Nature of Management AccountingCharacteristics of Management Accounting:1. It is a selective technique. It compiles only t...
Functions of Management Accounting:1.   It assists in planning and formulating future policies.2.   It helps to interpret ...
b)    Material Usage Variance is the variance in the usage of material in actualproduction and the estimated usage of mate...
The marginal cost of a product is defined as the change in cost that occurswhen the volume of output is increased or reduc...
Break Even Volume can be better explained with the diagram above.     Explain the concept of Margin of Safety.The positive...
What are the various methods of calculating profits on almost     completion of contract?When the contract is almost at th...
a certain percentage and viceversa.Abnormal Loss: It is the part of the process loss caused due to abnormalcircumstances i...
Budgetary ControlWhat is Budgetary Control? What are the steps involved in BudgetaryControl?Budgetary control is the manag...
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Nature Management accountingnotes @ BEC-DOMS

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Management accountingnotes @ BEC-DOMS

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Nature Management accountingnotes @ BEC-DOMS

  1. 1. Nature of Management AccountingCharacteristics of Management Accounting:1. It is a selective technique. It compiles only the data from balance sheet andprofit and loss, which is relevant and useful.2. It is concerned with data not decisions. It can inform but not prescribe.3. It deals with future. It is a kind of planning for the future because decisionsare taken for future course of action.4. It examines the cause and effect of relationship. Normally, a profit and lossaccount will show the amount of profit or loss for the year but does not tell usthe reasons for it. Management accounting studies the causes of profit orlosses.5. It does not follow rigid rules and formats like financial accounting. Thenecessary info is provided in the shape of various statements or reports inorder to meet the needs of the management.Objectives of Management Accounting:1. To help the management in promoting efficiency.2. To finalize budgets covering all functions of a business.3. To study the actual performance with plan for identifying deviations andtheir causes.4. To analyze financial statements to enable the management to formulatefuture policies.5. To help the management at frequent intervals by providing operatingstatements and short-term financial statements.6. To arrange for the systematic allocation of responsibilities for theimplementation of plans and budgets.7. To provide a suitable organization for discharging the responsibilities.Scope of Management Accounting:1. Financial accounting: Related to the recording of business transactionsincluding income, expenditure, inventory movement, assets, liabilities, cashreceipts, etc.2. Cost accounting: Costing is a branch of accounting. It is the process of andtechnique of ascertaining costs. It includes standard costing, marginal costing,differential and opportunity cost analysis.3. Budgeting and forecasting: Covers budgetary control4. It reports financial results to the management5. It provides statistical data to various departments. 1
  2. 2. Functions of Management Accounting:1. It assists in planning and formulating future policies.2. It helps to interpret and analyze the financial information.3. It controls and monitors performance.4. It helps to organize various functions of an organization.5. It offers solution for strategic business problems.6. It coordinates various departmental operations.7. It motivates employees.Functions of management Accountant:1. Collection of data2. Analysis3. Presentation of data4. Planning: A management accountant plans the entire accounting functions.5. Controlling: Examines the performance against the set standard and reports it to the management.6. Reporting: He reports to the management and advises them on future decisions.7. Coordinating: preparation of master budget8. Decision makingStandard costing What is Material Cost Variance? What are its sub-divisions?Material Cost Variance or Material Total Variance is the Variance in materialcost actually incurred on material and the material cost estimated on material.Material Cost Variance can be derived as follows:MCV = (Standard Quantity x Standard Rate) – (Actual Quantity x Actual Rate)Material Cost Variance can be sub-divided as follows:a) Material Rate Variance or Material Price Variance is the variance in therate or price of material actually spent and the material rate/price estimated.Thus, even if there is no change in quantity consumed, if there is a differencein the total cost, then it is due to the difference in the rate at which material isconsumed.Material Rate Variance can be derived as follows:MRV = Actual Quantity (Standard Price – Actual Price) 2
  3. 3. b) Material Usage Variance is the variance in the usage of material in actualproduction and the estimated usage of material.Thus, even if there is no change in the rate of material, if there is a change inthe total cost, then it is due to the change in consumption of material.Material Usage Variance can be derived as follows:MUV = Standard Rate (Standard Quantity – Actual Quantity) What is Material Usage Variance? What are its sub-divisions?Material Usage Variance is the variance in the usage of material in actualproduction and the estimated usage of material.Thus, even if there is no change in the rate of material, if there is a change inthe total cost, then it is due to the change in consumption of material.Material Usage Variance can be derived as follows:MUV = Standard Rate (Standard Quantity – Actual Quantity)Material Usage Variance can be further sub-divided into:a) Material Mix Variance: The difference between actual quantity ofmaterial and revised standard quantity of material is the Material Mix Variance.Revised Standard Quantity is the Actual Quantity of Material divided in thestandard raw material ratio.Material Mix Variance can be derived as follows:MMV = Standard Rate (Revised Standard Quantity – Actual Quantity)b) Material Yield Variance: The difference between the actual output andthe standard expected output is the Material Yield Variance.There are two methods of calculating Material Yield Variance. They are asfollows:Input Method:MYV = (Standard Input – Actual Input) x Average Cost / unitOutput Method:MYV = (Actual Output – Standard Output) x Total Cost / unit(Note: Labour Variances can be answered in the same manner as MaterialVariances. Incase of any doubt or query, please put your queries on:www.sigmaforum.tk)Marginal Costing What is Marginal Costing? Why is it calculated? 3
  4. 4. The marginal cost of a product is defined as the change in cost that occurswhen the volume of output is increased or reduced by one unit.Marginal costing is used to assess whether it is financially feasible to increasemanufacturing volume or to calculate the effect of reducing volume, perhapsdue to a decline in the market. It is based on variable costs because fixed costsare fixed. They occur and do not change if manufacturing volume changes.Following factors are calculated on the basis of marginal costing: production planning pricing make or buy close-down accept or reject dropping a production line accepting additional order Write a note on Break Even Point.Break Even Point is the level of sales required to reach a position of no profit,no loss. At Break Even Point, the contribution is just sufficient to cover thefixed cost. The organisation starts earning profit when the sales cross theBreak Even Point. Break Even Point can be calculated either in terms of units orin terms of cash or in terms of capacity utilization. It can be calculated asfollows:BEP in units = Fixed Cost / Contribution per unitBEP in cash = Fixed Cost / P.V. RatioBEP in terms of capacity utilization = BEP in units / Total capacity x 100 4
  5. 5. Break Even Volume can be better explained with the diagram above. Explain the concept of Margin of Safety.The positive difference between the operating sales volume and the break evenvolume is known as the margin of safety. The larger the difference, the saferthe organization is from a loss making situation. It can be calculated either incash or in units.Margin of Safety can be derived as follows:Margin of Safety = Actual Sales – Break even SalesMargin of Safety (in cash) = Profit___ P/V RatioMargin of Safety (in units) = Profit______ Contribution/unit What is Profit/Volume Ratio?Profit-Volume Ratio expresses the relationship between contribution and sales.It indicates the relative profitability of diff products, processes anddepartments.Formulae:P/V ratio = S – V/ S X 100 = Cont / Sales X 100 = Change in profit or loss / Change in sales Short note on :Limiting factorWhenever some resources required for products and are not adequatelyavailable, these resources become limiting factor. If there are limiting factors,then the product which gives more contribution per unit may not give moreamount of total contribution because, it may not make more profitable use oflimited resources.In such cases, we can calculate contribution per unit of limiting factor and theproduct which offers more contribution per unit of limiting factor is to betreated as more profitable product and the product priority order is to beaccordingly calculated.Contract Costing 5
  6. 6. What are the various methods of calculating profits on almost completion of contract?When the contract is almost at the stage of completion, profit can becalculated in four ways. It is upon the company to adopt any of the fourmethods. The four methods are as follows: 1. Profit = Estimated Profit x Work Certified___ Total Contract Price 2. Profit = Estimated Profit x Cost incurred to date Total estimated cost 3. Profit = Estimated Profit x Cash Received___ Total Contract Price 4. Profit = Estimated Profit x Cash Received___ x Cost incurred to date Total Contract Price Total estimated costExplain the terms:Contractor: A party who agrees to provide supplies or services in accordancewith a valid and legal contract. A contractor executes the work.Contractee: A party who orders supplies or services in accordance with a validand legal contract. A contractee gives the contract.Running Bill: It is a bill raised by the contractor for periodical payments.Retention Money: It refers to that part of the contract amount which iscertified but not paid.Work Certified: It refers to that part of the running bill, which is approved bythe architect of the contractee.Work Uncertified: It refers to that part of the running bill, which is rejected bythe architect of the contractee. It is always valued at cost.Basic Rate Concept: Basic Rate concept refers to the method in which a fixedrate is maintained for the raw materials throughout the contract irrespective ofthe fluctuations in the market price of the material.Escalation Clause: Escalation clause is a provision of a contract which calls foran increase in contract price in the event of an increase in certain costs beyond 6
  7. 7. a certain percentage and viceversa.Abnormal Loss: It is the part of the process loss caused due to abnormalcircumstances in the factory. For Ex, labour strike, break down of machinery. Itis avoidable and controllable by mgmt. Abnormal loss occurs in addition tonormal loss.Normal loss: It is part of process cost which is caused under normalcircumstances. It is inevitable. Example, weight loss, scrap loss, pilferage.Normal loss is calculated at a certain % of input in unit in respective process. Itmay have scrap value.Process CostingWrite a note on “Inter process profits”.While transferring the outputs of one process to another, the company mightadd some amount of profits to it. This is to get the actual cost of finishedproduct as, if the company would have bought the inputs for the next process,it would be inclusive of profits. But, at the end of an accounting period, thisinter process profit has to be excluded in order to get the real valuation ofclosing stock.E.g.: Process I: Cost- 10000 Profit- 2000 Transferred Price- 12000 Process II: Inputs from Process I- 12000 Additional Processing cost- 12000 Total Cost incurred - 24000 Sales - 21600 Closing Stock - 2400 Inter-process profit of P-I - 200 Value of Closing Stock - 2200 What is equivalent production?At the end of a financial period, all the stock of a company needs to beassessed. All the partially completed units are valued through the method ofequivalent production. The units of production are calculated according to thepercentage of completion of processing on the partially completed units.For example, two units that are 50 percent complete are the equivalent of oneunit fully completed. 7
  8. 8. Budgetary ControlWhat is Budgetary Control? What are the steps involved in BudgetaryControl?Budgetary control is the management process of using budgets to monitor andcontrol the performance of the organization. This is done by comparing theplanned values (in the budget) with the actual values as they occur during theyear.A budget has been defined as a financial and quantitative statement preparedand approved prior to a defined period of time, of the policy to be pursuedduring that period for the purpose of attaining a given objective.The following steps are involved in Budgetary Control:1. Establishment of Budgets: Targets are fixed for each function relating to theresponsibilities of individual executives.2. Measurement of actual performance.3. Comparison of actual performance with budgeted performance to detectdeviation.4. Analysis of the causes of variations and reportingWhat are the uses of diff budgets? It serves a declaration of policies Defines the objectives/ targets for executives, at all levels. Means of coordination of activities Means of communication Facilitates centralised control Helps in planning activitiesNote: The information provided in this document on each topic is limited.We do not guarantee an inclusion of the whole scope of managementaccounting or of the whole syllabus of N.M.S.Y.B.M.S. We suggest you to referto the books recommended by your professor. 8

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