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Accounting
Unit-I
Introduction to
Management Control
Management Accounting
has been defined as "a form of
management accounting in which
emphasis is placed on information
which relates to factors external to
the firm, as well as non-financial
information and internally generated
information."
Why Strategic
Management
Accounting
Scope of SMA
The scope of the SMA system must be
comprehensive and include all
activities across the entire value chain
of the organization.
Scope of SMA
Historically many SMA measure & assess
performance in only one part of the value chain
the actual production. In this case, the
performance of suppliers, the design activities,
and the postproduction activities associated with
product and services are ignored . Without a
comprehensive set of information, managers can
only make limited decisions.
MACS
Management accounting and control system
(MACS) generates & uses information to help
decision makers assess whether an organization
is achieving its objectives.
The term control in management accounting &
control system refers to the set of procedures,
tools, performance measures, and systems that
organizations use to guide & motivate all
employees to achieve organizational objectives.
MACS
A system is in control if it is on the path to
achieving its strategic objectives, and it is
deemed out of control otherwise.
For the process of control to have meaning
& credibility, the organization must have the
knowledge and ability to correct situations that it
identifies as out of control; otherwise control
serves no purpose.
MACS
The process of keeping an organization in
control consists of 5 stages:
1.Planning
2.Execution
3.Monitoring
4.Evaluation
5.Correcting
Characteristics
of
MACS
Designers of MACS have both behavioral and technical
considerations to meet.
Behavioral considerations include the following:
1.Embedding the organizations ethical code of conduct into
MACS design,
2.Using a mix of short and long-term qualitative & quantitative
performance measures,
3.Empowering employees top be involved in decision making and
MACS design and
4.Developing an appropriate incentive system to reward
performance.
Characteristics of MACS
Technical information is based on the
relevance of information generated.
The relevance of information is
measured by 4 characteristics. The
information must be :
1.Accurate
2.Timely
3.Consistent
4.Flexible
COST
The term cost has different meanings.
It is used to define the amount of resources
given up in exchange for some goods or
services.
Determining the cost may be difficult when
goods are produced instead of purchasing.
So, cost is the amount expended/sacrificed
in relation to a specific thing or activity.
COST CLASSIFICATION
General classification
Direct &
indirect
Fixed
&
variable
roduct &
period
Manufacturing &
non-manufacturing
Decision making
COST BEHAVIOR
The
COST BEHAVIOR
Variable cost: Variable cost remains constant
per unit of production and the absolute
amount of the variable cost depends upon
the level of production.
Fixed costs & Variable cost are the
basic cost behavior pattern. Between two
extreme behavior pattern, there are other
cost which have characteristics of both the
fixed & variable costs. These may be known
as Semi-fixed, Semi-variable or Mixed costs.
COST BEHAVIOR
In
COST BEHAVIOR
Managers may use the cost information and
the details for different purposes as follows:
1.Inventory determination
2.Inventory valuation
3.Financial planning
4.Decision making
COST BEHAVIOR
A proper analysis of cost behavior
patterns is required for profit planning & cost
control. The different cost behavior patterns
must be evaluated carefully in the light of the
firm for which the behavior is being analyzed.
In order to analyze the cost behavior
and classification of cost items, the
management requires to establish a cost
function which would best describe the cost
behavior
Cost function
A Cost function is a relationship between
a certain cost item (as a depended
variable) and some measure of activity
or volume (as a independent variable).
For ex: Material cost is a dependent
variable and number of units produced is
an independent variable.
COST BEHAVIOR
The determination of total fixed cost, variable
cost per unit and bifurcation of semi-variable/
semi-fixed costs into fixed and variable
components is required by the management
for purposes such as:
1.Cost volume Profit analysis
2.Break Even analysis
3.Analysis of Operational efficiency
4.Application of Variable Costing method
5.Effect of a proposed capital expenditure etc.
COST-VOLUME-PROFIT (CVP)
ANALYSIS
COST-VOLUME-PROFIT (CVP)
ANALYSIS
Using CVP analysis, management accountant can
answer the questions about the consequences of
the following particular courses of action such as;
1.
2.
3.
4.
5.
COST-VOLUME-PROFIT (CVP)
ANALYSIS
CVP analysis is a systematic method of
examining the relationship between change
in volume (or output) and changes in sales
prices and expenses on the profit of the
firm.
The output or the volume is one of
the most vital & important variable affecting
total sales revenue, total costs & profits.
For this reason the CVP analysis is given
special attention
COST-VOLUME-PROFIT (CVP)
ANALYSIS