Management Accounting

MBA
First Year
CR23
1. Basics of Management Accounting
 1.0 Introduction
 1.1 Objectives
 1.2 Management Accounting: Meaning

1.2.1 Evolution and Definition of Management Accounting

1.2.2 Nature and Characteristics of Management Accounting
1.2.3 Scope of Management Accounting
1.2.4 Relationship of Management Accounting with Financial Accounting
1.2.5 Difference Between Cost Accounting and Management Accounting
 1.3 Important Concepts Related to Management

1.3.1 Objectives and Functions of Management Accounting

1.3.2 Tools and Techniques of Management Accounting
1.3.3 Advantages and Limitations of Management Accounting
1.3.4 Changing Role and Tasks of Management Accountants
1.3.5 Adaptation in Management Accounting as per Changing Business
Environment
 1.4 Emerging Trends in Management Accounting

2
2. Cost
 Introduction
 2.1 Objectives
 2.2 Basic Concepts Related to Cost Accounting
2.2.1 Meaning and Definitions
2.2.2 Costing and Cost Accountancy
2.2.3 Objectives and Functions of Cost Accounting
 2.3 Cost Concepts
2.3.1 Cost vs Expense and Loss
2.3.2 Cost Centre
2.3.3 Profit Centre
2.3.4 Responsibility Centre
2.3.5 Cost Unit
2.3.6 Cost Object
 2.4 Cost Classification
 2.5 Special Costs for Management Decision Making
 2.6 Cost Reduction and Cost Control
3
3. Marginal Costing and Break Even
Analysis
 3.0 Introduction
 3.1 Objectives
 3.2 Marginal Costing

3.2.1 Meaning and Definition

3.2.2 Difference between Marginal Costing and Absorption Costing
3.2.3 Advantages and Disadvantages of Marginal Costing
 3.3 Cost-Volume-Profit Analysis and Break Even Analysis

3.3.1 Contribution and Marginal Cost Equation

3.3.2 Profit-Volume Ratio (P/V Ratio)
3.3.3 Algebraic Method (Calculations in Break-even Analysis)
3.3.4 Margin of Safety (M/S), Angle of Incidence and Key Factor
3.3.5 Determination of Cost Indifference Point
3.3.6 Graphic Presentation of Break-Even Analysis
3.3.7 Uses and Limitations of Break-even Analysis
 3.4 Marginal Costing and Decision Making
 3.5 Problems and Solutions

4
4. Budgetary Control
 4.0 Introduction
 4.1 Objectives
 4.2 Concept of Budget

4.2.1 Meaning and Definition

4.2.2 Forecast and Budget
 4.3 Budgetary Control

4.3.1 Objectives of Budgetary Control

4.3.2 Merits and Limitations of Budgetary Control
 4.4 Budget Administration
 4.5 Types of budgets

4.5.1 Functional Budgets

4.5.2 Fixed and Flexible budgets
 4.6 Budget Report
 4.7 Newer Developments in Budgeting

4.7.1 Zero Base Budgeting

4.7.2 Programme Budgeting
4.7.3 Performance Budgeting
 4.8 Problems and Solutions.

5
5. Decision Making
 5.0 Introduction
 5.1 Objectives
 5.2 Steps in the Decision Making Process

5.2.1 Concept of Relevant Costs and Benefits

 5.3 Various Short Term Decision Making Situations

5.3.1 Make or Buy

5.3.2 Accept or Reject Special Order
5.3.3 Add or Drop Products
5.3.4 Sell or Process
5.3.5 Operate or Shutdown
5.3.6 Lease or Sell
5.3.7 Expand or Reduce Capacity
5.3.8 Reduce or Maintain Price
5.3.9 Some Practical Problems
 5.4 Pricing Decisions

5.4.1 Major Factors Influencing Pricing Decisions

5.4.2 The Economists’ Approach to Pricing
5.4.3 Product Cost Categories and Costing Methods
 5.5 Various Methods of Pricing

5.5.1 Cost Plus and Target Costing

5.5.2 Transfer Prices: Market Based and Cost Based 6

5.5.3 Multinational Pricing

Basics of Management Accounting
 Accounting can be divided into three broad categories—financial,
management and cost accounting. Before learning about the
concepts related to management accounting it is crucial
to learn a little bit about financial and cost accounting.

 Financial Accounting
“Financial accounting as a growing discipline helps to regulate a
system that is capable of recording, classifying and summarizing
the mercantile transactions occurring in an organization.
 It is the art of recording and classifying business transactions and events in a
systematic manner.

 Transactions are recorded in monetary terms

 It involves summarizing, analysing and interpreting the results of accounting Basics

of Management information, as well as communicating and explaining the
information to decision makers

7
Basics of Management Accounting
 Cost Accountancy
 Thus, cost accounting is the branch of accounting designed
to determine and accumulate the costs of certain activities
and to report cost information to management.
 It provides the means to gather the data needed to
determine unit costs and to prepare reports, schedules,
statements and analyses that are relevant to management.
 Cost accounting procedures and routines are used as a
means of accumulating and allocating all elements of
manufacturing cost in a manner that will produce
meaningful data for the use of management

8
 1. Basics of Management
Accounting
Meaning of Management Accounting

“The presentation of accounting information

in such a way as to assist management in
the creation of policy and in the day-to-
day operation of an undertaking.

9
 Institute of Cost and Management
Accountants (ICMA), London:

Management accounting is the application of

professional knowledge and skill in the
preparation of accounting information in such a
way as to assist management in the formation of
policies and in the planning and control of the
operations of the undertaking.
10
 American Accounting Association:
Management accounting is the application of
appropriate techniques and concepts in
processing historical and projected economic data
of an entity to assist management in establishing
plans for reasonable economic objectives in the
making of rational decisions with a view towards
these objectives
11
Nature and Characteristics of
Management Accounting
1. Useful in decision making
2. Financial and cost accounting information
3. Internal use
4. Purely optional
5. Concerned with future
6. Flexibility in presentation of information.

12
Scope of Management Accounting
 Financial Accounting
 Cost Accounting
 Financial Statement
 Budgeting
 Inflation Accounting
 Management Reporting
 Quantitative Techniques
 Tax Accounting
 Internal Audit
 Office Services
13
Relationship of Management Accounting
with Financial Accounting
 Objectives:

 The basic objective of accounting is to measure the business result and

assess the financial position of an organization. To achieve this objective,
financial accounting has to perform functions like recording, classifying and
summarizing business transactions of an organization during the
accounting period. Such functions are related to the preparation of final
accounts, i.e., profit and loss account and balance sheet. Contrary to this,
the objective of management accounting is to facilitate managerial
decisions. Management accounting deals with the preparation of analytical
and critical financial reports to assist management in improving the

organization’s performance .
14
Relationship of Management Accounting
with Financial Accounting
 Nature:
 Financial accounting is historical in its outlook in the sense that it has to

maintain records of such business events that have taken place during the
accounting period. Under financial accounting system a transaction is
recorded as and when it takes place. Therefore, prospective transactions
are not considered before their maturity under such system of accounting.
On the other hand, management accounting system is devised to help
managers in shaping future operations of the business. It deals with
 projection of data to be used for planning and decision making for the
future. Thus, management accounting has prospective character

15
Relationship of Management Accounting with
Financial Accounting
 Adherence to Accounting Principles:
Financial accounting system is based on some accounting principles
and conventions which financial accountant has to strictly follow

while preparing financial accounts and statements

But management accounting is not bound by the constraints of

generally accepted accounting principles and conventions. The
preparation of reports and statements under management
accounting are governed by the requirements of the
management.

16
Relationship of Management Accounting with
Financial Accounting
 Compulsion:
The Indian Companies Act has made it obligatory for the
companies to maintain a system of financial accounting. At the
same time, the benefits as offered by a financial accounting
system have made it more or less compulsory for the non
company organization.
On the other hand, the setting up of management accounting
system is at the discretion of the management. The Indian
Companies Act has made it obligatory for the companies to
maintain a system of financial accounting. At the same time,
the benefits as offered by a financial accounting system have
made it more or less compulsory for the non company
organization. On the other hand, the setting up of management
accounting system is at the discretion of the management .

17
Relationship of Management Accounting
with Financial Accounting
 Precision:
 Frequency of Reports
 Recipients:
 Nature of Data Used
 Publication:

18
 Difference Between Cost Accounting and
Management Accounting
Basis Cost Accounting
1. Scope Scope of cost accounting is
limited to providing cost
information for managerial
uses.
2. Emphasis Main emphasis is on cost
ascertainment and cost
control to ensure maximum
profit.
3. Evolution Evolution of cost
accounting is mainly due to
the limitations of financial
accounting
4. Statutory Maintenance of cost
Requirements records has been made
compulsory in selected
industries as notified by the
Govt. from time to time.
5 Status in In the organizational set-up,
Management Accounting
broader than that of cost accounting
as it provides all types of
information, i.e., cost accounting as
well as financial accounting
information for managerial uses.
Main emphasis is on planning,
controlling and decision making to
maximize profit.
Evolution of management
accounting is due to the limitations
of cost accounting. In fact,
management accounting is an
extension of the managerial aspects
of cost accounting.
Management accounting is purely
voluntary and its use depends upon
its utility to management.
19
Management accountant is generally
IMPORTANT CONCEPTS RELATED TO
MANAGEMENT
 Planning:
 Organizing
 Evaluating
 Communication

20
Objectives and Functions of
Management Accounting
The basic role of management accounting is to provide accurate
and relevant information to the internal parties of an organization
for decision making
 Data Collection:
 Data Processing
 Analysis and Interpretation
 Communication
 Coordinating
 Tax Administration

21
Tools and Techniques of Management
Accounting
 Management accounting is an information system designed to
communicate meaningful economic and financial information to managers,
so that they may discharge their functions efficiently. It makes extensive
use of a number of tools and techniques to meet the increasing needs of
business. Important among them are:
 Financial Planning
 Analysis of Financial Statement
 Cost Accounting
 Standard Costing
 Marginal Costing
 Budgetary
 Funds Flow
 Management
22
 Statistical Analysis
Advantages of Management Accounting
 It increases the efficiency in business activities.
 It ensures efficient regulation of business activities by establishing
an efficient system of planning and budgeting.
 It makes possible the efficient utilization of the available resources
and thereby increase the return on capital employed.
 It ensures effective control by comparing actual results with the
standards.
 It helps maintain good relations with the public by providing
quality service to the customers.
 It provides the means to motivate the employees.
 It keeps managers informed about the ongoing operations,
thereby enabling them to suggest remedial measures in case of
deviations.
 It helps in evaluating the efficiency and effectiveness of the
organization’s business policies by incorporating management
audit.

23
Limitations of Management
Accounting
 Management accounting uses data that are available from financial statements.

Thus, the validity of the decisions largely depends on the reliability of the historical

data as obtained from conventional financial statements. Any drawback in such

statements is bound to affect the effectiveness of the decision.

 The application of management accounting tools and techniques requires knowledge about
various subjects like accounting, costing, economics, taxation, statistics and mathematics,
engineering and management. To find a manager in the organization with a comprehensive
knowledge of all these subjects is almost impossible.
 Though management accounting attempts to analyse both qualitative and

quantitative factors that influence a decision, the element of intuition in managerial

decision has not been completely eliminated. There is a tendency among business

executives to use a short-cut approach to managerial problems rather than the

lengthy process as required by the scientific analysis prescribed by management

accounting

24
Limitations of Management
Accounting
 The installation of management accounting system requires
a huge investment both in terms of money and manpower.
Therefore, smaller concerns may not be able to afford it.
The management system cannot be replaced by a system
of management accounting, as the latter system simply
provides the necessary data for a decision and not the
decision itself.
 The principle of objectivity is not always followed in its real
spirit in management accounting as the collection and
analysis are considerably influenced by the personal bias of
the management accountant

25
Changing Role and Tasks of
Management Accountants
 Accounting for product valuation and
pricing
 Policy formulation and planning
 Decision making
 Cost control

26
Adaptation In Management Accounting As
per Changing Business Environment
 Growth of Service Sector
 New Ways of Competing
 Higher Expectations of Customers
 New Standards in Customer Value
 Increased Reliance on Strategic Alliance
 Focus on Customer Retention
 Developments in Information Technology
 Growth and Development of New
Industries
27
Thank you

28