpretation, cash and fund flow analysis, management of
liquidity, performance evaluation and responsibility accounting etc. for control.
Create a Spending Plan or a Budget to Solve and Prevent Financial Problems- Making
monthly spending is perhaps the sharpest thing you can accomplish for your business, yet it's the
most disregarded answer for a great many people's financial issues. Having a spending plan or a
financial plan (the specialized name for a month to month spending plan) makes tasks a lot
simpler on the grounds that you've given yourself a manual for choose how you need to go
through your cash.
Forecasting and budgeting- This refers to formulation of budgets and forecast with the help of
operation and other departments of business concern. The ultimate success of any budgeting
depends on the proper setting of target figures in the budget and the actual realization of the
same in practice.
Cost control techniques- There serve as effective tools for comparing the actual results with the
predetermined figures determined in budgets. They greatly help in bringing the budget in
operating plans.
Statistical data- It is concerned with the supply of necessary statistical data and particulars
needed by various departments of the business concern. This includes statistical compilation of
case studies, engineering records, minutes of meetings, special surveys and many other business
documents.
The management accounting imbibes critical aspects that act as a tonic for internal decision
making and effective organizational setting in general since its areas of specialization comprises
financial accounting, cost accounting, forecasting and budgeting, cost control techniques,
statistical data, taxation and office services[ CITATION Kha04 \l 1033 ]. Hence, the organization
leverages over formulating plans, co-coordinating information, evaluation of data and facilitate
managerial decision making due to implementation of management accounting.
In the context of accounting and business, cost is the monetary value that an organization has
spent so as to deliver something. Cost indicates the measure of cash that an organization spends
on the creation or production of products or services. There are different classifications of cost
and these can be classified on the basis of element, functions, behavior, decision making and
controllability[ CITATION Ame03 \l 1033 ]. The costs on the basis of functions include those costs
that are required for a company to operate efficiently. It comprises costs such as production
costs, administration costs, selling and distribution costs, research and development costs.
Direct labour- It is the workforce, which is directly involved on production. It refers to labour
cost, which can be identified with and allocated to cost centers or cost units.
Indirect labour cost- These are the labour cost or wages, which cannot be allocated but can be
apportioned or absorbed by cost units. For example, salary paid to factory manager.
Direct materials- The materials which forms part of finished output and can be identified with
the finished product easily. For example, wood, ply wood, adhesive, wood polish in case of
manufacturing furniture. Cost of cotton in case of cloth and cost of iron in case of manufacturing
machinery etc.
Indirect material costs- These are the materials which cannot be traced as a part of the product
and their cost is distributed among the various cost centers or cost units.
Fixed cost- The costs, whose total amount remain constant, up to a certain capacity are known as
fixed cost. The level of production changes but total amount of fixed cost remains constant.
Fixed cost is also called capacity cost, periodic cost, standard costing and burden cost. If the
level of production increases then per unit cost decreases and vice-versa, but total amount of
fixed cost remains constant. Theses cost remain fixed in total but their per unit cost changes with
changes in output or sales. Rent, depreciation and salary of a permanent staffs are examples of
fixed cost.
Variable cost- The costs that changes proportionately with the change in output is known as
variable cost. An increase in the volume means a proportionate increase in the variable cost and
decrease in volume will lead to proportionate decline in total variable costs. Variable cost is also
known as marginal costs, direct cost, pocket costs etc. Direct material costs, direct labour costs,
direct expenses are examples of variable costs.
Semi-Variable costs- The costs which are neither perfectly variable nor absolutely fixed in
relation to changes in volume are called semi-variable or semi-fixed costs. These costs have
characteristics of both variable and fixed costs. Electricity charges, telephone charges, water
supply charges are the examples of semi-variable costs.
An organization prepares income statements to access the profitability. Income statements are
used for decision making by internal parties like various levels of management and external
parties like investors, creditors, government etc. Before the preparation of income statement, the
cost of producing the goods or providing the services are collected, classified and analyzed.
There are two methods of preparing income statements namely variable costing and absorption
costing[ CITATION Bra14 \l 1033 ]. The objectives for preparing these statements are different. The
variable costing method is used for internal reporting as well decision making whereas the
absorption costing is used for external reporting. Variable costing is also known as direct costing
or marginal costing.
Absorption costing comprises all kinds of manufacturing cost in product cost. In other words, it
includes both variables as well as fixed manufacturing overheads in product costs. Thus, it is also
known as full costing. It absorbs all the cost necessary for production. This method is mostly
used for external reporting purpose.
The profit is determined by deducting variable costs and fixed costs from sales. CVP analysis
becomes the significant part of variable costing. Only the variable manufacturing costs are
changed to production and all fixed costs are recover from contribution.
Marginal cost per unit for
the year 2019
Direct
Material= 195/unit
Direct labor= 70/unit
Variable Manufacturing overhead= 65/unit
Cost of goods sold = 330/unit
Question no..6…
Income statement under Marginal costing for the year ended 2019
Particulars Amount
Particulars Amount
Reconciliation Statement
CVP analysis
Variable expenses=65/unit
CM unit= 335
=$175000
Question no.7-
Interpretation
The company produced 8500 units of Televisions in 2019 and liquidated all in the same year or
within the year 2019 which signifies that brand has well reputation in market. Because of the
high contribution margin and gross margin the company had covered all the manufacturing
overheads properly.
Thereby, at 472 units of sales there would be neither profit nor loss situation and at that BEP
sales revenue ought to be $175000. Form this, we could further comprehend the fact that the
company is in profitable stage since it has sold more than 472 units in 2019. This managerial tool
clearly depicts the relationship between cost and profits with sales volume.
It is simple to understand, easy to control and a very useful tool for profit planning and
control.
It is an appropriate technique for managerial decision making regarding alternative
choices like special offer, make or buy, drop or continue.
Cost-volume profit analysis or break-even point analysis is totally based on variable
costing.
It helps to evaluate the performance of different departments, divisions and salesman.
There is no problem of over and under absorption of fixed manufacturing overheads
because fixed manufacturing overhead is considered as period cost.
Limitation with variable costing-
In variable costing all costs of the organizations are separated into fixed and variable as
per the behavioral classifications of costs. In fact, no variable cost is completely variable
and no fixed cost is completely fixed. Actually most of the costs are semi variable and it
is difficult to segregate them into fixed and variable.
Sometimes the offer can be accepted at lower price in the argument that if variable cost is
little less than the price of offer, it will give some positive contribution. Therefore, it can
reduce the selling price and suffer from loss.
This method indicates the over or under absorption of fixed factory overhead that
discloses the profitable and unprofitable utilization of resources.
This method makes the departmental manager more responsible for their cost centers due
to proper allocation of fixed factory overhead on the respective centre.
This approach is more suitable if the income statement is to be reported to the external
parties.
It is a suitable method of calculating profit if productions are done for future sales since
this method enables the calculation of gross profit and net profit separately in income
statement.
Under absorption costing, per unit cost changes with the changes in output which makes
it difficult to compare and control cost.
Since the absorption costing includes the fixed costs in product costs, it is not helpful in
managerial decisions in the pretext that the most of the managerial decisions are made
on the decisions of marginal costing.
Conclusively, this training manual would be utterly helpful to the trainees at MC group as it has
revealed management accounting tools and techniques as well as comprehensive knowledge of
management accounting.
Bibliography
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