management accounting

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.



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.



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.



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.



Financial Accounting vs. Cost Accounting

• Purpose• Forms of Accounts• Recording• Items of Costs• Analysis of Profits• Control• Periodicity• Nature of Transaction• Inventory Valuation• Figures



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.



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 decision 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.



Functions of Controller and Treasurer



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.



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



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.



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



Importance of Costing

• To the Management– Planning– Organizing– Controlling– Budgeting– Decision-making– Pricing– Evaluation of operating efficiency




• To the Employees– Incentive Bonus– Higher earnings through time and motion study– Overtime payments– Benefit of job evaluation– Continuous employment and job security




• 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 accounting

Documents