MANAGEMENT ACCOUNTING:

MEANING:
Management accounting can be viewed as Management-oriented
Accounting. Basically it is the study of managerial aspect of
financial accounting, "accounting in relation to management
function". It shows how the accounting function can be re-oriented
so as to fit it within the framework of management activity. The
primary task of management accounting is, therefore, to redesign
the entire accounting system so that it may serve the operational
needs of the firm. If furnishes definite accounting information,
past, present or future, which may be used as a basis for
management action. The financial data are so devised and
systematically development that they become a unique tool for
management decision.
The term “Management Accounting”, observe, Broad and
Carmichael, covers all those services by which the accounting
department can assist the top management and other
departments in the formation of policy, control of execution and
appreciation of effectiveness. This definition points out that
management is entrusted with the primary task of planning,
execution and control of the operating activities of an enterprise. It
constantly needs accounting information on which to base its
decision. A decision based on data is usually correct and the risk
of erring is minimized. The position of the management in respect
of its functions can be compared to that of an army general who
wants to wage a successful battle. A general can hardly fight
successfully unless he gets full information about the surrounding
situation and the extent of effectiveness of each of his battalions
and, to the extend possible, even the enemy's intentions. Like a
general a successful management too strives to outstrip other
competitors in the field by streamlining its operating efficiency. It
needs a thorough knowledge of the situation and the
circumstances in which the firm operates. Such knowledge can
only be gained through the processed financial data rendered by
the accounting department on the basis of which it can take policy
decision regarding execution, control, etc. It is here that the role of
management accounting comes in. It supplies all sorts of
accounting information in the form of such statements as may be
needed by the management. Therefore, management accounting
is concerned with the accumulation, classification and
interpretation of information that assists individual executives to
fulfill organizational objectives.

DEFINATION:
Accounting is defined as ‘the art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events which are of financial character and
interpreting the result thereof”.

ROLE OF MANAGEMENT ACCOUNTING:

 Preparing monthly management accounts and other
financial reports such as budgets. 
 Presenting reports to senior management to aid with
business decision making. 
 Compiling strategies that will reduce business costs. 
  Obtaining finance for projects. 
 Advising on the financial implications of business
decisions. 
 Developing and overseeing financial systems and
procedures and identifying opportunities to improve
these. 
 Controlling income and expenditure within the business
and ensuring that expenditure is inline with budgets. 
 Overseeing accounting technicians and support with
generic accountancy tasks. 
 Communicating with all levels within the organisation and
being able to present financial information to non - finance
members of staff. 
 Analysing and managing risk within the business. 

COST SHEET:
Cost Sheet is a statement which presents detailed information
relating to the various stages of cost. It also shows the total cost
of the product manufactured during a particular period of time.
Thus, the cost sheet is prepared for a particular period of time
monthly, quarterly, yearly etc.

(i) The total cost and cost per unit of the product can be
ascertained;

(ii) It helps the management to fix up the selling price on the basis
of the cost per unit of the product after charging certain
percentage of profit on cost;
(iii) It also helps the management presenting a comparative study
of current cost with the existing cost per unit;

(iv) After proper comparison the management can take the

corrective measures;

(v) It helps the management while formulating suitable production

policy;

(vi) It is very helpful to submit a price quotation for tenders; and

(vii) It also helps the management by supplying suitable

information for management control.

Method of Preparation of Cost Sheet:

Step I = Prime Cost = Direct Material + Direct Labour + Direct
Expenses.

Step II = Works Cost = Prime Cost + Factory/Indirect Expenses.

Step III = Cost of Production = Works Cost + Office and

Administration Expenses.

Step IV = Total Cost = Cost of Production + Selling and

Distribution Expenses. Profit = Sales – Total Cost.

BASIC COST TERMS OF MANAGEMENT

ACCOUNTING:
 1. Manufacturing Costs
Most manufacturing companies separate manufacturing costs into
three broad categories: direct materials, direct labor,
and manufacturing overhead. A discussion of each of these
categories follows.
(i) Direct Materials
The materials that go into the final product are called raw
materials. This term is somewhat misleading because it seems to
imply unprocessed natural resources like wood pulp or iron ore.
Actually, raw materials refer to any materials that are used in the
final product; and the finished product of one company can
become the raw materials of another company.
Raw materials may include both direct and indirect
materials. Direct materials are those materials that become an
integral part of the finished product and whose costs can be
conveniently traced to the finished product.
Sometimes it isn’t worth the effort to trace the costs of relatively
insignificant materials to end products. Such minor item would
include the glue used to assemble a chair. Materials such as
solder and glue are called indirect materials and are included as
part of manufacturing overhead.
(ii) Direct Labor
Direct labor consists of labor costs that can be easily (i.e.,
physically and conveniently) traced to individual units of product.
Direct labor is sometimes called touch labor because direct labor
workers typically touch the product while it is being made.
Examples of direct labor include assembly-line workers
at Toyota, carpenters at the home builder, and electricians who
install equipment on aircraft.
Labor costs that cannot be physically traced to particular
products, or that can be traced only at great cost and
inconvenience, are termed indirect labor. Just like indirect
materials, indirect labor is treated as part of manufacturing
overhead. Indirect labor includes the labor costs of janitors,
supervisors, materials handlers, and night security guards.
Although the efforts of these workers are essential, it would be
either impractical or impossible to accurately trace their costs to
specific units of product. Hence, such labor costs are treated as
indirect labor.
(iii) Manufacturing Overhead
Manufacturing overhead, the third element of manufacturing
cost, includes all manufacturing costs except direct materials and
direct labor. Manufacturing overhead includes items such as
indirect materials; indirect labor; maintenance and repairs on
production equipment; and heat and light, property taxes,
depreciation, and insurance on manufacturing facilities. A
company also incurs costs for heat and light, property taxes,
insurance, depreciation, and so forth, associated with its selling
and administrative functions, but these costs are not included as
part of manufacturing overhead. Only those costs associated with
operating the factory are included in manufacturing overhead.
Various names are used for manufacturing overhead, such
as indirect manufacturing cost, factory overhead, and factory
burden. All of these terms are synonyms for manufacturing
overhead.
2. Nonmanufacturing Costs
Nonmanufacturing costs are often divided into two categories:
(1) selling costs and (2) administrative costs. 
(i) Selling costs include all costs that are incurred to
secure customer orders and get the finished product to
the customer. These costs are sometimes called order-
getting and order-filling costs. Examples of selling costs
include advertising, shipping, sales travel, sales
 commissions, sales salaries, and costs of finished
goods warehouses.
(ii) Administrative costs include all costs associated with
the general management of an organization rather than
with manufacturing or selling. Examples of
administrative costs include executive compensation,
general accounting, secretarial, public relations, and
similar costs involved in the overall, general
administration of the organization as a whole.
Nonmanufacturing costs are also often called selling, general, and
administrative (SG&A) costs or just selling and administrative
costs.