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COST AND MANAGEMENT ACCOUNTING find out the ultimate result, i.e., profit and loss; But
Management accounting discusses the cause and
Module 4 effect relationship. The reasons for the loss are
Management Accounting- Meaning, Definition, enquired and the factors directly influencing the
Scope, Objectives-Management Accounting as profitability are also studied. Profits are compared to
distinct from Cost Accounting and Financial sales, different expenditures, current assets, interest
Accounting- Budgetary Control- Classification of payables, share capital, etc.
Budgets(Emphasis on theory).
3. Use of special techniques and concepts.
Introduction Management accounting uses special
techniques and concepts according to necessity to
Management Accounting is comprised of two make accounting data more useful. The techniques
words “Management‟ and “Accounting‟. Therefore usually used include financial planning and analyses,
Management accounting can be viewed as standard costing, budgetary control, marginal costing,
Management-oriented Accounting. It means the study project appraisal, control accounting, etc.
of managerial aspect of accounting. It is developed
mainly to help the management in the discharge of its 4. Taking important decisions.
functions and for taking various decisions. It supplies necessary information to the
management for its decisions. The past data is studied
According to Anglo-American Council of to see its possible effect on future decisions. The
Productivity "Management accounting is the effect / result of various decisions is also taken into
presentation of accounting information in such a way account.
as to assist the management in creation of policy and
the day to day operation of an undertaking". 5. Achieving of objectives.
According to the Institute of Chartered Management accounting uses the accounting
Accountants of England and Wales “Any form of information to develop plans and setting up
accounting which enables a business to be conducted objectives. Comparing actual performance with
more efficiently can be regarded as Management targeted figures will give an idea to the management
Accounting “ about the performance of various departments. When
there are deviations, corrective measures can be taken
with the help of budgetary control and standard
Nature of Management Accounting costing.
(i) Financial Accounting: Financial Accounting is (viii) Taxation: This includes computation of income
concerned with providing information of external in accordance with the tax laws, filing of returns and
users. It prepares final accounts which is used by making tax payments.
persons inside and outside a business enterprise, such
as shareholders, creditors, labour unions, government (ix) Office Services: This includes maintenance of
authorities etc. The end product of the financial proper data processing and other office management
accounting process are the financial statements like services, reporting on best use of mechanical and
Trading and P&L Account, which communicate electronic devices.
useful information to decision-makers.
(x) Internal Audit: Development of a suitable
Management accounting is mainly concerned with internal audit system for internal control.
the rearrangement of the information provided by
financial accounting. Hence, management accountant (xi)Management Information System [MIS]:
cannot perform its operations without financial Management Accounting serves as a centre for
accounting system. Similarly Management collection and dissemination of information.MIS is an
accounting provides financial data and advice to a essential part of Management Accounting.
company for use in the organization. Hence
Management accounting is an extension of financial Functions of Management Accounting.
accounting. It also covers internal controls and
management information system. The basic function of management accounting
is to assist the management in performing its
This shows that Management accounting is functions effectively. The functions of the
actually an extension of financial accounting. management are planning, organizing, directing and
controlling. Management accounting helps in the
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performance of each of these functions in the Advantages / Merits of Management Accounting:
following ways:
Management accounting has various
(i) Provides data: Management accounting provides advantages. Through an effective management
data for Planning Decision making etc. The accounts accounting system, it is possible to enhance the
and documents provides vast quantity of data about overall performance of the company. Let us have a
the past performance of the enterprise, which are a look at the advantages of management accounting.
must for making forecasts for the future.
1. It helps to increase the efficiency of all functions of
(ii)Modifies data: The accounting data required for management.
managerial decisions is properly compiled and 2. It helps in target fixing, decision making, price
classified. For example, purchase figures for different fixing, selection of product-mix and so on.
months may be classified to know total purchases 3. Forecasting and Budgeting of management
made during each period product-wise, supplier-wise accounting help the concern to plan the future
and territory-wise. financial activities.
4. Various tools and techniques of management
(iii) Analyses and interprets data: The accounting accounting provide reliability and authenticity to
data is analyzed meaningfully for effective planning carry out the business functions.
and decision-making. For this purpose the data is 5. Management Accounting is useful in controlling
presented in a comparative form. Ratios are wastage and defects.
calculated and likely Trends Projections are also 6. It helps in complete communication between all the
made. levels of management.
7. It helps in controlling the cost of production and
(iv) Serves as a means of communicating: thus increasing the profit percentage.
Management accounting provides a means of 8. Management Accounting is proactive – analyzes
communicating management plans upward, the governmental policies and socio-economic
downward and outward through the organization. scenario which helps to assess the external
This is usually performed for collecting / giving environmental impacts on the organization
information for development of plan. At later stages it 9. Since Management Accounting is focused on
informs all parties about the plans that have been making future decisions with the help of past
agreed upon and their roles in these plans. Similarly financial data, it is forward looking and therefore
functions like budgeting etc also involves progressive in nature.
communication to various levels. 10. Management Accounting is meant for internal
users like top management and therefore, it is not
(v) Facilitates Control: Management accounting necessary to follow strict guidelines - which is the
helps in developing objectives / goals and also helps case with financial accounting.
in the accomplishment of these goals in an efficient 11. Management Accounting is flexible in nature and
manner. All this is made possible through budgetary therefore, it can be prepared any time and they are not
control and standard costing which is an integral part required to be made yearly. They can be made
of management accounting. monthly or on weekly basis.
12. Management Accounting takes all the data and
(vi) Uses also qualitative information: Management then present it in such a way that a proper analysis
accounting not only uses quantitative financial data about the feasibility and profitability of any business
for helping the management in decision making but decision can be made.
also uses such information which may not be capable
of being measured in monetary terms. For example
for taking effective decisions in marketing, consumer Objectives of Management Accounting.
behavior, their taste preference etc are needed, which
cannot always expressed in quantity. Such
information’s are also collected and used by 1. Planning and policy formulation: Planning is one
management accountant. of the primary functions of management. It involves
forecasting on the basis of available information.
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For example Managerial accountants meet Management accounting consists of a set of
with department managers throughout the company to tools that have been proven to be useful in making
determine expenses for the following year. Purchase decisions involving revenue and cost data. Even
of fixed assets require capital expenditure analysis.. though many of the techniques appear to be simplistic
Managerial accountants analyze capital expenditures in nature, they have proven to be of considerable
using the payback method, the internal rate of return value.
method and the net present value method. The results
are shared with managers for final decision making. The management accounting can assist
Managerial accountants also join with the management in formally structuring decision
plant manager to create a production plan. Similarly problems as well as placing the alternatives and their
the fund flow statement, cash flow statement, consequences in a form that will be easier for
budgeting, standard costing, capital budgeting and management to evaluate. While developing and
marginal costing are used for planning purpose. gathering information for decision making purposes,
the management accountant should include
2. Help in the interpretation process: One of the qualitative information also in his report to help
main object of Management accounting is to present managers better in their decision-making tasks.
financial information. The financial information must
be interpreted and presented in easily understandable Therefore it can be concluded that
manner. "Management accounting is a decision making
system".
3. Helps in decision making: Decision-making is an
important and prime function of top management. 4. Controlling: Control is the process of monitoring,
Management accounting makes decision making measuring, evaluating and correcting actual results to
process more modern and scientific by providing ensure that a business enterprise’s goals and plans are
significant information relating to various achieved. Control is accomplished with the use of
alternatives. Management accounting provides feedback. Feedback is information that can be used to
accounting information in such a way as to assist evaluate or correct the steps being taken to implement
management in the creation of policy and in the day- a plan. Feedback allows the managers to take
to-day operations. remedial actions or do some re-planning.
4. Wide scope: Management accounting has a very The CIMA Official Terminology defines a
wide scope incorporating many disciplines. It budget as “ A quantitative statement, for a defined
considers both monetary as well as non-monetary period of time, which may include planned revenues,
factors. This all brings inexactness and subjectivity in expenses, assets, liabilities and cash flows.”
the conclusions obtained through it.
Budgeting:
5. Top-heavy structure: The installation of
management accounting system requires heavy costs Budgeting is the process of preparing and
on account of an elaborate organization and numerous using budgets to achieve management objectives. It is
rules and regulations. It can, therefore, be adopted the systematic approach for accomplishing the
only by big concerns. planning, coordination, and control responsibilities of
management by optimally utilizing the given
6. Opposition to change: Management accounting resources. (J. Batty)
demands a break away from traditional accounting
practices. It calls for a rearrangement of the personnel Budgetary Control:
and their activities, which is generally not like by the
people involved. Budgetary Control is a method of managing
costs through preparation of budgets. It is the
7. Evolutionary stage: Management accounting is process of establishment of budgets relating to
still in its initial stage. It has, therefore, the same various activities and comparing the budgeted figures
impediments as a new discipline will have, e.g., with the actual performance for arriving at deviations.
fluidity of concepts, raw techniques and imperfect Budgetary control is a system which uses budgets as a
analytical tools. This all creates doubt about the very means of planning and controlling.
utility of management accounting.
4. Rolling Budgets: It is also known as Progressive 1. Past sales figures and trend
Budget. In this case companies prepare the budget for 2. Salesmen’s estimates
a year in advance. A new budget is prepared after the 3. Plant capacity
end of each month or quarter for a full year in 4. General trade position
advance. The figures for the month or quarter which 5. Orders in hand
has rolled down are dropped and the statistics for the 6. Proposed expansion
next month or quarter are added. 7. Seasonal fluctuations
8. Market demand
(b) Classification on the basis of function 9. Availability of raw materials and other
supplies
10. Financial position
According to functions, budgets can be classified in 11. Nature of competition
to Functional budgets and Master budgets. 12. Cost of distribution
13. Government controls and regulations
Functional budget: The functional budget is one 14. Political situation.
which relates to any of the functions of an
organization. Functional budget may be Operating 2. Production budget:
budgets or financial budget.
The production budget is prepared on the
Operating budgets are those budgets which relate to basis of estimated production for budget period.
the different activities or operations of a firm. These Usually, the production budget is based on the sales
are the primary budgets. Financial budgets are those budget. At the time of preparing the budget, the
which incorporate financial decisions of an outflow of production manager will consider the physical
cash and the overall financial position. facilities like plant, power, factory space, materials
and labour, available for the period. Production
The number of functional budgets depends upon the budget envisages the production program for
size and nature of business. The following are the achieving the sales target.
commonly used:
The budget may be expressed in terms of quantities or
1. Sales budget money or both. Production may be computed as
2. Production budget follows:
3. Cash budget:
4. Raw‐material budget: Units to be produced = Desired closing stock of
5. Capital‐ expenditure budget: finished goods + Budgeted sales – Beginning stock of
6. Administration cost budget: finished goods.
7. Purchase budget:
8. Selling and distribution cost budget: It is facilitates the purchasing department to
plan its operations in time in respect of purchases so
that long term forward contract may be organized.
1. Sales budget: The sales budget is an estimate of 3. Cash budget:
total sales which may be expressed in financial or
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The cash budget is a sketch of the business This budget includes the administrative costs
estimated cash inflows and outflows over a specific for non‐manufacturing business activities like
period of time. Cash budget is one of the most directors fees, managing directors’ salaries, office
important and one of the last to be prepared. It is a lightings, heating and air condition etc. Most of these
detailed projection of cash receipts from all sources expenses are fixed so they should not be too difficult
and cash payments for all purposes and the resultants to forecast. There are semi‐variable expenses which
cash balance during the budget. get affected by the expected rise or fall in cost which
Cash budget assists the management in should be taken into account. Generally, this budget
determining the future liquidity requirements of the is prepared in the form of fixed budget.
firm, forecasting for business of those needs,
exercising control over cash. So, cash budget thus 8. Selling and distribution cost budget:
plays a vital role in the financial management of a
business enterprise. The Selling and Distribution Cost budget is
estimating of the cost of selling, advertising, delivery
4. Raw‐material budget: of goods to customers etc. throughout the budget
period. This budget is closely associated to sales
Direct Materials budget is prepared with an budget in the logic that sales forecasts significantly
intention to determine standard material cost per unit influence the forecasts of these expenses.
and consequently it involves quantities to be used and Nevertheless, all other linked information should also
the rate per unit. This budget shows the estimated be taken into consideration in the preparation of
quantity of all the raw materials and components selling and distribution budget. The sales manager is
needed for production demanded by the production responsible for selling and distribution cost budget.
budget. It should be noted that raw material budget Naturally, he prepares this budget with the help of
generally deals with only the direct materials whereas managers of sub‐divisions of the sales department.
indirect materials and supplies are included in the The preparation of this budget would be based on the
overhead cost budget. analysis of the market condition by the management,
advertising policies, research programs and many
5. Purchase Budget: other factors.
Fixed Budget is one which is prepared on the basis of Fixed budget Flexible budget
a standard or a fixed level of activity. It does not 1. It does not change 1. It can be changed
change with the change in the level of activity. This is with the actual volume of on the basis of activity
a budget in which targets are tightly fixed. It is known activity achieved. level achieved.
as a static budget. According to CIMA, “A budget
which is designed to remain unchanged irrespective 2. It is flexible
of the level of the activity attained is fixed budget.” 2. It is rigid
Fixed Budget is firm and prepared with the 3. It consists of
assumption that there will be no change in the various budgets for
budgeted level of motion. Thus, it does not provide 3. It operates on one level different levels of
room for any modification in expenditure due to the of activity and under one activity
change in the projected conditions and activity. set of conditions..
2. Flexible Budget:
A budget prepared to give the budgeted cost 4.. It has limited use for 4. It is very useful
of any level of activity is termed as a flexible budget. cost control. for cost control
According to CIMA, London, a Flexible Budget is, „a
budget designed to change in accordance with level of
activity attained‟. It is prepared by taking into 5.. Costs are not 5. Costs are
account the fixed and variable elements of cost. The classified according to classified according to
flexible budget is also called as Variable Budget or their variability, i.e., the nature of their
Sliding Scale Budget, as it takes both fixed, and fixed, variable etc variability.
variable manufacturing costs into account.