2 0 0 Final

UTTARANCHAL UNIVERSITY
(Established vide Uttaranchal University Act, 2012, Uttarakhand Act No. 11 of 2013)
Premnagar-248007, Dehradun, Uttarakhand, INDIA
Program Name OMBA Program Code 501

Course Code OMBA-112 Credit 4
Year/Semester 1/1 L-T-P 4-0-0
Course Name Accounting For Managerial Decision
Objectives of the Course
● To understand the concepts, methods, and techniques of management accounting.
● To discuss the usage in managerial decision making and control.
UNIT-I: Introduction to Accounting
Management accounting as an area of accounting; objectives, nature and scope of financial
accounting, cost accounting and management accounting; Management accounting and managerial
decisions; Management accountant’s position, role, and responsibilities, Accounting Plan and
Responsibility Centres: meaning and significance of responsibility accounting; Responsibility centers
- cost center, profit center and investment center; objective and determinants of responsibility
centers
UNIT-II: Managerial Costing and Break-even Analysis
Concept of managerial cost; Marginal costing and absorption costing; cost-volume-profit
analysis; Break-even analysis; Decisions regarding sales-mix; make or buy decisions and
discontinuation of a product line etc
UNIT-III: Budgeting
Definition of budget; Essential of budgeting; Types of Budgets; functional, master etc. Fixed and
flexible budget; Budgetary control; Zero-base budgeting; Performance budgeting.
UNIT-IV: Standard Costing and Variance Analysis
Standard costing as a control technique; setting of standards and their revision; Variance analysis -
meaning and importance, kinds of variance and their uses - materials labor and overhead variance;
Disposal of variances.
UNIT-V: Contemporary Issues
Horizontal, vertical and ratio analysis; cash flow analysis. Reporting to Management: Objectives of
reporting; reporting needs at different management levels; Types of reports, models of reporting,
reporting at different levels of management.
Course Outcomes (CO)
CO1 Recognizes the importance of the application of management accounting concepts in various
managerial decision-making processes.
CO2 Understand the various cost analysis required in business functioning.
CO3 Understand standard costing and variance analysis.
UTTARANCHAL UNIVERSITY
(Established vide Uttaranchal University Act, 2012, Uttarakhand Act No. 11 of 2013)
Premnagar-248007, Dehradun, Uttarakhand, INDIA
Books for References:

1. Horngren, C.T. Gary l. Sundam and Williams O, Stratton: Introduction to Management
Accounting, Pearson Education, Delhi.
2. Horngren Charles T, George Foster and Srikanta M. Dattar: Cost Accounting: A Managerial
Emphasis, Pearson Education, Delhi.
3. Banerjee Bhabatosh: Management Accounting.
4. Anthony, Robert: Management Accounting, Tarapore-wala, Mumbai.
5. Barfield, Jessie, Ceily A. Raiborn and Michael R. Kenney: Cost Accounting: Traditions and
Innovations, South Western College Publishing, Cincinnati, Ohlo.
6. Decoster, Don T and Elden L. Schafer: Management Accounting: A Decision emphasis, John Wiley
and Sons Inc, New York.
7. Garrison, Ray H. and Eric W. Noreen: Management Accounting, Richard D.Irwin, Chicago.
Jawaharlal: Adv. Management Accounting, S. Chand, New Delhi.
8. Hansen, Don R. and Maryanne M. Moreen: Management Accounting, South-Western College,
Publishing, Cincinnati, Ohlo.
9. Lall, B. M., and I. C. Jain, Cost Accounting: Principles and Practices, PH, Delhi.
10. Pandey, I.M.: Management Accounting, Vani Publication, Delhi.
11. Welsch Glenn A., Ronald W. Hilton and Poul N. Gordon: Budgeting Profit Planning and Control,
PH Delhi.
Accounting for Managerial Decisions
UNIT – 1 INTRODUCTION TO
ACCOUNTING
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2.Management accounting as an area of accounting,
1.3 Objectives
1.4 Nature and scope of financial accounting
1.5 Cost accounting and management accounting
1.6 Management accounting and managerial decisions
1.7 Management Accountants position
1.8 Role and Responsibilities
1.9 Accounting plan and responsibilities centres
1.10 Meaning and significance of responsibility accounting
1.11 Responsibilities centre
1.12 Objective and determinants of centres
1.13 Let Us Sum Up
1.14 Key Words
1.15 Some Useful Books
1.16 Answer to check your progress
1.17 Terminal Questions
1.0 OBJECTIVES
● To understand the concepts, methods,and techniques of manageme

nt accounting.
● To discuss the usage in managerial decision making and control.
● To state the meaning and
andsignificance of responsibility accounting;Responsibility centers
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1 INTRODUCTION TO ACCOUNTING
Accounting can be defined as a process of reporting, recording,

interpreting and summarising economic data. The introduction of
accounting helps the decision-makers of a company to make effective
choices, by providing information on the financial status of the business.
The American Institute of Certified Public Accountants (AICPA) had
defined accounting as the “art of recording, classifying, and summarising
in a significant manner and in terms of money, transactions and events
which are, in part at least, of financial character, and interpreting the
results thereof”.
Today, accounting is used by everyone and a good understanding of it is
beneficial to all. Accountancy act as a language of finance. To understand
accounting efficiently, it is important to understand the aspects of
accounting.
• Economic Events- It is a consequence of a company has to
undergo when the number of monetary transactions is involved.
Such as purchasing new machinery, transportation, machine
installation on-site, etc.
• Identification, Measurement, Recording, and
Communication- The accounting system should be outlined in
such a way that the right data is identified, measured, recorded and
communicated to the right individual and at the right time.
• Organization-In refers to the size of activities and level of a
business operation.
Interested Users of Information- It is about communicating important
financial information to the customers, according to which they will make
the correct decision.
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1.2 MANAGEMENT ACCOUNTING AS AN

AREA OF ACCOUNTING
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,
organising, 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 maximising profits or
minimising losses.”
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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 summarised
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 form different financial records (such as profit and 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 bout 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.
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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, organising, directing, and controlling.
Fig 1.1 function Of Management Accounting

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:
• 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.
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• 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.
• 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.
• Analyses and interprets data
The accounting data is analysed 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.
• 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.
• Facilitates control
Management accounting helps in translating given objectives and strategy
into specified goals for attainment t 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.
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• 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.
• 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.
• To assist in organising.
By preparing budgets and ascertaining specific cost centres, it delivers the
resources to each centre and delegates the respective responsibilities to
ensure their proper utilisation.
As a result, an interrelationship grows among the different parts of the
enterprise.
• 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.
• 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.
• 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
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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.’
• To Control
The actual work done can be compared with ‘Standards’ to enable the
management to control the performances effectively.
What Is Managerial Accounting?
Managerial accounting is the practice of identifying, measuring, analysing,
interpreting, and communicating financial information to managers for the
pursuit of an organization's goals.
Managerial accounting differs from financial accounting because the
intended purpose of managerial accounting is to assist users internal to the
company in making well-informed business decisions.
How Managerial Accounting Works
Managerial accounting encompasses many facets of accounting aimed at
improving the quality of information delivered to management about
business operation metrics. Managerial accountants use information
relating to the cost and sales revenue of goods and services generated by
the company. Cost accounting is a large subset of managerial accounting
that specifically focuses on capturing a company's total costs of production
by assessing the variable costs of each step of production, as well as fixed
costs. It allows businesses to identify and reduce unnecessary spending
and maximize profits.
Managerial Accounting vs. Financial Accounting
The key difference between managerial accounting and financial
accounting relates to the intended users of the information. Managerial
accounting information is aimed at helping managers within the
organization make well-informed business decisions,
while financial accounting is aimed at providing financial information to
parties outside the organization.
Financial accounting must conform to certain standards, such as generally
accepted accounting principles (GAAP). All publicly held companies are
required to complete their financial statements in accordance with GAAP
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as a requisite for maintaining their publicly traded status.1 Most other
companies in the U.S. conform to GAAP in order to meet debt covenants
often required by financial institutions offering lines of credit.
Because managerial accounting is not for external users, it can be modified
to meet the needs of its intended users. This may vary considerably by
company or even by department within a company. For example,
managers in the production department may want to see their financial
information displayed as a percentage of units produced in the period. The
HR department manager may be interested in seeing a graph of salaries by
employee over a period of time. Managerial accounting is able to meet the
needs of both departments by offering information in whatever format is
most beneficial to that specific need.
Types of Managerial Accounting
• Product Costing and Valuation
Product costing deals with determining the total costs involved in the
production of a good or service. Costs may be broken down into
subcategories, such as variable, fixed, direct, or indirect costs. Cost
accounting is used to measure and identify those costs, in addition to
assigning overhead to each type of product created by the company.
Managerial accountants calculate and allocate overhead charges to assess
the full expense related to the production of a good. The overhead
expenses may be allocated based on the number of goods produced or
other activity drivers related to production, such as the square footage of
the facility. In conjunction with overhead costs, managerial accountants
use direct costs to properly value the cost of goods sold and inventory that
may be in different stages of production.
Marginal costing (sometimes called cost-volume-profit analysis) is the
impact on the cost of a product by adding one additional unit into
production. It is useful for short-term economic decisions. The
contribution margin of a specific product is its impact on the overall profit
of the company.
Margin analysis flows into break-even analysis, which involves
calculating the contribution margin on the sales mix to determine the unit
volume at which the business’s gross sales equal total expenses. Break-
even point analysis is useful for determining price points for products and
services.
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• Cash Flow Analysis
Managerial accountants perform cash flow analysis in order to determine
the cash impact of business decisions. Most companies record their
financial information on the accrual basis of accounting. Although accrual
accounting provides a more accurate picture of a company's true financial
position, it also makes it harder to see the true cash impact of a single
financial transaction. A managerial accountant may implement working
capital management strategies in order to optimise cash flow and ensure
the company has enough liquid assets to cover short-term obligations.
When a managerial accountant performs cash flow analysis, he will
consider the cash inflow or outflow generated as a result of a specific
business decision. For example, if a department manager is considering
purchasing a company vehicle, he may have the option to either buy the
vehicle outright or get a loan. A managerial accountant may run different
scenarios by the department manager depicting the cash outlay required to
purchase outright upfront versus the cash outlay over time with a loan at
various interest rates.
• Inventory Turnover Analysis
Inventory turnover is a calculation of how many times a company has sold
and replaced inventory in a given time period. Calculating inventory
turnover can help businesses make better decisions on pricing,
manufacturing, marketing, and purchasing new inventory. A managerial
accountant may identify the carrying cost of inventory, which is the
amount of expense a company incurs to store unsold items.
If the company is carrying an excessive amount of inventory, there could
be efficiency improvements made to reduce storage costs and free up cash
flow for other business purposes.
• Constraint Analysis
Managerial accounting also involves reviewing the constraints within a
production line or sales process. Managerial accountants help determine
where bottlenecks occur and calculate the impact of these constraints on
revenue, profit, and cash flow. Managers can then use this information to
implement changes and improve efficiencies in the production or sales
process.
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• Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order
to acquire assets and increase its return on investments. Through balance
sheet analysis, managerial accountants can provide management with the
tools they need to study the company's debt and equity mix in order to put
leverage to its most optimal use.
Performance measures such as return on equity, debt to equity, and return
on invested capital help management identify key information about
borrowed capital, prior to relaying these statistics to outside sources. It is
important for management to review ratios and statistics regularly to be
able to appropriately answer questions from its board of directors,
investors, and creditors.
• Accounts Receivable (AR) Management
Appropriately managing accounts receivable (AR) can have positive
effects on a company's bottom line. An accounts receivable aging report
categories AR invoices by the length of time they have been outstanding.
For example, an AR aging report may list all outstanding receivables less
than 30 days, 30 to 60 days, 60 to 90 days, and 90+ days.
Through a review of outstanding receivables, managerial accountants can
indicate to appropriate department managers if certain customers are
becoming credit risks. If a customer routinely pays late, management may
reconsider doing any future business on credit with that customer.
• Budgeting, Trend Analysis, and Forecasting
Budgets are extensively used as a quantitative expression of the company's
plan of operation. Managerial accountants utilise performance reports to
note deviations of actual results from budgets. The positive or negative
deviations from a budget also referred to as budget-to-actual variances, are
analysed in order to make appropriate changes going forward.
Managerial accountants analyse and relay information related to capital
expenditure decisions. This includes the use of standard capital budgeting
metrics, such as net present value and internal rate of return, to assist
decision-makers on whether to embark on capital-intensive projects or
purchases. Managerial accounting involves examining proposals, deciding
if the products or services are needed, and finding the appropriate way to
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finance the purchase. It also outlines payback periods so management is
able to anticipate future economic benefits.
Managerial accounting also involves reviewing the trend-line for certain
expenses and investigating unusual variances or deviations. It is important
to review this information regularly because expenses that vary
considerably from what is typically expected are commonly questioned
during external financial audits. This field of accounting also utilises
previous period information to calculate and project future financial
information. This may include the use of historical pricing, sales volumes,
geographical locations, customer tendencies, or financial information.
Is Financial Accounting the Same as Managerial Accounting?
While they often perform similar tasks, financial accounting is the process
of preparing and presenting official quarterly or annual financial
information for external use. Such reports may include audited financial
statements that help investors and analysts decide whether to buy or sell
shares of the company. Because of this managerial accounting in the U.S.
must adhere to GAAP standards.
Conclusion
Managerial accounting is important for drafting accurate and complete
financial statements for internal use and crafting a company's long-term
strategy. Without good managerial accounting, corporate leadership can
struggle to make appropriate choices or misunderstand the firm's true
financial picture. Because managerial accounting documents are not
official, they do not have to conform to GAAP and can be used internally
for a variety of purposes.
1.3 OBJECTIVES OF FINANCIAL

ACCOUNTING
What is financial accounting?

Financial accounting’s main goal is to disclose the company’s profits and
losses and to present a genuine and fair picture of the company to protect
the interests of all internal and external stakeholders that have a stake in
the company.
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Financial accounting objectives vary in nature, from compliance with

statutory requirements, focus on externalities of a business, stakeholder
objectives to be met, etc.
A predetermined periodic reporting period, typically quarterly, half-
yearly, and annually, is used when performing financial accounting. It
makes comparisons simple and maintains the information’s relevance and
educational value for different stakeholders.
One of the prime aspects of accounting, financial reporting’s main goal of
creating financial accounts, is to determine whether a business made a
profit or suffered a loss during the relevant time.
Objectives of Financial Accounting
1 Compliance with Statutory Requirements
One of the objectives is to ensure compliance with local laws related to
taxation, the Companies Act and other statutory requirements relevant to
the country where the business undertakes. It ensures that the business
affairs adhere to such laws and relevant provisions comply while business
is conducted.
2 – Safeguarding of Interest of Various Stakeholders
It provides suitable and relevant information related to business
operations to stakeholders such as Shareholders, Prospective Investors,
Financers, customers, and creditors. They are not just appropriate for those
who have existing business relationships but also for those who are
interested in having future collaboration with the business by providing
them with meaningful information about the business. In addition, further
financial accounting standards ensure control over accounting policies of
businesses to protect the interest of investors.
3 – Helps in the Measurement of Profit and Loss of Business
It measures the business’s profitability for a particular period and discloses
the net profit or loss of the business as a whole. It also exhibits the Assets
and Liabilities of the business.
4 – Presentation of Historical Records
Unlike other accounting, it focuses on the presentation of historical records
and not on forecasting the future. Therefore, the primary rationale for
preparing Financial Accounts is ascertaining profit earned or loss incurred
by the business in the period concerned.
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5 – Focus on External Transaction of Business
It focuses on a transaction that the business enters into with external
parties, such as customers, suppliers, etc. The accounts are prepared to
quantify the business, costs incurred as expenses, and resultant profit or
loss earned based on these transactions.
6 – Periodic Reporting and Wide Availability
Financial Accounting is undertaken with a pre-specified periodic reporting
period, usually quarterly, half-yearly, and annually. It enables easy
comparison and keeps the information relevant and informative for various
stakeholders. Further Financial Accounts are available publicly and are
accessible to everyone who wants to know about the business and its
performance.
7 – Basis for Other Accounting
The other types of accounting, namely cost accounting or management
accounting, provides their base data from financial accounting. It acts as a
source for different types of accounting undertaken by the business. It
deals with business transactions broadly, which acts as a base for Cost
Accounting to further identify costs with products and services.
Check Your Progress- 1

1. Which of the following describes the primary objective of financial
accounting?
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2. State the importance of financial accounting?
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3. What are the types of managerial accounting?
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1.4 NATURE AND SCOPE OF FINANCIAL

ACCOUNTING
The nature of financial accounting can be explained as below:

(i) It is a service providing system
It is a service providing system; its function is to provide quantitative
financial information, about economic activities of a firm that is useful in
making economic decisions by users. Financial accounting may not create
wealth though on its own, but it assists in wealth creation and maintenance.
(ii) It is a profession
Accounting is a profession. It is a systematized body of knowledge
emerged with the development of trade and business. The accounting
education is being imparted to the students by national and international
recognised the bodies like The Institute of Chartered Accountants of India
(ICAI), and American Institute of Certified Public Accountants (AICPA)
in USA etc. The members of these professional bodies usually have their
own associations or organizations, where in they are Associate member of
the Institute of Chartered Accountants (A.C.A.) and fellow of the Institute
of Chartered Accountants (F.C.A.). Thus, accountancy is a profession.
(iv) It acts as a language of business
Accounting is the means of reporting and communicating information
about a business. To converse and communicate, one has to learn a new
language, so also accounting is to be learned and practiced to communicate
business events.
Accounting is based on fundamental rules and regulations just as any
language has grammatical rules. The presentation of accounting data such
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as a numerals and debits and credit are accepted as symbols which specific
to accounting.
(v) It is both science and art
Just like any science is based on some fundamental principles, accounting
is also based on principles like double entry system, which explains that
every transaction has two fold aspects i.e. debit and credit. It also has rules
of journalising and posting and in presentation of financial statements.
Accounting is also an art as it requires knowledge, interest and experience
to maintain the books of accounts in a systematic manner. It can be
concluded from the above discussion that accounting is both an art and a
science.
(vi) Accounting is an information system
In this age of information explosion, managers require accurate
information for their decision-making Accounting provides this
quantitative information to managers and external users. The information
requirement of different external users of accounting is different from each
of them. For example, creditors look into the loan repaying capacity of a
company but investors watch the dividend policy or capital returns of the
company’s shares. Accounting process has evolved from manual system
to computer-based method with the advancement of technology.
Scope of Accounting
Reporting the account statement to various stakeholders highlights the
scope of accounting. Various parties in various forms use this information
for their benefit and the benefit of the company.
Financial accounting keeps the company’s various stakeholders updated
about its financial health. It should help each stakeholder make decisions
regarding the company’s business. For example, it allows shareholders to
understand the profit-making subsidiaries of the business. To indirect and
direct investors, it gives them an idea of whether the company is worth
investing in or not. Employees need to stay updated about it too, so they
know whether the company they are working in is in good financial health
or not.
• Reporting to shareholders: Shareholders are entities who invest
their money in the business seeking profit from their investment.
Since they have invested their own money in the business, they
need to be reported on the overall financial position of the company
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involving the number of outstanding loans, assets, expenses,
revenue streams, and so on.
• Reporting to the Public: The companies listed on the stock
exchange are the ones in which the general public can also invest.
Since the public also becomes an investor, account statements have
to be made public so that they are fully aware of their investment
choices.
• Reporting to Government: It is necessary for tax purposes.
Governments need to be aware of the financial position of the
businesses which come under their jurisdiction.
• Reporting to employees: Employees are indirect stakeholders and
they must know about the company’s financials which helps them
stay informed regarding their job security.
Conclusion
Over time, the scope of financial accounting has widened. Earlier limited
to shareholders and a few selected entities, today it involves reporting to
communities, employees, and the general public. It also helps prevent
financial frauds and scams that shake the foundation of the economy.
Accounting is the art of identifying, recording, classifying, analysing and
interpreting the financial information of a company, which is then used to
fulfil certain objectives.
1.5 COST ACCOUNTING AND MANAGEMENT

ACCOUNTING
Cost Accounting Vs Management Accounting

In order to sustain profitability and improve efficiency, Business owners
need to keep track of both financial and non-financial transactions of their
firm. Doing so, they would be able to ensure overall growth and
development of their Business operations and would improve their scope
of generating more revenue.
However, to ensure it, they need to employ effective means of collecting

and assessing data about all the transactions their firm is involved in. This
is where both Cost Accounting and Management Accounting come in.
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Let’s find out more about the two concepts and try to figure out the
difference between Cost Accounting and Management Accounting in
brief.
What is Cost Accounting?
Cost Accounting is a practice of Business in which we record, examine,
summaries and study the Cost of a company which is spent on any of the
company's processes, it's services, products or any thing of the company.
In other words we can say that Cost Accounting is a process through which
we can determine the Costs of goods and services of any organisation. It
is used in financial Accounting and includes the recording, classification
and allocation of various expenditures. Cost Accounting helps in
calculating the Costs of various goods of any organisation. It eventually
helps any organisation in controlling its Cost and plan their strategies
along with preparing them for making efficient decisions regarding Cost
improvement. It also helps the organization to understand the proper
utilisation of Cost spent and to correct their wrong decisions.
Cost Accounting is a method wherein, firm owners collect, classify and
analyse quantitative information pertaining to manufacturing Cost. With
the help of the accumulated financial data, Business owners can develop
required Business strategies.
Contrary to popular belief, Cost Accounting is not the same as financial
Accounting and is not necessarily reported at the end of a fiscal year.
Notably, there are 3 essential elements of Cost Accounting –
Cost of raw material
Labour Cost
Overhead Cost
Hence, it can be said that Cost Accounting factors in the Cost accrued at
each level of production along with fixed Costs to analyse their impact on
a specific production level accurately.
Cost Accounting Functions
• Cost Accounting helps the organization in ascertaining the per unit
Cost of every product which it manufactures.
• It also helps in analysing any wastages made in products, expenses,
tools, etc. Along with it, it also suggests the ways for minimising
these wastages.
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• Cost Accounting also helps in calculating the profitability of every
product of the company. It also finds out the ways of maximizing

their profits.
• Cost Accounting is also responsible for the amount of orders being
made of the raw material and to control them. So, it makes sure
that the raw material must not be over ordered which results in the
locking up of the capital.
Calculating Cost
Arguably, it is the primary function of Cost Accounting and serves as the
source of other associated Cost Accounting functions. The said method is
responsible for figuring out the Cost per unit of product produced by the
firm.
Controlling Cost
Cost Accounting is also responsible for identifying the areas where
operational Cost can be controlled, and helps firms to limit their expenses
within the budget constraint. Such a function helps to allocate limited
resources more optimally and helps improve efficiency.
Reducing Cost
With effective Cost Accounting, one can identify unwarranted expenses
and build suitable strategies to lower them in the long run. In turn, it plays
an essential role in maximising the profit margin per product significantly.
Now that we have become familiar with this concept, let's proceed to the
other equally important concept so that we can distinguish between Cost
Accounting and Management Accounting easily.
What is Management Accounting?
Management Accounting or managerial Accounting can be defined as the
process of preparing reports on Financial and Non-financial transactions
with the help of available data. Such reports are made by accumulating,
assessing and interpreting both Statistical and Qualitative and Quantitative
data and are also heavily based on the firm’s financial statements.
Usually, a firm uses some of these tools to practice effective Management
Accounting
Accounting ratios
Key performance indicators
Key result areas
Financial modelling
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The information compiled through this process is considered to be quite
useful for formulating Business policies and strategies for the short-term.
Notably, the reports formulated with the help of managerial Accounting
are accessed and used by the firm’s Management. Resultantly, it is not
mandatory to report the information compiled at every year-end.
Management Accounting is also known as Managerial Accounting. It is a
process which provides financial information and the resources to the
managers of the organization in making effective decisions. The only thing
which makes Management Accounting different from Financial
Accounting is that it is only used by the internal team of the organization.
Management Accounting presents the financial data along with Business
activities for the Internal Management of the organization. Management
Accounting also has a lot of benefits which includes decision making,
planning, controlling the operations of the Business, organizing,
understanding the financial data, identifying and managing the Business
problems and Management of strategies.
Management Accounting Functions
• Management Accounting helps in providing the necessary
information and data so that we can plan for the operations of the
organization.
• It helps the Management team to organise the resources (both
human and non - human) of the organization and analyses different
functions and responsibilities along with assigning the
responsibilities for making the working better.
• Management Accounting helps in increasing the efficiency of the
organization and to maximize its profits.
• It also controls the performance of the organization by using
budgetary control, standard Costing, Cost reduction programs etc.
Forecasting Cash Flow
With Management Accounting’s help, one can estimate a firm’s future
cash flow. Notably, a company’s Management factors in financial trends
uses budgeting measures to predict future cash flow effectively. Also,
depending on such estimates, the firm plans its future endeavours in terms
of investment and production.
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Analysing Performance Variance

Management Accounting tends to incline towards predictive analysis and
is subjected to variances, i.e. difference in estimated Cost and actual Cost.
However, by employing effective measures of Accounting Management,
a firm can bridge the gap between estimated Cost and actual Cost
significantly.
Facilitates Production-oriented Decisions
With the help of the data compiled through Management Accounting,
Business owners can easily analyse the Cost and profits behind different
managerial decisions. This, in turn, helps them to make a more informed
decision as to whether they should create raw materials or outsource the
same for a more Cost-effective production process.
With that being said, let’s move onto the basis of Cost Accounting vs
Management Accounting to find out the prominent differences.
This table highlights the Cost Accounting and Management Accounting
differences –
Difference between Cost Accounting and Management Accounting
Cost Accounting is all about the Cost and it includes things like Cost
control, Cost computation and Cost reduction. Whereas Management
Accounting is about managing the organization and making effective
decisions.
Cost Accounting has a narrow scope whereas Management Accounting
has much broader scope.
Cost Accounting helps the Business in preventing irrelevant spending
which sometimes goes beyond the budget. Whereas Management
Accounting gives an idea about how Management should strategize.
Cost Accounting is quantitative in nature whereas Management
Accounting is both quantitative and qualitative in nature.
Cost Accounting is used for shareholders, Management and vendors
whereas Management Accounting is only used for Management of the
Business.
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Basis of Comparison Cost Accounting Management

Accounting
Meaning The recording, The accounting in
classifying and which both financial
summarizing of cost and non-financial
data of an information is
organisation is known provided to managers
as cost accounting. is known as
management
accounting.
Information Type Quantitative. Quantitative and
qualitative.
Objective Determining the cost Providing information
of production. to managers to set
goals and forecast
strategies.
Scope Interested in Impart and effect
determining, aspect of costs.
allocating,
distributing and
accounting for costs.
Specific Procedure Yes No
Recording Records past and It focuses on the
present data analysis of future
projections.
Planning Short range planning Short and long-range
planning
Interdependency Can be installed Cannot be installed
without management without cost
accounting. accounting.
Table 1.1 Difference between Cost Accounting and
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Management Accounting
Examples to Determine the Differences Between Cost and
Management Accounting
In business, there are two main types of accounting: Cost accounting and
management accounting. Cost accounting focuses on the direct costs
associated with manufacturing a product or service, while management
accounting provides information that can be used to make decisions about
running the business. Both types of accounting are important, but they
serve different purposes.
For example, let's say that a company makes widgets. The cost accountant
would track the direct costs of making the widgets, such as the cost of raw
materials and labour. The management accountant would track other costs,
such as the cost of advertising and marketing, and use this information to
make decisions about allocating resources.
In general, cost accounting is more focused on the past, while management
accounting is more focused on the future. Cost accounting looks at how
much it costs to produce a widget, while management accounting tries to
predict how much it will cost to produce a widget in the future.
This difference is important because it can help managers to make
decisions about where to allocate resources. For example, if a company is
trying to decide whether to invest in new machinery, the management
accountant would use forecasting techniques to estimate the future costs
of production and make a recommendation based on that information.
Both cost and management accounting are important tools for business
decision-making. By understanding the differences between these two
types of accounting, you can choose the right method for the job at hand.
Pros and Cons of Cost and Management Accounting
Cost accounting and management accounting are two important tools that
businesses use to track and control expenses. Cost accounting focuses on
the cost of production, while management accounting provides insights
into how those costs can be reduced. Each approach has its own
advantages and disadvantages.
Cost accounting is a useful tool for businesses that want to understand the
actual cost of production. By tracking all of the expenses associated with
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production, businesses can make informed decisions about where to cut
costs. However, cost accounting can be time-consuming and complex,
requiring businesses to keep detailed records of all their expenses.
In addition, cost accounting does not always provide insights into how
costs can be reduced.
Management accounting, on the other hand, helps businesses to identify
opportunities for cost savings. By looking at expenses across different
departments and areas of the business, management accountants can spot
inefficiencies and areas where costs can be cut. However, management
accounting can be less accurate than cost accounting, as it often relies on
estimates and calculations rather than hard data. In addition, management
accounting requires a significant investment of time and resources to be
effective.
Ultimately, businesses need to weigh the pros and cons of each approach
to decide which is best for their needs. Both cost accounting and
management accounting have their own advantages and disadvantages,
but each can be a valuable method for reducing expenses and controlling
costs.
The Benefits of Using Cost Accounting and Management Accounting
In any business, it is important to have a clear understanding of the costs
associated with production and operations. This is where cost accounting
and management accounting come in. These two types of accounting
provide businesses with critical information about where their money is
going and how they can save money. Here are seven benefits of using cost
accounting and management accounting in a business:
Cost accounting can help businesses to identify areas where they are
wasting money. This information can then be used to make changes that
will save money.
Cost accounting can also help businesses to negotiate better prices with
suppliers. If businesses are equipped with accurate information about their
costs, they can bargain for better deals on the material they need to produce
their products or services.
Management accounting provides businesses with information about their
production costs, which can be used to make decisions about pricing their
products or services. By understanding their costs, businesses can avoid
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pricing their products or services too low and losing money, or pricing
them too high and missing out on sales.
Management accounting can also help businesses to understand where
they are most efficient and where they could improve their efficiency.
This information can be used to make changes that will save the business
time and money.
Cost accounting and management accounting can both help businesses to
prepare financial statements. These statements are essential for applying
for loans, attracting investors, and making important financial decisions.
Cost accounting and management accounting can provide valuable
information for making marketing decisions. For example, if a business
knows that its product is more expensive to produce than its competitor's
products, it may choose to advertise its product as being of a higher quality
and durable.
Finally, cost accounting and management accounting provide valuable
information for decision-making in general. By giving businesses a clear
picture of their costs, these two types of accounting help businesses make
informed decisions about all aspects of their operations.
Who Should Use Cost Accounting and Management Accounting?
Cost accounting and management accounting are two important methods
of finance that businesses can use to track and manage their finances. Both
types of accounting provide valuable information that can help businesses
make informed decisions about their expenses and pricing. However, there
are some key differences between the two disciplines.
Cost accounting focuses on the costs associated with manufacturing a
product or providing a service. This information can be used to make
decisions about how to price products and services and to assess the
profitability of different business activities. Management accounting, on
the other hand, provides information about a company's financial
performance. This information can be used to make decisions about where
to allocate resources and to set financial goals.
So, who should use cost accounting and management accounting? The
answer depends on the needs of the business. Businesses that need to make
decisions about pricing and profitability would benefit from cost
accounting. Businesses that need to make decisions about resource
allocation and financial planning would benefit from management
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accounting. Ultimately, both types of accounting can be useful
for businesses, but it's important to choose the right type of accounting for
the specific needs of the company.
Conclusion:
The main difference between cost accounting and management
accounting is that cost accounting focuses on understanding past costs
while management accounting focuses on predicting future costs and
making better business decisions. Both are important for companies
looking to be efficient and profitable. However, it is crucial to understand
which type of accounting you need for a specific situation. If you are
interested in learning more about either cost accounting or management
accounting, there are plenty of resources available online and in libraries.
1.6 MANAGEMENT ACCOUNTING AND

MANAGERIAL DECISIONS
Financial accounting is a statutory requirement for a business to maintain

financial records and compile financial statements. These statements are
useful for submission to authorities, financial institutions, management
and shareholders. But, financial information is also essential to monitor
the business and drive business decisions on a day to day basis.
Management accounting is the process of managing the financial
information that is related to the operational aspects of a business. It is
vital for a business to have an accurate and relevant management
accounting system and reports so that the organization can respond and
make decisions that are based on the actual financial metrics. It helps the
managers study the actual financial results and implications and results of
their decisions. Financial accounting is aimed at creating financial reports
and statements that are useful to present externally and internally.
Management accounting is most useful for the organization internally.
What is management accounting?
Accounting is the process by which a business keeps track of their daily
transactions. It also includes analysis and summarization of the
transactions into accounting reports. Financial accounting looks at the
overview of the financial transactions and produces the reports and
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analysis that is often used for submission to statutory bodies and
shareholders.
Management accounting which may also be called cost accounting is a
more internal process. Management accounting is the process of managing
and extracting reports and analysis of the financial data of the organization
for decision making. Management accounting helps managers strategize,
course correct and make informed decisions based on the analysis and
interpretation of the financial data related to the internal operations of the
company. Management accounting is a virtual tool to help the managers
of an organization steer it towards their goals. Management accounting
analyses financial information, interprets it and presents insights to the
management. It helps non-accounting personnel understand and make
sense of the financial data within the company. It translates the facts and
figures of business transactions into useful reports and insights to drive
fact based decision making.
Why management accounting is important for decision making
Decision making in business should be driven by facts and figures. Most
of the daily transactional information of an organization is too minute and
detailed to assess at a glance. Management accounting extracts reports and
insights from the actual data to answer important questions.
So, management accounting helps in making decisions based on the actual
accounting data. It also helps study trends and the effects of past decisions.
Management can base their strategic decisions based on the actual data
and trends. The more detailed operational decisions such as purchase and
inventory will also benefit from the insights provided by management
accounting. It is important to make accurate cash flow forecasts when
making business decisions. Trend charts for cash flows can be based on
the historical accounting data of the organization. The performance of the
business over a period of time is important to drive future decision making.
A business considering an expansion or fresh investment can analyse
management accounting reports to estimate what their cash flows may be
and how long it would take to break even.
• Relevant costs analysis
How a company spends its money directly impacts the bottom line. To
improve profit margins, a company will have to perform a cost analysis to
analyse expenses and better plan future expenses.
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Since expenses are likely to be spread out, expense analysis involves
comparing different suppliers, products, services and other factors to
determine the one that would be most advantageous and profitable.
When current and historical accounting data is compared, it is easy to
determine which service provider or supplier is more advantageous for the
company. The advantages may be more than cost driven. Rather than
merely pick the vendor who quotes the least amount, the organization can
determine the other benefits such as reliability, timely delivery, quality,
accuracy and other factors. Expenditure decisions that are based on reports
are more likely to be fact driven. There is greater transparency and more
confidence in vendor selection and expenditure decisions. Expenditure and
cost analysis can be used to plan and spend the company budget more
efficiently.
• Audience Targeting
Product or service design is successful when it fulfils the needs of the end
user or customer. A company that knows its target audience well will be
able to align both its products as well as its advertising campaigns to better
suit them. Many organizations do not take advantage of the valuable
information that they have about their existing customers. A company that
analyses their customer data will be able to understand their demographics.
Management accounting can be used to sift through customer data and
generate a buyer profile based on factors such as; age, gender, location,
educational level, income level, lifestyle etc. The customer profile factors
are unique to different industries and organizations. Not all customers are
the same. Certain customers or buyers are more lucrative than others.
Management can use their customer profile data to determine which
customers generate the most volume and the ones that have better profit
margins. This can help shape policies that pay more attention to enhance
the number of lucrative customers. When you invest more time and effort
into the target audience you get more returns for it. It is a good business
strategy to use resources in a way that will gain you the maximum benefit.
• Make or buy evaluations
Manufacturing industries have a large amount of data that they can analyse
to optimise every stage of production. Product production is the core focus
of the company. While some companies perform every stage of production
consecutively, other industries may use components sourced from outside.
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Sometimes it may be more time or cost effective to manufacture the

required components internally rather than to source them from a vendor.
If there are plenty of vendors who are able to supply the required input
components of the required quality, on time and at competitive prices,
buying from suppliers may be the better option.
Since the pros and cons of making or buying can differ wildly across
industries, geographies and products, make or buy decisions must be made
after analysing all these factors. A make or buy decision can greatly impact
the bottomline of the business. This decision can be made with greater
confidence when management accounting is used properly. A company’s
management accountant can prepare a comparison report on the relative
costs of manufacturing in house vs sourcing externally. If a company
determines that they have a greater advantage by manufacturing in house
they can make the required investments and changes for the same.
Management accountants will also be able to estimate how quickly the
company will be able to recover the additional investment made for in-
house manufacturing capabilities. The rate-of-return is essential to make
or buy decisions.
• Define budgets
Budgets that are decided at random are often wasted, misallocated or
insufficient. They may even be excessive and lock in money that could be
better used elsewhere in the company. The most intelligent way of
defining the budget for a period is to study the historical expense data.
Insufficient budget allocation may potentially stall a project or marketing
campaign mid way. This may cause the entire expenditure to be wasted or
stall the optimal operations of the company. Budget planning and
allocation is vital to the success of every action of the company. It would
be foolhardy to embark on any project, product development, manufacture
or marketing unless there are enough funds allocated to complete the
process.
Management accounting helps determine the budget forecast for the
coming time period. This budget planning can be done at different levels
of the company. Budgets can be planned for each project, department,
product, location, marketing campaign or any other planned action by the
company.
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This ensures that there is an optimal allocation of resources for each
function of the company. There will be no sudden unexpected difficulty in
operations caused by insufficient resources.
A company may have many projects, products or planned projects that call
for attention. It is essential that the company chooses the right one to spend
resources on for the best returns. If there are limited funds or resources,
this choice becomes even more important. Management accounting helps
management compare the cost analysis and determine which expenditure
would be the wisest. Budget planning using management accounting takes
the guesswork out of budget allocation.
• Controlling
Management can have better control over all the different functions and
departments of a company when they have the right data. Rather than word
of mouth, it is essential to also assess the details of each department
through the facts and figures. Management accounting is essential to
transform the data from departments into easy to understand reports that
keep management informed. So, if a department is underperforming,
management will be able to assess which aspects of that department are
lagging behind. Detailed analysis helps target the problem and address it.
If there is a department or project that is doing exceptionally well, the
relevant data can be analysed to understand what has contributed to its
success. So, good management accounting helps the different levels of
management better control the operations of the company. By cutting costs
that drain the company’s resources and allocating more resources to the
projects that work well, a company can increase its profits.
• Planing
Management of a company is about managing the current operations of a
company and also making future plans and steering the company towards
its goals. Planning that is based on data has a better chance of success. By
studying the historical and current patterns in the industry and company,
management accounting helps forecast future trends. Today’s highly
competitive markets require that a business should use every opportunity
to get one step ahead of the rest. Management accounting helps companies
extract and use the information that is readily available in their records to
make better decisions.
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Management accounting generates reports that give you the larger picture
and also drill down to finer details. It can be used to spot trends and keep
tweaking and adjusting plans in response.
• Meaningful report generation
Management accounting analyses large amounts of data to extract vital
information. Creating these reports can be a time consuming effort without
the proper tools. An intelligent enterprise management software such as
Tally helps a management accountant create reports quickly and
accurately. This also ensures that every report that is generated uses the
real time data. Computerized management accounting with accounting
software also helps the accountant easily access and compare historical
data and trends. Accurate and insightful reports drive the success of the
company. Use of the complete accounting software solution, Tally,
empowers management to make confident data-driven informed decisions.
1.7 MANAGEMENT ACCOUNTANT’S

POSITION
The following five points highlight the five roles of management

accountant.
Role # 1. Investment Opportunities:
A management accountant can assist either a person or a firm regarding
the investment in different ways.
He can suggest how, when, and where the investment should be made so
that the investor or the firm will earn a maximum return.
Role # 2. Expansion of the Undertaking:
When the existing undertaking is expanded or developed, the management
accountants, by interpreting accounts, making suggestions relating to
schemes for cost and financial matters, can render a valuable advice. He
can also advice the directors on problems relating to the issue of shares
and their allotment and also to borrow money if so needed.
Role # 3. Financial Investigations:
A management accountant can assist the management about the financial
investigations which is extremely desired in the following manner:
34
(a) To determine the financial position for the interested parties relating to
issue of shares, amalgamation/mergers, reconstructions etc.
(b) To ascertain the reason of decreasing profit or increasing costs, if so
happened,
(c) To assist the management when a particular product will be
manufactured or will be purchased from outside.
Role # 4. Working Capital Requirement:
Proper requirement of working capital and its efficient use improve
productivity, inventory control, credit control, cash management, sources
and applications of funds etc. which can properly be ascertained by a
management accountant.
Role # 5. Corporate Planning:
He can assist management for long-term planning and advise management
regarding amalgamation/mergers/reconstructions, including financial
planning—to see whether effective utilisation of resources is made or not.
Thus, the role of management accountants cannot be ignored. As such,
their services are primarily desired for the efficient management of an
undertaking.
1.8 ROLE AND RESPONSIBILITIES OF

MANAGEMENT ACCOUNTANT
Management Accountant is an officer who is entrusted with Management

Accounting function of an organization. He plays a significant role in the
decision making process of an organization. The organizational position
of Management Accountant varies from concern to concern depending
upon the pattern of management system. He may be an executive in some
concern, while a member of Board of Directors in case of some other
concern. However, he occupies a key position in the organization. In large
concerns, he is responsible for the installation, development and efficient
functioning of the management accounting system. He designs the frame
work of the financial and cost control reports that provide with the most
useful data at the most appropriate time. The Management Accountant
sometimes described as Chief Intelligence Officer because apart from top
management, no one in the organization perhaps knows more about
35
various functions of the organization than him. Tandon has explained the
position of Management Accountant as follows:
“The management accountant is exactly like the spokes in a wheel,
connecting the rim of the wheel and the hub receiving the information. He
processes the information and then returns the processed information back
to where it came from”.
7 Roles of Management Accountant
The following points will highlight the seven roles of management
accountant in decision-making process of the organisation. The seven
roles are: 1. Stewardship Accounting 2. Long-term and Short-term
Planning 3. Developing Management Information System (MIS) 4.
Maintaining Optimum Capital Structure 5. Participating in Management
Process 6. Control and 7. Decision-making.
Management Accountant Role # 1. Stewardship Accounting:
Management accountant designs the frame-work of cost and financial
accounts and prepares reports for routine financial and operational
decision-making.
Management Accountant Role # 2. Long-term and Short-Term
Planning:
Management accountant plays an important role in forecasting future
business and economic events for making future plans i.e., long-term
plans, strategic management accounting, formulating corporate strategy,
market study etc.
Management Accountant Role # 3. Developing Management
Information System (MIS):
The routine reports as well as reports for long-term decision-making are
forwarded to managerial personnel at all levels to take corrective action at
the right time.
The management accountant also uses these reports for taking important
decisions.
Management Accountant Role # 4. Maintaining Optimum Capital
Structure:
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.
36
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.
Management Accountant Role # 5. Participating in Management
Process:
The management accountant occupies a pivotal position in the
organisation. He performs a staff function and also has line authority over
the accountant and other employees in his office. He educates executives
on the need for control information and on the ways of using it. He shifts
relevant information from the irrelevant and reports the same in a clear
form to the management and sometime to interested external parties.
Management Accountant Role # 6. Control:
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.
Management Accountant Role # 7. Decision-Making:
Management accountant provides necessary information to management
in taking short-term decision e.g., optimum product mix, make-or-buy,
lease or buy, pricing of product, discontinuing a product etc. and long-
term decisions e.g., capital budgeting, investment appraisal, project
financing etc.
However, the job of management accountant is limited to provision of

required information in a comprehensive as well as reliable form to the
management for decision-making purposes. But the actual decision-
making responsibility lies with the management. In other words, neither
the management accountant nor the internal accounting reports can make
the decisions for the management.
Duties and Responsibilities of Management Accountant

The primary duty of Management Accountant is to help management in
taking correct policy-decisions and improving the efficiency of operations.
37
He performs a staff function and also has line authority over the
accountants.
If management accountant feels that a decision likely to be taken by the
management based on the information tendered by him shall be
detrimental to the interest of the concern, he should point out this fact to
the concerned management, of course, with tact, patience, firmness and
politeness. On the other hand, if the decision taken happens to be wrong
one on account t of inaccuracy, biased and fabricated data furnished by the
management accountant, he shall be held responsible for wrong decision
taken by the management. Following are the duties of Management
Accountant or controller:
• The installation and interpretation of all accounting records of the
corporative.
• The preparation and interpretation of the financial statements and
reports of the corporation.
• Continuous audit of all accounts and records of the corporation
wherever located.
• The compilation of costs of distribution.
• The compilation of production costs.
• The taking and costing of all physical inventories.
• The preparation and filing of tax returns and to the supervision of
all matters relating to taxes.
• The preparation and interpretation of all statistical records and
reports of the corporation.
• The preparation as budget director, in conjunction with other
officers and department heads, of an annual budget covering all
activities of the corporation of submission to the Board of
Directors prior to the beginning of the fiscal year. The authority of
the Controller, with respect to the veto of commitments of
expenditures not authorized by the budget shall, from time to time,
be fixed by the board of Directors.
• The ascertainment currently that the properties of the corporation
are properly and adequately insured.
• The initiation, preparation and issuance of standard practices
relating to all accounting, matters and procedures and the co-
38
ordination of system throughout the corporation including clerical
and office methods, records, reports and procedures.
• The maintenance of adequate records of authorised appropriations
and the determination that all sums expended pursuant there into
are properly accounted for.
• The ascertainment currently that financial transactions covered by
minutes of the Board of Directors and/ or the Executive committee
are properly executed and recorded.
• The maintenance of adequate records of all contracts and leases.
• The approval for payment(and / or countersigning ) of all
cheques, promissory notes and other negotiable instruments of the
corporation which have been signed by the treasurer or such other
officers as shall have been authorized by the by-laws of the
corporation or form time to time designated by the Board of
Directors.
• The examination of all warrants for the withdrawal of securities
from the vaults of the corporation and the determination that such
withdrawals are made in conformity with the by-laws and /or
regulations established from time by the Board of Directors.
• The preparation or approval of the regulations or standard
practices, required to assure compliance with orders of regulations
issued by duly constituted governmental agencies.
1.9 ACCOUNTING PLAN AND

RESPONSIBILITIES CENTRES
What Is Account Planning? (And How to Plan Accounts)

Marketers, sales professionals and account managers contribute valuably
to the success of sales efforts and generating revenue. There are several
types of plans and strategies these individuals may use to enhance their
marketing efforts, maintain client relationships and optimize lead
interactions. Understanding one of these strategies, account planning, may
help you more effectively form and maintain long-term, high-value
relationships with your existing accounts. In this article, we define account
39
planning, provide a list of its benefits and offer a step-by-step guide and
additional tips to help you successfully perform account planning.
What is account planning?
Account planning is a marketing strategy that sales, marketing and account
management professionals use to cater marketing efforts to their existing
client base. They may create account plans to better understand their
clients' motivations and needs and to form meaningful partnerships with
their accounts. To do this, they often conduct research on their target
audience and apply it to their marketing strategies.
Account planning can help companies gain long-term consumer retention,
which increases revenue potential. When professionals create an account
plan for a consumer base, they compile their goals and relevant research
into a single document. This allows these professionals to reference
valuable data about their clients and more accurately tailor ongoing and
future campaigns.
Benefits of account planning
There are many benefits of adding account planning to your marketing
efforts, including:
Increased customer loyalty
Account planning focuses primarily on forming mutually beneficial
relationships with your clients and agreeing on an objective that satisfies
the interest of both parties. Much of the research associated with account
planning focuses on the needs of your existing accounts and how to best
fulfil those needs. By offering beneficial value through a partnership, you
may incrzase client loyalty and retention.
Reduced acquisition costs
Finding and converting new accounts through marketing campaigns,
advertising and client outreach can be expensive and time-consuming.
Account planning may allow you to focus more of your efforts on
generating business through existing accounts instead of trying to attract
new ones. This may help you reduce acquisition costs and focus more of
your resources on strengthening your current client relationships.
Focused efforts
Account planning may provide insight into which of your accounts and
client bases have the most growth potential. By focusing your marketing
efforts on accounts that are most likely to result in revenue, you may be
40
able to more efficiently target and maintain relationships with high-value
clients.
Faster sales
Because account planning focuses on generating revenue from current
accounts, it may result in faster sales and increased efficiency. Many of
the lengthy, detailed efforts of acquiring a new client have already taken
place, meaning professionals can focus more of their time and energy on
closing high-value sales with existing clients.
Continued education
Account planning offers an opportunity to continually learn about your
clients' priorities and may provide valuable knowledge that can help
professionals more accurately position value based on client needs.
Account planning may also help to develop skills such as critical thinking,
decision making, research and data analysis.
How to perform account planning
Understanding the steps necessary to successfully perform account
planning can help you be more impactful in your marketing efforts.
Consider following these steps to effectively perform account planning:
1. Research your current accounts
The first step in the process of account planning often involves
understanding the position of your current accounts. Consider researching
your current accounts' metrics, such as revenue, profitability, growth,
geographic location and initiatives. Compiling and analysing this
information may help you more effectively determine the strategies and
interactions that are most likely to result in beneficial relationships and
increased revenue.
If possible, you may discuss these items with your accounts to gain first-
hand information that may be valuable to apply to your marketing
strategies. Questions to consider asking your current client base may
include:
• Which areas of your business are most important to you?
• What do you hope to gain through a partnership with our
organization?
• What kinds of obstacles do you worry about?
• Where do you see yourself and your business in five years?
41
• What would you like to see from a primary supplier?
• What is your primary business concern?
• What do you consider essential to the success of this partnership?
2. Identify your clients' needs
In order to provide valuable offers to your accounts, it's important to
identify and prioritise their needs. Using the information gathered in your
account research, consider the challenges, concerns, and problems your
clients may be facing. Then, you may think of ways your products and
services can assist in their challenges and solve their problems.
Understanding the needs of your accounts may help you develop new
offers or implement changes to existing ones to best fulfil the needs of
your accounts and maintain high-value, mutually beneficial relationships.
3. Manage your accounts
It's important to implement a strategic account management process to
organise your communication and marketing efforts with your clients. To
do this, you may seek the help of an account manager to track and record
the last date of contact, sales progress, financial transactions and contract
changes of your current accounts. This may help to ensure that each
account receives the appropriate amount of communication throughout
each stage of the sales cycle and prevent any organizational oversight.
4. Create a map of relationships
It's equally important to understand and manage the human relationships
within your accounts. Consider mapping each of your accounts onto a
visual representation of their organization. Include each key member of
the account, their job titles and relationships with each other. Consider
determining and recording important information such as who controls the
budget, who influences whom, and who has authority in business
transactions.
This may help you determine who is the best point of communication for
varying tasks within your marketing efforts. It may also contribute to the
productiveness of your client relationships by ensuring you engage the
appropriate individuals throughout different phases of the sales cycle. This
may help you optimise your lead interactions by understanding the
relationships and influences of individuals within your accounts.
42
5. Maintain and update your records
It's important to maintain and update your account information and
relationship maps as your relationships with existing accounts evolve and
new accounts enter your client base.
Consider updating your documents with any relevant information as it
becomes available to ensure you have all the updated resources necessary
to continue successful account planning and client management.
Tips for account planning
Below are some additional tips to help you successfully perform account
planning:
Create actionable steps
When creating long-term account plans, it may be helpful to create
actionable steps for each phase of the process. Doing this may help you
remain organised and better understand how to prioritise your tasks.
Consider creating a timeline with milestones and objectives for each phase
of your account planning process to increase efficiency and maintain a
focus on your long-term objectives.
Focus on mutual success
Throughout each phase of your account plan, consider the mutual benefits
for you and your clients. Often, a successful account plan focuses more on
creating valuable partnerships than selling products or services. Keeping
the benefits of a partnership in mind may help you develop offers that
contribute to the success of both parties and could help you maintain long-
term, highly valuable relationships with your clients.
1.10 MEANING AND SIGNIFICANCE OF

RESPONSIBILITY ACCOUNTING
Responsibility Centre
Definition: Responsibility Centre refers to an operating segment within the
firm, lead by the manager who is accountable for its activities,
performance and results, in terms of expenditure, profit, and return on
investment.
43
A responsibility centre has its own goal and objectives, plans and
strategies, policies and procedures. Further, it has a dedicated team or staff
who works for the achievement of its goals and performance targets.
As the firm grows and expands, its size, functions, activities and overall
structure also change and so, for better management and control over
the organization,
it is split into various centres and the management assigns the
responsibility to the supervisor or manager These centres are termed as
responsibility centres.
Examples of Responsibility Centre
Given below are the examples of the responsibility centre.
Revenue Centre: A good example would be the sales department or the
salesperson.
Cost: A good example, in this case, would be the janitor department.
Profit Center: This would be a product line for which the product
manager will be responsible.
Investment Center: Example would be that of a subsidiary entity for
which the subsidiary’s president is held responsible.
1.11 RESPONSIBILITIES CENTRES
Types of Responsibility Centre
44
Fig 1.2 Types of Responsibility Centre

Cost Centre: The smallest segment of an organization for which a specific
accumulation of cost is attempted, is called cost centre. It is that unit of the
firm into which the entire factory is divided appropriately. It can be a
department or a team,
which represent one job, activity, process or machine, whose costs are
allocated equitably and practically to cost unit, for the purpose of costing.
The performance of the cost centre can be measured against set standards
and budgets. Cost centres are created after determining a rational basis, for
tracing and attributing the cost of production and a person is authorised to
control the centre and is accountable for its performance and cost charged
to the centre.
Profit Centre: A type of responsibility centre, which is held accountable
for all the production-related activities and the sale of products, and
provision of services. Meaning that the managers of the profit centres are
not only responsible for the incurrence of expenditure, but also for the
generation of revenue. Hence, both inputs and outputs are measured, so as
to identify the firm’s profitability.
The profit centres aim at adopting new ways and implementing such
strategies which help in earning more profits on a product, service or
activity. Strategic business units are one of the examples of profit centres
Revenue Centre: Revenue Centre is a uniquely identifiable subunit of the
organization which is held accountable for generating revenue for the
45
organization from selling products and rendering services. The efficiency
of the revenue centre is evaluated on the basis of its ability to generate
Fig 1.3 Revenue Centre

sales and not on the costs incurred. The manager of the revenue centre is
held responsible for achieving sales targets.
A company’s sales department is an example of a revenue centre, which
is responsible for attaining the sales targets.
Investment Centre: Responsibility Centres which are not just
accountable for the profitability of the unit but are authorized to take
important decisions concerning the capital investments, such as
company’s credit policy, monetary policy, inventory policy, etc.
The head of the investment centre is held accountable for making decisions
regarding investment in the production, advertising and assets. Return on
Investment acts as the basis for measuring the performance of the
investment centres.
One can gauge the performance of the responsibility centre against a pre-
defined standard. Thereafter, the actual results are compared with the
standard ones and are evaluated against the objectives of the firm.
46
1.12 OBJECTIVES AND DETERMINANTS OF

RESPONSIBILITIES CENTRES
Advantages of Responsibility Center

Given below is how the responsibility center helps an organization.
Assignment of Role and Responsibility: When there is a responsibility
attached to each segment, each individual is aligned and directed towards
a purpose with the responsibility in line with their roles. The person or
department will be tracked, and nobody can shift the responsibility to
anybody else, suppose anything goes wrong.
Improves Performance: The idea of assigning tasks and responsibilities
to a particular person would stand to act as a motivational factor. Knowing
that their performance will be tracked and reported to the top management,
the departments and persons involved will try to give their best
performance.
Delegation and Control: The assignment of responsibility center with
roles assigned to various segments helps the organization bring about and
achieve the purpose of delegation. The responsibility of multiple persons
is fixed, which will help the management control their work. Thus, it now
helps the management achieve the desired dual objective of delegating and
controlling the tasks.
Helps in Decision Making: Responsibility centres help the management
in decision making as the information disseminated and collected from
various centres helps them plan their future actions. It helps them
understand the segment-wise breakups of revenues, costs, issues, plans of
action, etc.
Helps in Cost Control: Having segment-wise breakup responsibility
centres help the top management in having to assign different budgets for
the various centres, thereby achieving cost control as per the requirements.
Determinants of responsibility centres
1. Inputs and Outputs or Costs and Revenues:
The implementation and maintenance of responsibility accounting system
is based upon information relating to inputs and outputs. The physical
resources utilized in an organisation; such as quantity of raw material used
47
and labour hours consumed, are termed as inputs. These inputs expressed
in the monetary terms are known as costs.
Similarly outputs expressed in monetary terms are called revenues. Thus,
responsibility accounting is based on cost and revenue information.
2. Planned and Actual Information or Use of Budgeting:
Effective responsibility accounting requires both planned and actual
financial information. It is not only the historical cost and revenue data but
also the planned future data which is essential for the implementation of
responsibility accounting system. It is through budgets that responsibility
for implementing the plans is communicated to each level of management.
The use of fixed budgets, flexible budgets and profit planning are all
incorporated into one overall system of responsibility accounting.
3. Identification of Responsibility Centres:
The whole concept of responsibility accounting is focused around
identification of responsibility centres. The responsibility centres
represent the sphere of authority or decision points in an organisation. In
a small firm, one individual or a small group of individuals, who are
usually the owners may possibly manage or control the entire
organisation.
However, for effective control, a large firm is, usually, divided into
meaningful segments, departments or divisions. These sub- units or
divisions of organisation are called responsibility centres. A responsibility
centre is under the control of an individual who is responsible for the
control of activities of that sub-unit of the organisation.
This responsibility centre may be a very small sub-unit of the organisation,
as an individual could be made responsible for one machine used in
manufacturing operations, or it may be very big division of the
organisation, such as a divisional manager could be responsible for
achieving a certain level of profit from the division and investment under
his control. However, the general guideline is that “the unit of the
organisation should be separable and identifiable for operating purposes
and its performance measurement possible”.
For effective planning and control purposes, responsibility centres are,
usually, classified under three categories:
(i) Cost centres;
(ii) Profit centres; and
48
(iii) Investment centres.
4. Relationship between Organisation Structure and Responsibility
Accounting System:
A sound organisation structures with clear-cut lines of authority—
responsibility relationships are a prerequisite for establishing a successful
responsibility accounting system. Further, responsibility accounting
system must be so designed as to suit the organisation structure of the
organisation. It must be founded upon the existing authority- responsibility
relationships in the organisation. In fact, responsibility accounting system
should parallel the organisation structure and provide financial
information to evaluate actual results of each individual responsible for a
function.
The following chart shows relationship between organisation structure and
responsibility centres:
Fig 1.4 Relationship between Organisation Structure and

Responsibility Accounting System
5. Assigning Costs to Individuals and Limiting their Efforts to
Controllable Costs:
After identifying responsibility centres and establishing authority-
responsibility relationships, responsibility accounting system involves
assigning of costs and revenues to individuals.
49
Only those costs and revenues over which an individual has a definite
control can be assigned to him for evaluating his performance.
Responsibility accounting has an appeal because it distinguishes between
controllable and uncontrollable costs. Unlike traditional accounting where
costs are classified and accumulated according to function such as
manufacturing cost or selling and distribution cost, etc. or according to
products, responsibility accounting classifies accumulated costs according
to controllability.
Controllable costs’ are those costs which can be controlled or influenced
by a specified person or a level of management of an undertaking. Costs
which cannot be so controlled or influenced by the action of a specified
individual of an undertaking are known as ‘uncontrollable costs’. The
difference in controllable and uncontrollable costs may only be in relation
to a particular person or level of management.
The following guidelines recommended by the Committee of the
American Accounting Association in regard to assigning of costs may be
followed:
(a) If the person has authority over both the acquisition and use of the
services, he should be charged with the cost of these services.
(b) If the person can significantly influence the amount of cost through his
own action, he may be charged with such costs.
(c) Even if the person cannot significantly influence the amount of cost
through his own direct action, he may be charged with those elements with
which the management desires him to be concerned, so that he will help
to influence those who are responsible.
6. Transfer Pricing Policy:
In a large scale enterprise having decentralised divisions, there is a
common practice of transferring goods and services from one segment of
the organisation to another. In such situations, there is a need to determine
the price at which the transfer should take place so that costs and revenues
could be properly assigned.
The significance of the transfer price can well be judged from the fact that
for the transferring division it will be a source of revenue, whereas for the
division to which transfer is made it will be an element of cost. Thus, there
is a need of having a proper transfer policy for the successful
50
implementation of responsibility accounting system. There are various
transfer pricing methods in use, such as cost price, cost plus normal profit,
incremental cost basis, negotiated price, standard price, etc.
These methods of intra-company transfers have been discussed in detail
later in this chapter.
7. Performance Reporting:
As stated earlier, responsibility account is a control device. A control
system to be effective should be such that deviations from the plans must
be reported at the earliest so as to take corrective action for the future. The
deviations can be known only when performance is reported.
Thus, responsibility accounting system is focused on performance reports
also known as ‘responsibility reports’, prepared for each responsibility
unit. Unlike authority which flows from top to bottom, reporting flows
from bottom to top. These reports should be addressed to appropriate
persons in respective responsibility centres.
The reports should contain information in comparative form as to show
plans (budgets) and the actual performance and should give details of
variances which are related to that centre. The variances which are not
controllable at a particular responsibility centre should also be mentioned
separately in the report. To be effective, the reports should be clear and
simple. Use of diagrams, charts, illustrations, graphs and tables may be
made to make them attractive and easily understandable.
A specimen of a performance report is given below:
Fig 1.5 performance report

8. Participative Management:
The function of responsibility accounting system becomes more effective
if participative or democratic style of management is followed, wherein,
the plans are laid or budgets/ standards are fixed according to the mutual
51
consent and the decisions reached after consulting the subordinates. It
provides motivation to the workers by ensuring their participation and self
imposed goals.
9. Management by Exception:
It is a well accepted fact that at successive higher levels of management in
the organisational chain less and less time is devoted to control and more
and more to planning. Thus, an effective responsibility accounting system
must provide for management by exception, i.e., it should focus attention
of the management on significant deviations and not burden them with all
kinds of routine matters, rather condensed reports requiring their attention
must be sent to them particularly at higher levels of management.
The following diagram explains the flow and reporting details at different
levels of management:
Fig 1.6 flow and reporting details

10. Human Aspect of Responsibility Accounting:
‘The aim of responsibility accounting is not to place blame. Instead it is to
evaluate the performance and provide feedback so that future operations
can be improved’. Goals and objectives are achieved through people and,
hence, responsibility accounting system should motivate people. It should
be used in positive sense. It should not be taken as a device to punish
subordinates.
It should rather help in improving their performance. Subordinates
sometimes dislike control because they take them as restraints. The best
responsibility accounting system enlightens employees about the positive
side of control. To ensure the success of responsibility accounting system,
it must look into the human aspect also by considering needs of
52
subordinates, developing mutual interests, providing information about
control measures and adjusting according to requirements.
Check Your Progress-2

4. Is management and cost accounting the same?
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5... What is the significance of Accounting plan and responsibility?
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6. What are the types of responsibility centres?
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1.13 LET US SUM UP
1. Managerial accounting, also called management accounting, is

a method of accounting that creates statements, reports, and
documents that help management in making better decisions
related to their business’ performance. Managerial accounting is
primarily used for internal purposes.
2. The main objective of managerial accounting is to assist the
management of a company in efficiently performing its functions:
planning, organizing, directing, and controlling.
3. The main objective of managerial accounting is to maximize profit
and minimize losses. It is concerned with the presentation of data
to predict inconsistencies in finances that help managers make
53
important decisions. Its scope is quite vast and includes several
business operations.
4. Managerial accounting is a rearrangement of information on
financial statements and depends on it for making decisions. So the
management cannot enforce the managerial decisions without
referring to a concrete financial accounting system.
5. Managerial accounting uses easy-to-understand techniques such
as standard costing, marginal costing, project appraisal, and
control accounting.
6. Managerial accounting is used for forecasting. It concentrates on
supplying information that would ease the effect of a problem
rather than arriving at a final solution.
1.14 KEY WORDS
1. Management accounting- Managerial accounting, also called

management accounting, is a method of accounting that creates
statements, reports, and documents that help management in making better
decisions related to their business' performance. Managerial accounting is
primarily used for internal purposes.
2. Financial accounting- Financial accounting is the field of accounting

concerned with the summary, analysis and reporting of financial
transactions related to a business. This involves the preparation of
financial statements available for public use
3. Cost center- A cost center is a department or function within an

organization that does not directly add to profit but still costs the
organization money to operate. Cost centers only contribute to a
company's profitability indirectly, unlike a profit center, which contributes
to profitability directly through its actions
4. Profit centre- A profit center is a branch or division of a company that

directly adds or is expected to add to the entire organization's bottom line.
It is treated as a separate, standalone business, responsible for generating
its revenues and earnings.
54
5. Investment centre- An investment center is a center that is responsible
for its own revenues, expenses, and assets and manages its own financial
statements which are typically a balance sheet and an income statement.
1.15 ANSWER TO CHECK YOUR PROGRESS
1. Refer 1 for Answer to check your progress- 1 Q. 1 …

Ans.1 To provide useful financial information about a business to help
external parties make informed decisions. Financial accounting standards
are known collectively as GAAP.
Ans.2 It is used to compare reports so that stakeholders and investors
can decipher and use the data to make better decisions in the future. It
provides clarity in internal and external communication regarding the
sources and destinations of finances in the company.
3. Refer 1 for Answer to check your progress- 1 Q. 3…
Ans.3 Managerial accounting provides the information needed to fuel
the decision-making process. Managerial decisions can be categorized
according to three interrelated business processes: planning, directing,
and controlling.
4. Refer 2 for Answer to check your progress- 2 Q. 4…
Ans.4 Management accounting provides both quantitative and qualitative
data, whereas cost accounting focuses solely on quantitative data.
Management accounting is important for strategy development and goal
setting, whereas cost accounting helps prevent unnecessary costs.
Ans.5 it creates a sense of efficiency within individual employees as
their work and achievements will be reviewed. It guides the
management to plan and structure the future expenditure and revenue
of a company. Being a cost control tool, it creates 'cost consciousness'
among workers.
Ans.6 Corporate social responsibility is traditionally broken into four
categories: environmental, philanthropic, ethical, and economic
responsibility.
55
• Environmental Responsibility.
• Ethical Responsibility.
• Philanthropic Responsibility.
• Economic Responsibility.
1.16 SOME USEFUL BOOKS
1. R K Sharma & Shashi K Gupta, “Management

Accounting”, Kalyani Publishers, 2013.
2. M N Arora, “Cost and Management Accounting”, VikasPublishing
House.
3. M E Thukaram Rao, “Management Accounting”, New Age
International Publishers, 2007.
4. S P Jain, K L Narang, Simmi Agarwal, Monika Sehgal, “Cost &
Management Accounting”, Kalyani Publishers, 2013.
5. V K Saxena & C D Vashist, “Basics of Cost and Management
Accounting”, Sultan Chand & Sons, 2004.
6. M C Shukla, T S Grewal, M P Gupta, “Cost Accounting – Text and
Problems, S. Chand & Co. Ltd., 2000.
7. Khan and Jain, “Management Accounting & Financial Analysis” Tata
McGraw-Hill.
8. Dr. S N Maheshwari & Shard K Maheshwari, “Advanced Problems
and Solutions in Cost Accounting”, Sultan Chand & Sons
1.17 TERMINAL QUESTIONS
1. Give the meaning of ‘reissue of shares’

2. What are the primary objectives of financial accounting ?
3. What is nature and scope of financial accounting?
4. What is an Investment Center?
5. What are responsibility centers?
56
UNIT – 2 MANAGERIAL COSTING AND

BREAK EVEN ANALYSIS
STRUCTURE
2.0 Objectives
2.1 Introduction
2.2 Concept of managerial cost
2.3 Marginal costing and absorption costing
2.4 Cost volume profit analysis
2.5 Break even analysis
2.6 Decision regarding sales mix
2.7 Make or buy decisions and discontinuation of a product line etc
2.8 Let us Sum Up
2.9 Key Words
2.0 OBJECTIVES
● To understand the concepts, methods and techniques of managerial

costing
● To discuss the usage in cost volume profit analysis.
• To state the meaning and significance of break even analysis
2.1 INTRODUCTION TO MANAGERIAL

COSTING AND BREAK EVEN ANALYSIS
Marginal costing is used for managerial decision-making. It can be used

in conjunction with any method of costing, such as job costing or process
costing. It can also be used with other techniques of costing like standard
costing and budgetary control. In this, only variable cost are considered.
57
The term ‘marginal costing’ has been defined by the Chartered Institute of
Management Accountants (CIMA), London, as –
“The accounting system in which variable costs are charged to cost units
and fixed costs of the period are written off in full against the aggregate
contribution. Its special value is in decision-making.”
Earlier the term was defined as -“Ascertainment of marginal costs and of
the effect on profit of change in volume or type of output by differentiating
between fixed costs and variable costs. Note – In this method of costing,
only variable costs are charged to operations, processes or products while
fixed costs are written-off against profits in the period in which they arise.
The system of marginal costing, therefore, is a technique of cost
accounting which differentiates between fixed costs and variable costs and
shows the effect on profit of changes in the volume of output”.
One additional-unit of production is known as marginal unit and the
change in total cost on account of adding or subtracting one unit is known
as marginal cost.
Definitions:
“Marginal costing is that technique which studies the increase or decrease
in total cost as a result of increase or decrease of one unit of production.”
“Marginal costing is the ascertainment by differentiating between fixed
and variable costs.” – (I.C.M.A. London)
“Marginal cost may be defined as segregation of production cost between
fixed and variable cost.”
Its deals with the principle of treating the cost of producing marginal units.
It segregates fixed and variable cost. Thus marginal cost is the change in
total cost on account of increase or decrease by one unit in production
volume. Marginal cost is synonymous with the variable cost. In decision
making, marginal costs are related to change in cost due to charge of one
unit in production.
2.2 CONCEPT OF MANAGERIAL COSTING
Marginal costing in economics and managerial accounting refers to an

increase or decrease in the total cost of production due to a change in the
quantity of the desired output. It is variable, depending on the inclusion of
58
resources required to produce or deliver additional unit(s) of a product or
service.
Calculating marginal cost enables managers to make decisions on resource
allocation, optimize the production and operation, control manufacturing
costs, plan budget and profits, etc. It considers expenses incurred at each
production stage, except for overhead pricing. The practice is common in
manufacturing industries, allowing companies to achieve economies of
scale.
• Marginal costing is the increase or decrease in the overall cost of

production due to changes in the quantity of desired output.
• Managers can use it to make resource allocation decisions,
optimise production, streamline operations, control
manufacturing costs, plan budgets and profits, and so on.
• In most cases, variable costs influence marginal costs. It can,
however, consider fixed expenses in circumstances of increased
output.
• When a company’s marginal cost equals its marginal income, it
maximises profits while setting the selling price of a product or
service.
How Does Marginal Costing Work?

The marginal costing technique is crucial for any business aiming to
optimise the production of goods or delivery of services. The concept
technically means extra costs added to the production cost due to
additional unit(s). It helps companies determine the selling price of a
product or service. Furthermore, they can estimate the desired output by
understznding marginal and sales costs. It simply works like this:
• Sale or Unit price > Marginal cost = More production = Profit

• Marginal cost > Sale or Unit price = Less production = Loss
Moreover, entities can calculate the price associated with resources

needed to scale up the production of additionally ordered items. Also, it
enables managers to estimate production expenses and budget, avoiding
last-minute resource shortages.
59
this, it can be either short-run (i.e., fixed costs for additional production
in a short time) or long-run (i.e., variable inputs for extra output in more
time).
Fig 2.1 Marginal Cost benefits

In the other context, it is an essential tool for companies to maximize
profits and achieve economies of scale. It happens by producing to the
point where the marginal cost equals marginal revenue. Manufacturing
and selling an additional unit of a product or service generates marginal
or sales revenue.
Marginal Costing Factors
In the production process, some resources remain constant regardless of
how many extra orders the business receives. Such resources
involve fixed costs that do not change with the production quantity,
resulting in increased output. These mainly include overhead,
administration, and sales costs.
On the other hand, the company may require a few resources to enhance
the production speed for additional orders. Buying and maintaining these
resources involve variable costs that keep changing with the output
volume, increasing expenses. These usually include raw
materials and labour.
60
For example, baker Maria, on regular occasions, bakes 20 cakes per day.
Hence, she has a small plant, 2 baking machines, and 7 employees to
handle daily orders. However, during the Christmas season, Maria
receives the order of 50 cakes per day for as long as the New Year
hangover continues. To speed up the process, she employs 8 more
employees, who she needs to pay for the season, along with buying 3
more machines, which involves another significant investment from her
side, while her plant does not change.
In this example, adding new staff and machines involves variable costs.
It eventually adds to the total cost of production, contributing to Maria’s
marginal cost. The cost of the plant, on the other hand, remains fixed
without affecting the overall manufacturing cost.
Marginal costing typically considers variable costs in its calculation.

However, it can include fixed expenses in the cases of enhanced
production.
Equation Of Marginal Costing

Marginal costing signifies the change in the overall production cost due to
a variation in the desired quantity of goods or services. Companies
perform financial modeling to maximize cash flow generation using the
following equations:
Marginal Cost (MC) = (Change in Total Costs) / (Change in Quantity)
Or,
MC = ΔTC/ ΔQ ——————————— Equation (I)
Where,
• TC = Total cost
• Q = Quantity
• Δ = Incremental change of producing one additional unit
The total cost of production is the sum of both fixed and variable costs,
depending on the desired output. Marginal cost is directly proportional to
61
the variable cost occurring at every production level. So, let us have a
look at another equation to check out the interrelation between both:
TC = FC + (Q x VC) —————————— Equation (II)
Where,
• FC = Fixed cost
• VC = Variable cost
Combining both equations I and II together, we get:
• MC = ΔTC/ ΔQ = VC ————————— Equation (III)
Equation III shows how TC is directly proportional to VC. It means the

total cost will automatically increase if the variable cost increases and
vice-versa.
Calculation Example
Calculating marginal cost involves dividing the change in production
costs by the variation in the desired output. Here is a marginal costing
example with the step-by-step calculation:
Sam owns an automobile company. He manufactured 10 four-wheelers
worth $400,000 in the first year of business. The total cost involved in the
making of those sedans was $180,000. In the second year, he sold 20
vehicles worth $800,000. This time, the total cost he incurred in
manufacturing them was $360,000.
Here, the change in the total cost of production:
• = $360,000 – $180,000
• = 180,000
The change in quantity:
• = 20-10
• = 10
Using the marginal costing equation,
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MC = ΔTC/ ΔQ
We get,
• MC = $180,000/10
• = $18,000
Therefore, $18,000 is the MC per sedan.
Advantages and Disadvantages

Correct marginal costs estimation can help managers develop budget and
profit plans for the next production cycle. It means an inaccurate
calculation can lead to massive losses to manufacturing units. Thus, it has
both pros and cons, which are as follows:
Advantages Disadvantages
Efficiency of resources and

Classifies costs as fixed and
other factors could also affect
variable
the marginal cost
Does not consider time as a

No overhead pricing included
factor
Easy cost ascertainment Not suitable for all sectors
Helps in effective decision-

making, whether it is to replace a
machine or discontinue a product
or service
Cost comparison becomes easy
Table 2.1 Advantages and Disadvantages
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2.3 MARGINAL COST AND ABSORPTION

COST
Difference between Marginal Costing vs Absorption Costing

Marginal Costing and absorption costing are two cost management
techniques used to allocate the cost to the products produced for their
valuation. Marginal costing allocates variable costs individually to the
products and fixed costs are treated as period costs and deducted as an
expense directly from the amount of contribution earned. In absorption
costing fixed costs are also allocated to the cost of the product as
overheads.
Marginal costing creates a differentiation between product costs and
period costs. The variable costs incurred on the products are treated as
product costs and the fixed costs incurred by the entity during a particular
period are considered as period costs. Thus, in the case of marginal
costing, while variable costs are added to the cost of products, fixed costs
are not added to the product cost, instead, they are deducted from the
contribution to arrive at the value of operating profit. Absorption costing
as the name suggests absorbs or charges the fixed costs as well to the
product cost. Thus, absorption costing allocates fixed costs also in addition
to the variable costs to each product based on an absorption rate.
Head to Head Comparison between Marginal Costing vs Absorption
Costing (Infographics)
Below are the top 6 differences between Marginal Costing vs Absorption
Costing:
Key Differences between Marginal Costing vs Absorption Costing
The key differences between marginal costing and absorption costing are
explained below:
1. Meaning
Marginal costing is a cost management technique that is used to determine
the total cost of production. Absorption costing refers to the technique that
allocates or apportions the total costs incurred to various cost centres to
separately determine the cost of production in relation to each cost center.
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2. Cost Treatment
Marginal costing identifies variable and fixed costs separately; variable
costs are allocated to the product as product cost and fixed costs are
considered as period costs and deducted directly from the contribution to
arrive at operating profits. Absorption costing considers both fixed and
variable costs as product costs and make allocations to the products.
3. Profitability Measurement
The profit volume (PV) ratio is used to measure the profits earned on
products in marginal costing. PV Ratio gives the amount of contribution
earned on products and fixed costs are reduced from the contribution to
arrive at profits. Absorption costing appropriates a portion of fixed costs
to products and as a result, the profitability of a product gets affected due
to the inclusion of the fixed cost.
4. Effect on Change in Stock
In marginal costing, the cost per unit of a product doesn’t get affected due
to variation in opening and closing stock. However, the difference in
opening and closing inventory affects the cost per unit in absorption
costing due to the effect of fixed costs.
5. Cost per Unit
The cost per unit remains the same even if the level of production changes
since only variable costs are included in product cost. In absorption
costing, the cost per unit decreases as the production level increases due
to the absorption of fixed costs. However, only the fixed cost reduces per
unit and variable costs remain the same.
6. Cost Data
The cost data in marginal costing represents contribution per unit which
can be used to calculate total contribution. It is calculated by reducing the
variable cost per unit from the unit sales price. In absorption costing, cost
data reflect net profit per unit of product which is calculated by reducing
fixed and variable overheads from sales price per unit.
Marginal Costing vs Absorption Costing Comparison Table
The differences between marginal costing and absorption costing are
tabulated below for better understanding:
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Basis of Difference Marginal Costing Absorption Costing
Meaning A technique used to A technique used to

determine the total apportion costs to
cost of production. each cost center and
determine the total
cost of production of
each cost center.
Cost Treatment Variable costs are Both variable and

treated as product fixed costs are treated
costs and fixed costs as product costs.
are treated as period
costs.
Profitability The profit volume Fixed costs are

Measurement ratio reflects the already included in
profitability of the product costs and
products by reflecting thus profitability gets
the contribution influenced.
earned.
Effect of Change in The difference The difference

Stock between the opening between the opening
and closing stocks and closing stocks
doesn’t impact the impacts the cost per
cost per unit. unit due to the
presence of fixed
costs.
Cost Per Unit The cost per unit Cost per unit reduces
remains the same as the production
irrespective of the increases since the
level of production. fixed cost per unit
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reduces, but the
variable cost
proportion remains
the same.
Cost Data Cost data represents Cost data represents

the contribution per net profit per unit.
unit.
Table 2.2 The differences between marginal costing and

absorption costing
Conclusion
Marginal and absorption costing provide different results in the income
statement since both treat fixed costs differently. In marginal costing cost
per unit doesn’t include the apportionment of fixed cost, while in
absorption costing fixed costs are apportioned to each unit based on an
absorption rate which is based on a budgeted production level.

1. What is marginal costing?
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2. What is the difference between marginal costing and absorption

costing?
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3. Why profit is difference in absorption and marginal costing?
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2.4 COST VOLUME PROFIT
What Is Cost-Volume-Profit (CVP) Analysis?

Cost-volume-profit (CVP) analysis is a method of cost accounting that
looks at the impact that varying levels of costs and volume have on
operating profit.
Understanding Cost-Volume-Profit (CVP) Analysis
The cost-volume-profit analysis, also commonly known as breakeven
analysis, looks to determine the breakeven point for
different sales volumes and cost structures, which can be useful for
managers making short-term business decisions. CVP analysis makes
several assumptions, including that the sales price, fixed and variable
costs per unit are constant. Running a CVP analysis involves using several
equations for price, cost, and other variables, which it then plots out on an
economic graph.
The CVP formula can also calculate the breakeven point. The breakeven
point is the number of units that need to be sold or the amount of sales
revenue that has to be generated in order to cover the costs required to
make the product. The CVP breakeven sales volume formula is:
Breakeven Sales Volume=FCCM
Where:
FC=Fixed costs
CM=Contribution margin=Sales−Variable Costs
To use the above formula to find a company's target sales volume, simply
add a target profit amount per unit to the fixed-cost component of the
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formula. This allows you to solve for the target volume based on the
assumptions used in the model.
CVP analysis also manages product contribution margin. The contribution
margin is the difference between total sales and total variable costs. For a
business to be profitable, the contribution margin must exceed total fixed
costs. The contribution margin may also be calculated per unit.
The unit contribution margin is simply the remainder after the unit variable
cost is subtracted from the unit sales price. The contribution margin ratio
is determined by dividing the contribution margin by total sales.
The contribution margin is used to determine the breakeven point of sales.
By dividing the total fixed costs by the contribution margin ratio, the
breakeven point of sales in terms of total dollars may be calculated. For
example, a company with $100,000 of fixed costs and a contribution
margin of 40% must earn revenue of $250,000 to break even.
Profit may be added to the fixed costs to perform CVP analysis on the
desired outcome. For example, if the previous company desired a profit of
$50,000, the necessary total sales revenue is found by dividing $150,000
(the sum of fixed costs and desired profit) by the contribution margin of
40%. This example yields a required sales revenue of $375,000.
Special Considerations
CVP analysis is only reliable if costs are fixed within a specified
production level. All units produced are assumed to be sold, and all fixed
costs must be stable in CVP analysis. Another assumption is all changes
in expenses occur because of changes in activity level. Semi-variable
expenses must be split between expense classifications using the high-low
method, scatter plot, or statistical regression.
How Is Cost-Volume-Profit (CVP) Analysis Used?
Cost-volume-profit analysis is used to determine whether there is an
economic justification for a product to be manufactured. A target profit
margin is added to the breakeven sales volume, which is the number of
units that need to be sold in order to cover the costs required to make the
product and arrive at the target sales volume needed to generate the desired
profit. The decision maker could then compare the product's sales
projections to the target sales volume to see if it is worth manufacturing.
What Assumptions Does Cost-Volume-Profit (CVP) Analysis Make?
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The reliability of CVP lies in the assumptions it makes, including that the
sales price and the fixed and variable cost per unit are constant. The costs
are fixed within a specified production level. All units produced are
assumed to be sold, and all fixed costs must be stable.
Another assumption is all changes in expenses occur because of changes
in activity level. Semi-variable expenses must be split between expense
classifications using the high-low method, scatter plot, or statistical
regression.
Example of an Alcohol Producer

Using a Cost-Volume-Profit Analysis
The spirits producer Brown-Formanis constantly dealing with the impact
of climate and agricultural changes on their business. As a result, they need
to have an accurate idea of how many units they will need to break even.
At the same time, sales volume of wine and spirits is also subject to
seasonal trends. In addition, crop yield can be the deciding factor in the
amount of supply that can be produced. A CVP analysis helps Brown-
Forman determine how many units they need to sell or if a price change
needs to be made. Typically, spirits producers tend to run a tight ship when
it comes to keeping fixed costs low, so adjusting this area might not always
be possible.
Since Brown-Forman produces various types of spirits that all require
different ingredients, their CVP calculation can become complex. From
harvest numbers and labor demands to production requirements and
packaging costs, there are a lot of different factors to take into account.
However, crunching the numbers is an important part of not just breaking
even, but turning a healthy profit that helps an alcohol beverage brand stay
in business.
If your beverage alcohol brand has been heavily focusing on marketing-
efforts and other field activity Operations and not seeing the anticipated
return, it may be time to conduct a cost-volume-profit analysis. This will
provide you with a more accurate picture of the main elements of your
business and some insight into how adjusting one or more aspects could
help or hinder your profits.
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2.5 BREAK EVEN ANALYSIS
A break-even analysis is an economic tool that is used to determine the

cost structure of a company or the number of units that need to be sold to
cover the cost. Break-even is a circumstance where a company neither
makes a profit nor loss but recovers all the money spent.
The break-even analysis is used to examine the relation between the fixed
cost, variable cost, and revenue. Usually, an organisation with a low fixed
cost will have a low break-even point of sale.
Fig 2.2 break-even analysis

Importance of Break-Even Analysis
Manages the size of units to be sold: With the help of break-even
analysis, the company or the owner comes to know how many units need
to be sold to cover the cost. The variable cost and the selling price of an
individual product and the total cost are required to evaluate the break-
even analysis.
Budgeting and setting targets: Since the company or the owner knows
at which point a company break-even can, it is easy for them to fix a goal
and set a budget for the firm accordingly. This analysis can also be
practised in establishing a realistic target for a company.
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Manage the margin of safety: In a financial breakdown, the sales of a

company tend to decrease. The break-even analysis helps the company to
decide the least number of sales required to make profits. With the margin
of safety reports, the management can execute a high business decision.
Monitors and controls cost: Companies’ profit margin can be affected by
the fixed and variable cost. Therefore, with break-even analysis, the
management can detect if any effects are changing the cost.
Helps to design pricing strategy: The break-even point can be affected
if there is any change in the pricing of a product. For example, if the selling
price is raised, then the quantity of the product to be sold to break-even
will be reduced. Similarly, if the selling price is reduced, then a company
needs to sell extra to break-even.
Components of Break-Even Analysis
Fixed costs: These costs are also known as overhead costs. These costs
materialise once the financial activity of a business starts. The fixed prices
include taxes, salaries, rents, depreciation cost, labour cost, interests,
energy cost, etc.
Variable costs: These costs fluctuate and will decrease or increase
according to the volume of the production. These costs include packaging
cost, cost of raw material, fuel, and other materials related to production.
Uses of Break-Even Analysis
New business: For a new venture, a break-even analysis is essential. It
guides the management with pricing strategy and is practical about the
cost. This analysis also gives an idea if the new business is productive.
Manufacture new products: If an existing company is going to launch a
new product, then they still have to focus on a break-even analysis before
starting and see if the product adds necessary expenditure to the company.
Change in business model: The break-even analysis works even if there is
a change in any business model like shifting from retail business to
wholesale business. This analysis will help the company to determine if
the selling price of a product needs to change.
Break-Even Analysis Formula
Break-even point = Fixed cost/-Price per cost – Variable cost
Example of break-even analysis
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Company X sells a pen. The company first determined the fixed costs,
which include a lease, property tax, and salaries. They sum up to
₹1,00,000. The variable cost linked with manufacturing one pen is ₹2 per
unit. So, the pen is sold at a premium price of ₹10.
Therefore, to determine the break-even point of Company X, the premium
pen will be:
Break-even point = Fixed cost/Price per cost – Variable cost
= ₹1,00,000/(₹12 – ₹2)
= 1,00,000/10
= 10,000
Therefore, given the variable costs, fixed costs, and selling price of the
pen, company X would need to sell 10,000 units of pens to break-even.
2.6 SALES MIX
What is Sales Mix?

Sales Mix is the share of various products or services to be sold in business
concerning its total sales and is one of the key decisions to be taken
because demand and profitability vary from one product/service to
another. Therefore, this mix needs to be identified for efficient business
operations to maximize revenue and profitability.
Explanation
AB Sells two types of Cool drinks (Drink X and Drink Y). So the company
can sell both the products equally, or it can sell Drink X 70% and Drink Y
30%. Deciding the right proportion of the sales mix is a strategic decision.
This plays an important role in deciding the future of the business (i.e.)
which products/services should be given priority, where the focus of the
business should be, Short term Vs. Long-term profitability, market,
demand for the product, etc.
The management analyses continuously concerning changing market
conditions, demand for the products in the market, Production capacity,
availability of raw materials, and profitability of the various products, and
it creates a direct impact on the business performance, choosing the right
sales mix is a crucial decision for the business growth and sustainability.
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Sales Mix Formula

The cost and profitability of each product need to be identified to find the
optimal mix.
Profit = Sale Price of the Product (-) Cost of the Product Profit % =
Profit Per Unit / Sales Value Per Unit
Example
XY Corp, a car dealer, sells the following types of Car:
The above mentioned is the Sales Mix of XY Corp. They sell More of the
Nissan Versa because that is the low-cost car, and the demand is more for
that car in the market. Therefore, the profit from the low-cost car will be
less in terms of monetary value. They also sell Kia Forte, a costlier car that
yields more profit, but there is not much demand for that car. This has to
be decided based on the demand in the market, production capacity,
profitability of the product, etc.
Sales Mix Variance
This variance analysis helps the management understand the reasons for
deviation from the budgeted sales mix and reconsider their decisions. In
addition, it helps to understand the performance of various products
concerning sales and profitability and each product’s contribution to the
business.
Formula
Sales Mix Variance Formula = (Actual Sales Mix – Budgeted Sales
Mix) * Budgeted Units Sold * Budgeted Contribution Margin
• The actual Sales Mix is the actual performance of every product

concerning the business’s total sales.
• The budgeted sales Mix is the ratio of products concerning the total
budgeted sales at the beginning of the period.
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Example
A company sells products A and B with an actual sales mix of 40:60. They
produce 2000 units per year. The budgeted mix is 60:40. The contribution
margin for product A is $10 per unit, and for product, B is $8 per unit.
Sales Variance:
• Product A: (600-900) * 10 = -3000 (Unfavourable Variance)

• Product B: (900-600) * 8 = 2400 (Favourable Variance)
• Total Sales Mix Variance = -600 (Unfavourable Variance)
It indicates that the actual mix doesn’t yield profitable results as budgeted.
Therefore, management needs to relook the sales mix and the variance for
better performance.
Importance
• It is one of the important decisions to be made for a business that
sells more than one product, as it helps the management channel
the resources based on the demand and profitability of the
products.
• Individual product performances can be analysed based on which
the sales mix can be fixed.
• It helps the management fix the budget and target revenue and
profitability.
Advantages
• A wide range of products and services can be provided to the
customer.
• Different products will have demand in the market; the revenue
and profitability can be improved by choosing the right sales mix.
• The customer base can be improved by offering various products
and services.
• This analysis helps management understand the product-wise
performance and contribution to the business.
Disadvantages
• More manpower and specialisation is required while dealing with
various product lines.
• More workforce and specialization are required while dealing with
various product lines.
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• Any issue with one product can damage the overall reputation of
the business.
• Handling and managing multiple product lines comes at a huge
cost.
• All products produced by the company need not be successful.
Another product can erode the margins generated by one product.
Conclusion
Sales Mix is one of the vital decisions taken by the business management.
It needs to be chosen to sustain in the market and improve financial
performance. Handling multiple product lines can be both favorable and
unfavorable at times, depending on the market conditions, customer needs,
the economy in the country, etc.
Therefore, it needs to be monitored continuously, and it shall be altered
from time to time by analysing the individual product contribution.
2.7 MAKE OR BUY DECISIONS AND

DISCONTINUATION OF PRODUCT LINE
Make or Buy Decision Meaning

A Make or Buy Decision is a decision made to either manufacture a
product/ service in house or buy it from outside suppliers (outsourcing)
based on cost-benefit analysis. A complete or accept decision can be made
using quantitative or qualitative research and most of the time, the results
of quantitative analysis (cost-benefit analysis) are enough to decide on
whether to make the product in-house or buy (outsource) from outside
suppliers.
How Does Make or Buy Decision Work?
The decision applies to both goods and services. Businesses compare the
cost and benefits of producing the goods or services within the company
and the cost and benefits of getting an outside supplier to supply the goods
and services into consideration. The value here must include all the fees
associated with manufacturing (including material, labor, cost of
machinery and space), storing, moving, taxes, etc. and the corresponding
benefits must include benefits in terms of increased margins (for in-house
production) or low capital requirement (for outsourcing).
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Fig 2.4 Make or Buy Decision Work

Analysis for Make or Buy Decision
Let’s discuss the analysis of make or buy decisions.
• Under quantitative analysis, businesses consider all the costs
associated with producing the product or service in-house. These
costs include buying and maintaining equipment, cost of the
premises (lease, etc.), raw material cost, conversion cost, cost of
fuel and electricity, labor cost, warehousing or storage cost,
shipping cost, and the cost of capital. The benefits include higher
margins from in-house production.
• The cost associated with outsourced production includes the
product and service, transportation, warehousing, and storage and
labor costs for managing the logistics.
• The decision becomes a little straightforward if the company does
not have an idle capacity to produce the product or service. In this
case, the management can opt to hire an outside supplier
considering that it is not of critical importance, and the firm’s
intellectual property is not endangered.
• Considering the company has the idle capacity, and it is already
incurring a large part of fixed expenses, it can choose to
manufacture in the house if the marginal cost of manufacturing is
less than what it will cost to buy from outside suppliers.
Examples of Make or Buy Decision
Lest discuss examples of make or buy decisions for better understanding.
Make or Buy Decision Example #1
As stated earlier, there may be some factors at play that may influence a
company’s company’s decision to make an item in the house or
outsourcizg it.
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Under such circumstances, two factors are to be considered:

Whether surplus capacity is available and
The marginal cost of per unit manufacturing
Assume a company is deciding between manufacturing a part in-house that
costs $26 per unit, including direct cost, fixed overheads, and variable
overheads, as given in the table below.
Cost Head Cost per Unit ($)
Direct Cost 15
Fixed Overhead 4
Variable Overhead 7
Total Cost 26
The same part is available in the market at $23 per unit, including the cost
of buying, shipping, and warehousing, as shown in the table below.
Cost Per Unit

Cost Head
($)
Cost of Part 20
Shipping and Warehousing

3
Cost
Total Cost 23
Should the Firm Make or Buy the part?
Analysis
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If surplus capacity available will remain idle if the component is
bought, out of pocket expenses will be $23 per unit, $1 more than the
variable and direct cost of making component which is $22 ($15 + $7).
Hence it is economical to make it. However, if the Firm is utilizing or can
utilize the capacity in making some other part which contributes to say $4
per unit in profits, the effective cost of buying the component will be $19
($23 less $4 contribution from other products). In that case, it would be
economical to buy the Component at $23 per unit from outside.
The relevant calculation for making decision may be as follows:
Buy and
Per Unit Use
Cost Buy Capacity
Make
Particulars & Leave for
($)
Capacity Other
Idle ($) Product
($)
Cost of
22 23 23
Making/Buying
Contribution
from other – – 4
Product
Net Relevant
22 23 19
Cost
Make or Buy Decision Example #2

The smartphone giant Apple Inc. outsources the manufacturing of all its
devices to China because manufacturing is not its core competency. It is
also significantly cheaper to assemble the tools in China due to
substantially lower costs. Apple designs its produces in its office in the
United States; the products are then manufactured in China and shipped
back to the United States and other countries for sales.
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Factors Considered for Make or Buy Decision

The following are the major factors considered while deciding to make the
good or service in-house.
• Cost concerns (when it is expensive to outsource)
• Desire to enhance the manufacturing focus
• Intellectual property concerns
• Quality concerns
• Unreliable suppliers
• The need for direct quality control over the product
• Emotional reasons (for example, pride)
• Absence/shortage of competent suppliers
• Insignificant volume for a prospective supplier
• Reduction of shipping and transportation costs
• For maintaining a backup source
• Environmental reasons
• Political reasons
• The following are the major factors considered while deciding to
buy the good or service from the outside supplier.
• Lack of expertise
• Research and specialized know-how of the supplier better than the
buyer
• Cost considerations (cheaper to buy the item)
• Insufficient or no manufacturing capacity at the buyer’s end
• De-Risking the sourcing
• Low-volume requirements
• The supplier is more equipped than the buyer
• Procurement and inventory considerations
• Product or service not essential to the firm’s strategy
• Preference of Brand
Advantages of Make or Buy Decision
Some of the advantages of making or buy decisions are as follows:
• The finding helps choose the most efficient option to go about in-
house production of outsourcing.
• The decision helps in the strategic maneuver of the business.
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• The decision helps save the cost for many businesses.
• Businesses benefit from the lower cost of mistakes if they think
strategically about this decision.
Conclusion
The make or buy decision should be taken with utmost care keeping the
long-term and short-term benefits into consideration. There are pros and
cons to both make and purchase; however, generally, businesses tend to
outsource function where they do not have a core competency or when the
cost of procuring the components or services from outside suppliers is
significantly cheaper.

4. What is cost profit analysis?
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5 Explain Break even analysis?
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6. Explain the concept of sales mix ?
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2.8 LET US SUM UP
1. A cost is variable or fixed depending on whether the amount of the

cost changes as the volume of production changes. A cost is a
variable cost if it increases (decreases) as the volume or production
levels increase (decrease.)
2. The objective of managerial costing is to provide a monetary
reflection of the utilization of business resources and related cause-
and-effect insights into past, present, or future enterprise economic
activities.
3. Three types of managerial costing are As follows: Variable costs:
This type of expense is one that varies depending on the company's
needs and usage during the production process. .
4. Fixed costs: Fixed costs are expenses that don't change despite the
level of production.
5. Direct costs: These costs are directly related to manufacturing a
product.
6. A break-even analysis is a financial calculation that weighs the
costs of a new business, service or product against the unit sell
price to determine the point at which you will break even. In other
words, it reveals the point at which you will have sold enough units
to cover all of your costs
7. Cost-volume-profit (CVP) analysis is a way to find out how
changes in variable and fixed costs affect a firm's profit.
Companies can use CVP to see how many units they need to sell
to break even (cover all costs) or reach a certain minimum profit
margin.
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2.9 KEY WORDS
1. Managerial costing- A cost is variable or fixed depending on

whether the amount of the cost changes as the volume of
production changes. A cost is a variable cost if it increases
(decreases) as the volume or production levels increase (decrease.)
2. Break even analysis- A break-even analysis is a financial
calculation that weighs the costs of a new business, service or
product against the unit sell price to determine the point at which
you will break even. In other words, it reveals the point at which
you will have sold enough units to cover all of your costs
3. Cost Volume Profit- Cost-volume-profit (CVP) analysis is a way
to find out how changes in variable and fixed costs affect a firm's
profit. Companies can use CVP to see how many units they need
to sell to break even (cover all costs) or reach a certain minimum
profit margin.
4. Sales Mix- sales mix refers to the proportion of sales a single
product accounts for in a company's total sales. It is used to
determine which products are performing well and which products
are sinking so that inventory adjustments can be made down the
line
5. Absorption cost-Absorption costing allocates fixed overhead
costs to a product whether or not it was sold in the period. This
type of costing method means that more cost is included in the
ending inventory, which is carried over into the next period as an
asset on the balance sheet.

Ans.1 Marginal costing calculates the change in the overall production
cost owing to variation in the volume of the targeted output. The price
varies depending on the number of products. Marginal costs include
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expenses incurred at each production stage due to changes in resources
needed to create the required additional quantity of products or services.
Refer 1 for Answer to check your progress- 1 Q.2….
Ans.2 The marginal costing technique considers variable costs to as the
actual production cost. In contrast, absorption costing is the method that
considers both variable and fixed costs as part of the production cost.
Ans.3 The difference between the profit figures calculated under
absorption and marginal costing principles is caused by the treatment of
fixed production overheads.
Ans.4 The cost-volume-profit analysis, also commonly known as
breakeven analysis, looks to determine the breakeven point for
different sales volumes and cost structures,
which can be useful for managers making short-term business decisions.
CVP analysis makes several assumptions, including that the sales
price, fixed and variable costs per unit are constant. Running a CVP
analysis involves using several equations for price, cost, and other
variables, which it then plots out on an economic graph.
Ans.5 A break-even analysis is a financial calculation that weighs the costs
of a new business, service or product against the unit sell price to
determine the point at which you will break even. In other words, it reveals
the point at which you will have sold enough units to cover all of your
costs.
Refer 2 for Answer to check your progress- 2 Q.6..,,
Ans.6 Most commonly, sales mix refers to the proportion of sales a single
product accounts for in a company's total sales. It is used to determine
which products are performing well and which products are sinking so that
inventory adjustments can be made down the line
84

House.
McGraw-Hill.
1. Give the meaning of managerial cost?

2. What are the primary objectives of managerial costing?
3. What is difference between managerial cost and absorption cost?
4. What is break even analysis?
5. What is cost volume profit analysis?
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UNIT – 3 BUDGETING
STRUCTURE
3.0 Objectives
3.1 Introduction to budgeting
3.2 Definition of budget
3.3 Essential of budgeting
3.4 Types of budget
3.5 Fixed and Flexible budget
3.6 Budgetary control
3.7 Zero base budgeting
3.8 Performance budgeting
3.9 Let Us Sum Up
310 Key Words
3.0 OBJECTIVES
● To understand the concepts, methods, and techniques of budgeting

● To discuss the types of budget
• To understand the difference between Fixed and flexible
budgeting
3.1 INTRODUCTION TO BUDGETING
Budgeting in business is a process of looking at a business’ estimated

incomes (the money that comes into the business from selling products
and services) and expenditures (the money that goes out form paying
expenses and bills) over a specific period in the future. It allows a business
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to see if they will be able to continue operating at their expected level with
these projected incomes and expenditures.
A budget is often drawn up for a financial year and contains information
about anticipated sales and associated business costs within that period.
By using this budget a business can see how well they are expecting to
perform within the year and actual performance can be monitored against
this original proposed plan.
3.2 DEFINITION OF BUDGET
What Is a Budget?
The term budget refers to an estimation of revenue and expenses over a
specified future period of time and is usually compiled and re-evaluated
on a periodic basis. Budgets Can be made for any entity that wants to
spend money, including governments and businesses, along with people
and households at any income level.
To manage your monthly expenses, prepare for life's unpredictable events,
and be able to afford big-ticket items without going into debt, budgeting
is important. Keeping track of how much you earn and spend doesn't have
to be drudgery, doesn't require you to be good at math, and doesn't mean
you can't buy the things you want. It just means that you'll know where
your money goes, and you'll have greater control over your finances.
Fig 3.1 Budgeting
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KEY TAKEAWAYS
• A budget is an estimation of revenue and expenses over a specified
future period of time and is utilized by governments, businesses,
and individuals at any income level.
• A budget is basically a financial plan for a defined period, normally
a year that is known to greatly enhance the success of any financial
undertaking.
• Corporate budgets are essential for operating at peak efficiency.
• Aside from earmarking resources, a budget can also aid in setting
goals, measuring outcomes, and planning contingencies.
• Personal budgets are extremely useful in managing an individual's
or family's finances over both the short and long-term horizon.
Understanding Budgeting
A budget is a microeconomic concept that shows the trade-off made when
one good is exchanged for another. In terms of the bottom line—or the end
result of this trade-off—a surplus budget means profits are anticipated,
a balanced budget means revenues are expected to equal expenses, and
a deficit budget means expenses will exceed revenues.
How to Budget in 7 Steps
• The specifics of your budget will depend on your personal
financial situation and goals. In most cases, though, the steps for
creating a budget are the same. You can make a budget by
following seven simple steps
• Add up your total income. This should include all sources, such as
a pay-check, tips, Social Security, disability, alimony, or
investment income.
• Track your spending. Spend a month keeping track of everything
you spend, whether you pay with a credit card or cash, to find what
your real expenses are. Be sure to include automatic payments,
subscriptions, and utilities.
• Set financial goals. Do you want to save money? Pay off debt? Stop
overspending? Decide on realistic goals. Remember, you can
adjust these over time. Pick the most pressing goals, such as paying
off debt or creating an emergency fund, first.
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• Calculate mandatory expenses. These are expenses you must pay
each month, such as rent, insurance premiums, taxes, childcare, or
your cell phone bill. Subtract these from your total income.
• Identify debt payments. If you are paying off debt, such as student
loans or a credit card bill, find the minimum payment for each debt.
Subtract that from your income as well.
• Make a spending plan. The amount of income you have left is what
you can spend on discretionary expenses. These can include your
goals, such as debt payment or savings. It should also include
things like groceries, entertainment, gas, or surprise expenses.
Give every dollar a job, based on your goals and what you
discovered when you tracked your spending.
• Adjust each month. Each month, look at your spending and goals,
Reevaluate and adjust where you assign your discretionary
spending. A flexible budget will help you avoid overspending.
3.3 ESSENTIALS OF BUDGETING
Essential elements for effective Budgetary Control

Essential of effective budgetary control or Preliminaries for the adoption
of budgetary control system are listed below.
Essential elements of effective budgetary control
1. Support of Top Management
Generally budgets are prepared for one year. On the basis of the budgets,
the employees are changing their working methods, habits and even their
inter-relationship also. Hence, there may be a resistance to change on the
part of employees. It leads to the preparation of every budget with top
management Support.
2. Formal Organization
An employee can understand his scope of authority and responsibility with
regard to budget. In a formal organization, duties of every employee are
clearly defined and assigned. If so, they can know their authority and
responsibility that are highly useful for control through budgets.
3. Preparation by Responsible Executives
The involvement of employees in budget preparation helps the
management for easy implementation of budgets. This practice is followed
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subject to the approval and control of Budget Director and Budget
Committee.
4. Clear Cut Objectives
The success of budgetary control programme depends upon the clear-cut
objectives of the organization. Hence, the management before framing the
objectives should take care. Moreover, objectives are unambiguous.
5. Attainable Objectives
If the objectives are not attainable, the budgetary control system cannot
succeed. On the other hand, if the objectives are easily attainable, there is
no need of special efforts and there is no challenge to anybody. Hence,
attainable objectives are framed for effective implementation of budgetary
control system.
6. Budget Committee
A budget committee is formed to prepare and implements the budgets. The
budget committee consists of functional managers of business
organization. The committee should be presided over by one of the top
management personnel, to be called the Budget Director.
7. Adequate Accounting System
Budgets are prepared on the basis of historical data. Hence, accounting
records should be properly maintained. Moreover, actual costs and
revenue are periodically compared with those of budgeted figures. The
accounts are classified in terms of authority and responsibility that
facilitates the introduction of responsibility accounting system.
8. Periodic Reporting
There should be a proper communication in an organization for effective
budgetary control. Each employee of an organization should know about
what is going on and what has been achieved so far with regard to budget.
For which, the management can make an arrangement through which
information about budget performance can be communicated periodically.
The employees can understand the variances through this system.
Moreover, it is highly useful to get communication for corrective actions
9. Budget Education
A budget can be implemented very successfully with the active
participation of line managers and their sub-ordinates. For which, there is
a need of showing interest by the line managers and their subordinates.
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The budget director should take steps to create interest among the line
managers and their sub-ordinates through budget education.
The objectives of framing each budget, potentials of an organization and
its employees and techniques of budgeting are covered in the budget
education.
Moreover, the budget director should create a close relationship with the
line managers and their sub-ordinates on the floor; discuss with them
problems relating to the budgets and its implementation and receive
suggestions from them for improving budget procedures.
10. Appreciation Uses
Every employee of an organization should understand the uses of every
budget. No one should have the feeling that the budget is imposed on him.
Nobody can participate mechanically in the budget preparation and its
administration regardless of whether he likes it or not.
11. Limitations of Budgeting
The management should disclose not only the uses of budgets bud also the
limitations of every budgets. Everyone should realise that budget is only a
managerial tool in capable of managing itself.

1. Explain the concept of budgeting?
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3. What are the essentials of budgeting ?
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3.4 TYPES OF BUDGET
Following are different types of budgets prepared by individuals,

businesses, and governments.
1. Sales Budget
In any organization, it’s the sales department that has the overall
responsibility of preparing the sales forecast. Sales forecast is a
requirement in devising sales budget on which an organization can
schedule its production. Sales budget refers to a comprehensive schedule
that shows the anticipated sales for a given period of time. The plan for
this given period is usually expressed in terms of volume of total sales and
selling prices of each class of goods or services. An accurate sales budget
is an important element in budgeting as it contributes to the overall
organization budgeting process. If sloppily done and formulated, the rest
of the budgeting process becomes a waste. The sales budget is also referred
to as revenue budget since it’s a preliminary step in preparation of master
budget. In an organization, sales budget assist the management to
determine the amount of units to be produced thus the production budget
is formulated after the sales budget, which in turn is used to determine
budgets for production costs that include direct materials , production
overhead costs and direct labor budget. In essence, the sales budget is very
critical in that it elicits a chain of reaction that often leads to growth and
development of other types of budgets. The sales budget consists of sales
that are expressed in terms of number of units and the amount of revenue
including all expenses that support sales, advertising and the cost of
distribution of goods sold. Sales budget also consist of forecast of
distribution of expenditure for goods sold.
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When developing a sales budget, the following calculations are
formulated; the sales budget is erected by multiplying the budgeted sales
in units by the selling price.
Budgeted Sales = [Budgeted Unit Sales] * [Budgeted Sales Prices]
For the management, sales budget is often the preliminary step in
preparation of the master budget. All other components in the master
budget do depend on it in some way.
2. Production Budget
It’s mostly prepared with data from sales budget. Companies that are
product oriented usually create production budget that tends to estimate
the number of units that ought to be produced in order to meet the sales
goals and objectives. The other function of production budget is that it
estimates different types of costs involved in production or manufacturing
of the said units, inclusive of material and slabour costs. Any typical
organization spends huge amount of money in production than in any other
type of expense. For this reason, it’s vital to create production budget that
include all production expenditures so as to estimate the future working
capital and future effects on inventory and levels. Production budget is an
all-inclusive plan that considers all manufacturing works to be done within
the period including the amount expenditures to be incurred on these
projects. When creating production budget, it requires individuals
involved to be accurate with detailed production estimates. This kind of
estimates are typically prepared in combination with the title budgets,
which must be finished prior to contracting of other project.
Before production budget is prepared, the management should always
review the production period of budget. The major function of production
budget is that it calculates approximately different costs involved in
production or manufacturing of products including the cost of materials
and labour. When calculating the total production needs, an organization
adds anticipated sales to ending inventory and deducts the commencement
of inventory from that sum
. Total production= (projected sales) + (ending inventory) – (starting
inventory).
3. Direct Materials Usage Budget
Direct material budget refers to analytical plan that shows how much
materials would be required in manufacturing or production and the
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amount of material required to meet the production needs. It’s usually
prepared after calculation of production needs or requirements. Materials
budgeting show the amount of raw material to be purchased in order to
accomplish production requirements and the necessary amount to provide
adequate inventories. Preparation of this kind of budget constitutes the
organizational overall use of material requirements planning (MRP).
This organization tool help manage inventories and materials, and ensures
the required materials are available in the right quality and quantity and at
the required time to meet the production needs of the company. Direct
materials budget regularly go along with a schedule of anticipated cash
pay-outs for raw materials and this plan is required for the preparation of
the overall cash budget. Expenditures for materials include the cost of
purchases of purchases the present budget period. Direct material budget
is mostly constructed to determine the amount and cost of any additional
materials needed to fulfill the anticipated production levels. Most
organizations depicts this in two tables, where the first table shows the
number of units to be purchased and the total cost for those purchases
while the second table shows a plan of the projected distributions of cash
to suppliers of materials. The formula for the computation of materials
purchases is given by:-
Purchase costs = (Materials Purchase Costs Unit of Materials to Be
Purchased) * (Unit Price).
Most successful organizations uses the planning and control of a direct-
materials budget in order to determine the level of competence in their
cargo space, inventory system success and to appraise the capacity of
dealers to supply raw materials in the estimates and qualities that are
required, and plan material purchases in relation with movement of funds
into the organization.
4. Direct Materials Purchase Budget
Production budget provide necessary information for determining the
projected amount of direct materials that ought to be purchased. Simply
by multiplying these amounts with the anticipated costs of purchase price,
gives the total costs of materials to be purchased. The major function of
direct material purchases budget, is that it provides the essential
framework to plan and schedule cash payments for direct materials. This
budget also critically reveals the company’s planned end of the fiscal year
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inventory. This value is very important in cost accounting techniques
because it a vital component in preparation of the budgeted year ending
balance sheet.
For effective implementation, the direct purchases budget should be
incorporated with the production budget to make sure any level of
production is not interrupted during the period of production.
This budget tends to estimate the quantity of materials to be purchased in
order to promote the budgeted production level and keep desired inventory
levels. Direct materials to be purchased are given by:
Materials to be purchased = (materials required for production) +
(desired ending materials inventory) – (estimated beginning materials
inventory).
5. Direct Labour Budget

Definitively, direct labour budget refers to a fixed Schedule for anticipated
labour cost. The anticipated labour costs is chiefly reliant on projected
volume of production or production budget. The labour needs are
dependent on production volume multiplied by direct labour-hours per
unit. The derived product is then multiplied by direct labour cost per hour
to achieve the exact budgeted direct labour costs. This budget is created
from the production budget where direct labour needs are computed to
make the management know whether there is sufficient labour time to
fulfil the budgeted manufacturing requirements. This advance knowledge
helps the management in to develop plans to regulate labour force when
adverse situations occur. Organizations that fail to budget well always face
the risk of having labour shortages or increases in unwarranted times. This
kind of unpredictable often leads to inconsistent labour policies that
contribute to insecurity, low workers morale, and low productivity. Direct
materials budget is used in an organization to illustrate the amount and
cost of direct materials to be purchased. It also provides the foundation for
preparation of direct labour cost budget. Most organizations give this
budget in terms of the number of units and the total costs. Labour hours
are displayed using parameters like the type of operation, workers used,
and the overall cost centres involved. Total direct labour cost is given by:
Total direct labour cost = (Expected production) + (direct labour hour
per unit) + (direct labour cost per hour)
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6. Factory Overhead Budget
In cost accounting, factory overhead budget is referred to as a to-do list of
all anticipated manufacturing or production costs apart from for costs
related to direct material and labour. Factory overhead include items like
indirect material and labour, cost of insurance, rent and rates Factory
overhead are usually variable or fixed, or a blend of the two.
The major function for this schedule is that it critically analyses all the
anticipated production costs for the specific period of time. Factory
overhead budget does not include miscellaneous expenses incurred in
marketing and administration. These expenses are considered
miscellaneous because they are not involved in the production process. As
mentioned earlier, production overhead costs determine the total
production factory overhead costs and also determine the manufacturing
overhead cost per unit. The overall overhead costs include the costs of
materials required to make the finished product, direct labour costs needed
to produce one unit and the factory expenses required to create one
finished unit. The summation of the three costs gives the manufacturer a
rough idea of the cost required to produce one unit or finished product.
7. Selling and Administration Budget
Selling and administrative expense budget refers to a schedule of budgeted
expenses for other areas rather than manufacturing. In organizations this
type of budget consists of assemblage of many and individual budgets that
are forwarded by various departments. It provides a detailed plan
involving all the company’s operating expenses, other than the ones
involved in production. The said expenses are required in maximum in
order to maintain the sales and organization overall operations for a given
period of time. This comprehensive financial plan is analytically used by
the management to plan and control the day-to-day running of business
affairs and activities. In this budget the organization gives details of the
amount of money it projects to spend in support of manufacturing or
production and sales efforts to be taken. Selling and administrative
expense budget consists of employee’s salaries and benefits, office
supplies and expenses; expenses sustaining administration, taxes, and any
other professional services. Normally, these expenses differ little for
changes in the volume of production which fall within the period of
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budget. As a result, the selling and administrative budget is always a fixed
budget.
8. Cash Budget
Cash budget is definitively referred to as an evaluation of cash outflows
and inflows for an organization for a given period of time. They are
mostly used to appraise the performance of an organization and check
whether it has adequate cash to accomplish the overall regular operations
of a company. The budget is also used to check whether funds are being
used as per laid down guidelines. The cash budget shows the company’s
liquidity position and shows the capability of an organization to meet it
goals and objectives. Even though profits promote liquidity, they do not
have a high relationship. This budget assists the management in keeping
proper cash balances that relates with needs and objectives of the
organization. It also helps the management to plan usage of cash where by
it avoids cash fro lying idle and prevents possible funds shortages. most
budgets consists of four sections that include receipts section,
disbursement section, cash surplus section and finally the financing
section which gives details of payments and borrowings expected during
the budget period.
A budget properly prepared shows how funds flows in and out of the
organizations and indemnify any loopholes that may slow organization
productivity. The cash budget also determines the organization future
ability to pay expenses, loans and as well as debts. Banks and other
financial institutions grant loans to organizations that have effective
liquidity ratio and proper systematic cash plan. Similarly, organizations
that function on a casual basis are able to borrow more funds at unfortunate
times.Cash budgets are commonly given by:
Budgeted Cash Available = (Beginning Cash Balance) + (Budgeted
Cash Collections)

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2. Explain types of budgeting?
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3. What are the essentials of budgeting ?
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3.5 FIXED AND FLEXIBLE BUDGET
In the case of the Fixed Budget, there is no change in the budget of the
company because of the change in the level of activity or the output level,
whereas, in the case of the Flexible Budget, changes happen in the budget
of the company whenever there is any change in the level of activity or the
output level.
There are two kinds of budgets in cost accounting that differ in scope,
nature, and usefulness. We call these fixed budgets and flexible budgets.
• A fixed budget is a kind of budget where the income and the
expenditure are Pre-determined. Irrespective of any fluctuation or
change, this budget is static. Companies that are static and execute
the same transactions can significantly benefit from a fixed budget.
But wherever there are fluctuations, a fixed budget doesn’t turn out
to be the most suited one.
• On the other hand, a flexible budget is a budget that is flexible as
per the needs of the hour. For example, if the company sees that it
can sell off more of its products by expending more on advertising
costs, a flexible budget would help execute that. That’s why a
flexible budget is very effective for companies who go through
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many changes during a particular period. It is much more
complicated than the fixed budget too.
Fig 3.2 fixed and flexible budget

Key Differences between Fixed and Flexible Budget
• A fixed budget is a budget that doesn’t change due to any change
in activity level or output level. A flexible budget is a budget that
changes as per the activity level or production of units.
• The fixed budget is static and doesn’t change at all. On the other
hand, a flexible budget is adjustable as per the necessity of the
business.
• A fixed budget is always fixed. That means it is the same for any
activity level. A flexible budget, on the other hand, is semi-
variable. One part of it is fixed, and another changed as per the
activity level.
• The fixed budget is very simplistic. A flexible budget is pretty
complicated.
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• The fixed budget takes comparatively little time to prepare. On the
other hand, a flexible budget takes a lot more time.
• A fixed budget is estimated on the past data and management’s
anticipation regarding future events. On the other hand, a flexible
budget is estimated based on realistic situations.
• A fixed budget isn’t advantageous to medium and large enterprises
but only suitable for micro-organizations. A flexible budget is
suitable for all kinds of organizations – from micro to large.
Comparative Table
Basis for Fixed Budget Flexible Budget
Comparison
Meaning A fixed budget is a A flexible budget is a
budget that remains budget that changes as
static irrespective of per the necessity of
the activity level. activity level.
What it’s all about? The fixed budget Flexible budget
doesn’t change as per changes as per the
the fluctuations of fluctuations of
business. business;
Nature A fixed budget is A flexible budget is
always static. very dynamic.
Simplicity Pretty simple. Quite complex
Ease of preparation It is easy to prepare a It is quite tough to
fixed budget prepare a flexible
budget since one
needs to prepare for
all situations.
Consequences The dissonance The dissonance
between the actual between the actual
level and the budgeted level and the budgeted
level is quite high level is quite low.
since there is no
similarity in activity
level
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Comparison Comparison is Comparison is quite
difficult since the easy since the activity
activity levels are levels are quite
different at the actual similar.
level and budgeted
level.
Rigidity Pretty rigid, no Quite flexible, almost
fluctuation is taken every fluctuation is
into account. taken into account.
How is it estimated? A fixed budget is A flexible budget is
mostly estimated on prepared with realistic
assumptions and situations in mind.
anticipations.
Table 3.1 Comparative Table
Conclusions
By comparing the fixed and flexible budgets, we get an idea about which
one is more useful and applicable. Even if a fixed budget is elementary to
prepare, ideally, it’s not an excellent budgeting method, to be precise,
because fixed budgeting doesn’t leave room for fluctuations.
On the other hand, flexible budgeting is very much adjustable to business
situations. As a result, the business doesn’t need to incur losses. That’s it’s
prudence to use flexible budgeting no matter what scale of business you’re
in.
3.6 BUDGETARY CONTROL
Budgetary control is known as setting up a particular budget by

management to know the variation between the company’s actual
performance and budgeted performance. It also helps managers utilise
these budgets to monitor and control various costs within a particular
accounting period.
It is a process of planning and controlling all the functions of an
organization through comparison and analysis of budgeted numbers to
actual results. Comparing the budgeted numbers with actual results
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identifies the areas that need improvement and where cost reduction is
feasible or budgeted numbers need to be revised
.
Budgetary Control Types
There are various types of control an organization can implement –
Fig 3.3 Budgetary Control

1 – Operational Control
It covers the revenue and operating expenses, which are essential to
running a day-to-day business. The actual numbers to a budget are
compared monthly in most cases. It helps achieve control over EBITDA –
Earnings before interest, taxes, depreciation, and amortisation.
#2 – Cash Flow Control
This is an important budget that controls the working capital requirement
and cash management. Therefore, cash crunches could be detrimental to
everyday functioning, which is an important aspect.
#3 – Capex Control
It covers capital expenditures, like buying machinery or constructing a
building. Because it involves a huge amount of money, the control here
helps eliminate waste and reduce costs.
How is the Budget Prepared?
The budget is prepared based on previous expenses and considers any
foreseeable expenses that are bound to occur. Nowadays, in a
computerized environment, financial statements are prepared in excel
sheets. We have the option of selecting the quarterly average or yearly
average.
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For example – if we want to prepare the budget for July 2019 based on Q2
results, it will look like this –
1. Here, July Budget Formula = (April + May + June)/3, i.e., the

average of April, May, and June.
2. Based on April, May, and June actual results in the above
table, we expect the sales to be $6,250 and the net profit to be
$383 for July.
Now let’s assume that we got actual results for July and compare
them with the July Budget to get the difference –
In this case, the actual sales for July have exceeded the budget by $150.
This could be because more quantities were sold or the sales price per unit
has increased slightly. If the sales price per unit remained constant in July,
it means that the sales team has performed better than average, which is
why sales have increased.
Further analysis will show which region and which product the sale has
increased. In the same way, the operating cost has gone up by $33, which
could be due to an increased cost of any input material or incidental to
extra sales.
Advantages and Disadvantages of Budgetary Control
Advantages
• An effective tool for performance measurement of departments,
individuals, and cost centres.
• Identification of areas for reduction and efficiency improvement;
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• Increased efficiency and cost reduction result in profit
maximization;
• It also helps in introducing incentive schemes based on
performance.
• Cost reduction is always the primary target.
• Improves coordination between departments as the results and
costs are interrelated.
• It provides insight for in-depth analysis and any corrective action.
• Helpful in achieving an organization’s long-term goal.
Disadvantages
• Budgeted numbers often need revision as future prediction is
difficult.
• Time-consuming and costly process, need people and resources
Budgetary control processes.
• This process sometimes requires coordination between various
departments and is a difficult task.
• This process requires approval and support from top senior
management.
• Always comparing the actuals with a budget is detrimental to
employees’ motivation.
Limitations
• The future is unpredictable, so a budget always does not guarantee
a smooth future for an organization.
• Mostly usage of past recorded numbers
• Ignores demographics and many other economic factors
• Government policies and tax reforms are not always predictable
• Natural events like rain, monsoon, drought and other
uncontrollable factors affect an organization’s actual performance,
which cannot be considered for the budget.
Important Points to Note
• Any foreseeable revenue or expenses not included previously
should be included in the budget.
• The control functions should not be extreme to put personnel under
pressure. If it is, a change is needed.
• The standards need revision periodically.
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• Any change must be informed to all the stakeholders immediately
or in advance.
• The change in production, sales, or any function within the
organization will impact the control functions.
• The basis of cost allocation becomes important at micro-level
analysis, so if there is a change in the basis of cost allocation, it
should be analysed fully before putting it in place.
Conclusion
Budgetary control is an important aspect of an organization’s day-to-day
activities and long-term prospects. When placed carefully, it helps in
controlling cost and helps in efficiency improvement. There are other
things like standard costing, which is also a part of it.
We can calculate the cost, efficiency, yield or mix variances, etc. So, it
identifies the exact reason behind any variance when we compare the one-
period activity to another. Because in today’s cut-throat competition, the
organizations are always striving for excellence and best practices, and
budgetary control helps identify and attain those policies and practices.
It identifies if there is any issue or chance of improvement with input
material procurement, the desired output from the material, any processing
issue, or sales team administration. So, to understand the business
functions completely and root causes analysis of various outcomes,
budgetary control is one important tool in the hands of parties associated
with the organization.
3.7 ZERO BASE BUDGETING
What Is Zero-Based Budgeting (ZBB)?

Zero-based budgeting (ZBB) is a method of budgeting in which
all expenses must be justified for each new period. The process of zero-
based budgeting starts from a "zero base," and every function within an
organization is analysed for its needs and costs. The budgets are then built
around what is needed for the upcoming period, regardless of whether each
budget is higher or lower than the previous one.
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KEY TAKEAWAYS
Zero-based budgeting is a technique used by companies, but this type of
budgeting can be used by individuals and families.
Budgets are created around the monetary needs for each upcoming period,
like a month.
Traditional budgeting and zero-based budgeting are two methods used to
track expenditures.
Zero-based budgeting helps managers tackle lower costs in a company.
How Zero-Based Budgeting (ZBB) Works
In business, ZBB allows top-level strategic goals to be implemented into
the budgeting process by tying them to specific functional areas of the
organization, where costs can be first grouped and then measured against
previous results and current expectations.
Zero-Based Budgeting vs. Traditional Budgeting
Traditional budgeting calls for incremental increases over previous
budgets, such as a 2% increase in spending, as opposed to a justification
of both old and new expenses, as called for with zero-based budgeting.
Traditional budgeting also only analyses only new expenditures,
while ZBB starts from zero and calls for a justification of old, recurring
expenses in addition to new expenditures. Zero-based budgeting aims to
put the onus on managers to justify expenses and aims to drive value for
an organization by optimizing costs and not just revenue.
Example of Zero-Based Budgeting
Suppose a construction equipment company implements a zero-based
budgeting process calling for closer scrutiny of manufacturing department
expenses. The company notices that the cost of certain parts used in its
final products and outsourced to another manufacturer increases by 5%
every year. The company can make those parts in-house using its workers.
After weighing the positives and negatives of in-house manufacturing, the
company finds it can make the parts more cheaply than the outside
supplier.
Instead of blindly increasing the budget by a certain percentage and
masking the cost increase, the company can identify a situation in which
it can decide to make the part itself or buy the part from the external
supplier for its end products.
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Traditional budgeting may not allow cost drivers within departments to be
identified. Zero-based budgeting is a more granular process that aims to
identify and justify expenditures. However, zero-based budgeting is also
more involved, so the costs of the process itself must be weighed against
the savings it may identify
What Is Zero-Based Budgeting?
Zero-based budgeting originated in the 1960s by former Texas Instruments
account manager Peter Pyhrr.1 Unlike traditional budgeting, zero-based
budgeting starts at zero, justifying each individual expense for a reporting
period. Zero-based budgeting starts from scratch, analyzing each granular
need of the company, instead of incremental budgeting increases found in
traditional budgeting, Essentially, this allows for a strategic, top-down
approach to analyze the performance of a given project.
What Are the Advantages of Zero-Based Budgeting?
As an accounting practice, zero-based budgeting offers a number of
advantages including focused operations, lower costs, budget flexibility,
and strategic execution. When managers think about how each dollar is
spent, the highest revenue-generating operations come into greater focus.
Meanwhile, lowered costs may result as zero-based budgeting may
prevent the misallocation of resources that may happen over time when a
budget grows incrementally.
What Are the Disadvantages of Zero-Based Budgeting?
Zero-based budgeting has a number of disadvantages. First, it is timely
and resource-intensive. Because a new budget is developed each period,
the time cost involved may not be worthwhile. Instead, using a modified
budget template may prove more beneficial. Second, it may reward short-
term perspectives in the company by allocating more resources to
operations with the highest revenues. In turn, areas such as research and
development, or those that have a long-term horizon, may get overlooked.
3.8 PERFORMANCE BUDGETING
A performance budget is a budget that refers to programs, functions, and

performance that reflects the estimated expenses and revenues of the
companies, Government, or Statutory bodies.
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It is a budget that provides the objective and purpose for raising funds and
proposed activities and programs to be accomplished.
It is aimed to improve the efficiency of the people involved in performing
the budgeted task as per the budget.
Explanation
Performance budget is not just about the performance; it is much more
than evaluating performance or providing the performance information in
the budget. The main characteristics of this budget are introducing the
performance measurement in the budgeting procedure and including the
budget management system with the overall responsibility to compensate
for the excellent performances and punish the poor performances.
Purpose
A performance budget is mainly aimed at evaluating whether the budgeted
task is being carried out as planned and measuring the performance
involved in the budget procedure. The purpose is to ensure the
performance is as per the budgets and workings are being done smoothly
and the persons performing their task with utmost responsibility along
with efficient utilization of the funds raised and achieving the objectives.
Characteristics of Performance Budgets
Following are the characteristics:
1 – Improved Management
It helps in improving management skills and implementing the
management processes more efficiently. In addition, it helps in identifying
the organizational objectives, evaluating the program performances, and
understanding the problems with the operations and structure of the
program.
#2 – Higher Transparency & Accountability
The resources are categorised according to the programs and provide
performance indicators. It finds solution-based accountability
management responsible for the objectives they have to achieve.
#3 – Enhanced Communications
It helps enhance the communications as there are personal responsibilities
in performing their work, which will result in clear and improved
communication to avoid any delay in achieving the program’s objective
and helps in the individual performances of the management.
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#4 – Better Decision Making
It helps in deciding with the help of a better understanding of the processes.
Then, with the help of proper information, the management can implement
techniques for improvement and take appropriate actions to resolve the
issues involved.
Performance Budget Process
Below is the step by step process which takes place:
Fig 3.4 Performance Budget

Step #1 – Formulation of Objectives
It is the initial step to formulate the objective as to what to achieve. It is
essential to set the objectives, and then only the designated tasks can be
allocated to the teams based on their abilities.
Step #2 – Identifying various process and plans
The second stage is to identify the process and plan, which will help
achieve the objectives—various processes and strategies that can be
introduced to the program to achieve the objective.
Step #3 – Evaluation & Selection of the processes and plans
After identifying various processes and plans, the most profitable and easy
to communicate and implement plans and processes should be evaluated
and selected to achieve the objectives.
Step #4 – Development of Performance Criteria
It is another step to developing the criteria on which the processes and
plans will be rolled out. It is also essential to develop a basis to measure
the performances of the persons involved in the processes.
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Step #5 – Financial Planning
After developing the processes and identifying the steps involved, it is
required to plan for the financial requirement and prepare a financial
budget for the processes planned.
Step #6 – Assessing Performance
After rolling out the processes, it is vital to measure the performance given
by the persons involved in the process to initiate the actions accordingly.
In addition, it is crucial to see whose performance was up to the mark and
what changes are required to be made.
Step #7 – Correcting Deviations
It is the final step that corrects the deviations in the process and
performance. Also, to make the required changes in both the process and
performance to remove all those deviations.
Performance Budget Examples
• 80% reduction in the patients suffering from Malaria & Dengue by
2020.
• 20% decrease in manufacturing waste by introducing staff training
in the manufacturing process;
• 50% reduction in the infant mortality rate through the successful
implementation of vaccination centres in different parts of the
country by 2021;
Advantages
There are the following advantages:
• Clear Purpose: It provides a clear purpose for budgeting and
provides a clear understanding of the performance of the persons
involved. It becomes easier to access the deviations and the
performances and correct them.
• Improvement in Performance:It helps improve the performance,
as there will be a continuous check on the deviations and
performances to remove the errors and correct the deviations.
Therefore, this will help improve the performance.
• Sets Accountability: Since this budget provides a clear
understanding of the roles to be performed and tasks to be
completed by the persons, it provides accountability to every
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person for their roles and tasks, and they will be held accountable
for their part of the work.
• Transparency: It succeeds in making transparency in the
budgeted task and their performances, as it is clear to all their roles
and responsibility, and they are accountable for their jobs, which
will help in providing clear transparency in the processes.
Disadvantages
Following are the disadvantages:
• It is difficult for the long-term processes as there is a continuous
update in the processes;
• There can be the possibility of manipulation of data;
• There is a requirement for a robust system of accounting;
• These budgets are subjective.
Conclusion
A performance budget is vital for the organization to assess the
performance of the persons handling the processes and remove the
deviations they face while performing their tasks.
4...Explain the difference between fixed and flexible budget
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5. What is budgetary control?
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6. What are the objectives of zero-based budgeting?
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3.9 LET US SUM UP
1. The Budget Summary includes budgeted amounts, encumbrances,

transaction totals, and budget balances and is the online equivalent
to the printed BSR. The Budget Summary Report now also
includes Open Balances.
2. Budgeting in business is a process of looking at a business'
estimated incomes (the money that comes into the business from
selling products and services) and expenditures (the money that
goes out form paying expenses and bills) over a specific period in
the future.
3. Once developed, the budgeting system provides management with
a means of controlling its activities and of monitoring actual
performance and comparing it to budget goals. A comprehensive
profit planning and control program involves budgeting the
materials and parts used in the production process.
4. Budgeting is the planning and approval stage in this process.
Accounting and auditing of government expenditures (e.g. internal
and external controls) comes in later. The budget process is the
process through which government incomes and expenditures are
determined and allocated.
5. The rule states that you should spend up to 50% of your after-tax
income on needs and obligations that you must-have or must-do.
The remaining half should be split up between 20% savings and
debt repayment and 30% to everything else that you might want.
310 KEY WORDS
1. Budgeting -A budget is a financial document used to project future

income and expenses. To put it simply, a budget plans future
saving and spending as well as planned income and expenses.
2. Fixed budget-A fixed budget is a financial plan that is not
modified for variations in actual activity. It is the most commonly-
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used type of budget, because it is easier to construct than a flexible
budget
3. Flexible budget-A flexible budget adjusts based on changes in
actual revenue or other activities. The result is a budget that is
fairly closely aligned with actual results. This approach varies from
the more common static budget, which contains nothing but fixed
expense amounts that do not vary with actual revenue levels.
4. Budgetary control-Budgetary control is financial jargon for
managing income and expenditure. In practice it means regularly
comparing actual income or expenditure to planned income or
expenditure to identify whether or not corrective action is required.
5. Zero base budgeting-Zero-based budgeting (ZBB) is a budgeting
technique in which all expenses must be justified for a new period
or year starting from zero, versus starting with the previous budget
and adjusting it as needed.

Ans.1 Marginal costing calculates the change in the overall production
cost owing to variation in the volume of the targeted output. The price
varies depending on the number of products. Marginal costs include
expenses incurred at each production stage due to changes in resources
needed to create the required additional quantity of products or services.
Ans.2 The marginal costing technique considers variable costs to as the
actual production cost. In contrast, absorption costing is the method that
considers both variable and fixed costs as part of the production cost.
Ans.3 The difference between the profit figures calculated under
absorption and marginal costing principles is caused by the treatment of
fixed production overheads.
Ans.4 A fixed budget is a budget that doesn't change due to any change in
activity level or output level. A flexible budget is a budget that changes as
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per the activity level or production of units. The fixed budget is static and
doesn't change at all.

Ans.5 Budgetary control is financial jargon for managing income and
expenditure. In practice it means regularly comparing actual income or
expenditure to planned income or expenditure to identify whether or not
corrective action is required.
Ans.6 The primary objective of zero-based budgeting is the reduction of
unnecessary costs by looking at where costs can be cut. To create a zero-
base budget involvement of the employees is required.

House.
McGraw-Hill.
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1. Give the meaning of budgeting?

2. What are the primary objectives of budgeting?
3. What is difference between fixed and flexible budget?
4. What is budgetary control?
5. Which is better zero base budgeting or performance budgeting. Explain
with valid reason?
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UNIT – 4 STANDARD COSTING AND
VARIANCE ANALYSIS
STRUCTURE
4.0 Objectives
4.1 Introduction
4.2. Standard costing as a control technique
4.3 Variance analysis-Meaning and Importance
4.4 kinds of variance and their uses
4.5 Disposal of variances
4.6Let Us Sum Up
4.7 Key Words
4.0 OBJECTIVES
● To understand the concepts, methods,and techniques of variance

analysis
● To discuss the kinds of variance analysis
• To understand the concept of disposal of variance
4.1 INTRODUCTION TO STANDARD COSTING

AND VARIANCE ANALYSIS
What is Standard Costing?

Standard costing is the practice of substituting an expected cost for an
actual cost in the accounting records. Subsequently, variances are recorded
to show the difference between the expected and actual costs. This
approach represents a simplified alternative to cost layering systems, such
as the FIFO and LIFO methods, where large amounts of historical cost
information must be maintained for inventory items held in stock.
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Standard costing involves the creation of estimated (i.e., standard) costs
for some or all activities within a company.
The core reason for using standard costs is that there are a number of
applications where it is too time-consuming to collect actual costs, so
standard costs are used as a close approximation to actual costs. This
results in significant accounting efficiencies.
Since standard costs are usually slightly different from actual costs, the
cost accountant periodically calculates variances that break out differences
caused by such factors as labour rate changes and the cost of materials.
The cost accountant may periodically change the standard costs to bring
them into closer alignment with actual costs.
What is variance analysis?
Variance analysis is the quantitative investigation of the difference
between actual and planned behavior. This analysis is used to maintain
control over a business through the investigation of areas in which
performance was unexpectedly poor. For example, if you budget for sales
to be $10,000 and actual sales are $8,000, variance analysis yields a
difference of $2,000. Variance analysis is especially effective when you
review the amount of a variance on a trend line, so that sudden changes in
the variance level from month to month are more readily apparent.
Variance analysis also involves the investigation of these differences, so
that the outcome is a statement of the difference from expectations, and an
interpretation of why the variance occurred
. To continue with the example, a complete analysis of the sales variance
would be:
"Sales during the month were $2,000 lower than the budget of $10,000.
This variance was primarily caused by the loss of ABC customer at the
end of the preceding month, which usually buys $1,800 per month from
the company. We lost ABC customer because we had several instances of
late deliveries to it over the past few months."
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4.2 STANDARD COSTING AS A CONTROL

TECHNIQUE
Standard costing is technique of cost planning and control, based on

scientific analysis of elements of cost in terms of standard input / output
norms and standard rates / price per unit of input. The following process
is involved in setting and practicing standard cost.
• Establish standard cost, component-wise, for each output
• Measure the actual cost, component-wise, for each output
• Their comparison with the actual costs and the measurement of
variances.
• The location of responsibility for the variances and the corrective
action to be taken.
• The analysis of variances for ascertaining the reasons for the same.
Establishment of a Standard Costing System
The installation of Standard Costing System in a manufacturing concern
involves the following steps:
• Standardisation of Functions: All activities should be standardised
and the technical processes of operations should also be susceptible
to planning.
• Establishment of Cost Center
• Classification of Accounts: The different accounts can be codified
and different symbol may be used to facilitate speedy collection,
analysis and reporting.
• Setting up of Standards: Standards may be basic (long period) and
current (short period).
The standard should be realistic and attainable. Unrealistic standards
provoke resentment and depress performance. Loose standard leads the
management to indulge in self-congratulation. Normally, a period of one
year is more realistic, as it coincides with the budget period and the normal
accounting period.
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Setting of Standard Costs

Standard Costs should be determined for each element of cost separately
and accurately. Like a budget committee in big institutions, there should
be a standards committee or Standards Division which will be vested with
the work of setting standard costs. The Standards Committee generally
consists of all functional heads like program manager, personal manager,
etc.
Standard Costs
For any given program or unit the following standards must be determined:
• Standard material costs
• Standard labour costs
• Standard direct costs
• Standard variable overhead costs
• Standard fixed overhead costs
• Standard selling prices and profit
The standard direct material cost is found by multiplying the quantity of
materials to be purchased with the rate of a price at which they are
available.
Determination of Standard Labour cost involves fixation of
• Standard labour grades

• Standard labour times i.e., standard hours through “Time, Motion
and Fatigue Study” with the help of work study engineers and
• Standard wage rates based on time rate, piece rate and premium
plans.
Standard Direct (expenses) cost is any expenditure (other than direct
material and direct labour which is directly to be incurred on a specific
cost unit. It is charged directly to the particular cost standard (account)
concerned.
Standard Overhead costs are classified as manufacturing, administration.
selling and distribution overheads. They are also classified as fixed,
variable and semi-variable so that correct estimate for each class may be
prepared for the budget period. Standard overhead rate is determined on
the basis of past records and future trend of prices.
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Determination of Standard Hour:Time factor is common to all the

operations. So if standard costing ‘Standard hour’ is applied to the quantity
of work or output which should be performed in one hour. A standard hour
may be defined as an hour which measures the amount of work that should
be performed in one hour under standard conditions. It has a practical
advantage in the measurement of ‘Efficiency Ratio’ and ‘Activity Ratio’.
Efficiency ratio: Efficiency ratio is the number of standard hours
equivalent to the work produced, expressed as a percentage of the actual
hours spent in producing that work.
Efficiency Ratio = [Standard hours for actual production/Actual
hours for action production] x 100
Activity Ratio: Activity Ratio is the number of standard hours equivalent
to the work produced, expressed as a percentage of budgeted standard
hours.
Activity Ratio = [Standard hours for actual production/Standard
hours for budgeted production] x 100
Advantages of Standard Costing

Though most companies do not use standard costing in its original
application of calculating the cost of ending inventory, it is still useful for
a number of other applications. In most cases, users are probably not even
aware that they are using standard costing, only that they are using an
approximation of actual costs. Here are some potential uses:
• Budgeting. A budget is always composed of standard costs, since
it would be impossible to include in it the exact actual cost of an
item on the day the budget is finalized. Also, since a key
application of the budget is to compare it to actual results in
subsequent periods, the standards used within it continue to appear
in financial reports through the budget period
• Inventory costing. It is extremely easy to print a report showing
the period-end inventory balances (if you are using a perpetual
inventory system), multiply it by the standard cost of each item,
and instantly generate an ending inventory valuation. The result
does not exactly match the actual cost of inventory, but it is close.
However, it may be necessary to update standard costs frequently,
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if actual costs are continually changing. It is easiest to update costs
for the highest-dollar components of inventory on a frequent basis,
and leave lower-value items for occasional cost reviews.
• Overhead application. If it takes too long to aggregate actual
costs into cost pools for allocation to inventory, then you may use
a standard overhead application rate instead, and adjust this rate
every few months to keep it close to actual costs.
• Price formulation. If a company deals with custom products, then
it uses standard costs to compile the projected cost of a customer’s
requirements, after which it adds a margin. This may be quite a
complex system, where the sales department uses a database of
component costs that change depending upon the unit quantity that
the customer wants to order. This system may also account for
changes in the company’s production costs at different volume
levels, since this may call for the use of longer production runs that
are less expensive.
Nearly all companies have budgets and many use standard cost
calculations to derive product prices, so it is apparent that standard costing
will find some uses for the foreseeable future. In particular, standard
costing provides a benchmark against which management can compare
actual performance.
Problems with Standard Costing
Despite the advantages just noted for some applications of standard
costing, there are substantially more situations where it is not a viable
costing system. Here are some problem areas:
• Cost-plus contracts. If you have a contract with a customer under
which the customer pays you for your costs incurred, plus a profit
(known as a cost-plus contract), then you must use actual costs, as
per the terms of the contract. Standard costing is not allowed.
• Drives inappropriate activities. A number of the variances
reported under a standard costing system will drive management
to take incorrect actions to create favourable variances. For
example, they may buy raw materials in larger quantities in order
to improve the purchase price variance, even though this increases
the investment in inventory. Similarly, management may schedule
longer production runs in order to improve the labour efficiency
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variance, even though it is better to produce in smaller quantities
and accept less labour efficiency in exchange
• Fast-paced environment. A standard costing system assumes that
costs do not change much in the near term, so that you can rely on
standards for a number of months or even a year, before updating
the costs. However, in an environment where product lives are
short or continuous improvement is driving down costs, a standard
cost may become out-of-date within a month or two.
• Slow feedback. A complex system of variance calculations is an
integral part of a standard costing system, which the accounting
staff completes at the end of each reporting period.
• If the production department is focused on immediate feedback of
problems for instant correction, the reporting of these variances is
much too late to be useful.
• Unit-level information. The variance calculations that typically
accompany a standard costing report are accumulated in aggregate
for a company’s entire production department, and so are unable
to provide information about discrepancies at a lower level, such
as the individual work cell, batch, or unit.
The preceding list shows that there are many situations where standard
costing is not useful, and may even result in incorrect management actions.
Nonetheless, as long as you are aware of these issues, it is usually possible
to profitably adapt standard costing into some aspects of a company’s
operations.
4.3 VARIANCE ANALYSIS -MEANING AND

IMPORTANCE
Forecasting how much you’re going to spend and receive is a key part of
running a business. But, rarely do predictions match actual income and
expenses. More than likely, you’ll experience a variance in accounting at
some point.
Variances are normal in accounting. But, that doesn’t mean you can’t
analyze variances and learn from them. Read on to learn:
• Variance meaning in accounting
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• Formula for calculating variance amounts
• How to analyze variances
What is a variance in accounting?
A variance in accounting is the difference between a forecasted amount
and the actual amount. Variances are common in budgeting, but you can
have a variance in anything that you forecast. Basically, whenever you
predict something, you’re bound to have either a favorable or unfavorable
variance.
Favorable variances mean you’re doing better in an area of your business
than anticipated. Unfavorable variances mean your prediction is better
than the actual outcome.
You can have variances in your:
• Budget
• Materials purchased
• Labour hours
• Overhead costs
• Materials produced
• Number of sales
• Revenue
Due to the different types of variances, you might measure variances in

dollars, units, or hours.
You can measure your total variance (e.g., your budget as a whole) or
break it down (e.g., sales revenue). Finding specific variances can give you
a more detailed view of your business’s performance and financial health.
Only looking at your total variance could give you a skewed impression
of your business’s performance and health.
For example, you could have an overall favorable budget variance. But
after breaking down the variances, you notice that your revenue is greater
than predicted, but you spent more on materials than anticipated. Using
this information, you can shop around for new vendors and cut down
unnecessary expenses.
Looking at variance in cost accounting helps you nip problems in the bud
that could otherwise go undetected—and snowball into bigger issues.
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Variance in accounting formula

Before you can figure out your variance, you need to know how to
calculate it. Whether you’re looking at a variance in labor, pricing, or
material usage, the formula is the same:
Variance = Forecast – Actual
To find your variance in accounting, subtract what you actually spent or

used (cost, materials, etc.) from your forecasted amount.
If the number is positive, you have a favorable variance (yay!). If the
number is negative, you have an unfavorable variance (don’t panic—you
can analyze and improve).
Want to calculate your variance accounting as a percentage? You can do
that, too. Keep in mind that a favorable variance percentage is expressed
as a negative number, whereas an unfavorable variance is positive. Here’s
the formula to calculate your variance as a percentage
Variance = [(Actual / Forecast) – 1] X 100
In this formula, divide what you actually spent or used by what you
predicted. Then, subtract 1 and multiply the total by 100 to turn it into a
percentage.
Variances Formula Example
Want to see these formulas in action? Take a look at our examples to see
both the amount and percentage for unfavorable and favorable variances.
Unfavorable variance
Let’s start with the variance amount formula. Say you predict to spend
$5,000 on inventory. But, there’s a supply shortage that drives up your
costs to $7,000. What’s your variance?
Variance = $5,000 – $7,000
Your variance is -$2,000, which is an unfavorable variance. What is this

amount as a percentage? Use the other variance formula to find out:
Variance = [($7,000 / $5,000) – 1] X 100
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Your variance is 40%. This shows that your actual cost was 40% greater
than your prediction.
Favorable variance
Now, let’s look at a favorable variance example. Say you predicted you
would spend 1,000 hours on Project XYZ. Instead, you only spent 500
hours on the project. What’s your variance?
Variance = 1,000 – 500
Your favorable variance is 500, showing you spent 500 fewer hours on the
project than you projected. Here’s that as a percentage:
Variance = [(500 / 1,000) – 1] X 100
Your variance is -50%, showing that your actual labor hours were 50%
fewer than you predicted.
Variance analysis accounting process
Understand variance in accounting and why it’s important? Check. Now,
here’s what to do with that information to help your business.
It’s time to analyze said variance. So, what is variance analysis?
You can conduct a variance analysis of financial statements, hours your
employees log, purchase receipts, etc.
Follow these general steps to start your variance analysis in cost
accounting.
1. Calculate your overall variance
First, determine what you want to analyze. Is it your annual budget? A
project you’re working on? Employee input and output?
Once you’ve decided what you want to measure, calculate the difference
between your prediction and actual results.
Is your variable favorable or unfavorable? Regardless of the answer, move
on to the next step to get a better picture of where you’re over- or
underperforming.
2. Break it down by analyzing specific variances
Take a look at the specific variances for whatever you’re measuring. If it’s
your budget, you can start by looking at the differences between your
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budgeted and actual cost for each of your expenses. And if you’re
measuring how long it took you to complete Project XYZ, you could look
at the number of hours it took each department compared with your
predictions.
Whatever it is you’re breaking down, start by gathering documents to
compare actual results to your predictions.
For example, you may need:
• Receipts
• Employee time logs
• Financial statements
• Write out each variance to help you analyze your accounting
information and make well-informed decisions.
Of course, if you’re off by an insignificant amount (e.g., $20), you
probably don’t need to waste time analyzing the reason why.
Keep in mind that there are some challenges that come with looking at
specific variances. It can be a time commitment to gather records and sort
through information (especially if you’re not using tools like accounting
software).
3. Explain the reasons for different outcomes
Here’s where you get to play detective. Why is there a variance? Refer to
the specific variances you calculated and look at your records to identify
why there could be a difference.
Don’t skip over favorable variances. Sure, it’s great that you’re doing
better in said area than you predicted. But by assessing the reason why,
you may be able to apply that success to underperforming areas. Not to
mention, you can duplicate the success for next time, too.
Take a look at some of the reasons for variances in accounting:
• Supply shortages
• Vendor discounts
• Natural disasters and emergencies (e.g., COVID-19)
• Employee terminations
• Employee absences
• Drop in sales
• Expense cuts
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4. Report variances to interested parties
Don’t file away your findings on a shelf to collect dust. Instead, share the
information (both the good and the bad) with interested parties, such as:
• Managers
• Employees
• Investors
5. Make improvements to underperforming areas

You’ve put in the time calculating, analyzing, and explaining your
variances. Now, it’s time to put that information into action. Use what you
learned to make improvements to underperforming areas.
You can use variances to make changes like:
• Getting rid of expenses
• Changing suppliers
• Finding ways to boost sales
• Terminating employees
• Streamlining processes
And, remember to keep a good thing going in over-performing areas, too.
Need and Importance of Variance Analysis
• Variance analysis aids efficient budgeting activity as management
wishes to have lower deviations from the planned budgets.
Wanting a lower deviation usually leads managers to make detailed
and forward-looking budgetary decisions.
• Variance analysis acts as a control mechanism. Analysis of
significant deviations on essential items helps the company know
the causes, and it allows management to look into possible ways of
how much deviation can be avoided.
• Variance analysis facilitates assigning responsibility and engages
control mechanisms in departments where required. For example,
suppose labor efficiency variance is seen to be unfavorable, or
procurement of raw material cost variance is unfavorable. In that
case, the management can enhance control of these departments to
increase efficiency.
Advantages of Variance analysis
The following are the merits of variance analysis.
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1. The reasons for the overall variances can be easily find out for taking
remedial action.
2. The sub-division of variance analysis discloses the relationship
prevailing between different variances.
3. It is highly useful for fixing responsibility of an individual or department
or section for each variance separately.
4. It highlights all inefficient performances and the extent of inefficiency.
5. It is used for cost control.
6. The top management can follow the principle of management by
exception. Only unfavorable variances are reporting to management.
7. Sometimes, the variances can be classified as controllable and
uncontrollable variances. In this case, controllable variances are taken into
consideration for further action.
8. Profit planning work can be properly carried on by the top management.
9. The results of managerial action can be a cost reduction.
10. It creates cost consciousness in the minds of the every employee of
business organization.
Limitations of Variance Analysis
The variance analysis is of immense use to corporations; however, it
comes with its own set of limitations as follows:
• Variance analysis as an activity is based on financial results, which
are released much later after quarterly closing; there may be a time
gap that may affect the remedial action-taking ability to a certain
extent. Also, not all sources of variance may be available in
accounting data, which makes acting upon variances difficult.
• Suppose the budgeting is not made, considering the detailed
analysis of each factor. In that case, the budgeting exercise may be
loosely done, which is bound to deviate from the actual numbers—
after that, analyzing variances may not be a useful activity.
1. Explain standard costing as a control technique?
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2. Explain variance analysis?
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3. What is the concept of variance analysis?
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4.4 KINDS OF VARIANCE
Types of Variances which we are going to study in this chapter are:-

• Cost Variances
• Material Variances
• Labour Variances
• Overhead Variance
• Fixed Overhead Variance
• Sales Variance
• Profit Variance
Cost Variances
A cost variance is a difference between an actual expenditure and the
expected (or budgeted) expenditure. A cost variance can relate to virtually
any kind of expense, ranging from elements of the cost of goods sold to
selling or administrative expenses. This variance is most useful as a
monitoring tool when a business is attempting to spend in accordance with
the amounts stated in its budget.
The cost variance formula is usually comprised of two elements, which
are:
• Volume variance. This is the difference in the actual versus
expected unit volume of whatever is being measured, multiplied
by the standard price per unit.
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• Price Variance. This is the difference between the actual versus
the expected price of whatever is being measured, multiplied by
the standard number of units.
When you combine the volume variance and the price variance, the
combined variance represents the total cost variance for whatever the
expenditure may be.
Material Variances
The difference between the standard cost of direct materials and the actual
cost of direct materials that an organization uses for production is known
as Material Variance.
Material Cost Variance Formula:
Standard Cost – Actual Cost
In other words, (Standard Quantity x Standard Price) – (Actual Quantity x
Actual Price)
Material Variance is further sub-divided into two heads:
• Material Price Variance:
MPV = (Standard Price – Actual Price) x Actual Quantity
• Material Usage Variance:
MUV = (Standard Quantity – Actual Quantity) x Standard Price
Labour Variances
Labor Variance arises when there is a difference between the actual cost
associated with a labour activity from the standard cost.
Labor Variance Formula:
Standard Wages – Actual Wages
In other words, (Standard Hours x Standard Rate) – (Actual Hours x
Actual Rate)
Labor Variance is further sub-divided into two heads:
• Labor Rate Variance:
LRV = (Standard Rate – Actual Rate) x Actual Hours
• Labor Efficiency Variance:
LEV = (Actual Hours – Standard Hours) x Standard Rate
Overhead (Variable) Variance
Variable Overhead Variance arises when there is a difference between the
actual variable overhead and the standard variable overhead based on
budgets.
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Variable Overhead Variance Formula:
Standard Variable Overhead – Actual Variable Overhead
In other words, (Standard Rate – Actual Rate) x Actual Output
Variable Overhead Variance is further sub-divided into two heads:
• Variable Overhead Efficiency Variance:
VOEV = (Actual Output – Standard Output) x Standard Rate
• Variable Overhead Expenditure Variance:
VOEV = (Standard Output x Standard Rate) – (Actual Output x
Actual Rate)
Fixed Overhead Variance
It arises when there is a difference between the standard fixed overhead
for actual output and the actual fixed overhead.
Fixed Overhead Variance Formula:
= (Actual Output x Standard Rate per unit) – Actual Fixed Overhead
Fixed Overhead Variance is further sub-divided into two heads:

• Fixed Overhead Expenditure Variance:
FOEV = Standard Fixed Overhead – Actual Fixed Overhead
• Fixed Overhead Volume Variance:
FOVV = (Actual Output x Standard Rate per unit) – Standard
Fixed Overhead
Sales Variance
Sales Variance is the difference between the actual sales and budgeted
sales of an organization.
Sales Variance Formula:
= (Budgeted Quantity x Budgeted Price) – (Actual Quantity x Actual
Price)
Sales Variance is further sub-divided into two heads:
• Sales Volume Variance:
SVV = (Budgeted Quantity – Actual Quantity) x Budgeted Price
• Sales Price Variance:
SPV = (Budgeted Price – Actual Price) x Actual Quantity
Profit Variance
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Profit variance is the difference between the actual profit experienced and
the budgeted profit level. There are four types of profit variance, which
are derived from different parts of the income statement. They are:
• Gross profit variance. This measures the ability of a business to
generate a profit from its sales and manufacturing capabilities,
including all fixed and variable production costs.
• Contribution margin variance. This is the same as the gross
profit variance, except that fixed production costs are excluded.
• Operating profit variance. This only measures the results of
operations; it excludes all financing and extraneous gains and
losses. This variance provides the best view of how the core
operations of a business are functioning.
• Net profit variance. This is the most commonly-used version of
the profit variance. It encompasses all aspects of a company’s
financial results, without exception.
Conclusion
Thus, Variance Analysis is important to analyze the difference between
the actual and planned behaviour of an organization. If such analysis is not
carried out at regular intervals, it may cause a delay in the management
action to control its costs.
Sales Quantity The quantum of (Actual Quantity

Variance sales. Sold – Budgeted
Quantity) X Profit
per Unit
This is directly
affected by a
sudden rise/fall in
demand for the
products or
services offered by
the company.
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Sales Mix The proportion of This may happen
Variance various products due to shifts in the
sold, i.e., the sales demand curve.
mix.
Sales Price The selling price of (Actual Selling
Variance the products. This Price – Standard
may happen due to Selling Price) X
higher Quantity Sold
competition/
achievement of
higher market
share.
Raw Material The direct cost of (Standard quantity
Price Variance raw materials used. Of Raw Material *
Standard Cost Per
Unit) – (Actual
Quantity Of Raw
Material *Actual
Cost Per Unit)
This may happen
due to changes in
external factors,
e.g., cheaper
imports due to
changes in
taxation, etc.
Raw Material The quantity of (Budgeted
Usage Variance raw materials used Quantity – Actual
up. Quantity) *
Standard Price
Many reasons
could cause this
deviation,
including sales
volume.
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The cost of the standard proportion of raw

materials used by the company to produce
goods
Costs of labor paid to Labour rate variance

produce the goods. helps the management
This may happen due in optimizing labor
to economies of cost, which is one of
scale or due to the key components of
unplanned direct cost
recruitments.
The number of hours (Standard/Budgeted
utilized by the labor Hours –Actual
resource of the Number of Hours) *
company. Budgeted Hourly Rate
Fixed cost Usually, these do not
expenditure incurred deviate much unless
by the company like expansion plans come
rent, electricity, up or expansion plans
machinery, land, etc. which were planned
get delayed or halted
due to some problem,
some unplanned
losses happen, or
natural calamity
occurs.
Variable costs like Deviation in this
indirect material cost measure could be on
the favorable side if
costs reduce due to
economies of scale or
could be on the
unfavorable side due
to reasons such as an
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increase in idle time,
reduction in sales, etc.
Table 4.1 difference between the actual and planned behaviour
of an organization.
4.5 DISPOSAL OF VARIANCE
In order to make the analysis a control instrument, the management should

investigate the causes of variances and take the necessary corrective
measures. Another method is to carry forward the variances to the next
financial year by crediting the same to a reserve account to be set off in
the subsequent year or years. The favourable and adverse variances may
cancel each other in the course of reasonable time and thus be disposed-
off.
1. Materials Price Variance:
(a) Causes:
Change in market price, delivery costs; purchase of non-standard
materials, emergency purchases, incorrect shipping instruction, loss of
discount, etc.
(b) Disposition:
If all or a portion of the price variance is the result of inefficiencies or a
saving has resulted from efficient purchasing, the amount may be adjusted
to P&L account. If it is due to incorrect standards or change in market price
the amount may be adjusted to inventories and cost of goods sold.
2. Materials Usage Variance:
(a) Causes:
Poor quality of materials; change in material mix, product or production
methods; careless handling; excessive waste or scrap; incorrect setting of
standards.
(b) Disposition:
The amount of usage variance resulting in inefficiency in handling and
processing materials is transferred to profit and loss account. The amount
of usage variance due to incorrect standards is apportioned to work in
progress, finished goods and cost of goods sold.
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3. Direct Wages Rate Variances:
(a) Causes:
General rise due to award or agreement, non-standard grade, abnormal
overtime or payment above or below standard rates during seasonal or
emergency operations.
(b) Disposition:
The amount of variance arising out of inefficiency can be controlled if
transferred to profit and loss account. The amount of variance resulting
from the use of out-of-date standards or from conditions beyond the
control of management is adjusted to work-in-progress, finished goods
and cost of goods sold, on the basis of wages or time.
4. Direct Labour Efficiency Variance:

(a) Causes:
Poor working conditions, abnormal idle time i.e., power failure,
breakdown, go-slow technique, quality of supervision, non-standard grade
of material, or employees’ non-co-operation in service departments.
(b) Disposition:
The amount of variance attributed to various forms of inefficiency which
are controllable is transferred to profit and loss account. The amount of
variance resulting from improperly prepared standards and from
conditions beyond the control of management may be adjusted to work-
in-progress, finished goods and cost of goods sold.
5. Overhead Expenditure Variance:
(a) Causes:
Under or over utilisation of a service; seasonal conditions; inefficiency in
the use of a service (e.g. electricity in lieu of gas).
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(b) Disposition:
The amount of variance due to seasonal conditions should be treated as a
deferred item. The amount arising out of inefficiency which is controllable
is transferred to profit and loss account.
The amount resulting from incorrectly prepared standard and from
conditions beyond control is adjusted to work-in-progress, finished goods
and cost of goods sold.
6. Overhead Cost of Capacity Variance:
(a) Causes:
Calendar variations, abnormal idle time such as strikes, breakdowns
absenteeism, labour shortage, etc.
(b) Disposition:
The amount of seasonal variations is reasonably a deferred item. The
amount arising from inefficient operations controllable by management is
transferred to profit and loss account. The amount of variance arising out
of abnormal idle time and beyond control of management is transferred to
profit and loss account.

4. What is variance analysis used for?
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5. What is variance analysis formula?
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6. What are the kinds of variance?
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4.6 LET US SUM UP
1. A standard cost is an estimated expense that normally occurs

during the production of a product or performance of a service. In
other words, this is theoretically the amount of money a company
will have to spend to produce a product or perform a service under
normal conditions.
2. The objective of the standard costing and budgeting is to achieve
maximum efficiency and cost control. Under both the systems
actual performance is compared with predetermined standards,
deviations, if any, are analysed and reported.
3. Here is a simple standard costing example. Let's take a company
that makes widgets. Based on historical data, a cost analyst
determines that producing one widget typically requires 1 pound
of raw material costing $2 dollars and 1 hour of labor costing $20
dollars.
4. Variance analysis can be summarized as an analysis of the
difference between planned and actual numbers. The sum of all
variances gives a picture of the overall over-performance or under-
performance for a particular reporting period
5. Variance analysis is used in budgeting and management
accounting. It is a study of the variation (difference) between an
actual (forecasted) action and a planned action. Variance
analysis carries out a quantitative investigation to find out the
difference between the actual cost and the standard cost of
production
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4.7 KEY WORDS
1. Variance analysis-Variance analysis is the study of deviations of

actual behaviour versus forecasted or planned behaviour in
budgeting or management accounting. This is essentially
concerned with how the difference of actual and planned behaviors
indicates how business performance is being impacted
2. Standard costing-Standard costing is the practice of estimating
expenses in the production process since manufacturers cannot
predict actual costs in advance. Manufacturers use this
methodology to plan upcoming costs of various expenses, such as
labour, materials, production and overhead
3. Overhead variance-Overhead variance refers to the difference
between actual overhead and applied overhead. You can only
compute overhead variance after you know the actual overhead
costs for the period. Overhead is applied based on a predetermined
rate and a cost driver.
4. Material cost variance - It is the difference between actual cost
of materials used and the standard cost for the actual output.
5. Labour cost variance -It is the difference between the actual
direct wages paid and the direct labour cost allowed for the actual
output to be achieved.

Ans.1 Standard costing is a technique where the firm compares the costs
that were incurred for the production of the goods and the costs that should
have been incurred for the same. Essentially it is the comparison between
actual costs and standard costs. The differences between the two are
variances.
Ans.2 Variance analysis refers to identifying and examining the difference
between the standard numbers expected by the business and the actual
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numbers achieved, which helps the company analyze favorable or
unfavorable outcomes.
Ans.3 Variance analysis is the study of deviations of actual behaviour
versus forecasted or planned behaviour in budgeting or management
accounting. This is essentially concerned with how the difference of actual
and planned behaviors indicates how business performance is being
impacted.
Ans.4 Variance analysis is used in budgeting and management
accounting. It is a study of the variation (difference) between an actual
(forecasted) action and a planned action. Variance analysis carries out a
quantitative investigation to find out the difference between the actual cost
and the standard cost of production
Ans.5 Here are the expense and revenue variance analysis formulas:
Revenue Variance = Actual – Budget. Expense Variance = Budget –
Actual.
• Ans.6 Sales variance.
• Direct material variance.
• Direct labour variance.
• Overhead variance.

House.
140
McGraw-Hill.
1. Give the meaning of standard costing?

2. What are the primary objectives of standard costing?
3. Give the meaning and importance of variance analysis?
4. What are the different kinds of variance analysis?
5. What is disposal of variance?
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UNIT -5 CONTEMPORARY ISSUES
STRUCTURE
5.0 Objectives
5.1 Introduction to contemporary issues
5.2 Horizontal analysis
5.3 Vertical analysis
5.4 Ratio analysis
5.5 Cash flow analysis
5.6 Reporting to Management
5.7 Types of Report
5.8 Modes of reporting
5.9 Reporting at different level of management
5.10Lets sum up
5.11 Key Words
5.12Some Useful Books
5.0 OBJECTIVES
● To understand the concepts, methods,and techniques of reporting

management
● To discuss the differences between horizontal,,vertical and ratio
Analysis
• State the models of reporting
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5.1 INTRODUCTION TO CONTEMPORARY

ISSUES
Accounting systems take economic events and transactions that have

occurred and process the data in those transaction into information that is
helpful to managers and others users. It provides information about
financial statements and performance reports.
Complex Business Environment:
Modern cost accounting provides information managers need when
making decisions.
Cost accounting provides information also for management accounting
and financial accounting. Management accounting is a specialized sub-set
of accounting, focusing on internal needs of businesses. The business
environment is changing rapidly. Business is expanding their areas day by
day. For that reason, management of the companies is also becoming
complex. For reducing the complexity the new issues are coming to cope
up in the new environment. The contemporary issues of the management
accounting are evolving to help and provide information to the managers
in a new business environment.
Over the past decade, management accounting has seen changes not just
within existing domains of the field but has also witnessed extensions
outside its established realms of activity. Wider systemic transformations
including changes in political regimes, novel conceptions of management
controls, the impact of globalizing forces on commercial affairs, shifts in
notions of effective knowledge management, governance and ethics, and
technological advances, including the rise of broadband, have all impacted
management accounting endeavors. The field is as fast changing as it has
ever been. Now a day the Contemporary Issues in Management
Accounting are one of the main tools along with the other decision making
tools for the managers.
Cost Accounting:
Cost accounting is the internal business function responsible for allocating
business costs to goods or services produced by companies and analyzing
other financial information resulting from business operations. This
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accounting method is also referred to as cost accounting. Cost accounting
is the specific process of allocating raw material, labour and overhead
costs to consumer products. Managerial accounting often expands on this
function to include forecasting, budgets and assessing the profitability of
current business operations.
Cost accounting deals with 3 main areas. They are-a) Direct material b)
Direct labour c) Overhead (Variable/Fixed)
Cost accounting is also concerned with forecasting the amount of sales or
new business opportunities companies may achieve when operating in the
business environment.
Management accountants use statistical techniques such as decision trees,
game theory, net present value calculations or a variety of other
quantitative or qualitative methods when creating economic forecasts.
Management Accounting:
Management accounting is a specialised sub-set of accounting, focusing
on internal needs of businesses. Popular with manufacturing
environments, management accounting focuses on assigning costs to
processes. Instead of dealing with debits and credits, accounts or financial
statements, as financial accounting does, management accounting
quantifies details, quality controls, and expectations. Cost Accounting is
one of the main principles of management accounting. It is used to
determine budgets, costs, and profitability of products or departments.
Management accounting is a changing, growing area with many
challenges. Finding ways to measure costs and to control them is at the
heart of this type of accounting. Management needs tools to control costs
to allow for analysis of processes, making operations more efficient and
profitable. Management accounting usually fits this need very well.
Most management accounting processes are performed using computer
systems that can handle large amounts of data and make the data usable
by users. Computer systems and the Information Technology (IT)
department are very important in management accounting.
Contemporary Issues in Management Accounting:
In the current world, manager is facing more complexities in the operation
of daily activities. Every day new techniques or strategies are innovating
for operating or controlling organization. As a result, to sustain in the
competitive era as a manager have to adapt new techniques or strategies.
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Those techniques or strategies managers is using for adapting or
controlling as well as for getting competitive advantages with new
environment it’s called the contemporary issues in management
accounting. Such as;
1. ABC & ABM;
2. TQM;
3. TOC;
4. CVP Analysis;
5. MASTER BUDGET & RESPONSIBILITY ACCOUNTING;
6. PROCESS COSTING;
7. DIRECT COSTING & ABSORPTION COSTING;
8. BALANCED SCORECARD AND STRATEGIC
PROFITABILITY ANALYSIS;
9. TARGET COSTING;
10. KAIZEN COSTING;
5.2 HORIZONTAL ANALYSIS
What Is Horizontal Analysis?

Horizontal analysis is used in financial statement analysis to compare
historical data, such as ratios, or line items, over a number of accounting
periods. Horizontal analysis can either use absolute comparisons or
percentage comparisons, where the numbers in each succeeding period are
expressed as a percentage of the amount in the baseline year, with the
baseline amount being listed as 100%. This is also known as base-year
analysis.
KEY TAKEAWAYS
• Horizontal analysis is used in the review of a company's financial
statements over multiple periods.
• It is usually depicted as percentage growth over the same line item
in the base year.
• Horizontal analysis allows financial statement users to easily spot
trends and growth patterns.
• Horizontal analysis shows a company's growth and financial
position versus competitors.
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• Horizontal analysis can be manipulated to make the current period
look better if specific historical periods of poor performance are
chosen as a comparison.
How Horizontal Analysis Works
Horizontal analysis allows investors and analysts to see what has been
driving a company's financial performance over several years and to spot
trends and growth patterns. This type of analysis enables analysts to assess
relative changes in different line items over time and project them into the
future. An analysis of the income statement, balance sheet, and cash flow
statement over time gives a complete picture of operational results and
reveals what is driving a company’s performance and whether it is
operating efficiently and profitably.
The analysis of critical measures of business performance, such as profit
margins, inventory turnover, and return on equity, can detect emerging
problems and strengths. For example, earnings per share (EPS) may have
been rising because the cost of goods sold (COGS) has been falling or
because sales have been growing steadily.
Coverage ratios, like the cash flow-to-debt ratio and the interest coverage
ratio, can reveal how well a company can service its debt through
sufficient liquidity and whether that ability is increasing or decreasing.
Horizontal analysis also makes it easier to compare growth rates and
profitability among multiple companies in the same industry.
Generally accepted accounting principles (GAAP) are based on the
consistency and comparability of financial statements. Using consistent
accounting principles like GAAP ensures consistency and the ability to
accurately review a company's financial statements over time.
Comparability is the ability to review two or more different companies'
financials as a benchmarking exercise.
How to Perform a Horizontal Analysis
A horizontal analysis is performed by following the three primary steps.
Step 1: Gather Financial Information

To perform a horizontal analysis, you must first gather financial
information of a single entity across periods of time. Most horizontal
analysis entail pulling quarterly or annual financial statements, though
specific account balances can be pulled if you're looking for a specific type
of analysis.
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Be mindful that the gaps between each financial statement are consistent.
You can choose whatever interval (month-over-month, year-over-year,
etc.), but each iterative financial statement should be equal distance away
regarding when it was issued compared to other bits of financial
information.
Step 2: Determine Comparison Methods
With the financial information in hand, it's time to decide how to analyze
the information. There are several primary comparison methods.
First, a direction comparison simply looks at the results from one period
and comparing it to another. For example, the total company-wide revenue
last quarter might have been $75 million,
while the total company-wide revenue this quarter might be $85 million.
This type of comparison is most often used to spot high-level, easily
identifiable differences.
Second, a variance analysis determines not only the dollar amount but the
direction of change for a given general ledger account. As opposed to
simply identifying the difference between two numbers, variance analysis
strives to determine the company's financial health by identifying
directional changes, frequency of directions, or how each financial result
compared against an internal target (i.e. a budget).
Last, a horizontal analysis can encompass calculating percentage changes
from one period to the next. As a company grows, it often becomes more
difficult to sustain the same rate of growth, even if the company grows in
pure dollar size. This percentage method is most useful when identifying
changes over a longer period of time where there may be significant
deviations from the base period to the current period.
Step 3: Identify Trends and Patterns
With different bits of calculated information now embedded into the
financial statements, it's time to analyze the results. The identification of
trends and patterns is driven by asking specific, guided questions. For
example, upper management may ask "how well did each geographical
region manage COGS over the past four quarters?". This type of question
guides itself to selecting certain horizontal analysis methods and specific
trends or patterns to seek out.
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5.3 VERTICAL ANALYSIS
What Is Vertical Analysis?

Vertical analysis is a method of financial statement analysis in which each
line item is listed as a percentage of a base figure within the statement.
Thus, line items on an income statement can be stated as a percentage
of gross sales, while line items on a balance sheet can be stated as a
percentage of total assets or liabilities, and vertical analysis of a cash flow
statement shows each cash inflow or outflow as a percentage of the total
cash inflows.
KEY TAKEAWAYS
• Vertical analysis makes it easier to understand the correlation
between single items on a balance sheet and the bottom line,
expressed in a percentage.
• Vertical analysis can become a more potent tool when used in
conjunction with horizontal analysis, which considers the finances
of a certain period of time.
How Vertical Analysis Works
Vertical analysis makes it much easier to compare the financial statements
of one company with another, and across industries. This is because one
can see the relative proportions of account balances. It also makes it easier
to compare previous periods for time series analysis, in which quarterly
and annual figures are compared over a number of years, in order to gain
a picture of whether performance metrics are improving or deteriorating.
For example, by showing the various expense line items in the income
statement as a percentage of sales, one can see how these are contributing
to profit margins and whether profitability is improving over time. It thus
becomes easier to compare the profitability of a company with its peers.
Financial statements that include vertical analysis clearly show line item
percentages in a separate column. These types of financial statements,
including detailed vertical analysis, are also known as common-size
financial statements and are used by many companies to provide greater
detail on a company’s financial position.
148
Common-size financial statements often incorporate comparative
financial statements that include columns comparing each line item to a
previously reported period.
Vertical vs. Horizontal Analysis
Another form of financial statement analysis used in ratio analysis is
horizontal analysis or trend analysis. This is where ratios or line items in
a company's financial statements are compared over a certain period of
time by choosing one year's worth of entries as a baseline, while every
other year represents percentage differences in terms of changes to that
baseline.
For example, the amount of cash reported on the balance sheet on Dec. 31
of 2018, 2017, 2016, 2015, and 2014 will be expressed as a percentage of
the Dec. 31, 2014, amount. Instead of dollar amounts, you might see 141,
135, 126, 118, and 100.
This shows that the amount of cash at the end of 2018 is 141% of the
amount it was at the end of 2014. By doing the same analysis for each item
on the balance sheet and income statement, one can see how each item has
changed in relationship to the other items.
Example of Vertical Analysis
For example, suppose XYZ Corporation has gross sales of $5 million and
cost of goods sold of $1 million and general and administrative expenses
of $2 million and a 25% tax rate, its income statement will look like this
if vertical analysis is used:
Sales 5,000,000 100%
Cost of goods sold 1,000,000 20%
Gross profit 4,000,000 80%
General and Administrative Expenses 2,000,000 40%
Operating Income 2,000,000 40%
Taxes (%25) 500,000 10%
Net income 1,500,000 30%
Difference Between Horizontal and Vertical Analysis
In Horizontal Financial Analysis, the comparison is made between an
item of financial statement, with that of the base year’s corresponding
item. On the other hand, in vertical financial analysis, an item of the
financial statement is compared with the common item of the same
accounting period.
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Financial Statement implies the formal and final summary of the
financial affairs of the concern, indicating the performance, profitability,
position, etc. The process of thoroughly analysing the information given
in the financial statement, so as to estimate the present and past financial
position, operational efficiency of the concern, is called financial
statement analysis or financial analysis. Financial Analysis can be of two
types, i.e. Horizontal Analysis and Vertical Analysis
Now let’s discuss the differences between horizontal and vertical analysis.
BASIS FOR HORIZONTAL ANALYSIS VERTIC
COMPARIS AL
ON ANALYS
IS
Meaning Horizontal analysis is the comparative Vertical
evaluation of the financial statement for analysis is
two or more period, to calculate the proportio
absolute and relative variances for every nal
line of item. evaluatio
n of the
financial
statement
wherein
each item
on the
statement
is
expressed
as a
percentag
e of the
total, in
the
respective
section.
150
Use It helps in
forecastin
It represents the growth or decline of an item.
g and
determini
ng the
relative
proportio
n of an
item to
the
common
item in
the
financial
statement.
Aims at Ascertaining the trend and changes in an It aims at
item over time. ascertaini
ng the
proportio
n of items
to the
common
item of
the single
accountin
g year.
Expresses Item from past financial statement are Each item
restated to a percentage of amount from of
base year. financial
statement
is denoted
as a
percentag
e of
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another
item.
Comparison Helpful in intra-firm comparison Helpful in
both intra-
firm
comparis
on and
inter-firm
comparis
on
Table 5.1 differences between horizontal and vertical analysi
Key Differences between Horizontal and Vertical Analysis

The difference between horizontal and vertical analysis can be drawn
clearly on the following grounds:
• Horizontal Analysis refers to the process of comparing the line of
items over the period, in the comparative financial statement, to
track the overall trend and performance. On the other hand, vertical
analysis refers to the tool used to study financial statement by
making a comparison of each line of the item as a proportion of the
base figure within the statement, i.e. assets, liabilities, sales or
equity.
• Horizontal Analysis is undertaken to ascertain how the company
performed over the years or what is its financial status, as
compared to the prior period. As against, vertical analysis is used
to report the stakeholder about the portion of line items to the total,
in the current financial year.
• The primary aim of horizontal analysis is to keep a track on the
behaviour of the individual items of the financial statement over
the years. Conversely, the vertical analysis aims at showing an
insight into the relative importance or proportion of various items
on a particular year’s financial statement.
• In horizontal analysis, the items of the present financial year are
compared with the base year’s amount, in both absolute and
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percentage terms. On the contrary, in vertical analysis, each item
of the financial statement is compared with another item of that
financial statement.
• The horizontal analysis is helpful in comparing the results of one
financial year with that of another. As opposed, the vertical
analysis is used to compare the results of one company’s financial
statement with that of another, of the same industry. Further,
vertical analysis can also be used for the purpose of benchmarking.
Example
1. Horizontal Analysis
Formula Used:
Vertical Analysis
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Formula Used:
Conclusion
Financial Analysis is helpful in accurately ascertaining and forecasting
future trends and conditions. The primary aim of horizontal analysis is to
compare line items in order to ascertain the changes in trend over time. As
against, the aim of vertical analysis is to ascertain the proportion of item,
in relation to a common item in percentage terms.

4. What is difference between horizontal and vertical analysis?
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5. What is horizontal analysis?
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6. What is cash flow analysis?
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5.4 RATIO ANALYSI
What is Ratio Analysis?

Ratio analysis is the comparison of line items in the financial statements
of a business. Ratio analysis is used to evaluate a number of issues with an
entity, such as its liquidity, efficiency of operations, and profitability. This
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type of analysis is particularly useful to analysts outside of a business,
since their primary source of information about an organization is its
financial statements. Ratio analysis is less useful to corporate insiders,
who have better access to more detailed operational information about the
organization. It is particularly useful when employed in the following two
ways:
Trend Line Analysis
Calculate each ratio over a large number of reporting periods, to see if
there is a trend in the calculated information. The trend can indicate
financial difficulties that would not otherwise be apparent if ratios were
being examined for a single period. Trend lines can also be used to
estimate the direction of future ratio performance.
Industry Comparison
Calculate the same ratios for competitors in the same industry, and
compare the results across all of the companies reviewed. Since these
businesses likely operate with similar fixed asset investments and have
similar capital structures, the results of a ratio analysis should be similar.
If this is not the case, it can indicate a potential issue, or the reverse - the
ability of a business to generate a profit that is notably higher than the rest
of the industry. The industry comparison approach is used for sector
analysis, to determine which businesses within an industry are the most
(and least) valuable.
Categories of Ratio Analysis
Financial ratios can be grouped into the following clusters of ratios, where
each cluster is targeted at a different type of analysis.
Coverage Ratios
Coverage ratios are used to evaluate the ability of a business to meet its
debt obligations. These ratios are most commonly used by lenders and
creditors to review the finances of a prospective or current borrower.
Examples of coverage ratios are the interest coverage ratio, debt-service
coverage ratio, and asset coverage ratio.
Efficiency Ratios
Efficiency ratios measure the ability of a business to use its assets and
liabilities to generate sales. A highly efficient organization has minimised
its net investment in assets, and so requires less capital and debt in order
to remain in operation. Examples of efficiency ratios are accounts
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receivable turnover, inventory turnover, fixed asset turnover, and accounts
payable turnover.
Leverage Ratios
Leverage ratios are used to determine the relative level of debt load that a
business has incurred.
These ratios compare the total debt obligation to either the assets or equity
of a business. Examples of leverage ratios are the debt ratio and debt to
equity ratio.
Liquidity Ratios
Liquidity ratios are measurements used to examine the ability of an
organization to pay off its short-term obligations. Liquidity ratios are
commonly used by prospective creditors and lenders to decide whether to
extend credit or debt, respectively, to companies. Examples of liquidity
ratios are the cash ratio, current ratio, and quick ratio.
Market Value Ratios
Market value ratios are used to evaluate the current share price of a
publicly-held company's stock. These ratios are employed by current and
potential investors to determine whether a company's shares are over-
priced or under-priced. Examples of market value ratios are book value
per share, earnings per share, and market value per share.
Profitability Ratios
Profitability ratios are a set of measurements used to determine the ability
of a business to create earnings. Profitability ratios are derived from a
comparison of revenues to difference groupings of expenses within the
income statement. Examples of profitability ratios are the contribution
margin ratio, gross profit ratio, and net profit ratio.
Examples of Ratios Used in Financial Analysis
There are several hundred possible ratios that can be used for analysis
purposes, but only a small core group is typically used to gain an
understanding of an entity. These ratios include the following:
• Current ratio. Compares current assets to current liabilities, to see
if a business has enough cash to pay its immediate liabilities
• Day’s sales outstanding. Determines the ability of a business to
effectively issue credit to customers and be paid back on a timely
basis.
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• Debt to equity ratio. Compares the proportion of debt to equity,
to see if a business has taken on too much debt.
• Dividend payout ratio. This is the percentage of earnings paid to
investors in the form of dividends. If the percentage is low, it is an
indicator that there is room for dividend payments to increase
substantially.
• Gross profit ratio. Calculates the proportion of earnings
generated by the sale of goods or services, before administrative
expenses are included. A decline in this percentage could signal
pricing pressure on a company's core operations.
• Inventory turnover. Calculates the time it takes to sell off
inventory. A low turnover figure indicates that a business has an
excessive investment in inventory, and therefore is at risk of having
obsolete inventory.
• Net profit ratio. Calculates the proportion of net profit to sales; a
low proportion can indicate a bloated cost structure or pricing
pressure.
• Price earnings ratio. Compares the price paid for a company's
shares to the earnings reported by the business. An excessively
high ratio signals that there is no basis for a high stock price, which
could presage a stock price decline.
• Return on assets. Calculates the ability of management to
efficiently use assets to generate profits. A low return indicates a
bloated investment in assets.
Disadvantages of Ratio Analysis
The use of ratio analysis can be misleading when comparing the results of
businesses across industries. For example, ratio results in the utility
industry will be completely different from those in the software industry,
because utilities have a large fixed asset base, while software companies
invest in few fixed assets at all. This means that a utility is more likely to
incur debt in order to pay for its fixed assets, while a software company
may incur no debt at all.
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5.5 CASH FLOW ANALYSIS
Cash flow is the amount of cash and cash equivalents, such as securities,
that a business generates or spends over a set time period. Cash on hand
determines a company’s runway—the more cash on hand and the lower
the cash burn rate, the more room a business has to maneuver and,
normally, the higher its valuation.
Cash flow differs from profit. Cash flow refers to the money that flows in
and out of your business. Profit, however, is the money you have after
deducting your business expenses from overall revenue.
What Is Cash Flow Analysis?

There are three cash flow types that companies should track and analyze
to determine the liquidity and solvency of the business: cash flow from
operating activities, cash flow from investing activities and cash flow from
financing activities. All three are included on a company’s cash flow
statement.
In conducting a cash flow analysis, businesses correlate line items in those

three cash flow categories to see where money is coming in, and where it’s
going out. From this, they can draw conclusions about the current state of
the business.
Depending on the type of cash flow, bringing in money in isn’t necessarily

a good thing. And, spending money it isn’t necessarily a bad thing.
Key Takeaways
▪ Cash flow analysis helps you understand how much cash a

business generated or used during a specific accounting period.
▪ Understanding cash sources and where your cash is going is

essential for maintaining a financially sustainable business.
▪ A business may be profitable and still experience negative cash

flow or lose money and experience positive cash flow.
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▪ Complementary measurements, such as free cash flow and
unlevered free cash flow, offer unique insights into a company’s
financial health.
Cash Flow Analysis Explained

Cash flow is a measure of how much cash a business brought in or spent
in total over a period of time. Cash flow is typically broken down into cash
flow from operating activities, investing activities, and financing activities
on the statement of cash flows, a common financial statement.
While it’s also important to look at business profitability on the income

statement, cash flow analysis offers critical information on the financial
health of a company. It tells you if cash inflows are coming from sales,
loans, or investors, and similar information about outflows. Most
businesses can sustain a temporary period of negative cash flows, but can’t
sustain negative cash flows long-term.
Newer businesses may experience negative cash flow from operations due
to high spending on growth. That’s okay if investors and lenders are
willing to keep supporting the business. But eventually, cash flow from
operations must turn positive to keep the business open as a going concern.
Cash flow analysis helps you understand if a business’s healthy bank

account balance is from sales, debt, or other financing. This type of
analysis may uncover unexpected problems, or it may show a healthy
operating cash flow. But you don’t know either way until you review your
cash flow statements or perform a cash flow analysis.
In addition to looking at the standard cash flow statement and details, it’s
often also useful to calculate different versions of cash flow to give you
additional insights. For example, free cash flow excludes non-cash
expenses and interest payments and adds in changes in working capital,
which gives you a clearer view of operating cash flows. Unlevered free
cash flow shows you cash flow before financial obligations while levered
free cash flow explains cash flow after taking into account all bills and
obligations.
Depending on the size of your company, your financial situation, and your
financial goals, reviewing and tracking various forms of cash flow may be
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very helpful in financial planning and preparing for future quarters, years,
and even a potential downturn in sales or economic conditions.
Why Is Cash Flow Analysis Important?

A cash flow analysis determines a company’s working capital — the
amount of money available to run business operations and complete
transactions. That is calculated as current assets (cash or near-cash assets,
like notes receivable) minus current liabilities (liabilities due during the
upcoming accounting period).
Cash flow analysis helps you understand if your business is able to pay its
bills and generate enough cash to continue operating indefinitely. Long-
term negative cash flow situations can indicate a potential bankruptcy
while continual positive cash flow is often a sign of good things to come.
Cash Flow Analysis Basics

Cash flow analysis first requires that a company generate cash
statements about operating cash flow, investing cash flow and financing
cash flow.
• Cash from operating activities-represents cash received from
customers less the amount spent on operating expenses. In this
bucket are annual, recurring expenses such as salaries, utilities,
supplies and rent.
• Investing activities reflect funds spent on fixed assets and financial
instruments. These are long-term, or capital investments, and
include property, assets in a plant or the purchase of stock or
securities of another company.
• Financing cash flow is funding that comes from a company’s
owners, investors and creditors. It is classified as debt, equity and
dividend transactions on the cash flow statement.
How Do You Perform Cash Flow Analysis?
To perform a cash flow analysis, you must first prepare operating,
investing and financing cash flow statements. Generally, the finance team
uses the company’s accounting software to generate these statements.
Alternately, there are a number of free templates available.
Preparing a Cash Flow Statement
Let’s first look at preparing the operating cash flow statement. The line
items that are factored into the company’s net income and are included on
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the company’s operating cash flow statement include but are not limited
to:
▪ Cash received from sales of goods or services
▪ The purchase of inventory or supplies
▪ Employees’ wages and cash bonuses
▪ Payments to contractors
▪ Utility bills, rent or lease payments
▪ Interest paid on loans and other long-term debt and interest

received on loans
▪ Fines or cash settlements from lawsuits
There are two common methods used to calculate and prepare the
operating activities section of cash flow statements.
The Cash Flow Statement Direct Method takes all cash collections from
operating activities and subtracts all of the cash disbursements from the
operating activities to get the net income.
The Cash Flow Statement Indirect Method start with net income and
adds or deducts from that amount for non-cash revenue and expense items.
The next component of a cash flow statement is investing cash flow. That
bottom line is calculated by adding the money received from the sale of
assets, paying back loans or selling stock and subtracting money spent to
buy assets, stock or loans outstanding.
Finally, financing cash flow is the money moving between a company and
its owners, investors and creditors.
Cash Flow Analysis Example
Net income adjusted for non-cash items such as depreciation expenses
and cash provided for operating assets and liabilities. Using a free
public template from the Small Business Administration (SBA), let’s say
Wild Bill’s Dog Trainers and Walkers had a net income of $100,000 to
start and generated additional cash inflows of $220,000.
As you can see in the spreadsheet, it spent $41,000 on operating cash

outflows like hiring an additional person, buying new equipment for the
dog park, paying taxes and more. The owner paid some principal down on
a loan and took a draw of $50,000 for an ending cash balance of $127,200.
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Small changes in any of those line items show the impact of hiring more
people, paying more taxes, buying more equipment and more to ensure the
business has a healthy balance sheet and doesn’t go “into the red.”
Five Steps to Cash Flow Analysis

There are a few major items to look out for trends and outliers that can
tell you a lot about the health of the business.
• Aim for positive cash flow

When operating income exceeds net income, it’s a strong indicator of a
company’s ability to remain solvent and sustainably grow its operations
• Be circumspect about positive cash flow
On the other hand, positive investing cash flow and negative operating
cash flow could signal problems. For example, it could indicate a company
is selling off assets to pay its operating expenses, which is not always
sustainable.
• Analyze your negative cash flow
When it comes to investing cash flow analysis, negative cash flow isn’t
necessarily a bad thing. It could mean the business is making investments
in property and equipment to make more products. A positive operating
cash flow and a negative investing cash flow could mean the company is
making money and spending it to grow.
• Calculate your free cash flow
What you have left after you pay for operating expenditures and capital
expenditures is free cash flow. This can be used to pay down principal,
interest, buy back stock or acquire another company.
• Operating cash flow margin builds trust
The operating cash flow margin ratio measures cash from operating
activities as a percentage of sales revenue in a given period. A positive
margin demonstrates profitability, efficiency and earnings quality.
Cash flow analysis helps your finance team better manage cash inflow and
cash outflow, ensuring that there will be enough money to run—and
grow—the business.
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5.6 REPORTING TO MANAGEMENT
Reporting to management – Meaning

The reporting to management is a process of providing information to
various levels of management so as to enable in judging the effectiveness
of their responsibility centres and become a base for taking corrective
measures, if necessary.
Definition of Reporting to Management
S.N.Maheshwari,
“Reporting to Management can be defined as an organized method of
providing each manager with all the data and only those data which he
needs for his decisions, when he needs them and in a form which aids his
understanding and stimulates his action”.
The reporting to management can also be called as management reporting
or internal reporting.
Objectives or Purpose of Reporting to management
A Management Accountant has to prepare the report for the following
purposes.
1. Means of Communication: A report is used as a means of upward
communication. A report is prepared and submitted to someone who needs
that information for carrying out functions of management.
2. Satisfy Interested Parties: The interested parties of management report
are top management executives, government agencies, shareholders,
creditors, customers and general public. Different types of management
reports are prepared to satisfy above mentioned interested parties.
3. Serve as a Record: Reports provide valuable and important records for
reference in the future. As the facts and investigations are recorded with
utmost care, they become a rich source of information for the future.
4. Legal Requirements: Some reports are prepared to satisfy the legal
requirements. The annual reports of company accounts is prepared to
furnished the same to the shareholders of the company under Companies
Act 1946. Likewise, audit report of the company accounts is submitted
before the income tax authorities under Income Tax Act 1961.
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5. Develop Public Relations: Reports of general progress of business and
utilization of national resources are prepared and presented before the
public. It is useful for increasing the goodwill of the company and
developing public relations.
6. Basis to Measure Performance: The performance of each employee is
prepared in a report form. In some cases, group or department performance
is prepared in a report form. The individual performance report is used for
promotion and incentives. The group performance report is used for giving
bonus.
7. Control: Reports are the basis of control process. On the basis of
reports, actions are initiated and instructions are given to improve the
performance
Levels of Management reporting | Records to be submitted
The presenting report should satisfy the needs of various levels of
management. The levels of management can be divided into three
categories. They are,
1. Top level management.
2. Middle level management.
3. Lower level management or First line management.
Generally, the lower level of management requires more detailed report.
But the top level management requires very short report. The lower level
management consisting of foreman, supervisor and the like. The top level
management consisting of Managing Director, Board of Directors,
Company Secretary and General Manager.
The frequency of report to lower level management should be kept in
minimum. But, in the case of top level management maximum number of
reports required for taking policy decision and improve the operational
efficiency of the concern.
Reporting to top level management
Objectives
Several reports are submitted before the top level management to achieve
the following objectives.
• Framing basic objectives of the organisation.
• Prepare the planning activities to achieve objectives of
organisation.
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• Proper delegation of authority and responsibility to various levels
of managerial executives for effective and efficient operation.
• Promoting appropriate development schemes.
• Framing various policy decision.
• Taking of capital expenditure decision.
• Deciding about merger and acquisition of business.
• Decide the time of implementing expansion or modernization
programme.
Reports to be submitted to top level management
The following reports should be submitted before the top level
management at the required time.
• Managing Director
• Periodic report about Profit and Loss Account and Balance Sheet.
• Fund flows statement and cash flow statement.
• Report on production trend and utilization of capacity.
• Reports about cost of production.
• Periodic reports on sales, selling and distribution expenses, credit
collection.
• A statement on research and development expenditure.
Board of Directors
• Quarterly Balance Sheet and Profit and Loss Account.
• Quarterly Fund Flows Statement and Cash Flows Statement.
• Quarterly Cost of Production Statement.
• Quarterly Labour and Machine Utilization Statement.
• Production Manager
• Monthly cost of production statement.
• Monthly department wise machine utilization statement.
• Monthly department wise labour utilization statement.
• Monthly department wise material scrap statement.
• Monthly department wise overheads cost statement.
• Monthly production statement showing budgeted quantity, actual
quantity produced and other relevant matters.
Sales Director
• Monthly report of order received, or orders executed, orders kept
pending product wise and division wise.
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• Monthly report of finished goods stock position product wise.
• Monthly report of selling and distribution cost division wise.
• Monthly report of credit Collection,,arrears and bad debts division
wise.
Finance Director
• Monthly Fund Flows Statement.
• Monthly Cash Flows Statement.
• Monthly abstract of receipts and payments.
Reporting to Middle level management
Objectives
Generally, plans are prepared to achieve the objectives of the organisation
by the top level management. But, the plans are actually executed by the
middle level management. In this context, the following reports are
submitted before the middle level management.
• Reports to be submitted to middle level management
• Production Manager
• Report on actual production figures along with budgeted
production figures for a specific period. These reports are generally
daily, weekly or fortnightly-product wise.
The figures about the availability and utilization of workers. Figures about
normal and abnormal idle time are also reported.
• Capacity utilization report.
• Material usage report-product wise.
• Machine and Labour utilization report-product wise.
• Absenteeism and labour turnover reports.
• Scrap report product wise.
• Machine hours lost report.
• Stock position report-product wise.
• Analysis of budgeted cost of production and actual cost of product
etc in product wise.
Sales Manager
Reports on budgeted and actual sales. These reports are submitted area
wise and product wise to the sales manager.
• Weekly reports on orders booked, orders executed and orders
pending product wise.
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• Reports on credit collection and bad debts.
• Reports on stock position-product wise.
• Analysis of selling and distribution expenses product as well as
area wise.
• Market survey reports.
• Reports on customer’s complaints.
• Reports on effectiveness of sales promotion campaigns etc.
• Purchase Manager
• Raw materials purchased, actual materials received and orders
pending materials wise.
• Use of raw materials for production-materials wise.
• Stock of raw materials-materials wise along with the details of
minimum level and maximum level.
• Analysis of purchase of expenses.
• Budgeted cost of purchases and actual cost of purchase.
Finance Manager
• Report on cash and bank balances.
• Periodic fund flow and cash flow statement.
• Debtors collection period reports.
• Report on average payment period.
• Working capital analysis report.
• Report on budgeted profit and actual profit.
• Statement of changes in financial position.
• Capital expenditure report.
Reporting to lower level management
Personnel in lower level management
The lower level management includes foreman, superintendents
supervisors, and the like. They are very much interested to know the level
of work in progress of various jobs which are performing under their
supervision. Hence, the following list of reports submitted before the
lower level management
Records to be submitted to lower level management
Shop Foreman
• Daily report of idle time and machine utilisation.
• Daily scrap report.
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• Daily production report budgeted and actual-product wise.
Sales Area Supervisors
• Weekly sales report-salesman wise and product wise.
• Weekly report of orders booked, executed and outstanding.
• Weekly report of credit collection, outstanding and bad debts..
Sales Supervisor
• Sales Force Progress of work.
• Sales Promotion Work.
• Exports.
• Publicity and advertisement.
• Cost of sales.
Production Supervisor
• Details of Raw Materials-Stock position-material wise.
• Finished goods stock levels-product wise.
• Work in progress-product wise.
• Capital expenditure.
• Progress of capital works.
Personnel Supervisor
• Direct labour employment estimates-approved and proposed.
• Other labour employment-approved and proposed.
• Approximate cost of present and proposed staff.
Finance Supervisor
• Accounts receivable position and estimates.
• Accounts payable position and estimates.
5.7 TYPES OF REPORTS
As discussed above, the preparation of management reports considers

the nature, volume and purpose of the data. Keeping in mind the following
questions:
• Why is it being prepared?
• Who is the sender?
• Who is the receiver?
• Which method is adopted for the preparation of the report?
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Following are the types of managerial reports available based on
different purposes:
Fig 5.2 types of managerial reports

Operating Reports
Managers use these reports to determine the gaps between the current and
budgeted targets. It includes reports for both short and long-term to
maintain the operating efficiency. It is further divided into:
Control Reports: It is presented monthly, quarterly and yearly to control
deviations. In addition, it helps in finding bottlenecks and taking
corrective measures wherever necessary.
Managers prepare control reports periodically. And, it can be further
classified into:
Current Control Report
Summary Control Report
1. Information Reports: It covers a broader area than control
reports. This is because, it needs detailed information,
examination, and analysis. Management uses information
reports for planning and policy formulation.
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Financial Reports
Financial reports contain information about the financial position of the
business. It shows the movement of financial resources over a specified
period. It is of the following two types:
1.Static Financial Reports: This report shows the position of
assets, liabilities and debts at a point in time. For Example,
Balance Sheet.
2. Dynamic Financial Reports: We use these reports to
summarise the change in the financial position.
Technique:
Trend Reports
Managers use these reports to make comparisons over a period of time. It
shows a certain type of movement or trend through graphics.
Analytical Reports
This type of reporting involves thorough data analysis and comparisons
with the predetermined objectives. It is prepared horizontally, between one
or more firms or departments.
Functional Area:
Individual Report
It includes reporting for a particular activity by the responsible personnel.
For example, a production report presented by the manager of the
production department.
Joint Report
A joint report is a report prepared by the managers of all the departments
jointly. For example, firms prepare the profit & loss statement based on
the production reports.
User:
Internal Reports
Managers prepare these reports for internal management. It is useful for
communicating information to employees and all levels of management.
It may include:
1. Routine Reports
2. Special Reports
3. Reports at various levels of management.
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External Reports
It is prepared to provide essential information to the parties outside the
business. External parties use these reports to ascertain the firm’s financial
position and decision-making for different purposes.
External reports can be used by:
1. Shareholders
2. Government Authorities
3. Stock Exchange
4. Credit Institutions
5.8 MODES OF REPORTING
Various Modes of Reporting:

Reports may be presented in the form of written statements, graphs, and/or
oral.
1. Written Statements:
(a) Formal Financial Statements:
These statements may deal with any one or more of the following:
(i) Actual against the budgeted figures;
(ii) Comparative statements over a period of time.
(b) Tabulated Statistics:
This statement may deal with statistical analysis of a particular type of
expenditure over a period of time or sales of a product over a period in
different regions, etc.
(c) Accounting Ratios:

The ratios may either form part of the formal financial statements or be
given in the form of separate statements.
Information is also given to throw light on certain aspects of the operations
of business especially the following:
(i) Return on Capital employed;
(ii) Profit/Volume ratio;
(c) Break-even point, etc.
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2. Graphic Reports:
The information may be presented by means of graphic reports, which give
a better visual view of the data than the long array of figures given in
statements. Charts, diagrams and pictures are the usual form of graphic
reports. They have the advantage of facilitating quick grasp of significant
trends by receivers of information.
3. Oral Reports:
Oral reports are mostly presented at group meetings and conferences with
individuals. However, the written reports are always considered as the
most appropriate basis for important managerial decisions.
Basic Requisites of a Good Report:
A report is vehicle carrying information to different levels of
administration. Quality of decision-making depends to a large extent on
the quality of information supplied and on the promptness and consistency
of reporting. Good reporting is necessary for effective communication.
Hence, a good report should possess the following basic requisites:
1. Promptness:
It means that report must be prepared and presented on time. Reports are
meant for action. Business executives may need quick reports for day-to-
day decision-making. In such cases accuracy may be sacrificed for speed
and timely need. In order to achieve promptness accounting executives
may improve the methods of collecting data, and employ modern
mechanical accounting devices.
2. Form and Consent:
A good report should have a suggestive title, headings and sub-headings,
paragraph divisions, statistical figures, facts, data, etc.
Further the contents should follow a logical sequence:
(a) The summary of present position;
(b) The course and expected results; and
(c) Recommendation and reasons for their submission.
3. Comparability:
Reports are also meant for comparison. Hence, the information is placed
in some perspective. Comparisons are generally affected over time as well
as with a norm of performance.
Figures should be given for some previous period such as ‘last month’ or
‘same month for the last year’, etc. Actual figures may also be placed side
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by side with corresponding budgets, standards or estimates. The object is
to highlight significant variations.
4. Consistency:
Consistency envisages the presentation of the same type of information as
between different reporting periods. Uniform procedure should be
followed over a period of time for collection, classification, and
presentation of the accounting information. It is also important to present
information in a consistent manner to the various operating levels of
management.
5. Simplicity:
The report should be in a simple unambiguous and concise form. In other
words, the report should avoid technical jargons and be presented in
simple style. Use of suitable units of measurement such as quantity, value,
weight, machine hours, man hours, percentages, ratio, index numbers, etc.,
would greatly enhance the utility of the report.
6. Controllability:
It is necessary that every report should be addressed to a responsibility
center and present controllable and uncontrollable factors separately. So
that while reporting performance against plans and targets, variances,
which are controllable could be analysed in depth, and details are
interpreted in an objective manner to help the manager for taking
corrective action.
7. Appropriateness:
Reports are sent to different levels of management and the forms should
be designed to suit the respective levels. While reporting to top
management, broad trends and significant exceptions are to be presented
in a summarized form with brevity, clarity, and should have
comprehensive coverage.
Reports to departmental managers are to be more detailed covering all
aspects about their departments. Reports to sectional supervisors must still
be more detailed with full information about their sections.
8. Cost Considerations:
The cost of maintaining the reporting system should commensurate with
the benefits derived there from. Hence, it may not be an unnecessary
burden on the resources of the enterprise.
173
9. Accuracy:
The report should be reasonably accurate. This means that the report
should be correct within the margin of error allowed; otherwise the
management may lose faith in the reports.
5.9 REPORTING AT DIFFERENT LEVELS OF

MANAGEMENT
Types of Reports:
External Reports:
These reports are meant for external parties such as government,
shareholders, bankers, financial institutions, etc., for example, published
financial statements of companies. Copies of such reports are also to be
filed with the Registrar of Joint Stock companies and with the stock
exchange.
In the interest of general understanding, these reports are expected to
conform to certain minimum standards of disclosure and disclose certain
basic details under the Companies Act, 1956.
Internal Reports:
These reports are meant for internal uses of different levels of management
such as top level, middle level, and junior level of managements. Hence,
the approach to the reporting problem would vary according to the
reporting level. These reports do not have to conform to any statutory
standards. While the reports meant for top management have to be
comprehensive and concise, the reports to operating supervisors should be
specific and detailed.
Routine Reports:
These reports cover routine matters and are submitted at periodical
intervals on regular basis. Example, variance analysis, financial
statements, budgetary control statements are routine reports. They are
submitted to different levels of management as per a fixed time schedule.
Routine reports are usually printed or cyclostyled forms with blank spaces
to be filled in. most of the internal reports are of the nature of the routine
reports.
174
Special Reports:
Reports, which are submitted on particular occasions on specific requests
or instructions, are special reports. When problems arise in a business, they
are to be investigative. The results of investigations and the
recommendations are submitted by way of special reports.
The form and contents of special reports will vary according to the nature
of problem investigated. Usually a special report contains the terms of
reference i.e., the problem to be studied, investigations made, findings and
observations and finally conclusions and recommendations.
Examples of some of the special reports are:
1. Reports of information about competitive products,
2. Reports by the Cost Accountants on the implication of price changes on
the cost of products,
3. Reports regarding choice of products or selection of a production
method, etc.
Operating Reports:
These reports may be classified into Control report and Information Re-
port.
Control Report:
It is an important ingredient of control process and helps in controlling
different activities of an enterprise. It provides information properly
collected and analysed to different levels of management. The framework
of this report is determined by the needs of the undertaking.
It is based on the company’s developed budgets and standards. It is related
to responsibility centres and it observes decision needs. This report may
be prepared on weekly, fortnightly, monthly, or yearly basis depending
upon the urgency of the matter reported. Most of the internal reports are
examples of control reports. They are also sort of routine reports.
Information Report:
These reports provide information, which are very much useful for future
planning and policy formulation. They may take the form of trend reports
or analytical reports. Trend reports provide information in a comparative
form over a period of time. On the other hand, analytical reports provide
information n a classified manner.
175
Sometimes these reports provide information in a summarised form the
results of operation of a specific venture or of the organization as a whole
for a specific period. In such cases they may be called as venture
measurement reports.
Financial Reports:
These reports contain information about the financial position of the busi-
ness. They may be classified into Static Reports and Dynamic Reports.
Static report reveals the financial position on a particular date e.g., balance
sheet of a company.
On the other hand, the dynamic report reveals the movement of funds
during a specified period, e.g., funds flow statement, cash flow statement.
Informational Needs of Different Levels of Management:
Generally the reporting levels in the internal management fall into three
broad categories. They are top level, middle level, and junior level
managements. They need different kinds of reports depending upon the
nature of functions they do.
Top Management Level:
The top management is primarily concerned with the policy formulation,
planning and organising. Hence, their function is to evolve proper plans,
to carry out proper delegation of authority to subordinates with a view to
obtain an effective and efficient utilisation of resources and to promote
appropriate development schemes.
For the purpose they should rather be supplied with information in
summary form covering all aspects of operating performance together with
a comparison of actual with budgeted performance.
Generally, the top management should receive the following reports at
different intervals:
Board of Directors:
Quarterly statements on production costs, machine and labour utilisation,
quarterly cash flow statements, and quarterly income statement and
balance sheet
Finance Director:
Monthly abstract of receipts and payments and monthly cash flow state-
ments.
176
Production Director:
Production cost statement, department-wise machine and labour utilisation
statements, and material scrap statements, overhead cost and production
statements. All these statements are to be presented to him on a monthly
basis.
Sales Director:
He is to receive the following reports on monthly basis: Reports on orders
received, orders executed, and orders kept pending – division-wise;
Reports on selling and distribution cost – division-wise; Reports on credit
collections, balances, and bad debts – division wise.”
Middle Management Level:
The departmental managers such as production, sales etc., are concerned
with the execution of plans formulated by top management. They act
mainly as coordinating executives to administer policies, direct operating
supervisors, and evaluate their performance. Hence the reports submitted
to them should enable to exercise these functions more effectively.
They may require reports at shorter intervals, say weekly, fortnightly basis.
For example, the works manager requires weekly reports on idle time, idle
capacity, scrap production costs, quantity produced, etc. The sales
manager needs fortnightly reports on budgeted and actual sales, credit
collection, orders booked, executed and pending, and stock position-
product-wise and area-wise.
Junior Management:
Foremen, Supervisors, etc., constitute this level of management. They are
interested in reports, which will apprise them of progress of jobs under
their control. Some of these reports are almost in the form of scrap of paper
having no proper format. They may need reports on daily or weekly basis.
For Example:
The shop foreman requires daily report of idle time and machine
utilisation, daily scrap reports and daily report of production – actual and
budgeted. Sales area supervisor needs weekly reports on sales – salesman-
wise, orders booked, executed and outstanding, credit collections and
outstanding, etc.
177

4. What is cash flow analysis with an example?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
5. What are the objectives of reporting?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
....................................................................................................................
6. What are types of reports ?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
....................................................................................................................
5.10 LET US SUM Up

1. Horizontal analysis is a financial analysis technique used to
evaluate a company's performance over time. By comparing
prior-period financial results with more current financial
results, a company is better able to spot the direction of change
in account balances and the magnitude in which that change
has occurred.
2. Vertical analysis is the comparison of financial statements
by representing each line item on the statement as a
percentage of another line item. This type of analysis is often
combined with “horizontal analysis”.
3. Ratio analysis is referred to as the study or analysis of the line
items present in the financial statements of the company. It can
be used to check various factors of a business such as
178
profitability, liquidity, solvency and efficiency of the company
or the business.
4. A cash flow analysis determines a company's working capital
— the amount of money available to run business operations
and complete transactions. That is calculated as current assets
(cash or near-cash assets, like notes receivable) minus current
liabilities (liabilities due during the upcoming accounting
period
5. Management reports keep internal stakeholders "in the know"
of company activities. They're among the internal reports
managers and senior executives use to run the organization,
make business decisions, and monitor progress. Management
reports help leadership monitor their department.
5.11 KEY WORDS
1. Horizontal analysis- Horizontal analysis is a financial analysis

technique used to evaluate a company's performance over
time. By comparing prior-period financial results with more
current financial results, a company is better able to spot the
direction of change in account balances and the magnitude in
which that change has occurred.
2. Vertical analysis- Vertical analysis is the comparison of
financial statements by representing each line item on the
statement as a percentage of another line item. This type of
analysis is often combined with “horizontal analysis”.
3. Ratio analysis- Ratio analysis is referred to as the study or analysis
of the line items present in the financial statements of the company.
It can be used to check various factors of a business such as
profitability, liquidity, solvency and efficiency of the company or
the business.
4. Cash flow analysis- A cash flow analysis determines a company's
working capital — the amount of money available to run business
operations and complete transactions. That is calculated as current
assets (cash or near-cash assets, like notes receivable) minus
179
current liabilities (liabilities due during the upcoming accounting
period
5. Reporting Management- Management reports keep internal

stakeholders "in the know" of company activities. They're among
the internal reports managers and senior executives use to run the
organization, make business decisions, and monitor progress.
Management reports help leadership monitor their department.

Ans.1 Horizontal analysis represents changes over years or periods,
while vertical analysis represents amounts as percentages of a base
figure. Horizontal analysis usually examines many reporting periods,
while vertical analysis typically focuses on one reporting period.
Ans.2 Horizontal analysis is a financial analysis technique used to
evaluate a company's performance over time. By comparing prior-period
financial results with more current financial results, a company is better
able to spot the direction of change in account balances and the magnitude
in which that change has occurred.
Ans.3 A cash flow analysis determines a company's working capital —
the amount of money available to run business operations and complete
transactions. That is calculated as current assets (cash or near-cash assets,
like notes receivable) minus current liabilities (liabilities due during the
upcoming accounting period
Ans.4 Cash flow analysis is a method of reviewing cash flow details for a
business. An example may be as simple as looking at the latest cash flow
statement or require more complex calculations, ratios, and comparisons.
Ans.5 The main objective of financial accounting and reporting is to give
information about a company's financial performance and position.
180
Management will use this information to analyze the company and plan
for the future
Ans.6 Different types of reports
• Internal reports
• External reports
• Operational reports
• Analytical reports

House.
McGraw-Hill.
181
1. Give the meaning of horizontal analysis?

2. What are the primary objectives of reporting?
3. Give the meaning and importance of cash flow analysis?
4. What is the difference between Horizontal and vertical analysis?
5. What are the different types of reports?
182

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UTTARANCHAL UNIVERSITY

Program Name OMBA Program Code 501

Books for References:

● To understand the concepts, methods,and techniques of manageme

Accounting can be defined as a process of reporting, recording,

1.2 MANAGEMENT ACCOUNTING AS AN

Management accounting is the provision of financial and non-financial

The Institute of Cost and Management Accountants London has defined,

Fig 1.1 function Of Management Accounting

• Uses also qualitative information

• Financial Leverage Metrics

1.3 OBJECTIVES OF FINANCIAL

What is financial accounting?

Financial accounting objectives vary in nature, from compliance with

Check Your Progress- 1

2. State the importance of financial accounting?

3. What are the types of managerial accounting?

1.4 NATURE AND SCOPE OF FINANCIAL

The nature of financial accounting can be explained as below:

1.5 COST ACCOUNTING AND MANAGEMENT

Cost Accounting Vs Management Accounting

However, to ensure it, they need to employ effective means of collecting

product of the company. It also finds out the ways of maximizing

Analysing Performance Variance

Basis of Comparison Cost Accounting Management

1.6 MANAGEMENT ACCOUNTING AND

Financial accounting is a statutory requirement for a business to maintain

Sometimes it may be more time or cost effective to manufacture the

1.7 MANAGEMENT ACCOUNTANT’S

The following five points highlight the five roles of management

1.8 ROLE AND RESPONSIBILITIES OF

Management Accountant is an officer who is entrusted with Management

However, the job of management accountant is limited to provision of

Duties and Responsibilities of Management Accountant

1.9 ACCOUNTING PLAN AND

What Is Account Planning? (And How to Plan Accounts)

1.10 MEANING AND SIGNIFICANCE OF

1.11 RESPONSIBILITIES CENTRES

Types of Responsibility Centre

Fig 1.2 Types of Responsibility Centre

Fig 1.3 Revenue Centre

1.12 OBJECTIVES AND DETERMINANTS OF

Advantages of Responsibility Center

Fig 1.4 Relationship between Organisation Structure and

Fig 1.5 performance report

Fig 1.6 flow and reporting details

Check Your Progress-2

1.13 LET US SUM UP

1. Managerial accounting, also called management accounting, is

1.14 KEY WORDS

1. Management accounting- Managerial accounting, also called

2. Financial accounting- Financial accounting is the field of accounting

3. Cost center- A cost center is a department or function within an

4. Profit centre- A profit center is a branch or division of a company that

1.15 ANSWER TO CHECK YOUR PROGRESS

1. Refer 1 for Answer to check your progress- 1 Q. 1 …

1.16 SOME USEFUL BOOKS

1. R K Sharma & Shashi K Gupta, “Management

1.17 TERMINAL QUESTIONS

1. Give the meaning of ‘reissue of shares’

UNIT – 2 MANAGERIAL COSTING AND

● To understand the concepts, methods and techniques of managerial

2.1 INTRODUCTION TO MANAGERIAL