management accounting
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Chapter 1
Overview to Management Accounting
Introduction• In today’s business world, the resources available are very scarce.• Hence, every business unit must strive hard to obtain maximum output
with the available input in order to ensure the optimum utilization of scarce resources.
• The value of input is measured against the value of output.• In the present era of cut-throat competition, the need to study this
subject is growing very fast.• Every businessman makes a constant effort to improve his/her
business.
Management AccountingBy Paresh Shah
Oxford University Press
Cost Accounting
• Cost accounting is the process of accounting for cost.
• Cost accounting is generally concerned with internal reporting for management requirement.
• The development of cost accounting is of recent origin.
Management AccountingBy Paresh Shah
Oxford University Press
Definition• The Chartered Institute of Management Accountants,
U.K. (CIMA) defines costing as ‘the technique and process of ascertaining costs.’
• Costing is a tool to determine the cost of products or service.
• Cost accounting – analysis and classification of costs or expenditure.
• Cost accountancy – application of costing and cost accounting principles.
Management AccountingBy Paresh Shah
Oxford University Press
Functions of Cost Accounting• ‘Cost Accounting is to serve management in the execution of
policies and in the comparison of actual and estimated results in order that the value of each policy may be appraised and changed to meet the future conditions.’– To calculate cost per unit– To prepare a correct cost analysis– To ascertain the wastage in each process of manufacture– To provide necessary information for the determination of selling price– To compute product-wise profit– To serve the management in the valuation of W-I-P– To install and implement cost control systems– To advice management for future expansion– To establish an effective reporting system– To guide the management in the preparation and implementation of
incentive schemes based on productivity and cost savings.Management Accounting
By Paresh ShahOxford University Press
Financial Accounting
• The functions of financial accounting are concerned with that of bookkeeping, i.e. maintenance of records of costs, debtors, and creditors, etc.
• As per the company law requirements, the company has to maintain the accounts for their adoption by the shareholders in the Annual General Meeting.
Management AccountingBy Paresh Shah
Oxford University Press
Limitations of Financial Accounting• Financial accounting doesn’t aims at continuous
reporting of financial data, which the cost accounting does
• Financial accounts will not reveal the data by jobs, process, products, etc.
• It provides only historical data, and it would be too late for any corrective action.
• It does not provide data for adequate control over materials, labour, and overheads.
• In financial accounting, there are no systems to set predetermined estimates, standards, or budgets.
Management AccountingBy Paresh Shah
Oxford University Press
Financial Accounting vs. Cost Accounting
• Purpose• Forms of Accounts• Recording• Items of Costs• Analysis of Profits• Control• Periodicity• Nature of Transaction• Inventory Valuation• Figures
Management AccountingBy Paresh Shah
Oxford University Press
Cost Accounting and Management Accounting
• To quote J. Batty, ‘Management Accountancy is the term used to describe the accounting methods, systems and techniques, which coupled with special knowledge and ability, assists management in its tasks of maximizing profits or minimizing losses.
• Management Accountancy is the blending together into a coherent whole, financial accounting, cost accountancy and all aspects of financial management.’
• Management Accounting is an extension of managerial aspects, of cost accounting.
• Thus, it is the accounting to assist the management in planning and decision-making.
Management AccountingBy Paresh Shah
Oxford University Press
Role of Management Accountant• A great variety of accounting information is available to managers.• The accountant chooses the information to be reported to a manager by:
– Identifying the purpose for which the information is needed. – Determining the relevance of the information.
• The accountant has to identify the specific purpose for which cost accounting information is required by the manager.
• Information is relevant if it– Affects the accomplishment of the objectives of the decision maker. – Will change as a result of the decisions or choice made by the deci- sion maker.
• Historically, the Management Accountant was known as ‘Controller’ since he/she was in charge of all financial accounting and cost accounting functions.
• Line managers are directly responsible for attaining this objective as efficiently as possible.
• When a department’s primary task is to advise and serve other departments in the organization, it is a ‘staff’ department.
Management AccountingBy Paresh Shah
Oxford University Press
Functions of Controller and Treasurer
Management AccountingBy Paresh Shah
Oxford University Press
Controller TreasurerPlanning and Controlling Procurement of Long – term
Finance
Reporting and Interpreting Investor
Evaluating and Consulting Short – Term Financing
Tax Administration Banking
Government Reporting Credits and Collections
Protection of Assets Investments
Economic Appraisal Insurance
Objects of Cost Accounting• To determine the actual cost of each article, process, operation, service, department
or segment of activity.• To reveal and report inefficiencies in the form of material wastage, loss of time in
material buying, storing, and issuing.• To provide actual figures of cost comparison with estimates of costs and price fixing.• To find out the degree of efficiency and productive capacity of men and machines
and ideal standard for their working.• To implement incentive wage plans for workers.• To reduce cost through budgetary control and standard costing.• To study trends at different volumes of output, and to determine production policies
and programs.• To ensure continuous check and adjustment of stores and materials with the help of
perpetual inventory.• To organize internal audit system, and interlocking of financial and cost accounts to
verify the accuracy of each other.• To furnish necessary data for the preparation of profit and loss account and balance
sheet at short intervals [e.g., monthly, quarterly, etc.] for each department or business as a whole.
Management AccountingBy Paresh Shah
Oxford University Press
Advantages of Cost Accounting• Price Fixation• Control on Unprofitable Activities• Useful Information• Cost Control• Provides Valuable Data• Effective Check• Preparation of Budgets and Regulations of production• Fixation of Responsibilities• Independent Check• Prevention of Manipulation, misappropriation, and
fraudsManagement Accounting
By Paresh ShahOxford University Press
Objections against Cost Accounting
• Expensive• Differences in Results• Unnecessary• Worthless• Inapplicability
Management AccountingBy Paresh Shah
Oxford University Press
Principles of Costing
• Every concern must design its own costing system, keeping in view its peculiar problems.
• If financial books can afford the necessary information, separate costing system is not needed.
• Reasonable accuracy is enough, of course, this depends upon the nature of industry.
• As a rule, costing information should be collected as and when the work proceeds.
Management AccountingBy Paresh Shah
Oxford University Press
Essentials of Cost Accounting System
• Simple and Easy• Should suit the organization• Co-ordination and co-operation among
executives• Ensure proper accounting and allocation of
material• Cost accounts should be able to reconcile with
Financial accounts• It should be Economical
Management AccountingBy Paresh Shah
Oxford University Press
Importance of Costing
• To the Management– Planning– Organizing– Controlling– Budgeting– Decision-making– Pricing– Evaluation of operating efficiency
Management AccountingBy Paresh Shah
Oxford University Press
Importance of Costing
• To the Employees– Incentive Bonus– Higher earnings through time and motion study– Overtime payments– Benefit of job evaluation– Continuous employment and job security
Management AccountingBy Paresh Shah
Oxford University Press
Importance of Costing
• To the creditors– Can access more information in comparison to
Financial accounts– To ascertain the solvency, profitability
• To the government– More taxes through higher production– Useful in preparing import and export policy
• To the society– Lower prices through cost reduction– Better quality of products and services
Management AccountingBy Paresh Shah
Oxford University Press
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