Nature of Management Accounting

Characteristics of Management Accounting:

1. It is a selective technique. It compiles only the data from balance sheet
and proft and loss, which is relevant and useful.
2. It is concerned with data not decisions. It can inform but not prescribe.
3. It deals with future. It is a kind of planning for the future because
decisions are taken for future course of action.
. It e!amines the cause and e"ect of relationship. #ormally, a proft and
loss account will show the amount of proft or loss for the year but does not
tell us the reasons for it. $anagement accounting studies the causes of
proft or losses.
%. It does not follow rigid rules and formats like fnancial accounting. &he
necessary info is provided in the shape of various statements or reports in
order to meet the needs of the management.
Objectives of Management Accounting:
1. &o help the management in promoting e"iciency.
2. &o fnali'e budgets covering all functions of a business.
3. &o study the actual performance with plan for identifying deviations and
their causes.
. &o analy'e fnancial statements to enable the management to formulate
future policies.
%. &o help the management at frequent intervals by providing operating
statements and short(term fnancial statements.
). &o arrange for the systematic allocation of responsibilities for the
implementation of plans and budgets.
*. &o provide a suitable organi'ation for discharging the responsibilities.
Scope of Management Accounting:
1. +inancial accounting, -elated to the recording of business transactions
including income, e!penditure, inventory movement, assets, liabilities, cash
receipts, etc.
2. .ost accounting, .osting is a branch of accounting. It is the process of
and technique of ascertaining costs. It includes standard costing, marginal
costing, di"erential and opportunity cost analysis.
3. /udgeting and forecasting, .overs budgetary control
. It reports fnancial results to the management
%. It provides statistical data to various departments.
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Functions of Management Accounting:
1. It assists in planning and formulating future policies.
2. It helps to interpret and analy'e the fnancial information.
3. It controls and monitors performance.
. It helps to organi'e various functions of an organi'ation.
%. It o"ers solution for strategic business problems.
). It coordinates various departmental operations.
*. It motivates employees.
Functions of management Accountant:
1. .ollection of data
2. 0nalysis
3. 1resentation of data
. 1lanning, 0 management accountant plans the entire accounting
functions.
%. .ontrolling, 2!amines the performance against the set standard and
reports it to the management.
). -eporting, 3e reports to the management and advises them on future
decisions.
*. .oordinating, preparation of master budget
4. 5ecision making
Standard costing
What is Material Cost Variance What are its sub!divisions
Material Cost Variance or $aterial &otal 6ariance is the 6ariance in
material cost actually incurred on material and the material cost estimated
on material.
$aterial .ost 6ariance can be derived as follows,
MCV = (Standard Quantity x Standard Rate) (Actual Quantity x
Actual Rate)
$aterial .ost 6ariance can be sub(divided as follows,
a7 Material "ate Variance or $aterial 1rice 6ariance is the variance in
the rate or price of material actually spent and the material rate8price
estimated.
&hus, even if there is no change in quantity consumed, if there is a
di"erence in the total cost, then it is due to the di"erence in the rate at
which material is consumed.
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$aterial -ate 6ariance can be derived as follows,
M"V # Actual $uantit% &Standard 'rice ( Actual 'rice)
b7 Material *sage Variance is the variance in the usage of material in
actual production and the estimated usage of material.
&hus, even if there is no change in the rate of material, if there is a change
in the total cost, then it is due to the change in consumption of material.
$aterial 9sage 6ariance can be derived as follows,
M*V # Standard "ate &Standard $uantit% ( Actual $uantit%)
What is Material *sage Variance What are its sub!divisions
Material *sage Variance is the variance in the usage of material in
actual production and the estimated usage of material.
&hus, even if there is no change in the rate of material, if there is a change
in the total cost, then it is due to the change in consumption of material.
$aterial 9sage 6ariance can be derived as follows,
M*V # Standard "ate &Standard $uantit% ( Actual $uantit%)
$aterial 9sage 6ariance can be further sub(divided into,
a7 Material Mi+ Variance, &he di"erence between actual quantity of
material and revised standard quantity of material is the $aterial $i!
6ariance.
-evised :tandard ;uantity is the 0ctual ;uantity of $aterial divided in the
standard raw material ratio.
$aterial $i! 6ariance can be derived as follows,
MMV # Standard "ate &"evised Standard $uantit% ( Actual
$uantit%)
b7 Material ,ield Variance, &he di"erence between the actual output
and the standard e!pected output is the $aterial <ield 6ariance.
&here are two methods of calculating $aterial <ield 6ariance. &hey are as
follows,
-nput Method:
M,V # &Standard -nput ( Actual -nput) + Average Cost . unit
Output Method:
M,V # &Actual Output ( Standard Output) + /otal Cost . unit
&Note: =abour 6ariances can be answered in the same manner as $aterial
6ariances. Incase of any doubt or query, please put your queries on,
www.sigmaforum.tk)
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Marginal Costing
What is Marginal Costing Wh% is it calculated
&he marginal cost of a product is defned as the change in cost that occurs
when the volume of output is increased or reduced by one unit.
$arginal costing is used to assess whether it is fnancially feasible to
increase manufacturing volume or to calculate the e"ect of reducing
volume, perhaps due to a decline in the market. It is based on variable
costs because f!ed costs are f!ed. &hey occur and do not change if
manufacturing volume changes. +ollowing factors are calculated on the
basis of marginal costing,
production planning
pricing
make or buy
close(down
accept or re>ect
dropping a production line
accepting additional order
Write a note on 0rea1 2ven 'oint3
/reak 2ven 1oint is the level of sales required to reach a position of no
proft, no loss. 0t /reak 2ven 1oint, the contribution is >ust su"icient to
cover the f!ed cost. &he organisation starts earning proft when the sales
cross the /reak 2ven 1oint. /reak 2ven 1oint can be calculated either in
terms of units or in terms of cash or in terms of capacity utili'ation. It can
be calculated as follows,
02' in units # Fi+ed Cost . Contribution per unit
02' in cash # Fi+ed Cost . '3V3 "atio
02' in terms of
capacit%
utili4ation #
02' in units . /otal
capacit% + 566
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/reak 2ven 6olume can be better e!plained with the diagram above.
2+plain the concept of Margin of Safet%3
&he positive di"erence between the operating sales volume and the break
even volume is known as the margin of safety. &he larger the di"erence,
the safer the organi'ation is from a loss making situation. It can be
calculated either in cash or in units.
$argin of :afety can be derived as follows,
Margin of Safet% # Actual Sales ( 0rea1 even Sales
Margin of Safet% &in cash) # 'ro7t888
'.V "atio
Margin of Safet% &in units) # 'ro7t888888
Contribution.unit
What is 'ro7t.Volume "atio
1roft(6olume -atio e!presses the relationship between contribution and
sales. It indicates the relative proftability of di" products, processes and
departments.
+ormulae,
'.V ratio # S ( V. S 9 566
# Cont . Sales 9 566
# Change in pro7t or loss . Change in sales
Short note on ::imiting factor
?henever some resources required for products and are not adequately
available, these resources become limiting factor. If there are limiting
factors, then the product which gives more contribution per unit may not
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give more amount of total contribution because, it may not make more
proftable use of limited resources.
In such cases, we can calculate contribution per unit of limiting factor and
the product which o"ers more contribution per unit of limiting factor is to
be treated as more proftable product and the product priority order is to
be accordingly calculated.
Contract Costing
What are the various methods of calculating pro7ts on almost
completion of contract
?hen the contract is almost at the stage of completion, proft can be
calculated in four ways. It is upon the company to adopt any of the four
methods. &he four methods are as follows,
53 'ro7t # 2stimated 'ro7t + Wor1 Certi7ed@@@
/otal Contract 'rice
;3 'ro7t # 2stimated 'ro7t + Cost incurred to date
/otal estimated cost
<3 'ro7t # 2stimated 'ro7t + Cash "eceived@@@
/otal Contract 'rice
=3 'ro7t # 2stimated 'ro7t + Cash "eceived@@@ !
Cost incurred to date
/otal Contract 'rice /otal
estimated cost
2+plain the terms:
Contractor: 0 party who agrees to provide supplies or services in
accordance with a valid and legal contract. 0 contractor e!ecutes the work.
Contractee: 0 party who orders supplies or services in accordance with a
valid and legal contract. 0 contractee gives the contract.
"unning 0ill: It is a bill raised by the contractor for periodical payments.
"etention Mone%: It refers to that part of the contract amount which is
certifed but not paid.
Wor1 Certi7ed: It refers to that part of the running bill, which is approved
by the architect of the contractee.
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Wor1 *ncerti7ed: It refers to that part of the running bill, which is
re>ected by the architect of the contractee. It is always valued at cost.
0asic "ate Concept: /asic -ate concept refers to the method in which a
f!ed rate is maintained for the raw materials throughout the contract
irrespective of the Auctuations in the market price of the material.
2scalation Clause: 2scalation clause is a provision of a contract which
calls for an increase in contract price in the event of an increase in certain
costs beyond a certain percentage and viceversa.
Abnormal :oss: It is the part of the process loss caused due to abnormal
circumstances in the factory. +or 2!, labour strike, break down of
machinery. It is avoidable and controllable by mgmt. 0bnormal loss occurs
in addition to normal loss.
Normal loss: It is part of process cost which is caused under normal
circumstances. It is inevitable. 2!ample, weight loss, scrap loss, pilferage.
#ormal loss is calculated at a certain B of input in unit in respective
process. It may have scrap value.
'rocess Costing
Write a note on >-nter process pro7ts?3
?hile transferring the outputs of one process to another, the company
might add some amount of profts to it. &his is to get the actual cost of
fnished product as, if the company would have bought the inputs for the
ne!t process, it would be inclusive of profts. /ut, at the end of an
accounting period, this inter process proft has to be e!cluded in order to
get the real valuation of closing stock.
2.g., 1rocess I, .ost( 1CCCC 1roft( 2CCC
&ransferred 1rice( 12CCC
1rocess II, Inputs from 1rocess I ( 12CCC
0dditional 1rocessing cost( 12CCC
&otal .ost incurred ( 2CCC
:ales ( 21)CC
.losing :tock ( 2CC
Inter(process proft of 1(I( 2CC
6alue of .losing :tock ( 22CC
What is e@uivalent production
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0t the end of a fnancial period, all the stock of a company needs to be
assessed. 0ll the partially completed units are valued through the method
of equivalent production. &he units of production are calculated according
to the percentage of completion of processing on the partially completed
units.
+or e!ample, two units that are %C percent complete are the equivalent of
one unit fully completed.
0udgetar% Control
What is 0udgetar% Control What are the steps involved in
0udgetar% Control
/udgetary control is the management process of using budgets to monitor
and control the performance of the organi'ation. &his is done by comparing
the planned values Din the budget7 with the actual values as they occur
during the year.
0 budget has been defned as a fnancial and quantitative statement
prepared and approved prior to a defned period of time, of the policy to be
pursued during that period for the purpose of attaining a given ob>ective.
&he following steps are involved in /udgetary .ontrol,
1. 2stablishment of /udgets, &argets are f!ed for each function relating to
the responsibilities of individual e!ecutives.
2. $easurement of actual performance.
3. .omparison of actual performance with budgeted performance to detect
deviation.
. 0nalysis of the causes of variations and reporting
What are the uses of diA budgets
It serves a declaration of policies
5efnes the ob>ectives8 targets for e!ecutives, at all levels.
$eans of coordination of activities
$eans of communication
+acilitates centralised control
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3elps in planning activities
Note: &he information provided in this document on each topic is
limited. ?e do not guarantee an inclusion of the whole scope of
management accounting or of the whole syllabus of #.$.:.<./.$.:. ?e
suggest you to refer to the books recommended by your professor.
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