Notes: UNIT – 1

UNIT – 1

Objective:
To introduce management accounting and various other cost concepts to the students as the tools for decision making.

UNIT OVERVIEW

Topics covered: Introduction: Accounting for Management, Role of cost in decision making, Management Accounting and Cost Accounting as internal control tools, Types of cost (cost concepts): Full costing, Overhead allocations, Preparation of cost sheet.

MANAGEMENT ACCOUNTING

According providence economic history of the organisation & the information that can be drawn by those quantitative statements recording, summonsing Analyzing & Interpretation are known as the traditional function of accounting while in the modern age due to various limitation & charges in the information needs, traditional accounting is not enough to aid the mgmt for effective decision making.
The managerial functions of accounting can be helpful for the manager for various kinds of decision to be taken.

Limitations of Financial Accounting:
1. Financial Accounting provides only limited Information.
2. Financial Accounting provides only past records of the business.
3. Financial Accounting fails to provide information according to the needs of different levels of Management.
4. The figures provided by Financial Accounting are single & silent.

Management Accounting refers to accounting for the management which provides necessary information to the management for discharging various functions such as planning, organizing, dissecting & controlling. Thus, Management Accounting provides the information to the management so that the management functions in the organisation can be done is an orderly manner.
The chartered Institute of Management Accountant, London defines management accounting as “the application of professional knowledge & skills in the preparation of accounting information in such a way so as to assist management in the formation of policies and in the planning & control of the operations of the undertaking.





FUNCTIONS OF MGMT ACCOUNTING

1. Management Accounting also provides qualitative information:
Management Accounting not only record & present financial data but it also express some information which may not be capable of being measured in monetary terms. Such information is generally colleted through special surveys, engineering records & statistical compilations.

2. Mgmt Accounting facilitates controls:
With the help of mgmt accounting the objectives are formulated & then translated into specific goals for the attainment in a specified period of time. The organisation has to accomplish these goals following the plan of action decided by the top management such planning facilitates control owner the activities & suggest the areas of improvement.

3. Mgmt Accounting sever as means of communication:
Management Accounting provides inform to various levels of mgmt upward, downward & outward though the organisation.

4. Modification & presentation of Data:
In management accounting, the presentation of the data changes according to the informational needs of particulars management. Modification means changes in the presentation format according to the needs not the manipulation of the data.







TOOLS OF MANAGEMENT ACCOUNTING

1. Financial Statement Analysis: Forecast for the future can be made for the earning ability to pay debt & profitability of a sound dividend policy by analyzing the financial statements of the company this technique of financial analysis includes finance comparative financial statement Ratio analysis, find flow statement 7 fund Analysis.
2. Financial Planning: Involucres determining both long term & short term financial objectives of the firm formulating financial policies & developing financial procedure for the attainment of pre determine financial objective such decision mainly concern with raising the funds & journalizing them to profitable entries.
For example: an org can decide about the type of the cap that can be equity or prefer debt capital by which the funds can be said at the most economical cost.
3. Historical cost Accounting.

4. Other Costing Techniques: it includes various cost concepts such as marginal costing differential costing, standard costing opportunity costing & absorption costing or full costing. Marginal cost it considers only contribution for managerial analysis. According to Marginal Costing:
Contribution = Fixed Cost + Profit (or) Sales – Variable Cost.
5. Budgetary Control.

6. Mgmt Reporting through Management Information System.

Cost Accounting Accord to charter Cost accounting is the quantitative method that accumulates, classifies, summaries and Interprets information for three main purposes.

A. Operation Planning and Control.
B. Special Decisions.
C. Product Decision.

The Cost Accounting was developed for ascertainment of cost for the purpose of deciding the selling price of the product, but in recent times it is realized that ascertainment of cost is not so important as controlling the cost Therese days cost Accounting not only help the managers to determine the price but also works as an effective tool to reduce & control the cost.

Objectives of cost Accounting
1. Determining the selling price (Traditional objective) & Controlling the efficiently of operations C.a. studies
2. Various operations of the manufacturing to measreu the efficiency of those activities. It also use standard costing & resource budgeting for accessing control our the cost.
3. It provides basis for operating policy: a helps the managers to determine there operating policies such as:
A. Make of buy decisions (Product components is with make or buyes)
B. Operating with existing machinery or choose modernization,.
C. Shutting down the business of continue at loss
D. Determining the cost volume profit relationship








ELEMENTS OF COST
i. Material Cost: It includes cost of various kinds of material to be used for manufacturing & in other activities we can clasfity the material cost in 2 types.
a. Direct material cost (products inputs or parts)
b. Indirect material cost (Printing stationary etc.)
ii. Labour cost: Includes the salaries of or compensation of work force. It again can be classified in 2 heads.
a. Direct Labour (Labour in manufacturing the product, material handling etc.)
b. Indirect labour Cost (Such as Manager Remuneration, storekeeper salary etc.)

iii. Expenses: Expenses are again of 2 types
a. Direct Exp. (Such as daily exp. For production labour
b. Indirect expenses (Such as Rent, insurance etc.)
iv. Overheads: overhead means al the indirect material, indirect labour & indirect expenses. To be inhered in the factory of office or at the point of sale. Overheads can be classified into 3 types.
a. Factory Overheads: It is sum of indirect material labour & Expt incurred at the point of production i.e. factory.
b. Office 7 Administrative overhead: It is the sum of all indirect material labour & exp incurred at office & Administrative activities in the organisation.
c. Selling & Distribution overhead: Includes all the indirect material labour & expenses such as printing material, stationary salaries to sales manager, insurance & other expenses.


COST CONCEPTS

There are four cost concepts to be used for calculating cost of a product at various stages.
1. Prime Cost: Direct material + Direct Labour + Direct expenses.
2. Factory cost: prime cost + Factory overheads
3. Office Cost: Factory cost + office & Administrative overheads.
4. Total Cost: Office cost + selling & distribution overheads.

Cost Sheet: Cost sheet may be defined as the statement which shows the cost of the product at various stages of the product.
A, B, C, ltd has the following cost structure for the months of December 2005 prepare cost sheet for the months.

REFERENCE:

Management Accounting by M Y Khan and P K Jain.
Management Accounting by R S N Pillai and Bagavathi.
Accounting for Managers by O S Gupta and Pankaj Kothari.