MANAGEMENT ACCOUNTING FOR DECISION-MAKING

Branches of accounting
(a) Financial Accounting (b) Cost Accounting (c) Management Accounting

Financial Accounting
• It is largely concern with financial statements for external use by investors, creditors, financial analysts, government Agencies and other interest groups. It deals with historical data & it involves recording, classifying, and analysis of financial transaction.

It is the published financial statement, which are useful for the investment decision by the shareholders, lending decision by the banks & FIs and credit decision by the vendors. Advantages of Financial Accounting are up to date accounts, preparation of interim reports and making comparison of financial statements

Cost Accounting
It is defined as the process of accounting for costs from the point of which expenditure is incurred or committed. It involves classification, allocation, absorption, and control of costs. It also evaluates the total costs and cost per unit of a product, service and operation. Cost Accounting helps in cost reduction and cost control .

Management Accounting
• It provides information for management activities such as decision making, planning and controlling. It is a system of accounting which is concern with internal reporting of information to management for (a) planning, controlling, operating (b) Decision making in special matter (c) Formulating long range planning.

FINANCIAL ACCOUNTING

Financial Accounting is concerned with
(i) finding out the profit/loss of a business enterprise, and (ii) determining its financial soundness.

COST ACCOUNTING

Cost accounting is the process of accounting for costs. “It is the formal mechanism by means of which costs of products or services are ascertained and controlled.”

MANAGEMENT ACCOUNTING

“Management Accounting is the process of using the accounting information for managerial decision-making.”
Accounting Information Financial Cost

Advantages of Cost Accounting
1. Profitable and unprofitable activities are disclosed. 2. It enables a concern to measure the efficiency and then to maintain and improve it . 3. It provides information upon which estimates and tenders are based . 4. It guides future production policies . 5. It helps in increasing profits.

6. It furnishes reliable data for comparing

costs . 7. The exact cause of a decrease or an increase in profit or loss . 8. It discloses the relative efficiencies of different workers. 9. Helpful to the government. 10. Helpful to consumers.

Objectives of Cost accounting
• • • • • • Ascertainment of Cost Cost Control and Cost reduction Guide to business Policy Determination of Selling Price Disclose Sources of Wastage To provide specialized services of cost audit

Difference between financial accounting & Cost accounting Purpose

FA Concerned with the overall performance of a business as a whole CA Concerned with the ascertaining and controlling the costs of products or services

Control
• FA does not give emphasis on control . CA gives emphasis on control by using standard costing & budgetary control .

Reporting of Cost
• In FA the costs are reported in aggregate • But in CA the costs are broken down as a unit basis.

Information
• FA uses only monetary information. • CA uses monetary as well as non monetary information like units.

Nature
• FA deals with historical data. • CA deals with both past and predetermined figure.

Usefulness
• FA is useful for both external and internal purpose. • CA is useful, mainly for the internal purpose.

Format
• FA has a single uniform format of presenting information. • CA has varied forms of presenting cost information.

Period
• Financial reports are prepared periodically, usually on an annual basis. • But cost reporting is a continuous process and may be daily, weekly , monthly , etc.

FINANCIAL ACCOUNTING VS.

COST ACCOUNTING
Financial Accounting Objective Concerned with the overall performance of a business as a whole External in nature Cost Accounting Concerned with the ascertaining and controlling the costs of products or services Internal in nature Voluntary No such method and principles

Orientation

Enforceabilit Compulsory y Accounting method and principles 1. Double entry is followed 2. GAAP is followed

Management Accounting
It means provision or provide of information for management activities such as decision making, planning and controlling. It is a system of accounting which is concern with internal reporting of information to management for planning, controlling, organising, decision making & formulating long range planning.

Scopes of Management Accounting
• • • • • Financial Accounting Cost Accounting Financial Management Budgeting & Forecasting Inventory Control

• • • • • •

Reporting to Management Interpretation of Data Internal audit Tax planning Control procedures & methods Office services

Functions of Management Accounting
• • • • • Planning and forecasting Modification of data Financial analysis and interpretation Facilitates managerial control Communication

• Helpful in taking strategic decisions • Supplying information to various levels of management. • Coordinating

Roles of Management Accounting
• • • • • • • Planning and Policy formulation, Helped in controlling performance, Helpful in organizing, Helpful in interpreting financial information, Motivating Employees, Helpful in making decisions and Helpful in planning, controlling and coordinating.

Difference Between Management Accounting and Finance Accounting
• Objective MA is essential to help management for formulating Policy and Plan. FA records various transactions in respect to maintain accounts to know the financial position and performance of the company.

• Nature MA is concern with the projection of figure in future. FA deals only with historical data.

• Scope MA area is very wide. FA finds the position and performance of the company

• Useful MA is very useful in management decision-making. FA is useful to both external and internal people for the reference

• Quickness MA is very quick. FA used to prepare time to time generally once in a year

• GAAP No GAAP but certain rules follows in MA FA follows the GAAP.

• Period MA used to prepare for period to period. FA uses to prepare for particular period.

Terminology of CA
CostThe price paid for something. Cost is a measurement ,in monetary terms, of the amount of resources used for the purpose of production of goods or rendering of services.

Costing
It is the techniques and processes of ascertaining costs .

Cost Unit
It is a unit of product or service in relation to which costs are ascertained .

Cost Centre
• For the purpose of ascertaining Cost, the whole organisation is divided into small parts or sections . Each small section is treated as a Cost center of which cost is ascertained . It may be a location (a department, a sales area), an item of equipment (a machine, a delivery van), a person ( a salesman, a machine operator) or a group of these (two automatic machines operated by one workman) .

Cost Object
Cost Object may be defined as “anything for which a separate measurement of cost may be desired . Object may be a product, service, activity or process etc. Product – Car , Computers Service – Telephone hotline, medical service Process – Melting process in a steel mill weaving process in a textile mill Activity – Developing a website .

Profit Centers
• When a responsibility center’s financial performance is measured in terms of profit (i.e. by the difference between the revenues & expenses), the center is called a profit center .

CLASSIFICATION OF COSTS
• • • • By nature or element By activities By time For managerial decisions

By nature or element
According to this classification costs are divided into three categories i.e. Material, Labour, Expenses.

By activities
• Cost can be classified into different categories depending upon the purpose for which information is required. The costs can broadly be classified into Fixed, Variable, and Semi-variable Costs. Fixed Costs: These are the costs, which remain constants irrespective of the quantum of output within and up to the capacity that has been built up. Examples of such costs are: rent, insurance charges, management salary, etc. Fixed costs sometimes are also referred to as period costs. They can further be divided into i) committed fixed costs and ii) discretionary fixed costs.

• Variable Costs are the cost, which fluctuate in total in direct proportion to the volume of output. It increases in aggregate as the output increase & decrease in the same proportion when out put falls. • Semi variable cost is the combination of the fixed & variable cost. These cost are partly variable and partly fixed, it is neither perfectly variable nor fixed in relation to the change in volume of output

By time
Cost can be classified as (i) Historical cost (ii) Predetermined cost. The cost which are ascertained after being incurred are called historical cost. Predetermined cost are estimated cost i.e. computed in advance of production, taking into consideration the previous periods costs and the factors affecting such cost.

For managerial decisions
Shut Down Costs: these represent the fixed costs which have to be incurred even during the period when a factory is shut down on account of some temporary difficulties, viz., shortage of raw materials, non-availability of requisite labour force, etc. During this period, though no work is done, the fixed costs, such as rent, insurance, depreciation, maintenance, etc. for the entire plant have still to be incurred. Such costs of the idle plant are known as shut down costs.

• Sunk costs: these are historical or past cost, that is, costs which have been incurred as a result of a decision-made in the past. Such costs cannot be reversed or revised by subsequent decisions. Investments in plant and machinery, building, etc. are some prominent examples of such costs.

• Controllable Costs: these are costs which can be influenced by the action of a specified member of an organization. For example, the foreman of a production department can control the utilization of power or raw materials in his department. These are, therefore, controllable costs as far as he is concerned.

• Uncontrollable Costs: These are costs, which cannot be influenced by the action of a specified member of an undertaking. For example, the foreman of a production department can control the wastage of power in his department, but he cannot control the power, which is being wasted in 0ther department. Similarly, he cannot control the increase in the cost of materials consumed in his department if the purchase department, which is the supplying department, buys the materials at higher prices due to its own inefficiency. Such costs are controllable at a particular level of management while they are uncontrollable at some other level of management

• Imputed or notional Costs: these are costs, which do not involve cash outlay. They are not included in cost but are important for making management decisions. For example- interest on capital invested, rental value of own building

• Differential, Incremental or Detrimental Costs: The difference in total costs between two alternatives is termed as differential cost. In case the choice of an alternative results increase in the total cost, such increased costs are known as incremental costs. If the choice results decrease in total costs, the resulting decrease is known as decremental costs.

• Out - of–Pocket Costs: Out-of-Pocket cost means the present or future cash expenditure regarding a certain decision, which may vary, depending upon the nature of the decision made. For example, a company has its own trucks for transporting raw materials and finished products from one place to another. In making this decision, the depreciation of the trucks is not to be considered, but the management must take into account the present expenditure on fuel, salary to drivers and maintenance which have to be incurred in cash. Such costs for arriving at a decision are termed as out-ofpocket costs.

• Opportunity costs: An Opportunity cost refers to the advantage, in measurable terms, which has been foregone on account of not using the facilities in the manner originally planned. For example, if an own building is proposed to be utilized for housing a new project plant, the likely revenue, which the building could fetch, if rented out, is the opportunity cost, which should be taken into account while evaluating the profitability of the project.

• Traceable, Untraceable and Joint Costs • Traceable Cost: These are costs, which can be easily identified or traced to specific products, services or units of the company such as raw material and labour, etc. • Untraceable costs: These are costs, which cannot be identified with a department, process or product. Such costs are also termed as common costs, as they are incurred collectively for a number of products or cost centers e.g. overheads incurred for the factory as a whole. As such they are apportioned among various products or cost centers using suitable criterion.

• Joint Costs: Whenever two or more products reproduced out of one and the same raw material or process, the cost of material purchased and the processing are called joint costs. Take the example of an oil refinery where a range of products such as petrol, Kerosene, diesel, etc. is derived in the process of refining crude oil. All these products have joint costs comprising the cost of crude and the cost incurred in the course of refining. These joint costs are then apportioned to various products on some basis

• Conversion Cost: The cost of transforming direct materials into finished products, exclusive of direct material cost, is known as conversion cost. It is usually taken as the aggregate of the cost of direct labour, direct expenses and factory overheads.

• The above classification concepts of costs help the management in the decision making process. For example, segregation of cost into fixed and variable elements will help the management in analyzing the total cost. Similarly, segregation of cost into controllable and uncontrollable categories will help the management in fixing responsibilities of different executives for unfavorable cost variances. Numerous other examples can be given highlighting the usefulness of the above classification of costs.

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