Intro To Management Accounting

Dr.Dimple Pandey

1
Importance of Financial Accounting
Management Accounting

Management accounting can be defined as a process of providing financial

information and resources to the managers in decision making.

Financial accounting is the recording and presentation of information for the

benefit of the various stakeholders of an organization. Management accounting,
on the other hand, is the presentation of financial data and business activities for
the internal management of the organization.
Importance of Management Accounting
Managerial accounting helps in calculating and allocating overhead charges to
assess the expenses or costs related to the production of a good or service.

Managerial accounting also includes reviewing the trendline for certain expenses
as well as investigating unusual deviations.

Managerial accounting also helps in analyzing information related to capital

expenditure decisions. It assists decision-makers on whether to invest in capital-
intensive projects or purchases or not.
 Difference between Management
Accounting and Financial Accounting
Sr. No. Management Accounting Financial Accounting

For external reporting to various stakeholders and

1 Only used for internal purposes of the firm
mandatory by law in most cases

Is not under the regulation of any law or

2 Is governed by Standards, Laws, regulations, etc
regulations

The main purpose is to help internal management Helps investors, creditors, etc. take investment
3
take decisions decisions

Includes both financial and non-financial

4 Is only concerned with financial information
information

5 Not subject to any audits or investigation Financial records are audited as per the norms
Importance of Accounting in Management
Decision Making
 Management Accounting Examples
Amanpreet runs a small consultancy business as the CEO. He wants to recruit a financial accountant as well as a
management accountant. He's compiled a list of work responsibilities, which he needs to divide between those that
belong to the management accountant and those that belong to the financial accountant. Anderson has devised the
following set of tasks:

1. Cash flow statements show how much money is coming in and going out.
2. Reporting on the income statement
3. Budgeting
4. Calculating shareholder equity changes
5. Organising taxes

Budgeting and taxes would be the sole duties given to the management accountant in this scenario, and the
financial accountant would handle the other chores.
Objectives of Management Accounting
Decision Making -Use techniques from all fields like costing, economics, statistics, etc.
It provides us with charts, tables, forecasts and various such analysis that makes the process of
decision making easier

Planning-managers can use this analysis and data to plan the activities of the organization
which is continuous and ongoing process.

Identifying business problem areas-low sales, unexpected losses

Strategic Management Decisions-launch a new product line, or discontinue an existing one

Cost Concept and Types

Implicit costs are imputed (estimated) costs of self-owned and self-employed resources. Example: (i)
Interest on entrepreneur's own capital. (ii) Rent on entrepreneur's own land used in business.
Normal vs Abnormal Costs

Normal Cost are the normal or regular costs which are incurred in the normal conditions during the normal
operations of the organization. They are the sum of actual direct materials cost, actual labour cost and other
direct expense. Example: repairs, maintenance, salaries paid to employees.

Abnormal Cost are the costs which are unusual or irregular which are not incurred due to abnormal
situation s of the operations or productions. Example: destruction due to fire, shut down of machinery, lock
outs, etc.
 Direct vs Indirect Costs
Direct costs are business expenses you can directly apply to producing a specific cost object, like a good or service. Cost
objects are items that expenses are assigned to. Example: Direct labor, Direct materials, Manufacturing supplies

Direct costs can be variable or fixed. Variable costs are expenses that change based on how many items you produce or how
many services you offer. For example, you would spend more money producing 200 toys as opposed to 100 toys. Fixed costs
are expenses that remain the same each month.

Indirect costs are expenses that apply to more than one business activity. Unlike direct costs, you cannot assign indirect
expenses to specific cost objects. Example: Rent, General office expenses, Employee salaries (e.g., administrative). Let’s say
you make rent and utility payments to keep your business going. And, you must buy computers. These costs are not directly
related to producing a specific product or performing a service, so they are indirect costs. Indirectly, they help you produce
goods and perform services, but you can’t directly apply them to a specific product or service.

Like direct costs, indirect expenses can be either fixed (e.g., rent) or variable (e.g., utilities).
 Budgeted vs Standard Costs

Budgeted Costs refer to the expected cost of manufacture computed on the basis of information available in advance of
actual production or purchase. For example, management might think that demand might increase 10 percent next year, so
they take the current sales figure and add 10 percent in the budget. Next management must figure out what expenses are
associated with producing this amount of product. These estimated expenses are considered budgeted costs.

Standard Costs, on the other hand, is a predetermination of what actual costs should be under projected conditions serving as
a basis of cost control and, as a measure of product efficiency, when ultimately aligned actual cost. For example, if the direct
materials price is $10 and the standard quantity is 20 pounds per unit, you would multiply $10 by 20 to get $200. This would
be the standard cost for the direct materials only.
Controllable vs Uncontrollable Costs
Three reasons to differentiate between these two cost types,
including:
1.Efficient management. By focusing more on controllable costs,
management can proactively – and more quickly – react to the
information that financial statements disclose.
2.Effective cost monitoring. Although a financial statement does
not present raw numbers, it is the organization’s financial
scorecard. A financial statement that separates controllable costs
from non-controllable costs gives management a clearer picture
of the entity’s financial health. Such a statement also allows
management to compare monthly or annual trends and quickly
pinpoint any unusual patterns.
3.Incentive packages. In some industries, management is paid
according to a profitability split. If a company’s financial
statements clearly define expenses and their impact on
profitability, then team members can more easily understand the
incentive packages.
 Historical vs Predetermined Cost

Predetermined cost means that estimation which is made by a manufacturing company in advance; it is done even before the
production of a product starts. The calculation for predetermined cost is done on the basis of various variables affecting the
production like raw material, labor, factory expense and so on. The idea behind its calculation is to have a better
understanding about the budget which will be needed to produce a product and also once production is complete to see
whether the company has done better or worse than what it was budgeted and if any variance is found reasons for it are found
and corrective action is taken so that same mistake is not repeated once again. Examples include rent payable, utilities
payable, insurance payable, salaries payable to office staff, office supplies, etc

The historical cost principle is important because it allows businesses to track the value of their assets over time, even if that
value changes. This principle helps ensure that companies are not taking advantage of changing market values to inflate their
financial statements.
According to Management Decisions

Marginal Cost: cost for producing additional unit

Differential Cost: portion of the cost of a function

attributable to and identifiable with an added
feature

Opportunity Cost

Replacement Cost

Sunk Cost
Functions of Cost Accounting
Examine each product’s cost per unit to determine whether
there are any wastes in terms of material or expense or time or
tools and spare parts etc.

Controlling raw material costs, it must ensure that we don’t

overorder, resulting in unnecessarily locked up capital.
Manage costs for materials, labour, and other extraneous
expenditures and give the management enough information to
evaluate and make business decisions.
Assisting the management with budget formulation and
implementation of financial controls
Methods of Costing