MANAGERIAL ACCOUNTING

MANAGEMENT
ACCOUNTING

FUNDAMENTALS OF ACCOUNTS
An account is a summarized record of
relevant transactions at one place
relating to a particular head. It records
not only the amount of transactions
but also their effect and direction.
Debit and Credit are simply additions to
or subtractions from an account.

Financial Statements

Financial Statements are compilation of

accounting information for the external
users.
They include
Profit and Loss Account
Balance Sheet
Schedules and Notes forming part of the
above

Types of Decisions

The decisions, managers are concerned

with, can be categorized as
Planning decisions
Control decisions

Planning Decisions

Planning Decisions are concerned with

the establishment of goals for the
organization and the choosing of
plans to accomplish these goals
Management accounting information is
needed to take Planning decisions

Control Decisions

Control decisions result from implementing

the plans and monitoring the actual
results to see if goals are being achieved
If goals are not being achieved, either
corrective steps must be taken resulting in
goal achievement or goals themselves
have to be revised to attainable levels
Cost accounting data are needed for
taking Control decisions

Financial Accounting vs.

Management Accounting

External users vs. Internal users

Record of financial history vs. Emphasis on
the future
GAAP vs. Own rules
Emphasis on accuracy vs. Acceptance of
estimates
Focus on company as a whole vs. Focus on
segments of a company
Governed by Regulatory Bodies vs.
Freedom of choice

Relating to Profit Planning

Fixed, Variable Costing

Fixed costs are associated with those
inputs which do not vary with changes in
volume of production (Committed and
Discretionary)
Variable costs which vary with volume of
production

Relating to Profit Planning

Future cost and Budgeted cost

Future costs are reasonably expected to be
incurred at some future date as a result of
a current decision
They are estimated costs based on
expectations
When an operating plan involving future
costs is accepted and incorporated
formally in the budget for a specific period,
such costs are referred as budgeted costs

Relating to Decision making

Relevant cost and Irrelevant cost

Incremental cost and Differential cost
Out of pocket cost and sunk cost
Opportunity cost and Imputed cost

Relating to Decision making

Relevant costs are those influenced by

a decision and hence are important for
decision makers, typically variable costs
Irrelevant costs are not affected by the
decision taken and hence decision
makers do not worry about them,
typically committed fixed costs

Relating to Decision making

Incremental costs are additional costs

incurred if management chooses a
particular course of action as against
another
Differential costs are difference in
costs between any two available
alternatives

Relating to Decision making

Out of pocket costs are costs which

involve fresh outflow of cash on decision
taken
Sunk costs are those which have already
been incurred where current decisions
have no impact on.
Opportunity costs represent benefits
foregone by not choosing one alternative
in favour of another that can be quantified

Break Even Analysis

(Contd.)

BEP (in Units) = Fixed cost (in Rs.)

---------------------------------Contribution Margin per
unit (in Rs.)
Contribution Margin per unit (in Rs.)
= SP(in Rs.)/unit VC(in Rs.)/unit

Break Even Analysis

(Contd.)

Margin of safety = Actual sales BEP

sales
Margin of safety ratio =
Actual sales BEP sales
-----------------------------Actual sales

Activity Based Costing

(ABC)

Better than Volume based costing

Applying overhead costs to each product or
service based on the extent to which it is
caused by them is the primary objective of
overhead costing
This is carried out using a single pre
determined overhead rate based on a single
activity measure
Less complex less costly & More complex
more cost

Budgetary Control (Contd.)

A budget is defined as a
comprehensive and coordinated
plan, expressed in financial terms, for
the operations and resources of an
enterprise for some specified period in
the future.
As a tool, a budget serves as a guide to
conduct operations and a basis for
evaluating actual results

Budgetary Control (Contd.)

The main objectives of budgeting are:

Explicit statement of expectations
Communication
Coordination
Expectations as framework for judging
performance

Budgetary Control (Contd.)

Sales budget
Production budget
Purchase budget
Direct labour budget
Manufacturing expenses budget
Administrative and Selling expenses
budget

Budgetary Control (Contd.)

Financial Budget
Budgeted income statement
Budgeted statement of retained earnings
Cash budget
Budgeted balance sheet

FINALLY

Transfer Pricing Concept

Operational Performance Measures

Price and Quantity Variance

Return on Investment
Residual Income (Imputed Interest rate)
Economic Value Added (Weighted
Average Cost of Capital): Cost of
acquiring capital