Management Accounting

Statement of Profit & Loss for the year ended 31/03/2021 ( Rs.in crore)

Particulars Amount
Revenue from operations 150
Other Income 20
Total Income 170
Less: Expenses
Cost of raw material consumed 75
Purchase of stock in trade 10
Changes in inventory of WIP & FG (5)
Employee benefit expenses 6
Finance cost 8
Depreciation and amortization 10
Other expenses 46
Total Expenses 150
Profit before Tax 20
Less: Tax 5
Profit After Tax 15

Other Expenses includes Power, Fuel, Repairs, Maintenance, Stores & spares,
Printing, stationery, Electricity, Broadband, Advertisement, Travelling, Sub
Contracting, Commission, Transportation, Administrative Expenses, Selling
Expenses, Legal fees, Audit fees etc.
Features of Financial Accounting
 FA is Historical Accounting
 FA is a legal requirement
 FA is more useful to outsiders
 FA shows the results at a delayed point of time
 FA shows overall performance of the company’s business
 FA shows the results in a specific format
 FA shows results after a particular interval For example Quarterly Results
 FA involves more rules and regulations
 Not directly involved in decision making
Features of Cost Accounting
 Calculates and controls operating cost
 Historical as well as futuristic
 Not compulsory to all entities
 Useful for Internal management
 CA data required as and when required
 Shows Product wise, Division wise, Factory Wise, Branch wise cost
 No Specific format
 CA involves less rules and regulations
 Not directly involved in decision making
Features of Management Accounting
 Uses Financial & Cost data
 Historical as well as futuristic
 Useful for Internal management
 MA is discretionary in nature
 No Specific format
 No rules and regulations
 Helps the management in decision making
Example

Berger King India Ltd has recently come out with Initial Public Offer of equity shares at
Rs.59 to Rs.60 per share to collect Rs.542 crore. Out of which company is planning to
spend Rs.270 crore for capital expenditure , Rs.162 crore to repay existing loan taken
from ICICI Bank and balance amount for general corporate purposes. Financial Data
shows following ( Rs.in crore )

Profit & Loss Account as per Companies Act, 2013

Particulars 2017-18 2018-19 2019-20
Sales 378 633 841
Other Income 11 11 6
Total income 389 644 847
Less: Expenses
Material consumed 144 230 301
Employee Benefit expenses 70 97 136
Finance Cost 37 46 65
Depreciation & Amortization 64 82 116
Other Expenses 156 227 299
Total Expenses 471 682 919
Profit before exceptional items & tax (82) (38) (72)
Exceptional items 4 00 00
Profit Before Tax (86) (38) (72)
Tax 00 00 00
Profit for the year (86) (38) (72)

Exceptional items are write off of food inventory due to reduction in level of
business activity because of COVID 19 Pandemic

Particulars 2017-18 2018-19 2019-20

Sales 378 633 841
Less: Operating Expenses 434 636 854
Operating Profit/( Loss ) (56) (3) (13)
Less: Finance Cost 37 46 65
Add: Other Income 11 11 6
Loss (82) (38) (72)
Cash generated from Operations 30 87 113

Operating expenses are mainly food & beverages with packing material, Power & Fuel,
Commission & Delivery expenses, Repairs & maintenance, Advertisement & marketing,
Royalty payment etc
Company has total 261 Berger King Restaurants through out India as detailed below

Particulars 2017-18 2018-19 2019-20

North 55 86 129
West 34 55 68
South 40 43 54
East 00 03 09
Total 129 187 260

Out of Total 260 Restaurants, 252 are owned by the company and 8 are sub Franchised
. Company is planning to have 300 QSR by 20-21 & 370 by 21-22

In Quick Service Restaurant business in India data shows position as below ( In % )

Particulars Domino’s Subway Mcdonald’s KFC Berger King

Market Share 19 8 7 6 4
Revenue 21 6 11 10 5

On the basis of above information, Explain the role of Financial Accounting, Cost
Accounting, Management Accounting and Financial Management
Examples

Tata Steel is planning to sale its assets in Netherlands where it is expected to get good
valuation. Company has reported more than expected earnings due to a better product
mix and cost control as well as sharp reduction in debt on better cash management.
Company also expecting to increase in international steel price which will lead to increase
domestic price . Overall impact of increase in sales price and reduction in coking coal
prices will lead to increase in net realization of Rs.4,500 to Rs.5,000 per tonne.

Tata Steels consolidated net debt stands at Rs.96,000 crore and it is expected that sale
proceeds from sale of Netherland Unit will be used to repay the debts. On standalone
basis EBITDA per tonne rose by 14% to Rs.12,882 per tonne. Q2 Consolidated Revenue
recorded at Rs.37,154 Crore and EBITDA Rs.6,111 Crore.

Royal Enfield is changing its strategy by increasing more number of small stores where
the break even is just sale of 6 to 7 bikes a month. Small stores space requirement and
capital expenditure is substantially lower. It also helps to tap the demand from small
towns. By September, 2020 RE is having total 1717 Dealers out of which 771 are small
stores. As per the company information around 60 % of the customers are from outside
the big cities.

Company is planning to lunch new products focusing on core mid – sized market between
250 cc to 750 cc. Company has also introduced a innovative tool through which a buyer
can customize bikes with several combinations. This will help the company improve its
average selling price as well as margins

Mid Tier IT Service Providers will need to beef up their European Operations and increase
revenue share from clients outside top 10 customers to off set the risk. Top Tier IT
companies on an average receives 25% of their revenues from Europe whereas this
number is around 15% for Mid Tier Companies . As the IT Industry is recovering from
pandemic impact , diversification of client base and increasing share in European revenue
will be critical

Godrej Properties, well known for joint property development with landowners, is buying
more plots on “outright basis” as land prices correct in top cities of the country. Joint
development was preferred by the company as it was less capital intensive and mitigated
risk.( Asset Light model )

The cash-rich developer has bought three land parcels in quick succession in recent
months when most developers have been sitting tight or doing everything possible to sell
their inventory to generate cash. Godrej Properties has bought land parcels in Mumbai,
Bengaluru, and Faridabad
Leading domestic carrier, SpiceJet plans to focus on cargo business to boost
its revenue going forward. Also, the airline enjoys higher margins in cargo
business compared to passenger business and moreover, the business
visibility is higher and is more consistent.
In fact, higher revenue from the cargo business helped the airline to cut its
losses in September 2020 quarter (Q2FY21). SpiceJet's revenue from cargo
business increased by 39 per cent in Q2FY21 to Rs 328.54 crore.
For the quarter ended September 30, the carrier reported a net loss of Rs 112.6
crore compared to Rs 462.6 crore in the corresponding quarter last year.
Revenue for the period fell 62 per cent year on year to Rs 1,305 crore led mainly
by a decline in passenger traffic revenue. But a surge in freight and logistics
revenue helped offset the revenue decrease.
For the first six months ended September 30, 2020, SpiceJet saw its cargo
revenue increase by 151 per cent to Rs 564.93 crore compared to the
corresponding quarter last year.

================================================================
Difference between Financial Accounting, Cost Accounting & Management
Accounting

Sr.No. Financial Accounting Cost Accounting Management

Accounting
1 Records Financial Records Cost Uses Financial &
Transactions of the business details Cost Data
2 Object is to prepare Financial Object is to Object is to Provide
Statements calculate Cost & to information in such
control cost a way so that
management can
make speedy
decisions
3 Shows profit or loss made by Shows product Prepares different
the business, assets & wise cost, reports as required
liabilities department wise, by the
factory wise cost management and
uses different
techniques
4 Shows historical information Shows historical Shows historical
information as information as well
well as estimates as estimates
5 It is a legal requirement i.e Not a legal Not a legal
compulsory requirement with requirement
certain exceptions
6 Shows the overall Keep cost details Decision wise
performance of the business as per the cost reporting to the
center management
7 Shows the result at a Gives information Gives information
particular interval as and when as and when
required required
8 More Useful to outsiders Useful for Internal Useful for Internal
management management
9 Financial statements In No specific format No specific format
specific format
10 More rules & regulations No rules & No rules &
regulations regulations
 11 Not directly involved in Not directly Helps the
decision making involved in management in
decision making decision making
12 Company Law, Accounting Maintenance of No such legal
standards costing records requirement
rules
13 No direct help in strategic No direct help in Helps in strategic
decisions strategic decisions decisions
14 Quarterly results, Half yearly Process costing, Target costing,
results, Ind AS Job Costing, Activity Based
Service costing Costing, Balance
Score Card

Management Accounting - Accounting for Management. Which is also called

Managerial Accounting. It uses financial and cost data and filters and presents this
data to the management in such a way so that management can make speedy and
correct decision.

Management Accounting uses different techniques such as Budgeting, Standard

Costing, Marginal Costing, Activity Based Costing, Balance Score Card, Target
costing etc.

Management Accounting is the provision of financial and non-financial decision-

making information to managers. In management accounting or managerial
accounting, managers use the provisions of accounting information to inform
themselves better before they decide matters within their organizations, which
allows them to manage better and perform control functions.

The part of accounting that helps managers in making decisions providing

accounting information is called management accounting.

Management accounting is a special branch of accounting. It is a modern and

scientific innovation of accounting. Management accounting is accounting for
effective management.

Meaning and Definition of Management Accounting

Management accounting is the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of
information that assists executives in fulfilling organizational objectives.

It helps the management to perform all its functions, including planning, organizing,
staffing, direction, and control. In other words, the field of accounting that provides
economic and financial information for managers and other internal users is called
management accounting.

Some beautiful definitions of management accounting are mentioned below:

The Institute of Chartered Accountants of England and Wales defines,

“Management Accounting is that form of accounting which enables a business to
be conducted more efficiently.”

According to R. N. Anthony, “Management Accounting is concerned with

accounting information that is useful to management.”

Professor J Batty defines, “It is the term used to describe the accounting methods,
systems, and techniques, which, coupled with special knowledge and ability, assist
management in its task of maximizing profits or minimizing losses.”

The Institute of Cost and Management Accountants London has defined,

“Management Accounting as the application of professional knowledge and skill in
the preparation of accounting information in such a way as to assist management
in the formulation of policies and the planning control of the operation of the
undertakings.”

Similarly, according to the American Accounting Association, “It includes the

methods and concepts necessary for effective planning for choosing among
alternative business actions and for control through the evaluation and
interpretation of performances.

From the above definitions, we can say that the part of accounting that provides
information to the managers for use in planning, controlling operations, and
decision making is called management accounting.

Characteristics/Nature of Management Accounting

The nature/characteristics of management accounting may be summarized as
under:

 Management Accounting is a technique of selective nature. It does not use

the whole data provided by financial records. It selects and picks up only that
information from different financial records (such as Profit & Loss account or
Balance Sheet), which are relevant and useful to the management to arrive
at important decisions on different aspects of the business.

 Management Accounting is concerned with the future. It collects and

analyses data to plan the future. The primary function of management is to
decide about the future course of action. Management accounting, with the
help of different techniques, formats the future course of action.

 Management Accounting makes available useful information which helps the

management in planning and decision-making. It can only provide
information but cannot proscribe. It is up to management to what extent it.
It can make use of the information depending upon its efficiency and
wisdom.

 Management Accounting studies the relation between causes and effects.

Financial Accounting does and analyses the causes responsible for profits or
losses. Management accounting attempts to study the cause-and-effect
relationship by analysing the different variables affecting the profits and
profitability of the business.

 Management accounting is no bound by the rules of Financial Accounting.

Financial accounting procedures are designed based on GAAPs.

Functions of Management Accounting

The basic function of management accounting is to assist the management in

performing its functions effectively. The functions of the management are
planning, organizing, directing, and controlling.

Management accounting is a part of accounting. It has developed out of the need

for making more use of accounting for making managerial decisions.
Management accounting helps in the performance of each of these functions in the
following ways:

1. Provides data Management accounting serves as a vital source of data for

management planning. The accounts and documents are a repository of a
vast quantity of data about the past progress of the enterprise, which is a
must for making forecasts for the future.

2. Modifies data Management accounting modifies the available accounting

data rearranging in such a way that it becomes useful for management.

The modification of data in similar groups makes the data more useful and
understandable. The accounting data required for management decisions is
properly compiled and classifies.

For example, purchase figures for different months may be classified to know total
purchases made during each period product-wise, supplier-wise, and territory-
wise.

3. Communication Management accounting is an important medium of

communication. Different levels of management (top, middle, and lower)
need different types of information.

The top management needs concise information at relatively long intervals, middle
management needs information regularly, and lower management is interested in
detailed information at short-intervals.

Management accounting establishes communication within the organization and

with the outside world.

4. Analyses and interprets data The accounting data is analyzed meaningfully

for effective planning and decision-making. For this purpose, the data is
presented in a comparative form, Ratios are calculated, and likely trends are
projected.

5. Serves as a means of communicating Management accounting provides a

means of communicating management plans upward, downward, and
outward through the organization.
Initially, it means identifying the feasibility and consistency of the various segments
of the plan. The later stages it keeps all parties informed about the plans they have
been agreed upon and their roles in these plans.

6. Facilitates control Management Accounting helps in translating given

objectives and strategy into specified goals for attainment by a specified time
and secures the effective accomplishment of these goals efficiently. All this
is made possible through budgetary control and standard costing, which is
an integral part of management accounting.

7. Uses also qualitative information Management Accounting does not restrict

itself to financial data for helping the management in decision making but
also uses such information that may be capable of being measured in
monetary terms. Such information may be collected from special surveys,
statistical compilations, engineering records, etc.

8. To assist in planning. Management Accounting assists the management in

planning as well as to formulate policies by making forecasts about the
production, selling the inflow and outflow of cash, etc.

Not only that, but it may also forecast how much may be needed from alternative
courses of action or the expected rate of return from that place and at the same
time decides upon the programmed of activities to be undertaken.

9. To assist in organizing. By preparing budgets and ascertaining specific cost

center, it delivers the resources to each center and delegates the respective
responsibilities to ensure their proper utilization.

As a result, an interrelationship grows among the different parts of the enterprise.

10. Decision-Making Management accounting furnishes accounting data and

statistical information required for the decision-making process, which
vitally affects the survival and the success of the business.

Management accounting supplies analytical information regarding various

alternatives, and the choice of management is made easy.

11. To assist in motivation By setting goals, planning the best and economic
courses of action, and also by measuring the performances of the employees,
 it tries to increase their efficiency and, ultimately, motivate the organization
as a whole.

12. To Coordinate It helps the management in coordination the whole activities

of the enterprise, firstly by preparing the functional budgets, then co-
coordinating the whole activities of the enterprise, firstly, by preparing the
functional budgets, then co-coordinating the whole activities by integrating
all functional budgets into one which goes by the name of ‘Master Budget.’

In this way, it helps the management by con-coordinating the different parts of the
enterprise. Besides, overall coordination is not at all possible without budgetary
control.

13.To Control

The actual work done can be compared with ‘Standards’ to enable the
management to control the performances effectively.