Management Accounting

Dr. Monika Dhochak

 Accounting
Accounting is a wider term and includes recording, classifying
and summarizing of business transactions in terms of money,
preparation of financial reports and analysis and interpretation of
these reports for the information and guidance of management.

– The business accounting system consists of three parts:

i. Financial Accounting
ii. Management Accounting
iii. Cost Accounting
Financial Accounting

??
Management Accounting

??
Management accounting involves furnishing of the accounting data
to the management in such a way that it facilitates the decision
making and improve the efficiency within the organization and
finally helps in achieving the goals of the organization.

Managerial accounting provides economic and financial

information for managers and other internal users.
 Cost Accounting

▪ Cost accounting is that branch of the accounting information

system, which records, controls, estimates and reports
information about costs.

▪ The primary purpose of cost accounting is cost ascertainment

and its use in decision making and performance evaluation.
Why is it important ?

Ask Apple
Apple changes iTunes pricing strategy
Number of downloads are down, but profits are up
Old Pricing – Flat fee – $0.99

New Pricing - $ 0.69

$ 0.99
$ 1.29 – Top 200 songs by famous artists like Taylor Swift etc.

No of Downloads - 6%
Revenue – 30%
 What is cost?

A cost is defined as the

amount of resources given up in exchange for
any goods and services
Cost is anything incurred during the production of the good
or services to get the output into the hands of the customer.

Factory Production Consumer

Why do we need to know the cost of a
product/service?
1) To provide information for economic decisions

2) To motivate managers/individuals

3) To justify costs and /or compute reimbursements

4) To measure income & assets for external reporting

Dr. Monika Dhochak 12

Decision Making and Planning…?
Some common decision that we will study are:

suppose your company makes medical probes. In July,

you receive a call from a Big company that is not a
regular customer. They would like to purchase 5000
probes this month only, and the price they offer is below
your production cost.

- Should you accept this one-time special order, and

under what circumstances?
- What information do you need to make this decision?
Basic Cost Terminology

• Actual cost – a cost that hasoccurred

• Budgeted cost – a predicted cost

• Cost object – anything of interest for which a cost is desired

• When you think of a cost, you invariably think of it in the context of
putting a price on a particular thing.

• We call this “thing” a cost object, which is anything for which a cost
measurement is desired.

• products,
• services,
• activities,
• processes
• customers
 Cost Object Examples
Cost Object Illustration
Product Smart phones, Tablet computer, SUV Car, Book etc.
Service An airline flight from Delhi to Mumbai, Concurrent audit assigned,
Software development

Project R&D project, Metro Rail Project, Road project

Process Refinement of crudes in oil refineries, melting of iron etc.

Activity Setting up productionmachines, Quality Inspection of materials, Placing an

order etc.

Department Production department, Finance & Accounting, Environmental, Health &

Safety
Cost Classification
There are several types/categories of cost.
▪ Criteria - traceability

▪ Direct Costs
Direct costs are business expenses that can be directly applied to
producing a specific cost object, like a good or service. direct costs
include direct labor, direct materials, and manufacturing supplies.

▪ Indirect Costs
Indirect costs extend beyond the expenses you incur creating a product
to include the costs involved with maintaining and running a company.
Dr. Monika Dhochak 17
Cost Classification: Criteria - Variability
▪ Cost Behavior Analysis is the study of how specific costs respond to
changes in the level of business activity.

◆ Activity levels may be expressed in terms of:

► Sales dollars (in a retail company)
► Miles driven (in a trucking company)
► Room occupancy (in a hotel)
► Dance classes taught (by a dance studio)
Fixed Vs Variable
▪ Variable costs – changes in total in proportion to changes in the related level of
activity or volume

▪ Fixed costs – remain unchanged in total regardless of changes in the related level of
activity or volume

▪ Variable costs – are constant on a per-unit basis. If a product takes 5 pounds of

materials each, it stays the same per unit regardless of one, ten or a thousand units
are produced

▪ Fixed costs – change inversely with the level of production. As more units are
produced, the same fixed cost is spread over more and more units, reducing the cost
per unit
▪ Labor costs _Fixed or variable ?

▪ Annual registration and license costs for a fleet of planes owned by

an airline company_ _Fixed or variable ?

▪ A particular cost item could be variable for one level of activity and
fixed for another. Consider annual registration and license costs for a
fleet of planes owned by an airline company.
▪ Registration and license costs would be a variable cost that would
change with the number of planes the company owned.
▪ But the registration and license costs for a particular plane are fixed
regardless of the miles flown by that plane during a year.
Why do many businesses fail?

Dr. Monika Dhochak 21

In the 1990s and early 2000s,
Quiksilver rode the wave of
young shoppers emulating
the cool lifestyle and fashions
of surfers, skateboarders, and
snowboarders to financial
success.

During this time, the

company opened hundreds
of retail stores worldwide,
many in expensive areas such
as Times Square in New
York.
High Fixed Costs Bankrupt Quiksilver
▪ This expansion saddled the company with a huge amount of debt. In
2015, as sales rapidly declined, the company collapsed under the weight
of its high fixed operating costs—like interest payment, long-term
leases and salaries—and crippling debt servicing payments.

▪ After declaring bankruptcy, Quiksilver began rapidly selling off non-

core brands and closing many retail stores

▪ In 2015, surf wear company, Quiksilver, announced it had filed for

bankruptcy. Its high fixed costs—costs that did not decrease as the
number of boardshorts and hoodies sold declined—crippled the
company.
 What
ZipCar
means for
companies.
 Owning the cars for business - very high fixed costs, including buying the asset
(car), costs of the maintenance department, and insurance for multiple drivers.

“We would get in a Zipcar to drive down to San Jose to pitch investors or go across the city,” says
Jack Dorsey, the micro-blogging service’s co-founder.

“Taxis are hard to find and unreliable here.” Twitter also uses Zipcar when traveling far away from
its headquarters, like when visiting advertisers in New York and technology vendors in Boston,
forgoing the traditional black sedans and long taxi rides from the airport.

Zipcar allows companies to convert the fixed costs of owning a company car to
variable costs. If business slows, or a car isn’t required to visit a client, Zipcar
customers are not saddled with the fixed costs of car ownership.
Relevant Range

Range of activity over which a company expects to operate during

a year.
Mixed/Semi-Variable Costs
◆ Costs that have both a variable element and a fixed element.

◆ Change in total but not proportionately with changes in activity level.

Type of Costs
Helena Company, reports the following total costs at two levels of production.

Classify each cost as variable, fixed, or mixed.

Variable
Fixed
Mixed
Exercise on cost classification
Particulars of cost Cost Object Criteria: Variability Criteria: Traceability
Variable Fixed Semi-Variable: Step Direct Indirect
function or y=mx+c
type
Milk in ice cream Specific Flavour
Monthly rental for a leased computer Admin Dept.
Freight cost for a B2C company – predetermined from X a) Customer
warehouse to a Y location, slab rates for different ranges b) Product
of weights
Security staff (on contract) in a factory manufacturing Admin Dept.
multiple products
Import duty on a raw material Specific material
Comprehensive maintenance contract for office Admin Dept
equipments like air conditioners
Technician’s salary in a radiology unit of a hospital Procedure (x-ray,
sonography)
Professional fees paid by the hospital to a cardiac surgeon Procedure
for a by-pass surgery
Paper cup used in packing 100 gm of Masti Dahi (AMUL) 100 gm product
Free samples given to doctors by a pharma company Product group
Trade discount (margin to channel partners) Channel partner
Cash discount for prompt payment Customer
Audit fees Accts. Dept.
Thank You

Dr. Monika Dhochak 31