01.

What is Management Accounting

Management accounting is a field of accounting that provides economic and financial information for managers and other internal
users. Managerial accounting is the practice of using accounting information — from revenues to production inputs and outputs
affecting the supply chain — internally, in support of organization-wide efficiency and for tracking the organization's progress
toward attaining its stated goals.
The processes and techniques that focus on the effective use of organizational resources, to support manager in their tasks of
enhancing both customer value and shareholder value
Customer value
The value that a customer places on particular features of a product or service
Shareholder value
The value that shareholders or owners place on a business
Resources
Financial and non-financial, including information, work processes, employees, committed
customers and suppliers

02. NATURE OF MANAGEMENT ACCOUNTING

1. It can be called an interdisciplinary subject, the scope of which is not clearly demarcated. Other fields of
study, which can be covered by management accounting, are political science, sociology, psychology,
management, economics, statistics, law, etc.
2. It is a wide and diverse subject. Management accounting has no set principles such as the double entry
system of bookkeeping. In place of generally accepted accounting principles, the philosophy of cost benefit
analysis is the core guide of this discipline. It says that no accounting system is good or bad but is can be
considered desirable so long as it brings incremental benefits in excess of its incremental costs.
3. Management accounting is highly sensitive to management needs. Finally, it can be said that the
management accounting serves as a management information system and so enables the management to
manage better.
4. Since management accounting is managerially oriented, its data is selective in nature. It focuses on potential
opportunities rather than opportunities lost. The data is operative in nature catering to the operational needs of
a firm. It details events, monetary and non-monetary. The nature of data, the form of presentation and its
duration is mainly determined by managerial needs. It is quite frequently reported as it is meant for internal
uses and managerial control.

03. Function of Management Accounting

1. Provides data: Management accounting serves as a vital source of data for management planning. The
accounts and documents are a repository of a vast quantity of data about the past progress of the enterprise,
which are a must for making forecasts for the future.
2. Modifies data: The accounting data required for managerial decisions is properly compiled and classified. For example,
purchase figures for different months may be classified to know total purchases made during each period product-wise, supplier-
wise and territory-wise.
3. Analyses and interprets data: The accounting data is analyzed meaningfully for effective planning and decision-making. For
this purpose, the data is presented in a comparative form. Ratios are calculated and likely trends are projected.
4. Facilitates control: Management accounting helps in translating given objectives and strategy into specified goals for
attainment by a specified time and secures effective accomplishment of these goals in an efficient manner. All this is made
possible through budgetary control and standard costing which is an integral part of management accounting.
5. 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 which may not be capable of being measured in monetary terms. Such
information may be collected form special surveys, statistical compilations, engineering records, etc.
6. 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. At later stages it keeps all parties informed about the plans that have been agreed upon and their roles in
these plans.
04. Scope of the Management Accounting
1. Financial Accounting: Management accounting is mainly concerned with the rearrangement of the information provided by
financial accounting. Hence, management cannot obtain full control and coordination of operations without a properly designed
financial accounting system.
2. Cost Accounting: Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost techniques
play a useful role in operation and control of the business undertaking.
3. Revaluation Accounting: This is concerned with ensuring that capital is maintained intact in real terms and profit is calculated
with this fact in mind.
4. Budgetary Control: This includes framing of budgets, comparison of actual performance with the budgeted performance,
computation of variances, finding of their causes, etc
5. Inventory Control: It includes control over inventory from the time it is acquired till its final disposal.
6. Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other statistical methods make the information
more impressive and intelligible.
7. Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income statements and the related reports, cash
flow and funds flow statements, scrap reports, etc.
8. Taxation: This includes computation of income in accordance with the tax laws, filing of returns and making tax payments.
9. Office Services: This includes maintenance of proper data processing and other office management services, reporting on best
use of mechanical and electronic devices.
10. Internal Audit: Development of a suitable internal audit system for internal control

05. Functions of management accountant

(i) Planning: He has to establish, coordinate and administer as an integral part of management, an adequate
plan for the control of the operations. Such a plan would include profit planning, programmes of capital
investment and financing, sales forecasts, expenses budgets and cost standards.
(ii) Controlling: He has to compare actual performance with operating plans and standards and to report
and interpret the results of operations to all levels of management and the owners of the business. This is
done through the compilation of appropriate accounting and statistical records and reports.
(iv) Other functions:
• He administers tax policies and procedures.
• He supervises and coordinated the preparation of reports to governmental agencies.
•He ensures fiscal protection for the assets of the business through adequate internal control and proper
insurance coverage.
• He carries out continuous appraisal economic and social forces and the government influences, and
interprets their effect on the business.

06. Limitations of Management Accounting

1. Limitations of basic records: Management accounting derives its information from financial
accounting, cost accounting and other records. The strength and weakness of the management accounting,
therefore, depends upon the strength and weakness of these basic records. In other words, their limitations
are also the limitations of management accounting
2. Persistent efforts. The conclusions draw by the management accountant are not executed automatically.
He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.
3. Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers
both monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the
conclusions obtained through it.
4. Management accounting is only a tool: Management accounting cannot replace the management.
Management accountant is only an adviser to the management. The decision regarding implementing his
advice is to be taken by the management. There is always a temptation to take an easy course of arriving at
decision by intuition rather than going by the advice of the management accountant.
5. Top-heavy structure: The installation of management accounting system requires heavy costs on
account of an elaborate organization and numerous rules and regulations. It can, therefore, be adopted only
by big concerns.
6. Opposition to change: Management accounting demands a break away from traditional accounting
practices. It calls for a rearrangement of the personnel and their activities, which is generally not like by the
people involved.
7. Evolutionary stage: Management accounting is still in its initial stage. It has, therefore, the same
impediments as a new discipline will have, e.g., fluidity of concepts, raw techniques and imperfect analytical
tools. This all creates doubt about the very utility of management accounting

07. Contemporary Developments in Managerial Accounting

Due to increased global competition from such countries as Japan and Germany, contemporary business managers demand
different and better information than they needed just a few years ago. The factors on the following slides contribute to the
expanding role of managerial accounting as we look toward the next century.
1. Technological Change — Through computer-integrated manufacturing (CIM), many companies can now manufacture products
that are untouched by human hands. Also, the widespread use of computers has greatly reduced the cost of accumulating, storing,
and reporting managerial accounting information.
2. Quality — Many companies have installed a total quality control (TQC) system to reduce defects in finished products. More
emphasis is now put on nonfinancial measures such as customer satisfaction, number of service calls, and time to generate
reports.
3. Focus on Activities — In order to obtain more accurate product costs, many companies are accounting for overhead costs by
the activities used in making the product. Activities include purchasing materials, handling raw materials, and production order
scheduling. This development is called activity based costing (ABC)
4. Service Industry Needs — In some respects, the challenges for managerial accounting are greater in service enterprises than in
manufacturing companies. In some companies, it may be necessary for the managerial accountant to develop new systems for
measuring the cost of serving individual customers and new operating controls to improve the quality and efficiency of specific
services.
5. A Final Comment — Not long ago, the managerial accountant was primarily engaged in cost accounting – collecting and
reporting manufacturing costs to management. Today, the managerial accountant’s responsibilities extend to cost management –
providing managers with data on the efficient use of company resources in both manufacturing and service industries

08. Differences Between Financial Accounting vs. Managerial Accounting

Financial accountants produce documents such as income statements and balance sheets, which external parties (investors,
industry regulators) use. The statements document an organization’s financial performance over a period of time, as well as its
overall financial health. Agencies such as the Securities and Exchange Commission (SEC) regulate the work of financial
accountants, who produce these statements.
Managerial accountants produce financial documents that organizations use internally. The documents account for company
resources such as raw materials, labor or equipment in ways that help executives maximize efficiency.
Although financial accounting and managerial accounting complement each other in an organization’s financial strategy,
professionals considering one of these careers should understand the differences between the disciplines. Managerial accounting
focuses on an organization’s internal financial processes, while financial accounting focuses on an organization’s external
financial processes.
Managerial accountants focus on short-term growth strategies relating to economic maintenance. For example, managerial
accountants can perform a make-or-buy analysis to determine the financial soundness of producing a part to help with
manufacturing a product.
Financial accountants focus on long-term financial strategies relating to organizational growth. The financial reports that these
accountants produce follow established formats and abide by Financial Accounting Standards Board (FASB) rules and
regulations. The guidelines are outlined in the generally accepted accounting principles (GAAP), which all publicly traded
companies in the U.S. have adopted.
Compliance with established formats is vital for financial accountants, who must prepare reports for shareholders and potential
investors as well as executives. Managerial accountants, however, generally prepare their reports for internal audiences.
09. Name the interest parties of financial information indicate the information needs for their interest?

 The interested parties of financial information include investors, creditors, management, employees, government, and the
general public.
 Investors are interested in financial information to make informed decisions about buying, holding, or selling shares of a
company. They look for information on the financial performance of the company, such as revenue, profits, and cash
flow.
 Creditors are interested in financial information to assess the creditworthiness of a company and to determine if they will
be paid back on time. They look for information on the company's ability to generate cash flow and its debt levels.
 Management is interested in financial information to monitor the performance of the company and to make decisions that
will improve its profitability and growth. They look for information on revenue and expenses to manage costs and
increase revenue.
 Employees are interested in financial information to understand the financial health of the company and to assess the
security of their jobs. They look for information on the company's profitability, revenue growth, and cash flow.
 Government is interested in financial information to ensure that taxes are being paid correctly and to monitor compliance
with regulations. They look for information on revenue, expenses, and taxes paid.
 The general public is interested in financial information to understand the performance of the company and to assess its
impact on the economy. They look for information on revenue, profits, and growth to determine its overall health and
success.
10. Discuss the Brief purpose of Prime entry books

This is where the transactions that are made by a business are recorded for the first time, before they are entered into the separate
ledger accounts.
These books are separated into:
1. The Sales Journal
This is used when a business has a lot of separate sale transactions. In this journal, the total is then entered into the ledger
accounts. The Common use of this journal is to record credit sales from invoices issued
2. Purchase Journal
This journal lists the transactions for credit purchases from the invoices that are received. At the end of the day, week or month
the total is transferred to purchase account
03. Returns Journal
Sales Returns, or Returns inwards, Journal
- For goods previously sold on credit and are being returned to the business by customers
Purchase Returns or Returns Outwards Journal
- For goods purchased on credit by the business and is now being returned to the suppliers.
4. Cash Book
The cash books are used for both the cash account and bank account
5. General Journal
The general journey is where transactions that are made by the business are entered. This is recorded chronologically showing an
explanation of the transaction, which account is affected, the amount and whether those accounts are increased or decreased.

11. occasions when accounting errors may occur

Accounting errors can occur at various stages of recording, analyzing, and summarizing financial transactions. Such errors may
arise due to human error, misunderstanding of accounting concepts, or inaccurate recording of transactions. Here are some
examples of occasions when accounting errors may occur:
1. Clerical errors: Clerical errors are the most common type of errors that occur during the recording of transactions. These errors
include mistakes in data entry, calculation errors, transposition errors, and incorrect postings.
2. Misunderstanding of accounting concepts: Accounting concepts can be complex, and a lack of understanding can lead to errors.
For example, if an accountant does not understand the matching principle, they may incorrectly record revenue or expenses.
3. Omission errors: Omission errors occur when a transaction is not recorded in the books of accounts. For example, if a business
receives cash but forgets to record it, the books will not reflect the transaction.
4. Compensation errors: Compensation errors occur when a mistake is made in one account, and another account is adjusted to
compensate for the error. This can result in inaccurate financial statements.
5. Fraud: Fraudulent activities such as embezzlement, theft, or misappropriation of funds can also result in accounting errors. For
example, an employee may steal cash and not record the transaction, causing an imbalance in the books of accounts.
It is essential for businesses to have effective internal controls to prevent and detect accounting errors. Regular reviews of
financial records and reconciliations can help identify and correct errors before they affect financial statements.
12. state the sequential steps to be followed in accounting process

The accounting process can be broken down into several sequential steps, including:
1. Identifying and analyzing transactions: This involves identifying and analyzing all financial transactions that have occurred
within a specified period.
2. Recording transactions: This involves entering the transaction data into the accounting system, including debits and credits.
3. Posting to the general ledger: This involves transferring the transaction data from the journal to the general ledger, which is a
master list of all accounts used in the business.
4. Preparing an unadjusted trial balance: This involves listing all the account balances to ensure that debits and credits are equal.
5. Adjusting entries: This involves making adjustments to the accounts to reflect any accruals or deferrals that have occurred
during the period.
6. Preparing an adjusted trial balance: This involves listing all the account balances after adjusting entries have been made.
7. Preparing financial statements: This involves using the adjusted trial balance to prepare the income statement, balance sheet,
and statement of cash flows.
8. Closing the books: This involves finalizing the financial statements and transferring the balances of all temporary accounts to
the retained earnings account.
9. Post-closing trial balance: This involves preparing a trial balance to ensure that all temporary accounts have been closed and
that the retained earnings account reflects the correct balance.
These steps ensure that financial information is recorded accurately and can be used to make important business decisions.

13. what are five principles for the five types of ledger accounts in financial accounting?
- Assets: These are resources owned by the company that have monetary value and are expected to provide future benefits.
Examples of assets include cash, accounts receivable, inventory, and property, plant, and equipment.
- Liabilities: These are obligations that the company owes to others and are expected to be settled in the future by providing goods
or services or paying cash. Examples of liabilities include accounts payable, loans payable, and accrued expenses.
- Equity: This represents the residual interest in the assets of the company after deducting liabilities. Equity includes common
stock, retained earnings, and other comprehensive income.
- Expenses: These are costs incurred by the company in order to generate revenue. Examples of expenses include wages and
salaries, rent, utilities, and depreciation.
- Income: This represents the revenue generated by the company from the sale of goods or services. It is recognized when earned,
regardless of when payment is received.
Each of these ledger accounts has its own set of rules and principles that govern how transactions are recorded and tracked. For
example, the rules for recording assets and liabilities are different from the rules for recording expenses and income. However,
there are no specific principles for each type of account. Instead, there are general accounting principles and rules that apply to all
types of accounts.

14. Short description

Product cost: refers to the costs incurred to create a product. These costs include direct labor, direct materials, consumable
production supplies, and factory overhead. Product cost can also be considered the cost of the labor required to deliver a service to
a customer.
The marginal cost refers to the increase in production costs generated by the production of additional product units. It is also
known as the marginal cost of production. Calculating the marginal cost allows companies to see how volume output influences
cost and hence, ultimately, profits.
The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small
business. In other words, you've reached the level of production at which the costs of production equal the revenues for a product.
A cost pool is a grouping of individual costs, typically by department or service center. Cost allocations are then made from the
cost pool. For example, the cost of the maintenance department is accumulated in a cost pool and then allocated to those
departments using its services.
A sunk cost, sometimes called a retrospective cost, refers to an investment already incurred that can't be recovered. Examples of
sunk costs in business include marketing, research, new software installation or equipment, salaries and benefits, or facilities
expenses.

14. Calculation of Break-even-point?

1. Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)
2. Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin.
3. Contribution Margin = Price of Product – Variable Costs.

15. Budgetary Control objectives explanation?

Budgetary control is a procedure that ensures that organizations’ actual revenue and expenditure adhere to the financial plans or
not. This system controls budgets by coordinating with various departments, establishing budgets, and comparing them with the
actual results. It implies regularly comparing actual expenses with the planned income and expenses. The purpose of preparing is
to ensure taking corrective measures in case of any variances.
Objectives of Budgetary Control
 Involving different levels of management in a cooperative endeavor to accomplish the firm’s objective.
 Facilitate centralized control with delegated authority and responsibility.
 Reduction in losses and wastes to a minimum.
 Clarification of the issues where actual work is required.
 Ensuring adequate working capital in other resources for efficient
 Achieving maximum profitability by planning income and expenditure through ideal use of the resources available
operation of the business.
 Ensure the firm is not deflected from its long-term objectives without being overwhelmed by emergencies.
 Using a budgetary control system, organizations coordinate their activities such as sales, production, purchase of
materials, etc.,

16. About 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.
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.
 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.

17. How to create cash budget?

When a crisis event first hits your business, an important step is to develop or revise your budget. The cash flow budget estimates
the future income and expenditure of the business, revealing any periods where it may fall short of cash.
1: Determine the time frame
Decide on the timeframe that the emergency might have a significant impact on your cash flow. This might be a weekly,
fortnight, month or longer.
2: Estimate sales units
Estimate the number of customers or sales units you could expect for a weekly, fortnightly or monthly forecast period. Do this for
each of your areas of income such as meals, tours, accommodation or equipment hire.
3: Estimate sales income
Multiply the customers or sales units by the actual (or average) price of each unit, to give the likely sales income.
4: Estimate timing of income
Calculate when this sales income will actually be paid to the business's account, taking into account any deposits, cash payments
or credit card payments.
5: Itemize and add expenditure
Identify and add up all the expenses that must be paid in each weekly, fortnightly or monthly forecast period. Separate the
expenditure into fixed costs (those that will occur regardless of your situation) and variable costs (those that are linked to the
number of sales).
6: Work out surplus or deficit
Calculate the surplus or deficit for the weekly, fortnightly or monthly forecast period. If there is a deficit, consider whether it can
be covered by any cash you have on hand, or by an overdraft or other credit facilities.
7: Review sales units
Review the number of sales units. Is there enough time to establish marketing strategies to increase sales with special offers or
add-ons? Add in any extra units you could expect to sell, and recalculate Steps 2-6.
8: Review timing of sales income
Review when the sales income is likely to be received into the business. Are there any opportunities to increase income during the
emergency projection period by paying incentives for cash payments, or by temporarily reducing the normal payment terms? Add
in any changes to the timing of when income is to be received and recalculate Steps 4-6 above.
9: Review expenditure
Look at each expense item and ask whether any expenses could be deferred, reduced or avoided altogether without impacting on
your business's reputation or future sales.
The separated fixed and variable costs will make it easier to look for potential savings because the fixed costs will tend to be
relatively constant amounts, paid at regular intervals irrespective of sales income, while the variable cost will be linked to the
sales income for the period.
Deduct any changes to expenses and recalculate Steps 5-6 above.
10: Finalize the budget
When a satisfactory and manageable result is obtained, finalise and print out the budget.

18. Activity based costing and overhead allocation system for decision making?
To determine the optimal product mix when a limiting factor exists, a company should identify the limiting factor and calculate
the contribution margin per unit of each product. Contribution margin is the amount by which revenue from a product exceeds
variable costs associated with producing that product. The company should then produce the product with the highest contribution
margin per unit until the limiting factor is reached, and then move on to the next most profitable product. In order to allocate
overhead costs, a company can use either the traditional costing method or activity-based costing. Activity-based costing involves
identifying activities that consume resources, assigning costs to those activities, identifying the cost drivers associated with each
activity, computing a cost rate per cost driver unit, and assigning costs to products. Activity-based costing is useful for businesses
with higher indirect costs due to their complexity and can help businesses to accurately set pricing strategies and identify
profitable products

19. How to calculate the relevant material cost?

Calculating relevant material cost involves identifying the direct materials that are used in the production of a specific product. To
calculate the relevant material cost, you will need to follow these steps:
1. Identify the direct materials used in the production of the product. Direct materials are materials that can be traced directly to
the product. For example, if you are manufacturing a chair, the relevant material cost would include the cost of wood used to
make the chair.
2. Determine the quantity of each direct material used in the production of the product. This can be done by reviewing the
production process and identifying the amount of each material used for each unit of the product.
3. Determine the cost of each direct material. This can be done by reviewing purchase orders or invoices from suppliers.
4. Multiply the quantity of each direct material used in the production of the product by its cost to determine the total relevant
material cost.
For example, if 10 units of a product require 100 pieces of wood, and the cost of each piece of wood is $2, the total relevant
material cost for the wood would be $200 (100 x $2). Repeat this process for each direct material used in the production of the
product to calculate the total relevant material cost for the product.
The current purchase price of $22 will be used to determine the relevant cost of Material C as this will be the value of each unit
purchased. The original purchase price of $20 is a sunk cost and so is not relevant. Therefore, the relevant cost of Material C for
the new product is (120 units’ x $22) = $2,640.

20. objective and need of financial accounting?

Financial accounting is a process of recording, summarizing, and reporting the financial transactions of a business to provide
useful information to various stakeholders. The primary objective of financial accounting is to provide accurate and reliable
information about a company's financial performance, position, and cash flows to help stakeholders make informed decisions.

The stakeholders of financial accounting include investors, creditors, regulatory bodies, management, and employees who need
financial information to evaluate the financial health of a company. They use financial statements such as the balance sheet,
income statement, and cash flow statement to analyze the company's performance and make decisions such as investing in the
company, lending money to the company, or managing the company's operations.

The need for financial accounting arises from the fact that businesses engage in multiple transactions with different parties such as
customers, suppliers, employees, and investors. Financial accounting provides a systematic approach to record and report these
transactions in a standardized format that is understandable and comparable across different companies and industries.

In summary, financial accounting plays a crucial role in providing relevant financial information to stakeholders to help them
make informed decisions about a company's financial health and future prospects.
21. About income statement and statement of financial position?
Certainly!

The income statement, also known as the profit and loss statement, is a financial statement that reports a company's revenues,
expenses, gains, and losses over a specific period of time. The purpose of the income statement is to show the profitability of the
business during that period. Essentially, it shows whether the company has made a profit or a loss.

The statement of financial position, also known as the balance sheet, is a financial statement that reports a company's assets,
liabilities, and equity at a specific point in time. It provides a snapshot of the company's financial position, including what it owns
and owes, as well as the amount of equity that belongs to its owners. The purpose of the statement of financial position is to
provide information about a company's financial health and its ability to meet its financial obligations.

Both the income statement and statement of financial position are important financial statements that a company uses to report its
financial performance and position.

Sure, here are some brief notes about the income statement and statement of financial position:

Income Statement:
- Also known as the profit and loss statement or P&L statement
- Reports a company's revenues, expenses, gains, and losses over a specific period of time, usually one year or one quarter
- Shows the company's net income or net loss for the period
- Provides information about the company's profitability and operating performance

Statement of Financial Position:

- Also known as the balance sheet
- Reports a company's assets, liabilities, and equity at a specific point in time, usually at the end of the year or quarter
- Shows the company's financial position, including what it owns (assets), what it owes (liabilities), and what is left over for the
owners (equity)
- Provides information about the company's liquidity, solvency, and financial health.