Management Accounting

AY 2021-23
MET PGDM

Mumbai Educational Trust

Bandra Reclamation, Bandra (W), Mumbai – 400050
Tel: (+ 91 22) 2644 0096 / 57, Toll free: 1800 22 0234 Email: communications@met.edu
Content :
Sr. No. Content
1 Introduction Management Accounting
Distinction and relationship among financial accounting, cost accounting and
2
management accounting
Marginal Costing and Cost-Volume-Profit Analysis, Marginal costing versus
3 absorption costing, Computation of breakeven point, margin of safety and
P/V Ratio Differential Costing and Incremental Costing
Budgeting and Budgetary Control
4
Concept of budget, budgeting and budgetary control, Types of budget
5 Standard Costing and Variance Analysis
6 Responsibility Accounting and Transfer Pricing
7 Activity Based Costing & Activity Based Management
8 Target Costing
9 Lifecycle Costing
10 Environmental Costing
11 Service Costing
1) Introduction to Management Accounting :
• Meaning : - Any accounting made for Management is called
Management Accounting, In other words Accounting designed and used
for managerial purpose is called Management Accounting. It is the
accounting activity which assist management to make / define policies,
to take decisions & perform all the functions efficiently.

• Definition : -
• Institute of Chartered Accountants of England and Wales defines
management accounting as:
“Any form of accounting which enables a business to conduct
more efficiently can be regarded as Management Accounting.”
• According to Kohler, Management Accounting is
“that portion of accounting which attempts to supply
management with quantitative information as basis for
decisions.”
Characteristics of Management Accounting :
Management accounting provides data to the management on the
basis of which they take decisions to achieve organizational goals
and improve their efficiency. In this section, we will discuss the main
characteristics of management accounting.
• To Provide Accounting Information
• Cause and Effect Analysis
• Decision Making
• Achieving Tasks
• Increasing Efficiency
• Informative with Insightful Analysis
• Forecasting
Objectives of Management Accounting :
Let us go through the objectives of management
accounting:
• Reporting to Management
• Coordinating among Departments
• Planning and Formulating Policies
• Controlling Performance
• Interpreting Financial Statement
• Motivating Employees
• Making Decisions
Financial Accounting :
• Financial accounting is oriented towards the preparation of
financial statements which summaries the result of operations
for the selected period and show the financial position of the
business for that particular period.
• Financial accounting is the original form of accounting. It is
mainly concerned with the preparation of financial statements
for the use of outsiders like shareholders, debenture holders,
creditors, banks and financial institutions.
• The financial statements. i.e., the Profit and Loss Account and
the Balance Sheet, show them the manner in which operations
of the business have been conducted during a specified period.
Contents of Financial Accounting :
• The finished products of financial accounting process are
financial statements of the firm/ company.
• Financial statements communicate useful information to
decision makers (Share holders [existing/investors],
managements, debenture holders, creditors etc.)
• This reflects the combination of recorded facts, accounting
conventions / contracts / agreements and personal judgments
of preparers.
• The accounting information generated by financial accounting
is quantitative, formal, structured, numerical and post-oriented
material.
Accounting System:
• An accounting system is a set of accounting processes with integrated with
procedures and controls.
• The accounting system includes the various techniques and procedures used
by the accountant in measuring, describing and communicating financial
data to users.
• There are two types of accounting system : -
 Single Entry : A single Entry System is a bookkeeping system in which
only one part of a transaction is recorded, such as debit or credit.
 Double Entry
• A single Entry System is a bookkeeping system in which only one part of a
transaction is recorded, such as debit or credit.
• The intent of an accounting system is to record business transactions,
summarize those transactions into an aggregated form, and create reports
that can be used by decision makers to monitor, analyze, and improve
operations.
Inventory Management Overview :
Costs associated with inventory:
• Purchase Price.
• Re-order costs:
 cost of delivery of purchase items.
 cost associated with placing order.
 cost associated with checking the inventory after delivery.
• Inventory holding costs:
 capital tied-up.
 insurance costs.
 cost of warehousing.
 obsolescence, deterioration and thief.
Inventory Management Overview :
• Shortage costs/Stock-out costs.
Changing inventory levels will affect variable holding costs but not
fixed cost

• Trade-off

• There is a trade-off between ordering costs and holding costs:

 The holding costs reduces , as when average inventory falls

as order size falls, thus increases order cost as there will be
more number of orders. The inverse is also correct.
Economic Order Quantity (EOQ):
EOQ is a mathematical model used to calculate the quantity to
order each time an order is made, in order to minimize the annual
inventory costs.

Assumptions of EOQ
• There are no bulk purchases discount. All units purchased cost
the same unit price.
• The order lead time/Re-order period (the time between placing
an order and receiving delivery) is constant. and known.
• Annual demand is constant throughout the year.
Inventory Control Techniques:
Important techniques covered here are :
I. ABC analysis
II. Economic Order Quantity (EOQ)
III. Reorder-point and
IV. Safety Stock

ABC System:
• ABC System assumes different degrees of control on different items of
inventory. ABC analysis is an approach for classifying inventory items
based on the items’ consumption values. Consumption value is the total
value of an item consumed over a specified time period, for example a
year. The approach is based on the Pareto principle to help manage what
matters and is applied in this context:
ABC System:
Important techniques covered here are :
I. ABC analysis
II. Economic Order Quantity (EOQ)
III. Reorder-point and
IV. Safety Stock

ABC System:
• ABC System assumes different degrees of control on different items of
inventory. ABC analysis is an approach for classifying inventory items
based on the items’ consumption values. Consumption value is the total
value of an item consumed over a specified time period, for example a
year. The approach is based on the Pareto principle to help manage what
matters and is applied in this context:
Economic Order Quantity (EOQ):
Based on the assumptions; the relevant costs are the annual
holding cost per item per annum and the annual ordering costs.
Formula to be used :
EOQ=2AB/C
Where
A = Annual usage of inventory (in units)
B = Ordering cost per buying order
C = Carrying cost per unit
 Thank You

Mumbai Educational Trust

Bandra Reclamation, Bandra (W), Mumbai – 400050
Tel: (+ 91 22) 2644 0096 / 57, Toll free: 1800 22 0234 Email: communications@met.edu