Accounting For

Managers
MBA Sem 1

Chirag Jain
Assistant Professor
Unit - 3
• Introduction to Management Accounting
• Difference from Financial Accounting
• Types of Cost
• Methods and Techniques of Costing
• Material, Labour, Overhead Cost and Management
• Cost Sheet
• Inventory Control measures
• Allocation, Apportionment and Absorption of Cost
Management Accounting
• The main objective of financial accounting is to provide information about the profitability and
financial position of an enterprise by preparing trading and profit & loss and a balance sheet. But it
does not present the accounting information in such a way as to assist the management in planning
day-to-day operations of a business and to make various types of decisions. There are various
limitations of financial accounting and management accounting removes these limitations.
• Management accounting presents the financial data in such a way as to assist the management in
planning and controlling the activities of the firm. Management accounting is also known as
‘accounting for management.’
• The term management accounting refers to accounting for the management, i.e., accounting which
provides necessary information to the management for discharging its functions.
• The functions of the information to the management are planning, organizing, directing and
controlling of business operations can be done in an orderly and effective manner.
• According to Anglo-American council of Productivity, “Management accounting is the presentation
of accounting information in such a way as to assist management in the creation of policy and in the
day-to-day operations of an undertaking.”
Characteristics or Nature of Management
Accounting
• lays more emphasis on future
• uses selective data which is relevant and useful to the management
• no set rules and formats
• establishes cause and effect relationship
• provides information and not the decisions
• use of special techniques and concepts
 BASIS FOR COMPARISON FINANCIAL ACCOUNTING
Meaning Financial Accounting is an accounting
system that focuses on the preparation
of a financial statement of an
organization to provide financial
information to the interested parties.
Orientation Historical
Users Both internal and external users
Nature of statements prepared General-purpose financial statements
Rules Rules of GAAP are followed
Reports Only financial aspects
Time Span Financial statements are prepared for a
fixed period, i.e. one year.
Objective To create periodical reports
Publishing and auditing Required to be published and audited by It is not meant to be published or
statutory auditors
Format Specified
MANAGEMENT ACCOUNTING
The accounting system which provides
relevant information to the managers to
make policies, plans and strategies for
running the business effectively is known
as Management Accounting.
Future
Only internal users
Special purpose financial statements
No fixed rules for the preparation of
reports
Both financial and non-financial aspects
Management Reports are prepared
whenever needed.
To assist internal management in
planning and decision-making process by
providing detailed information on
various matters.
audited. It is for internal use only.
Not Specified
Methods and Techniques of Costing
• Standard Costing
• Marginal Costing
• Job Costing
• Absorption Costing
• Differential Costing
• Incremental Costing
• Process Costing
Cost Sheet
• Statement which shows various components of total cost of product
• Shows total cost as well as per unit cost
• Selling price is ascertained with help of Cost sheet
Numerical
Solution
Inventory Control Measures
• Economic order quantity (EOQ) –
• It is the ideal inventory quantity that a company must purchase considering various
variables such as total production costs, demand rate, etc
• It helps to free up any tied cash in inventory for most entities and reduces the direct
costs
• ABC analysis –
• It involves categorising inventory into three buckets called A, B and C depending upon
the importance of the inventory to its profit
• A category consists of expensive items, and hence a small inventory is held. B category
has average-priced inventory with medium sales frequency. Category C inventories are
low in value but with high sales frequency. It requires less inventory control compared to
A or B.
Inventory Control Measures
• Just-in-time (JIT) inventory management –
• It is a technique to arrange raw material orders from suppliers in sync with the
production schedules to reduce inventory costs. There will be no excess inventory stored
beyond the production requirements, and hence it leaves no scope for deadstock in the
organisation.
• Safety stock inventory –
• Businesses can order an extra quantity of inventory as buffer stock above the projected
demand. It acts as a correction for underestimating demand.
• Fast, slow, and non-moving (FSN) –
• It involves the classification of inventories into fast-moving, slow-moving and non-moving
stock for deciding the pace at which a business can place orders
Allocation, Apportionment and Absorption of Cost
• Allocation –
• Cost allocation is the process of identifying, aggregating, and assigning
costs to cost objects
• A cost object is any activity or item for which you want to separately
measure costs - Examples of cost objects are a product, a research
project, a customer, a sales region, and a department
• Cost allocation is used for financial reporting purposes, to spread costs
among departments or inventory items - also used in the calculation of
profitability at the department or subsidiary level, which in turn may
be used as the basis for bonuses or the funding of additional activities
Allocation, Apportionment and Absorption of Cost
• Apportionment –
• When the cost items cannot be accurately allocated to a particular
cost centre, then such items of cost are pro-rated amongst various
cost objects, on an equitable basis. This is known as cost
apportionment. It is the distribution of different cost items in
proportions to the cost unit or cost centre on a suitable basis.
• Apportionment of cost refers to the distribution of various overhead
items, in proportion, to the department on a logical basis. The
apportionment will share the cost among multiple cost units, in the
proportion of expected benefit received.
 BASIS COST ALLOCATION COST APPORTIONMENT
Meaning Allocation of cost, implies the entire distribution Apportionment of cost refers to
of the overhead item to the departments on a distribution of various overhead
logical basis. items, in proportion, to the
department on a logical basis.

Represents It represents that part of cost attribution, which It represents that part of cost
charges a particular cost to a cost unit. attribution, which shares cost
among multiple cost units, in the
proportion of expected benefit
received.

Distribution Directly assigned to the department. Proportionately assigned to

different departments.
Application When the overhead belongs to a specific When the overhead belongs to
department. different departments.
Allocation, Apportionment and Absorption of Cost
• Absorption –
• Also referred to as full costing or the full costing method
• It is an accounting method that you can use to capture all of the
manufacturing costs associated with the production of one unit of
goods
• It includes the cost of materials and labour, as well as fixed and
variable overhead costs