Usage Level of Management Accounting Tools in Bangladeshi Manufacturing Sectors

Subject: Application of Management Accounting Tools in
Manufacturing Sectors in Bangladesh- a case study
Submitted by
Hasan Ullah Chy
8th Semester
19th Batch
Accounting Department
Submitted to
Mr. Sumon Kanti Deb
Lecturer of Accounting
Premier University, Ctg.
Date of submission: 1st April 2014

MyIdentification
Name Hasan Ullah Chy
ID 0919113029
Batch 19th
Session May 2009
Department Accounting

Date: 1st April 2014
To
Mr. Sumon Kanti Deb
Lecturer of Accounting
Faculty of Business Administration
Premier University, Ctg.
Sub: Submission of Term Paper
Dear Sir,
I am submitting my Term Paper regarding “The Application of Management Accounting
Tools in Manufacturing Sectors in Bangladesh-A Case Study” as a part of the requirement
of the completion of BBA program. Your guidelines have been followed in every aspect in
preparing the Term paper. I have really enjoyed working on this Term Paper and I hope that
my work would meet the level of your expectation.
I would be highly encouraged if you are kind enough to receive My Term Paper. If you have
any further enquiry concerning any additional information, I would be very pleased to clarify
that.
Thanking you
Sincerely yours
_______________
Hasan Ullah Chy
ID: 0919113029
Major: Accounting
Batch: 19th

(ii)
It was really a nice experience for me to do the term paper on “The Application of
Management Accounting Tools in Manufacturing Sectors in Bangladesh-A Case Study”. For
preparing this report I visited many manufacturing organizations. Therefore, I am thankful to
the concerned individuals of the sample manufacturing companies without which support
preparing this report was impossible.
Besides, there are many people who supported me in formulation of this Term Paper and
without the support of them I could never be able to complete this Paper successfully.
First of all, I would like to thank my honorable Term paper supervisor Mr. Sumon Kanti Deb,
lecturer of Accounting, Premier University. I am thankful to him for his continuous support
and supervision, suggestions and providing me the valuable information that was very much
needed for the completion of this Paper.
Finally, I am thankful to the researchers-Mr. Bidhan Chandra Mazumder, Farjana Yeshmin &
Rehana Fowzia- of whose articles help me to do my study.

(iii)
Chapter Page
1.1 Introduction……………………………………………………………………………………… 02
1.2 Statement of the problem…………………………………………………………………………02
1.3 Objective of the study……………………………………………………………………………. 02
1.4 Research question………………………………………………………………………………... 03
1.5 Scope of the study……………………………………………………………………………….. 03
1.6 Significance of the study………………………………………………………............................ 03
2.1 Introduction……………………………………………………………………………………… 05
Section A: My theoretical Study
2.2 What is management accounting?.................................................................................................. 05
2.3 Scope of management accounting……………………………………………………………….. 06
2.4 Relationship between cost accounting, financial accounting, management accounting
and financial management………………….................................................................. …………07
2.5 Management accounting functions………………………………………………………………. 08
2.6 Need for managerial accounting information……………………………………………………. 08
2.7 Code of conduct for management accountants………………………………………………….. 09
2.8 Management accounting tools…………………………………………………………………… 11
2.8.1 Classification of management accounting tools based on traditional and modern
viewpoint…………………………………………………………………………...…………11
2.8.2 Categories of management accounting tools based on management needs (my
viewpoint)…………………………………………………………………………..…………12
2.8.3 Description of management accounting tools………………………………………………... 12
2.8.3.1 Product Costing tools……………………………………………………………………. 12
2.8.3.1.1Product Costing method………………………………………………………………13
(a) Unit Costing……………………………………………………………………….. 13
(b) Job costing………………………………………………………………………….13
(c) Batch costing………………………………………………………………………. 13
(d) Contract costing…………………………………………………………………….13
(e) Process costing…………………………………………………………………….. 14
(f) Service or operating costing………………………………………………………..14
(g) Activity based costing……………………………………………………………... 14
(h) Multiple Costing……………………………………………………………………15
2.8.3.1.2Product Costing technique…………………………………………………………… 15
(a) Historical costing (or Absorption costing)…………………………………………15
(b) Marginal costing……………………………………………………………………15
(c) Target costing………………………………………………………………………15
(d) Throughput costing………………………………………………………………... 16
2.8.3.1.3Other costing techniques……………………………………………………………...16
(a) Differential costing…………………………………………………………………16
(b) Uniform costing…………………………………………………………………….17
(c) Opportunity costing………………………………………………………………...18
(d) Life cycle costing………………………………………………………………….. 18
2.8.3.2 Controlling tools………………………………………………………………………….19
(a) Budgetary control………………………………………………………………………...19
(b) Standard costing and Variance analysis…………………………………………………. 20
(c) Inventory control…………………………………………………………………………21
(d) Quality control……………………………………………………………………………21
(e) JIT (Just in Time)………………………………………………………………………... 22
2.8.3.3 Pricing tools………………………………………………………………………………22

(iv)
(a) Full cost-plus pricing……………………………………………………………………..22
(b) Marginal cost-plus pricing………………………………………………………………. 23
(c) Transfer Pricing…………………………………………………………………………..23
(d) Other pricing strategies :Premium pricing, Market skimming, Penetration
pricing………………………………………………………………………...…………. 23
2.8.3.4 Profitability analysis tools………………………………………………………………..23
(a) Cost-Benefit Analysis…………………………………………………………………… 23
(b) CVP Analysis……………………………………………………………………………. 24
(c) Break even analysis………………………………………………………………………24
2.8.3.5 Performance management tools…………………………………………………………. 24
(a) Balance scorecard………………………………………………………………………...24
(b) TQM……………………………………………………………………………………... 24
(c) Business process re-engineering………………………………………………………… 24
(d) Theory of constraint……………………………………………………………………... 26
(e) Value based management………………………………………………………………...26
(f) Six sigma………………………………………………………………………………… 26
2.8.3.6 Other management accounting tools…………………………………………………….. 27
(a) Fund Flow Analysis……………………………………………………………………... 27
(b) Financial Statement Analysis…………………………………………………………….28
(c) Cash Flow Analysis………………………………………………………………………28
(d) Inter-firm comparison…………………………………………………………………… 29
(e) Management reporting…………………………………………………………………... 29
(f) Learning curve……………………………………………………………………………30
(g) Decision tree analysis…………………………………………………………………….31
(h) Benchmarking…………………………………………………………………………… 31
(i) Statistical and operational research techniques…………………………………………..32
2.9 Emerging themes of management accounting…………………………………………………… 32
2.10 Cost accounting cycle…………………………………………………………………………... 32
2.11 Requisites for installation of management accounting system…………………………………. 32
Section B: Review of research of some reputed researchers
2.12Review of studies conducted by others on the same field……………………………………….. 33
3.1 Introduction……………………………………………………………………………………… 36
3.2 Research (or study) design………………………………………………………………………. 36
3.3 Selection of management accounting tools and categorizing those………………………………36
3.4 Designing questionnaire and assigning weight & percent………………………………………..37
3.5 Selection of manufacturing industries and data collection & specific data……………………...38
3.6 Data analysis technique………………………………………………………………………….. 38
4.1 Introduction……………………………………………………………………………………… 40
4.2 Identification of management accounting tools…………………………………………………. 40
4.3 Identification and details of management accounting tools by based on categories……………. 41
A. Product costing tools………………………………………………………………………41
B. Controlling tools………………………………………………………………………….. 42
C. Pricing tools………………………………………………………………………………. 43
D. Profitability analysis tools…………………………………………………………………43
E. Performance management tools…………………………………………………………...43
F. Other management accounting tools………………………………………………………44
4.4 Overall usage level of management accounting tools in manufacturing industries……………...44
A. Using percentage level…………………………………………………………………….44
B. Using significance level…………………………………………………………………...45

(v)
C. Using factor analysis………………………………………………………………………46
5.1 Introduction……………………………………………………………………............................ 48
5.2 Research Findings………………………………………………………………………………...48
5.3 Limitations of the study………………………………………………………………………….. 48
5.4 Recommendations………………………………………………………………………………...48
5.5 Conclusions…………………………………………………………………….............................49
……………………………………. 50
……………………………………………………52
……………………………………………………………..53
…………………………………………………… 56
…………………………………………………………………….60

(vi)
The study aims to examine the status & effectiveness of the uses of management accounting
tools in the manufacturing companies of Bangladesh. To achieve this objective, 47 companies
from 10 different manufacturing industries have been surveyed with a structured
questionnaire by using 5 point Likert scale. Mean Score and Percent of the usage level
through descriptive statistics is used to find out the management accounting tools being used
by the surveyed companies & to determine the extent of usage level of these identified tools.
A factor analysis is done to show the variability in the usage level of these identified tools. In
addition, an effort has been made to determine the most significant management accounting
tools used based on functions like product costing, controlling, pricing, profitability analysis,
performance management, and other functions.
The findings reveal that total 20 management accounting tools are being used by the
manufacturing companies of Bangladesh. Among them, nine management accounting tools
such as Cash Flow Analysis (98.40%), Financial Statement Analysis (96.28%), Management
reporting (95.21%), Full cost-plus pricing (90.96%), Budgetary control (88.83%), CVP
analysis (77.13%), Historical Costing (76.60%), Standard costing & Variance Analysis
(76.06%), Fund Flow Analysis (76.06%) are used frequently; five management accounting
tools such as Marginal costing (62.23%), Benchmarking (60.64%), Quality control (58.51%),
Process Costing (54.79%), Inventory control (54.26%) are used sometimes; six management
accounting tools such as Target Costing (47.87%), Batch costing (42.02%), Activity Based
Costing (34.04%), Break even analysis (22.34%), Operational costing (18.62%), Job order
costing (0.53%) are used rarely.
In addition, the findings also reveals that the cash flow analysis is the most important and
frequently used management accounting tool and the job order costing is the least used
management accounting tool.
By identifying 20 management accounting tools, six factors have been identified to determine
the variability’s of the usage level in managerial functions. The total variability in the
application of management accounting tools in managerial functions of manufacturing is
91.24 %. The first factor loads the highest scores i.e. 30.14%. This factor includes 7 tools
(marginal costing, breakeven analysis, process costing, cost volume profit analysis, standard
costing & variance analysis, inventory control, operational costing. Here, two of the tools
have negative loading which indicates low usage. The second factor exhibits large loading of
six tools- management reporting, benchmarking, financial statement analysis, inventory
control, batch costing, cash flow statement - for scoring 24.03%. The third factor exhibits
large loading of 4 tools- Target costing, Quality Control, Fund Flow Analysis, and
Operational Costing- for scoring 14.84 %. The fourth factor exhibits large loading of 2tools-
Full cost plus pricing, Activity based costing- for scoring 9.73 %. The fifth factor exhibits
large loading of 2 tools- Budgetary control, Historical costing - for scoring6.55 %. And the
last factor with a score of 5.95% includes 1 tool, Job order costing.
Moreover, the findings also reveal the most significant tools used by sample manufacturing
companies based on uses in particular function. In product costing function, Process costing
(54.79%) and Historical Costing( 76.60%); in controlling functions, budgetary control
(88.83%) and standard costing & variance analysis ( 76.06%); in pricing function, Full cost-
plus pricing (90.96%); in profitability analysis function, CVP analysis (77.13%) are used
most significantly. But no tools are used in performance management function. In addition, in
other functions, the most significant tools used by the sample manufacturing companies are
cash flow analysis (98.40%), Financial Statement analysis (96.28%), Management Reporting
(95.21%).

1.1 Introduction
1.2 Statement of the problem
1.3 Objective of the study
1.4 Research question
1.5 Scope of the study
1.6 Significance of the study

Globalization or Free market economy is now the world‘s major challenge to every business
industry. Recent business world as well as Bangladesh faces economic recession, with this
situation the present economy of Bangladesh demands immediate development of business
technique or tools and proper decision making policy. The prerequisite of the development of
the tools is to know whether the company uses management accounting tools and which tools
are being used by companies so that corrective and modified action can be taken. Therefore,
it is required to evaluate the effectiveness of the management accounting tools being used by
the companies in Bangladesh.
This report has been prepared in the light of management accounting practice ―An application
of management accounting tools in manufacturing sectors in Bangladesh‖ as a part of the
fulfillment of Term Paper required for the completion of the BBA program Major in
Accounting under the Faculty of Business Administration of Premier University, Chittagong.
This term paper is a mandatory requirement of my BBA program. This term paper was
prepared under the supervision of Mr. Sumon Kanti Deb, lecturer of the Faculty of Business
Administration, Premier University, Chittagong.
Success of an organization depends on the effective and efficient management. Decision
making is an important function of the management. To achieve the organization‘s goal, an
effective and accurate decision must be made. Management accounting tools help the
management to take the effective and accurate decision by providing relevant information.
Therefore, the usage of management accounting tools is very important.
The manufacturing company of developed country like USA, UK etc. practices management
accounting well therefore they are well managed and successful. But the usage of the
management accounting tools of manufacturing company of Bangladesh is not adequate. It is,
may be, because of the unfamiliarity with the tools.
However, to survive in the globalization the manufacturing company of Bangladesh needs to
be improved and updated with the management accounting tools so that it can take efficient
and effective decision and can be managed well and can be successful.
In this regard, it is necessary to know that whether Bangladeshi manufacturing enterprises
practice management accounting tools and to what extent the tools are being practiced in
producing the relevant information to the management so that corrective action can be taken.
The main objectives of the study are to see whether the manufacturing business enterprises in
Bangladesh are using management accounting tools in order to assist the managers with
information relevant to decision making and day-to-day operational activities and the extent
or degree of such use. In broader sense the objectives to be covered under the study are:

To find out the using status of Management Accounting Tools;
To evaluate the conception of managers as to importance of use and problems, if any,
they face in using the techniques;
To identify the Management Accounting information structure; and
To highlight suggestive measures to the users of management accounting information for
its extensive use.
Do the manufacturing companies use management accounting tools?
To what extent are the management accounting tools used?
What is the extent of the variability in the usage level of management accounting tools?
What are the manners of usage of the tools?
Which tools are being used most frequently?
Which tools are used sometimes?
Which tools are used rarely?
Which tools are not used?
Which tools are the most significant in favor of Bangladesh Manufacturing companies?
Which tools are needed to be eliminated or improved?
The study was undertaken in order to complete Term Paper required for the completion of the
BBA program. As there is a time limit, the study was kept limited to Chittagong City. A total
of 47 listed manufacturing companies from 10 different manufacturing industries in
Chittagong were selected for the purpose of the study. The study covers the internal data of
those companies.
The more the development of the market economy, the more the significance of management
accounting. To keep pace with this increasing market economy, it becomes imperative for the
organizations to adopt new management accounting tools. It is also important for the
Bangladeshi organizations.
But it is required to know whether the Bangladesh manufacturing companies practice
management accounting, whether the companies use the management accounting tools, and
which tools are being used. Moreover, it is also required to know the extent of the uses of the
management accounting tools. By knowing these a corrective action can be made to improve
the uses of efficient and effective management accounting tools for efficient and effective
management.
However, I have designed my study to answer the above questions. For this reason, this study
is important as it can be used for corrective action.

2.1 Introduction
Section A: My theoretical Study
2.2 What is management accounting?
2.3 Scope of management accounting
2.4 Relationship between cost accounting, financial accounting, management
accounting and financial management
2.5 Management accounting functions
2.6 Need for managerial accounting information
2.7 Code of conduct for management accountants
2.8 Management accounting tools
2.8.1 Classification of management accounting tools based on traditional and
modern viewpoint
2.8.2 Categories of management accounting tools based on management
needs (my viewpoint)
2.8.3 Description of management accounting tools
2.9 Emerging themes of management accounting
2.10 Cost accounting cycle
2.11 Requisites for installation of management accounting system
Section B: Review of research of some reputed researchers
2.12 Review of studies conducted by others on the same field

Management accounting tools act as devices for the manager to support him in making
effective and efficient decision. Management accounting helps the manager to know in which
situation which tools will be used and helps to know how those tools will be applied.
In this chapter, I entailed my theoretical study regarding the management accounting and its
tools and a snapshot of study of the same field conducted by some reputed researchers.
Management Accounting is concerned with the collection of data from both internal as well
as external sources and communicating relevant information to the management, after
processing, analyzing and interpreting those, to perform their managerial functions of
planning, controlling and decision-making in an effective and efficient manner. It acts as a
‗decision-making support system‘ to the management.
The followings are the some reputed definitions of management accounting:
According to the Chartered Institute of Management Accountants (CIMA),
―Management Accounting is the process of identification, measurement, accumulation,
analysis, preparation, interpretation and communication of information used by
management to plan, evaluate and control within an entity and to assure appropriate use
of and accountability for its resources. Management accounting also comprises the
preparation of financial reports for non-management groups such as shareholders,
creditors, regulatory agencies and tax authorities"
The American Institute of Certified Public Accountants(AICPA) states that management
accounting as practice extends to the following three areas:
 Strategic Management—Advancing the role of the management accountant as a
strategic partner in the organization.
 Performance Management—Developing the practice of business decision-making and
managing the performance of the organization.
 Risk Management—Contributing to frameworks and practices for identifying,
measuring, managing and reporting risks to the achievement of the objectives of the
organization.
The Institute of Certified Management Accountants (ICMA), states that "A management
accountant applies his or her professional knowledge and skill in the preparation and
presentation of financial and other decision oriented information in such a way as to
assist management in the formulation of policies and in the planning and control of the
operation of the undertaking."

Management Accounting has a very widespread scope. It covers a very wide area of
accounting system, which is discussed as follows:
i. Financial Accounting: Financial Accounting provides the basic historical data to the
Management Accounting which analyses and interprets those data and provides
necessary information to the management for its planning, controlling and decision-
making. As Management Accounting does not maintain the basic financial records, the
success of an effective and efficient Management Accounting System depends on the
existence of an effective Financial Accounting System. Therefore, Management
Accounting System can be introduced into an organization where there exists a well-
designed Financial Accounting System. Management Accounting applies the principles
and practices of Financial Accounting.
ii. Cost Accounting: On the one hand, Cost Accounting provides cost-related basic data to
the Management Accounting, which analyses and interprets those costing data and
provides necessary information to the management for the purpose of its controlling and
decision-making. On the other hand, most of the Cost Accounting techniques like
Standard Costing, Budgetary Control, Marginal Costing, Cost–Volume–Profit (CVP)
Analysis, Differential Cost Analysis and Inventory Controlling, are used by Management
Accounting in its process of planning, controlling and decision-making. Management
Accounting uses the principles and practices of Cost Accounting.
iii. Forecasting and budgeting: Management Accounting exercises the tool of forecasting
and budgeting in the process of planning, controlling and decision-making. Forecasting
makes an estimate of the probable event with a set of given or assumed information.
Budgeting prepares a number of plans for any future project by setting definite goals.
Forecasting helps to prepare the budget and budgeting helps to exercise the budgetary
control technique on future projects. Both these tools are frequently used in Management
Accounting.
iv. Statistical tools: Various statistical tools like graphs, charts, diagrams, time series,
sampling, index numbers and Regression Analysis are used in Management Accounting
in the process of planning, controlling and decision-making.
v. Operational research techniques: Various operational research techniques like Linear
Programming, Transportation Theory, Games Theory and Simulation Method are used in
Management Accounting to resolve various problems prevailing under the existing
situation in the process of decision-making.
vi. Financial analysis and interpretation: Various financial analysis techniques such as
Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, Comparative Financial
Statement, Common-Size Statement and Trend Analysis are widely used in Management
Accounting to analyze and interpret financial data to make them easily understandable
and useable to the management. Successful application of Management Accounting
depends a lot on these financial analysis and interpretation works.

vii. Tax accounting and tax planning: Determination of taxable income and tax liability of
the enterprise fall within the purview of the Management Accounting. In the process of
decision-making, the analysis of implication of tax provisions on future projects also
falls within the purview of Management Accounting. On the other hand, the
management accountant must have a vast knowledge of tax laws and their accounting
procedures, and also tax planning, to minimize the tax burden of the enterprise.
viii. Management Information System (MIS): Management Information System (MIS) is a
modern computerized information system, by which accurate processing and analysis of
a large volume of data can be done within a very short time. This information system is
used in Management Accounting to provide necessary and relevant information to the
management in the process of its planning, controlling and decision-making.
ix. Internal control and internal audit: Management Accounting highly depends on
internal control system existing in the organization, like internal check and internal audit,
to appraise the targeted performance and to identify the weaker area of the organization.
x. Office system: Management Accounting System should also be well conversant with the
modern office management system like filing, indexing, copying, electronic data
processing, information network system, and email and fax system.
xi. Legal provisions: Management Accounting System should also be well informed about
relevant and necessary legal provisions like Companies Act, Foreign Exchange Act,
Securities Act, and Direct and Indirect Tax Laws. In the process of decision-making,
management accountants should restrict their plan and action within the periphery of
such legal provisions.
xii. Other areas: Apart from the aforementioned areas, Management Accounting also
includes various newly developed areas of accounting like Human Resource Accounting,
Social Accounting, Environmental Accounting and Inflation Accounting, within the
purview of its scope.
Cost Accounting is a branch of management accounting, which has been developed because
of the limitations of Financial Accounting from the point of view of management control and
internal reporting. Financial accounting performs admirably, the function of portraying a true
and fair overall picture of the results or activities carried on by an enterprise during a period
and its financial position at the end of the year. Also, on the basis of financial accounting,
effective control can be exercised on the property and assets of the enterprise to ensure that
they are not misused or misappropriated. To that extent financial accounting helps to assess
the overall progress of a concern, its strength and weaknesses by providing the figures
relating to several previous years. Data provided by Cost and Financial Accounting is further
used for the management of all processes associated with the efficient acquisition and

deployment of short, medium and long term financial resources. Such a process of
management is known as Financial Management. The objective of Financial Management is
to maximize the wealth of shareholders by taking effective Investment, Financing and
Dividend decisions. Investment decisions relate to the effective deployment of scarce
resources in terms of funds while the Financing decisions are concerned with acquiring
optimum finance for attaining financial objectives. On the other hand, Management
Accounting refers to managerial processes and technologies that are focused on adding value
to organizations by attaining the effective use of resources, in dynamic and competitive
contexts. Hence, Management Accounting is a distinctive form of resource management
which facilitates management‘s ‗decision making‘ by producing information for managers
within an organization.
Management accounting is a financial method that helps senior managers and department
heads analyze business performance. Management accounting functions relate primarily to
budgeting and cost analysis, internal financial reporting and monitoring of cost controls.
Actually, Management accounting may be said to include all activities connected with
collecting, processing, interpreting and presenting information to management. The
management accounting satisfies the various needs of management for arriving of appropriate
business decisions. They may be described as modification of data, analysis and
interpretation of data, facilitating management control, formulation of business budgets, use
of qualitative information, and satisfaction of informational needs of management.
The followings are the primary tasks performed by management accountants (The degree of
complexity relative to these activities is dependent on the experience level and abilities):
 Variance Analysis
 Rate & Volume Analysis
 Product Profitability
 Cost Analysis & Cost Benefit Analysis
 Cost-Volume-Profit Analysis
 Life cycle cost analysis
 Capital Budgeting
 Strategic Planning Strategic
Management Advise
 Internal Financial Presentation and
Communication
 Sales and Financial Forecasting &
Annual Budgeting
 Cost Allocation
 Resource Allocation and Utilization
Every organization-large and small-has managers. Someone must be responsible for making
plans, organizing resources, directing personnel, and controlling operations. Everywhere,
mangers carry out three major activities-planning, directing and motivating, and controlling.

Planning: Planning involves selecting a course of action and specifying how the action will
be implemented. The first step in planning is to identify the alternatives and then to select
from among the alternatives the one that does the best job of furthering the organization's
objectives. While making choices, management must balance the opportunity against the
demands made on the company‘s resources. The plans of management are often expressed
formally in budgets, and the term budgeting is applied to generally describe the planning
process. Budgets are usually prepared under the direction of controller, who is the manager in
charge of the accounting department. Typically, budgets are prepared annually and represent
management's plans in specific, quantitative terms.
Directing and Motivating: In addition to planning for the future, managers must oversee
day-to-day activities and keep the organization functioning smoothly. This requires the ability
to motivate and affectively direct people. Managers assign tasks to employees, arbitrate
disputes, answer questions, solve on-the-spot problems, and make many small decisions that
affect customers and employees. In effect, directing is that part of the manager's work that
deals with the routine and the here and now. Managerial accounting data, such as daily sales
reports are often used in this type of day-to-day decision making.
Controlling: In carrying out the control function, managers seek to ensure that the plan is
being followed. Feedback, which signals operations are on track, is the key to effective
control. In sophisticated organizations, this feedback is provided by detailed reports of
various types. One of these reports, which compares budgeted to actual results, is called a
performance report. Performance report suggests where operations are not proceeding as
planned and where some parts of the organization may require additional attention.
The Planning and Control Cycle: The work of management can be summarized in a model.
The model, which depicts the planning and control cycle, illustrates the smooth flow of
management activities from planning through directing and motivating, controlling, and then
back to planning again. All of these activities involve decision making. So it is depicted as
the hub around which the activities revolve.
Practitioners of management accounting and financial management have an obligation to the
public, their profession, the organization they serve, and themselves, to maintain the highest
standards of ethical conduct. In recognition of this obligation, the Institute of management
Accountants has promulgated the following standards of ethical conduct for practitioners of
management accounting and financial management. Adherence to these standards
internationally is integral to achieving objective of management accounting. Standards of
Ethical Conduct for Management Accountants are:
Competence
Confidentiality
Integrity
Objectivity

Competence: Practitioners of management accounting and financial management have a
responsibility to:
 Maintain an appropriate level of professional competence by ongoing development of
their knowledge and skills.
 Perform their professional duties in accordance with relevant laws, regulations and
technical standards.
 Prepare complete and clear reports and recommendations after appropriate analysis of
relevant and reliable information
Confidentiality: Practitioners of management accounting and financial management have a
responsibility to:
 Refrain from disclosing confidential information acquired in the course of their work
except when authorized, unless legally obligated to do so.
 Inform subordinates as appropriate regarding the confidentiality of information acquired
in the course of their work and monitor their activities to assure the maintenance of that
confidentiality
 Refrain from using or appearing to use confidential information acquired in the course of
their work for unethical or illegal advantage either personally or through third parties.
Integrity: Practitioners of management accounting and financial management have a
responsibility to:
 Avoid actual or apparent conflicts of interest and advise all appropriate parties of any
potential conflict.
 Refrain from engaging in any activity that would prejudice their ability to carry out their
duties ethically.
 Refuse any gift, favor, or hospitality that would influence or would appear to influence
their actions.
 Refrain from either activity or passively subverting the attainment of the organization's
legitimate and ethical objectives.
 Recognize and communicate professional limitations or other constraints that would
preclude responsible judgment or successful performance of an activity.
 Communicate unfavorable as well as favorable information and professional judgment or
opinion.
 Refrain from engaging or supporting any activity that would discredit the profession.
Objectivity: Practitioners of management accounting and financial management have a
responsibility to:
 Communicate information fairly and objectively

 Disclose fully all relevant information that could reasonably be expected to influence an
intended user's understanding of the reports, comments, and recommendations presented.
Management accounting tools are the techniques or devices that assist management in
determining, analyzing, interpreting, presenting data relevant to take decision.
Lots of tools are available to support management in taking decisions. Some tools are
traditional and some are modern or advanced. Some tools are common to all organization and
some depend on the nature of the company.
2.8.1 Classification of management accounting tools based on traditional and modern
viewpoint:
Management decisions are basically based on some measures/techniques traditionally
designed based on quantitative data. However, in recent past to cope with global business
environment, change in business, increase in competition and complexity of decision making
some advanced quantitative techniques like Activity – based Costing and Target Costing and
some improved programs like Just-in-Time (JIT), Total Quality Management (TQM), Process
Reengineering and Theory of Constraints (TOC) have been introduced for application. Now,
both traditional and advanced management accounting techniques are shown in the following
table.
Traditional Tools Advanced Tools
1. Financial Statement Analysis 1. Activity Based Costing
2. Fund Flow Analysis 2. Target Costing
3. Cash Flow Analysis 3. Just in Time (JIT)
4. Marginal Costing 4. Total Quality Management (TQM)
5. Absorption Costing 5. Process Reengineering
6. Differential costing 6. The Theory of Constraints (TOC)
7. Standard costing
8. Opportunity costing
9. Budgetary control
10. Inter-firm comparison
11. Cost Volume Profit Analysis
12. Management Reporting
Taken from the article “Application of Management Accounting Techniqueers in Decision Making in the
Manufacturing Business Firms in Bangladesh” of Bidhan Chandra Mazumd

2.8.2 Categories of management accounting tools based on management needs (my
viewpoint)
It is required to identify which management accounting tools are practicing today. Among
them which are traditional and modern is also required to know.
However, it is also required to identify the management accounting tools based on
appropriate needs so that we can easily apply those tools based on appropriate needs. Hence,
I split the categories of management accounting tools in the following way:
1. Product Costing tools 2. Controlling tools 3. Pricing tools
(i) Costing Method
1) Job costing
2) Batch costing
3) Contract costing
4) Process costing
5) Activity based
costing
6) Service costing
7) Operating costing
(ii) Costing Technique
1) Historical costing
2) Marginal costing
3) Target costing
4) Uniform costing
5) Opportunity costing
6) Budgetary control
7) Standard costing and
variance analysis
2) Variance analysis
3) Inventory control
4) Quality control
5) JIT
1) Full cost-plus pricing
2) Marginal cost-plus
pricing
3) Transfer Pricing
4. Profitability
analysis tools
5. Performance management tools 6. Other management accounting
tools
1) Break even analysis
2) CVP Analysis
1) Balance scorecard
2) TQM
3) Business process re-engineering
4) Theory of constraint
5) Value based management
6) Six sigma
7) Activity based management
1) Financial Statement Analysis
2) Fund Flow Analysis
3) Cash Flow Analysis
4) Inter-firm comparison
5) Management reporting
6) Learning curve
7) Decision tree analysis
8) Benchmarking
2.8.3 Description of management accounting tools
2.8.3.1 Product Costing tools
A firm needs to determine the cost of product to determine the selling price and needs to
present the cost data to the management so that management can take effective decision in
cost control and cost reduction. Product costing tools helps the firm to do these tasks.
I defined Product costing tools are those costing methods applied by the firm to determine the
cost of the product or service and those costing techniques used to present data to the
management
However, it is necessary to understand the difference between the costing methods and
techniques.
Costing methods are for computation of the total cost of production/services offered by a
firm. On the other hand, costing techniques help to present the data in a particular format so
that decision making becomes easy. Costing techniques also help for controlling and reducing
the costs.

2.8.3.1.1 Product Costing method
Costing methods are used by the firm to determine the cost of the product produced by it.
Uses of the methods depend on the nature of the product, production method, and specific
business conditions. Therefore, uses of costing methods vary from firm to firm.
The various methods of costing used by the firm to determine the cost of product are
discussed below:
(a) Unit Costing: This method also called 'Single output costing'. This method of costing is
used for products which can be expressed in identical quantitative units and is suitable for
products which are manufactured by continuous manufacturing activity. Costs are
ascertained for convenient units of output. Examples: Brick making, mining, cement
manufacturing, dairy, flour mills etc.
(b) Job costing: Job costing is applied in those industries where the goods are manufactured
or services are rendered against specific orders as per customer‘s specifications. Under job
costing, each job or work order is treated as cost unit and costs are accumulated and
ascertained separately for each job or work order. A separate cost sheet is required to
prepare for each job to determine the profit and loss of each.
Under this method costs are ascertained for each work order separately as each job has its
own specifications and scope. Examples: Painting, Car repair, Decoration, Repair of
building etc.
Applicability:
Printing presses, ship-builders, shoe makers, furniture makers, construction engineers,
machine tool manufacturers, garment makers, foundries (a factory where metal or
glass is melted and made into different shapes or objects)
Repairing shops, consultant engineers, audit firms, general engineering workshops,
Painting, tailoring of dress
(c) Batch costing: Batch costing is applied when similar products can be produced in a lot or
batch. A batch is a group of identical or similar products. Under batch costing, each batch
is treated as cost unit and costs are accumulated and ascertained separately for each batch.
A separate cost sheet is prepared for each batch to determine the profit or loss of each.
Cost per unit in a batch is ascertained by dividing the total cost of a batch by the number of
units produced in that batch.
Applicability:
Pharmaceutical or drug industries, readymade garment industries, spare parts and
components manufacturing industries, toys manufacturing industries, tyre and tubes
manufacturing industries
(d) Contract costing: Contract costing is applied when work is undertaken based on contract
and each contract is of long duration. Under this costing, each contract is treated as a cost
unit and costs are accumulated and ascertained separately for each contract. Costing is
done for big jobs which involves heavy expenditure and stretches over a long period and

often it is undertaken at different sites. Each contract is treated as a separate unit for
costing. This is also known as Terminal Costing. Construction of bridges, roads, buildings,
etc. comes under contract costing.
Applicability:
Industries engaged in the construction of building, roads, bridges or other construction
work
Industries undertaking engineering projects
Ship building industries
(e) Process costing: Process costing is applied in those industries where manufacturing
activity is carried on continuously by means of two or more processes and the output of
one process becomes the input of the following process till completion. Under this costing,
all costs are accumulated for each stage of production (also called process of production)
and the cost per unit of product is ascertained at each stage of production by dividing the
total cost of each process by the normal output of that process.
Applicability:
Paper industries, Chemical industries, Pharmaceutical industry, Textile industries,
Sugar industries, Steel industries, Rubber industries
Oil refineries, soap manufacturing
(f) Service or operating costing: This method is used in those industries which rendered
services instead of producing goods. Service organizations are those that do not make or
sell tangible goods. Service organizations include transport companies, hospitals, schools,
etc. Again, a manufacturing company may maintain service department like transport
department, power house, canteen hospital etc. to provide services to the manufacturing,
sales and welfare activities of the concern. Operating costing may also be applied in these
service departments.
Applicability:
Transport concerns (railways, motor, shipping and air transport)
Public utility concerns (electricity, gas, hospitals, telephones, schools, colleges, etc.)
Catering establishments (hotels, canteens, hostels, etc.)
(g) Activity based costing: Activity based
costing (ABC) is a system that focuses on
activities as the fundamental cost objects and
uses the cost of these activities as building
blocks for compiling costs of products or
services. It is a two-stage product costing
method that assigns costs first to activities and
then to the products based on each product‘s
use of activities.

(h) Multiple Costing: When the output comprises many assembled parts or components such
as in television, motor Car or electronic gadgets, costs have to be ascertained or each
component as well as the finished product. Such costing may involve different methods of
costing for different components. Therefore this type of costing is known as composite
costing or multiple costing.
2.8.3.1.2 Product Costing technique
Costing techniques are those which help a firm to present the data in a particular manner so
as to facilitate the decision making as well as cost control and cost reduction. i.e. costing
techniques refer to the manner of ascertaining costs of product, job or activity and also refer
to the manner in which it is decided to present cost information to the management.
The main costing techniques used by the firm are discussed below:
(a) Historical costing (or Absorption costing): Absorption costing is a costing system which
treats all costs of production as product costs,
regardless weather they are variable or fixed. The
cost of a unit of product under absorption costing
method consists of direct materials, direct labor
and both variable and fixed overhead. Absorption
costing allocates a portion of fixed manufacturing
overhead cost to each unit of product, along with
the variable manufacturing cost. Because
absorption costing includes all costs of production
as product costs, it is frequently referred to as full
costing method.
(b) Marginal costing: Marginal costing is also called as direct costing or variable costing. It
is a costing system under which those costs of production that vary with output are treated
as product costs. This would usually include direct materials, direct labor and variable
portion of manufacturing overhead. Fixed manufacturing cost is not treated as a product
costs under variable costing. Rather, fixed manufacturing cost is treated as a period cost
and, like selling and administrative expenses, it is charged off in its entirety against
revenue each period. Consequently the cost of a unit of product in inventory or cost of
goods sold under this method does not contain any fixed overhead cost.
(c) Target costing: Target costing is the concept of price-based costing (instead of cost-
based pricing). It is defined as ―structured approach to determine the cost at which a
proposed product with specified functionality and quality must be produced, to generate a
desired level of profitability at its anticipated-selling price i.e. target price‖. A target price
is the estimated price for a product or service that potential customers will be willing to
pay and the difference between the target price and desired profit is the target cost of the
product. For instance, a shoe manufacturer can sell a particular shoe for Tk.1000 and
wants profits of Tk. 100 per pair. In this case, its target cost is (Tk.1000-Tk100) or Tk. 900
which limit on costs per pair.

Steps in target costing
Step 1: Selecting the product to be produced
Step 2: Determining the Target selling price of the product
Step 3: Determining the Desired profit on the product
Step 4: Determining the Target cost by subtracting desired profit from the target selling
price
Step 5: Manufacturing the product
Step 6: Estimate the actual cost of the product
Step 7: Comparison of estimate cost with actual cost
(d) Throughput costing: Throughput Costing requires that a company expense all costs other
than direct material costs as costs of the period. The
cost of goods sold rate is simply the amount of
direct materials required to produce each unit.
Throughput Costing produces an income that is the
lowest of the three costing methods when
production is greater than sales, and it will produce
the greatest income when sales is greater than
production
2.8.3.1.3 Other costing techniques
(a) Differential costing: This is far the most important concept of cost in the decision making
process. Differential costs are the additional costs which will be incurred if management
chooses one course of action as opposed to another. They are the extra or incremental costs
caused by a particular decision. For example, a firm wants to change their promotion
method, from a billboard which costs Tk.70 to a TV advertisement which costs Tk.100,
the differential cost between the two choices is Tk.30. If the expected revenue is higher
than Tk.30, then the firm's best choice would be the TV advertisement.
A Differential cost is the difference in costs between any two available, acceptable
alternatives. This approach compares the two alternatives directly by looking at the
differences between them. It is also known as incremental cost. But technically there is a
difference between incremental cost and differential cost. An increase in cost from one
alternative to another should be referred to as an incremental cost and a decrease in cost
should be referred to as decremental cost. But differential cost is a broader term,
encompassing both cost increases (incremental costs) and cost decreases (decremental
costs) between alternatives.
The differential costing is based on the implication that only the relevant cost, which will
change as a result of the decision, is useful for decision-making. Any costs which are not
expected to alter are irrelevant for decision-making. The following are the examples of
cost that are irrelevant:

 Sunk cost, i.e., those costs which have already been incurred are irrelevant
 Book values of assets
 Cost of fully utilized resources, i.e., where a limiting factor exists it will be used to the full
extent and will, therefore, cost the same whatever alternative is considered
 Fixed cost: any item which remains constant whichever alternative is chosen is not a
differential cost and can be ignored in choosing alternatives
Characteristics:
It may be an incremental and a decremental cost
It is expressed in total but not in cost per unit
The data considered for such analysis are: cost, revenue, and investment which are relevant
to the problem under consideration.
The constant costs at different levels are ignored and only the differentials are considered.
Absolute cost is not much importance in this analysis.
Where the difference between revenue and cost is highest, that course of action is adopted.
Practical Applications of differential costing
Differential costing techniques is used to solve the problems relating to the following:
 Make or buy decisions
 Accepting or rejecting a new order
 Increase, decrease or
discontinuation of production
 Determining whether to sell or
process further
 Expanding the marketability of the
products
 Changing the product mix
 Changing the method of production
 Introducing a new product line
 Replacing manual labor with
mechanical labor
 Fixation of selling price below the
competitive price
 Dealing about the most profitable
level of production
Sample of Differential cost statement
Elements of cost
Level of Activities
Differential cost
Alternative 1 Alternative 2
Material
Labor
Overhead
Total
(b) Uniform costing: This is not a separate method of costing. This is a system of using the
same method of costing by a number of firms in the same industry. It is treated as a
common system of using agreed principles and standard accounting practices in the
identical firms or industry. This helps in fixation of price of the product and inter-firm
comparisons.
Uniform costing is the adoption of the same costing systems by different units of an
industry. It is a technique by which several undertakings, regardless of the fact whether

they are managed by the same personnel or not, follow the same costing principles and
procedures with regard to cost accumulation, analysis and allocation.
Uniform costing may be used under the following situations:
 In a concern having several distinct production units
 In concerns in the same industry which are bound together through a trade association
 In industries which are of similar nature, e.g., rail, road, air transport; cotton and
woolen textiles, etc.
Application of uniform costing:
Uniform costing may be applied in two different circumstances which are:
(i) When an undertaking controls a number of factories, firms, etc. (a) producing similar
products, or (b) performing similar operations
(ii) When a number of firms or businesses are members of a trade association
(c) Opportunity costing: Sometimes a proposed investment project may use the existing
resources of the firm for which explicit, or adequate, cash outlays may not exist. The
opportunity costs of such projects should be considered. Opportunity costs are the
expected benefits which the company would have derived from those resources if they
were not committed to the proposed project. In addition to the accounting costs that are
explicit as labor, raw materials, supplies, rent, interest and utilities, some implicit costs are
also required for managerial decision making purpose. The objective in such case is to
determine the present and future costs of resources associated with various alternative
courses of action. Such an objective requires that one considers the opportunities foregone/
sacrificed whenever a resource is used in a given course of action. The implicit costs,
however, consist of the opportunity costs of time and capital that the owner-manager has
invested in producing the given quantity of output. But none of sample enterprises use it.
(d) Life cycle costing: Life cycle costing is the accumulation of costs over a product's entire
life. Life cycle costing is different to traditional cost accounting system which report cost
object profitability on a calendar basis i.e. monthly, quarterly and annually. In contrast life
cycle costing involves tracing cost and revenues on a product by product base over several
calendar periods.
Phases in the Life Cycle of a Product
Every product goes through a life cycle. A product life cycle can be divided into five
phases.
(i) Development
(ii) Introduction
(iii) Growth
(iv) Maturity
(v) Decline
(i) Development. The product has a research and development stage where costs are
incurred but no revenue is generated.

(ii) Introduction. The product is introduced to the market. Potential customers will be
unaware of the product or service, and the organization may have to spend further on
advertising to bring the product or service to the attention of the market.
(iii) Growth. The product gains a bigger market as demand builds up. Sales revenues
increase and the product begins to make a profit.
(iv) Maturity. Eventually, the growth in demand for the product will slow down and it
will enter a period of relative maturity. It will continue to be profitable. The product may
be modified or improved, as a means of sustaining its demand.
(v) Decline. At some stage, the market will have bought enough of the product and it will
therefore reach 'saturation point'. Demand will start to fall. Eventually it will become a
loss-maker and this is the time when the organization should decide to stop selling the
product or service
2.8.3.2 Controlling tools
(a) Budgetary control: Budgetary control involves framing of budgets, comparison of actual
results with budgeted estimates, ascertainment of any deviation of actual results from
budgeted estimates by computation of variances and adoption of necessary remedial
measures against such deviation. It is an essential tool widely used in the Management
Accounting in the process of its controlling, planning and performance evaluation of an
enterprise.
Budgetary control is the system of management control in which all the operations, as sales,
purchase, production etc. are forecasted in advance and the results, when known, are
compared with the planned targets. The difference between the planned targets and actual
results are analyzed and corrective steps are taken according to the original causes. By
budgetary control, attempts are made to make the best uses of resources under the
circumstances and all efforts are coordinated by pin-pointing responsibility. The Budget
Performance and Variation Reports act as communication in between top management and
financial management as also in between functional management and sub-ordinate
management. The system makes everyone conscious and responsible, and thus it is also
termed as Responsibility Accounting. All the sample enterprises reported to use it. But some
research report indicated that this technique is not rigorously followed and thereby the
enterprises are deprived of its benefit.
Steps involved in budgetary control
 Laying down organization goals or objectives
 Formulating the necessary plans to ensure that the desired objectives are achieved
 Translating plans into budgets, i.e., establishment of a budget for each function or activity or
segment of the organization
 Relating the responsibilities of executives to the requirements of a policy
 Recording and reporting actual performance

 Continuous comparison of actual with budgeted results
 Ascertainment of deviations, if any
 Focusing attention on significant deviations
 Investigation into deviations to establish causes
 Presentation of information to management, relating the variations to individual responsibility
 Taking corrective action to prevent recurrence of variations
 Provide a basis for revision of budgets
(b) Standard costing and Variance analysis: These two tools are discussed below.
Standard costing: When costs are determined in advance on certain predetermined standards
under a given set of operating conditions, it is called
standard costing. Standard costing is to be compared
with the actual costs periodically to analyze the
changes in the cost to revise the standards to avoid
any loss due to outdated costing.
Standard costing is defined as a control technique that
reports variances by comparing actual costs to pre-set
standards so facilitating action through management
by exception.
Management by exception is defined as the practice of concentrating on activities that require
attention and ignoring those which appear to be conforming to expectations. Typically
standard cost variances or variances from budget are used to identify those activities that
require attention.
Standard costing (for control) involves the following:
 The establishment of predetermined estimates of the costs of products or services
 The collection of actual costs
 The comparison of the actual costs with the predetermined estimates
Variance Analysis: Variances measure the difference between actual results and expected
results. And variance analysis is the evaluation of performance by means of variances, whose
timely reporting should maximize the opportunity for managerial action. Variance analysis
reveals the following variances:
1. Cost variances:
 Material variance
 Labor variance
 Overhead variance: variable overhead variance and fixed overhead variance

2. Sales variances:
 Sales price variance
 Sales volume variance
(c) Inventory control: Inventories consist of raw materials, stores, spares, packing materials,
coal, petroleum products, works-in-progress and finished products in stock either at the
factory or deposits.
Inventory control is concerned with the acquisition, storage, handling and use of inventories
so as to ensure the availability of inventory whenever needed, providing adequate provision
for contingencies, deriving maximum economy and minimizing wastage and losses. Hence
Inventory control refers to a system, which ensures the supply of required quantity and
quality of inventory at the required time and at the same time prevent unnecessary investment
in inventories.
It is vital to manage inventories efficiently in order to avoid unnecessary investments. Any
company that neglects the management of inventories may face serious problems relating to
cash crunch and long-term profitability. Inventory is one of the major parts of current assets,
provided it does not adversely affect the working capital position of a company.
Inventory control systems appear complicated, however, there are only a few basic questions
to answer for and efficient control of inventory and the most important of these are:
What items should be stock
When should an order be place to replenish inventory
How much should be ordered in each replenishment
(d) Quality control
Quality control (QC) is a procedure or set of procedures intended to ensure that a
manufactured product or performed service adheres to a defined set of quality criteria or
meets the requirements of the client or customer. In order to implement an
effective QC program, an enterprise must first decide which specific
standards the product or service must meet. Then the extent of QC actions
must be determined (for example, the percentage of units to be tested from
each lot). Next, real-world data must be collected (for example, the
percentage of units that fail) and the results reported to management
personnel. After this, corrective action must be decided upon and taken (for example,
defective units must be repaired or rejected and poor service repeated at no charge until the
customer is satisfied). If too many unit failures or instances of poor service occur, a plan must
be devised to improve the production or service process and then that plan must be put into
action. Finally, the QC process must be ongoing to ensure that remedial efforts, if required,
have produced satisfactory results and to immediately detect recurrences or new instances of
trouble.
However, the following figure shows the detail quality control cycle:

Quality control techniques for manufacturing
failure testing
statistical control
company quality
total quality control
six sigma
(e) JIT (Just in Time)
JIT is one of the management-forged operating philosophies for the new manufacturing
environment. This approach can also be used in merchandising companies. However, the JIT
operating philosophy requires that all resources, including materials, personnel, and facilities,
be acquired and used only as needed. It has most profound effects on the operations of
manufacturing companies, which maintain three classes of inventories – raw materials, work-
in-process, and finished goods. That means according to JIT concept raw materials are
received just in time to go into production, manufactured parts are completed just in time to
be assembled into products, and products are completed just in time to be shipped to
customers.
2.8.3.3 Pricing tools
(a) Full cost-plus pricing
Full Cost-plus pricing involves adding a mark-up to the total cost of the product, in order to
arrive at the selling price.

(b) Marginal cost-plus pricing
Marginal cost-plus pricing is a method of determining sales price whereby a profit mark-up is
added to either the marginal cost of production or the marginal cost of sales.
(c) Transfer Pricing
Transfer pricing is used when division of an organization need to charge other divisions of
the same organization for goods or services that they provide to them. Method of transfer
pricing are:
 Market price
 Cost-plus price
 Two part transfer price
 Dual pricing
(d) Other pricing strategies
(i) Premium pricing: Premium pricing is pricing above competition on a permanent basis.
This can only be done if the product appears ‗different‘ and superior to competition, which
normally means establishing a brand name based on one of the following:
● Quality
● Image/style
● Reliability/robustness
● Durability
● After-sales service
● Extended warranties.
(ii) Market skimming: Skimming is a technique where a high price is set for the product
initially, so that only those who are desperately keen on the product will buy it. Then the
price is lowered, making the product more accessible. When the next groups of customers
have had a chance to buy at that price, the price is lowered again, and so on. The aim of this
strategy is usually to maximize revenue. But, on occasions, it is also used to prolong the life
of older products.
(iii) Penetration pricing: Penetration pricing occurs when a company sets a very low price
for the new product initially. The price will usually be below total cost. The aim of the low
price is to establish a large market share quickly by encouraging customers to try the product
and then to repeat buy. This type of tactic is used, therefore, where barriers to entry are low.
It is hoped to establish a dominant market position, which will prevent new entrants coming
into the market because they could not establish a critical mass easily with prices so low.
2.8.3.4 Profitability analysis tools
(a) Cost-Benefit Analysis
There are plenty of accounting tools at for one‘s disposal, but those tools should only use
when there is a positive cost-benefit relationship. Modern systems and one‘s own creativity
allow us plenty of information options, but not all options are worth the work involved. The
ideal is to create enough information to improve management, without spending so much as
to wipe out the benefit.

(b) CVP Analysis
The single most important concept for management is cost-volume-profit. Understanding the
cost structure of an organization allows proper management decisions. Standard financial
statements do not provide the proper cost separation, that is - variable costs versus fixed
costs. But CVP analysis helps the management to analyze the changes of variable and fixed
cost with the changes of production. Thus, CVP is used to determine how changes in costs
and volume affect a company‘s operating income and net income. It is the study of the
interrelationships between costs, volume and profit at various levels of activity.
(c) Break even analysis
It is done through CVP analysis. It is used to determine the breakeven point where total cost
(variable + fixed) equals to revenue i.e. where profit is zero. It is usually shown by the
diagram. Beyond the breakeven point, the firm has profit and below the breakeven point the
firm has loss.
2.8.3.5 Performance management tools
(a) Balance scorecard: The balanced scorecard is a strategic planning and management
system that is used extensively in business and industry, government, and nonprofit
organizations worldwide to align business activities to the vision and strategy of the
organization, improve internal and external communications, and monitor organization
performance against strategic goals.
It translates a company's vision and strategy into a coherent set of performance measures. The
four perspectives of the scorecard--financial measures, customer knowledge, internal
business processes, and learning and growth--offer a balance between short-term and long-
term objectives, between outcomes desired and performance drivers of those outcomes, and
between hard objective measures and softer, more subjective measures.

It is a strategic management tool that views the organization from different perspectives,
usually the following:
1. Financial: The perspective of your shareholders
2. Customer: What your customers experience and perceive
3. Business Process: The key processes you use to meet and exceed customer and
shareholder requirements
4. Learning and Growth: How you foster ongoing change and continuous improvement
For each of these perspectives, the balanced scorecard prompts you to develop metrics, set
performance targets and collect and analyze data. Your scorecard thus offers an efficient
mechanism for reviewing strategy implementation based on measurement.
(b) TQM: The most popular approach to continuous improvement is known as total quality
management. There are two major characteristics of total quality management (TQM): (i) a
focus on serving customers and (ii) systematic problem solving using teams made up of front-
line. TQM is an approach to improving the competitiveness, effectiveness and flexibility of a
whole organization. It is essentially a way of planning, organizing and understanding each
activity, and depends on each individual at each level. TQM is also a way of ridding people‘s
lives of wasted effort by bringing everyone into the process of improvement, so that results
are achieved in less time. The methods and techniques used in TQM can be applied
throughout any organization. They are equally useful in the manufacturing, public service,
health care, education and hospitality industries.
TQM processes are divided into four sequential categories: plan, do, check, and act (the
PDCA cycle). In the planning phase, people define the problem to be addressed, collect
relevant data, and ascertain the problem's root cause; in the doing phase, people develop and
implement a solution, and decide upon a measurement to gauge its effectiveness; in the
checking phase, people confirm the results through before-and-after data comparison; in the
acting phase, people document their results, inform others about process changes, and make
recommendations for the problem to be addressed in the next PDCA cycle.
(c) Business process re-engineering: Business process reengineering focuses on
simplification and elimination of wasted effort. A central idea of business process
reengineering is that all activities that do not add value to a product or service should be
eliminated. Basically, in business process reengineering a business process is diagrammed in
detail, questioned, and then completely redesigned in order to eliminate unnecessary steps, to
reduce opportunities for errors, and to reduce costs.
Thus Business Process Reengineering (BPR) involves the fundamental rethinking and radical
redesign of business processes to achieve dramatic improvements in critical contemporary
measures of performance such as cost, quality, service and speed.
The business process re-engineering cycle is shown in the following figure:

(d) Theory of constraint: A constraint is anything that prevents one from getting more of
what he/she wants. Every individual and every organization faces at least one constraint. The
Theory of Constraint (TOC) maintains that effectively managing the constraint is a key to
success.
In TOC, an analogy is often drawn between business processes – the weakest option is
always identified first and then improvement efforts are shifted over to that option in order to
bring the biggest benefit. This simple sequential process provides a powerful strategy for
continuous improvement.
(e) Value based management: Value Based Management (VBM) is the management
philosophy and approach that enables and supports maximum value creation in organizations,
typically the maximization of shareholder value. VBM encompasses the processes for
creating, managing, and measuring value. The value based management process is shown in
the following figure:
(f) Six sigma: Six Sigma is a set of techniques and tools for process improvement. It was
developed by Motorola in 1986, coinciding with the Japanese asset price bubble which is
reflected in its terminology. Six Sigma became famous when Jack Welch made it central to
his successful business strategy at General Electric in 1995. Today, it is used in many
industrial sectors.
Six Sigma seeks to improve the quality of process outputs by identifying and removing the
causes of defects (errors) and minimizing variability in manufacturing and business
processes. It uses a set of quality management methods, including statistical methods, and
creates a special infrastructure of people within the organization ("Champions", "Black
Belts", "Green Belts", "Yellow Belts", etc.) who are experts in the methods. Each Six Sigma
project carried out within an organization follows a defined sequence of steps and has

quantified value targets, for example: reduce process cycle time, reduce pollution, reduce
costs, increase customer satisfaction, and increase profits.
However, Six Sigma quality is a term generally used to indicate a process is well controlled
(within process limits ±3s from the center line in a control chart, and requirements/tolerance
limits ±6s from the center line).
The Six Sigma expert uses qualitative and quantitative techniques to drive process
improvement. A few such tools include statistical process control (SPC), control charts,
failure mode and effects analysis, and process mapping
Six Sigma doctrines assert that:
 Continuous efforts to achieve stable and predictable process results (i.e., reduce process
variation) are of vital importance to business success.
 Manufacturing and business processes have characteristics that can be measured,
analyzed, controlled and improved.
 Achieving sustained quality improvement requires commitment from the entire
organization, particularly from top-level management
2.8.3.6 Other management accounting tools
(a) Fund Flow Analysis: It is a detailed analysis of inflows and outflows of fund (i.e., the
working capital) of an enterprise during a particular accounting period. Such analysis is done
by preparing a Fund Flow Statement at the end of an accounting period. The Fund Flow
Statement exhibits inflows and outflows of fund from various activities of the enterprise
during an accounting period. As working capital is considered as the life-blood of every
business concern, efficient management of working capital is highly effective for the smooth
running of all operating activities of the concern. For an effective and efficient management
of the working capital of a concern, Fund Flow Analysis is frequently used as a tool of the
Management Accounting.
Fund Flow analysis helps in judging the efficiency of capital functions and administration of
a business by providing a summary of the sources from which funds have been procured and
uses to which such funds have been put to. That is, it is the analysis of the flow of fund of
business. Fund has various meaning but the most acceptable meaning is working capital.
Working capital is the excess of current asset over current liabilities.
Flow of fund means the inward and outward movement of a fund of an enterprise. Fund
refers to working capital and flow means movement or changes. Therefore, flow of fund
means movement of or changes in the working capital (i.e. current) item.
However, the flow of fund is shown in a statement called the fund flow statement. In
addition, a fund flow statement is a summarized statement of the movement of fund (i.e.
working capital) from different activities of a concern during an accounting period. As it is a
summarized statement of fund inflows and fund outflows from different activities of an
enterprise during a particular period, the management gets a vivid picture of the movement of

fund in between two consecutive balance sheet dates by preparation of a fund flow
statements.
(b) Financial Statement Analysis: Financial statement analysis is a methodical and
systematic analysis and interpretation of the data as disclosed in the balance sheet and income
statement with a view to extract necessary and relevant information for proving them to the
management for determining liquidity, solvency, profitability, activity and the managerial
performance of the enterprise. Various tools of Financial Statement Analysis such as Ratio
Analysis, Comparative Financial Statement, Common-Size Statement and Trend Analysis are
frequently used in Management Accounting for analysis and interpretation of financial
statements.
(c) Cash Flow Analysis: It is a detailed analysis of inflows and outflows of cash and cash
equivalents (i.e., cash in hand, cash at bank and short-term investments) of an enterprise
during a particular accounting period. Such analysis is done by preparing a Cash Flow
Statement at the end of an accounting period. The Cash Flow Statement so prepared exhibits
the inflows and outflows of cash from various activities of the enterprise during an
accounting period. It reports cash flow from operating, investing, financing activities along
with net cash changes, opening and ending cash balances. As the movement of cash is very
much significant to every business concern, an efficient management of cash is highly
effective for the liquidity planning of the concern. For an effective and efficient management
of cash of a concern, Cash Flow Analysis is frequently used as a tool of Management
Accounting.
There are two methods for preparing cash flow statement: direct method and indirect method.
The only difference between the two methods is in cash flow from operating activities. In
direct method, cash outflows are subtracted from cash inflows to make cash flow from
operating activities and in indirect method, the relevant adjustment is made with net income
to bring into cash flow from operating activities.

(d) Inter-firm comparison: Inter-firm comparison implies comparison of the results of
different firms in an industry so that efficiencies or inefficiencies are located and profitability
may be judged. It is a technique of evaluating the relative performance, efficiency, costs and
profits of different firms in an industry engaged in the same line of business activity (SP
Iyengar). Thus, inter-firm comparison is a yardstick of performance evaluation and cost-
benefit analysis. The accumulated data regarding costs, prices, profits etc. of different
concerns are put in the form of consolidated statements and are made available to all the
member-units so that they can make a comparative assessment of their achievements and
weaknesses with those of others. Such a type of comparison is possible only when uniform
costing is applied by all the concerns. Thus, uniform costing is the foundation stone over
which inter-firm comparison is developed and applied in a wider field.
(e) Management reporting: It involves preparation and submission of reports of
performance of various activities of a concern to the management on regular intervals for its
effective planning, controlling, performance evaluation and decision-making. Management
Reporting is widely used as an essential tool in Management Accounting.
A report is a means of communication which is in written form and is meant for use of
management for the purpose of planning decision-making and controlling. Simply stated it is
a communication of result by a subordinate to superior. It serves as a feedback to the
management.
Reports submitted to various levels of management
Top level management: The top level management comprises of board of directors,
managing director and other executives who are concerned with determination of objectives
and formulation of policies. Top management is to be furnished with reports at regular
intervals in order to enable them to exercise control over the activities of business. The
following are some of the matters to be reported to board of directors.
 Master budget which conveys all functional budgets for taking remedial actions where there are significant
deviations from budgeted figures
 Various functional budgets prepared by various departmental managers for holding departmental
managers for any shortfall in their performance.
 Capital expenditure budget and cash budget to know the extent of variances for taking remedial measures
 Reports relating to production and sales, which shows the trend of the performance of business
 Report covering important ratios such as stock turnover ratio, fixed assets turnover ratio, liquidity ratio,
solvency ratio, profitability ratios, etc. to know the improvement in business
 Appraisal of various projects undertaken by the organization
Middle level management: It comprises of different department managers such as production
manager, purchase manager, sales manager, chief accountant, etc. These managers require
reports to improve the efficiency of their respective departments. The following are some of
the matters reported to production manager:
 Report relating to actual capacity utilized as compared to budgeted capacity
 Report relating to actual output as against standard output
 Labor and machine capacity utilized

 Idle time lost
 Report on scraps, wastages and losses in production
 Report relating to stock of raw materials, work-in-progress and finished goods
 Report relating to cost of production, operation of different departments
The following are some of the matters reported to sales manager:
 Report relating to number of orders executed, orders received and orders on hand
 Report relating to actual sales and budgeted sales and actual selling and distribution expenses and
budgeted selling and distribution expenses
 Summary of selling expenses incurred in different territories and their corresponding sales
 Gross profit earned on different products and in different areas
 Market survey reports
 Report relating to present and potential demand
The following are some of the matters reported to financial manager:
 Report relating to cash positions
 Summary of receipts and payments
 Report relating to outstanding debts on credit sales
 Report on debts due on credit purchases
 Monthly profit and loss account
 Quarterly report on capital expenditure
Lower level management: The lower level management includes supervisors, foremen and
inspectors who are concerned with the operations of the factory. They are interested in
increasing the efficiency of the production departments. The reports that are to be sent to
them are variances relating to planned and actual performance. The report must also
emphasize cost control aspects.
(f) Learning curve: Learning is the process by which an individual acquires skill, knowledge
and ability. When a new product or process is started, performance of worker is not at its best
and learning phenomenon takes place. As the experience is gained, the performance of
worker improves, time taken per unit reduces and thus his productivity goes up. This
improvement in productivity of workers is due to learning effect. Cost predictions especially
those relating to direct labor must allow for the effect of learning process. This technique is a
mathematical technique. It is a graphical technique used widely to predict cost. Learning
curve is a geometrical progression, which reveals that there is steadily decreasing cost for the
accomplishment of a given repetitive operation, as the identical operation is increasingly
repeated. The amount of decrease will be less and less with each successive unit produced.
The slope of the decision curve is expressed as a percentage. The other names given to
learning curve are Experience curve, Improvement curve and Progress curve. It is essentially
a measure of the experience gained in production of an article by an organization. As more
units are produced, people involved in production become more efficient than before. Each
additional unit takes less time to produce.

(g) Decision tree analysis: A decision tree is a decision support tool that uses a tree-like
graph or model of decisions and their possible consequences, including chance event
outcomes, resource costs, and utility. It is one way to display an algorithm.
A decision tree consists of 3 types of nodes:
1. Decision nodes - commonly represented by squares
2. Chance nodes - represented by circles
3. End nodes - represented by triangles
However, Decision Trees are excellent tools for helping the management to choose between
several courses of action. They provide a highly effective structure within which the
management can lay out options and investigate the possible outcomes of choosing those
options. They also help the management to form a balanced picture of the risks and rewards
associated with each possible course of action.
(h) Benchmarking: Benchmarking is the process of identifying "best practice" in relation to
both products (including) and the processes by which those products are created and
delivered. The search for "best practice" can take place both inside a particular industry, and
also in other industries (for example - are there lessons to be learned from other industries?).
The objective of benchmarking is to understand and evaluate the current position of a
business or organization in relation to "best practice" and to identify areas and means of
performance improvement.
The Benchmarking Process
Benchmarking involves looking outward (outside a particular business, organization,
industry, region or country) to examine how others achieve their performance levels and to
understand the processes they use. In this way benchmarking helps explain the processes
behind excellent performance. When the lessons learnt from a benchmarking exercise are
applied appropriately, they facilitate improved performance in critical functions within an
organization or in key areas of the business environment.
Application of benchmarking involves four key steps:
(1) Understand in detail existing business processes
(2) Analyze the business processes of others
(3) Compare own business performance with that of others analyzed
(4) Implement the steps necessary to adjust
Why should I benchmark?
By comparing your business to other businesses, you can learn a lot about how to develop
and grow your business. Benchmarking can show you
 Where your weaknesses are
 Which areas you can improve
 New or different ways to do things
 Strategies for improvement
 What is possible
 Where your strengths are and how to
maintain them
 Where you can increase efficiency

Using this information, you can plan ahead and improve your business and potentially get an
edge over any competitors. It can also give you direction and motivation.
(i) Statistical and operational research techniques: Various statistical and operational
research techniques such as charts, graphs, index number, sampling, time series, Regression
Analysis, Linear Programming, Games Theory, and Programme Evaluation and Review
Technique (PERT) are frequently used as tools of Management Accounting in its process of
performance evaluation and decision-making.
(a) Customer Orientation
(b) Cross-functional Perspective
(c) Global Competition
(d) Total Quality Management
(e) Time as a Competitive Element
(f) Advances in Information Technology
(g) Advances in the Manufacturing Environment
(h) Deregulation and Growth in the Service Industry
(i) Activity-based Management
2.10
(a) Recording of cost
(b) Classification of cost
(c) Ascertainment of total cost
(d) Ascertainment of unit cost
(e) Ascertainment of selling price
(f) Cost control
(g) Preparation of budget and planning
(h) Decision making
Following are the requisites for installation of an effective and efficient Management
Accounting System in an organization:
Introduction of appropriate organization manual defining therein power, functions,
responsibilities and scope of the employees of the organization.
Recruitment of adequate number of employees and arrangement of time-to-time
proper training for those employees.

Classification and codification of accounts.
Introduction of sound systems of internal control and internal audit in the
organization.
Setting up of suitable systems of budgetary control and standard costing technique.
Setting up of a suitable system for integrating cost and financial data.
Setting up of suitable cost centres and profit centres.
Setting up of a suitable system of responsibility accounting.
Developing of a sound management information system.
Developing of an operational research system in the organization.
Preparation of an effective proforma for feedback receiving and managerial report.
Most of the studies in relation to management accounting techniques conducted in
Bangladesh are on manufacturing firm. Bidhan (2007) has examined the status of use of
management accounting techniques in the manufacturing enterprises of Bangladesh. He
discovered that modern techniques like Activity-Based Costing, Target Costing, Just-in-Time
(JIT), Total Quality Management (TQM), Process Reengineering and The Theory of
Constraints (TOC) are not used in public and private sector manufacturing enterprises but a
few Multinational Corporations (MNC) are using some of the techniques like JIT and TQM.
Traditional techniques like Financial Statement Analysis, Standard Costing, Cash Flow
Analysis, are also being found widely used followed by CVP Analysis, Marginal Costing,
Fund Flow Analysis etc.
Another research (Yeshmin and Das, 2009) has been conducted on financial institutions in
Bangladesh. It has been revealed that managers of the financial institutions are very much
satisfied in application of budgetary control analysis and variance analysis to measure their
performance among the fourteen management accounting techniques. At the same time
managers are very much dissatisfied with application of segment reporting.
Another research conducted by Farjana Yeshmin & Rehana Fowzia to examine the use of the
management accounting techniques in manufacturing and service industries of Bangladesh
for discharging managerial functions. They conducted the research on 14 management
accounting techniques It has been revealed that management accounting techniques such as
financial statement analysis, budgetary control, CVP analysis, variance analysis and fund
flow analysis are common 14 both the industries and are used frequently in managerial
functions.

Another research conducted by Zakir Abdus Sultana to obtain an overview of the
management accounting practices in the listed manufacturing companies of Bangladesh. The
survey was conducted on eight manufacturing industries. The analysis has revealed that
though there is difference in extent of practices among the sectors, all sectors fail to practice
some newly developed techniques. If this trend continues, Bangladeshi organizations will lag
behind in the race of global competitiveness and comparative advantages. To keep pace with
the world changing management accounting environment, Bangladeshi firms should use the
newly developed techniques. A well-balanced practice of those techniques irrespective of the
sectors may be enhanced through compulsory enactment of cost and management accounting
audit in Bangladesh.

3.1 Introduction
3.2 Research (or study) design
3.3 Selection of management accounting tools and categorizing those
3.4 Designing questionnaire and assigning weight & percent
3.5 Selection of manufacturing industries and data collection & specific data
3.6 Data analysis technique

This chapter represents s the procedure of conducting my research. I described in this chapter
all the ways I followed in conducting my research.
I designed my study in the following way to solve my term paper topics:
1. Studying relevant books, articles, research paper for getting details of the topics
2. Selecting the management accounting tools that will be investigated
3. Designing questionnaire based on the selected management accounting tools
4. Making a list of manufacturing companies that will be visited
5. Visiting the companies and asking them based on questionnaire
6. Putting the data in MS excel and SPSS
7. Analyzing the data
8. Showing the findings of the analysis
9. Giving conclusion based on findings
Selection of management accounting tools is necessary for conducting my research.
Therefore, I have selected 38 management accounting tools for my study. These tools are:
1. Cash Flow Analysis
2. Financial Statement
Analysis
3. Management reporting
4. Full cost-plus pricing
5. Budgetary control
6. CVP analysis
7. Historical or Absorption or
Full Costing
8. Standard costing &
Variance Analysis
9. Fund Flow Analysis
10. Marginal costing
11. Benchmarking
12. Quality control
13. Process Costing
14. Inventory control
15. Target Costing
16. Batch costing
17. Activity Based Costing
18. Break even analysis
19. Operational costing
20. Job Order Costing
21. Throughput Costing
22. Uniform costing
23. Opportunity costing
24. Differential costing
25. Life cycle costing
26. JIT
27. Marginal cost-plus pricing
28. Transfer pricing
29. Cost benefit analysis
30. Balance scorecard
31. TQM
32. Business process re-
engineering
33. Theory of constraint
34. Value based management
35. Six sigma
36. Inter-firm comparison
37. Learning curve
38. Decision tree analysis

I have categorized these tools in the following way:
1. Product Costing tools 2. Controlling tools 3. Pricing tools
(i) Costing Method
1) Job costing
2) Batch costing
3) Contract costing
4) Process costing
5) Activity based costing
6) Service costing
7) Operating costing
(ii) Costing Technique
1) Historical costing
2) Marginal costing
3) Target costing
4) Uniform costing
5) Opportunity costing
7) Standard costing and
variance analysis
2) Variance analysis
3) Inventory control
4) Quality control
5) JIT
1) Full cost-plus
pricing
2) Marginal cost-plus
pricing
3) Transfer Pricing
4. Profitability analysis
tools
5. Performance management tools 6. Other management accounting
tools
1) Break even analysis
2) CVP Analysis
1) Balance scorecard
2) TQM
3) Business process re-engineering
4) Theory of constraint
5) Value based management
6) Six sigma
7) Activity based management
1) Financial Statement Analysis
2) Fund Flow Analysis
3) Cash Flow Analysis
4) Inter-firm comparison
5) Management reporting
6) Learning curve
7) Decision tree analysis
8) Benchmarking
I have designed a structured questionnaire (shown in the appendix) by using 5 point Likert scale. To
formulate the Likert scale I have expected the following five possible responses may be made:
1. Always
2. Frequently
3. Sometimes
4. Rarely
I have assigned a weight along with percent to each possible response as follows:
Possible Responses Weight Percent
Always 5 100
Frequently 4 75
Sometimes 3 50
Rarely 2 25
Never 1 0

I have selected 10 different types of manufacturing industries for conducting my research. For
data collection I have provided a questionnaire to each of 50 manufacturing companies among these
industries. But only 47 companies (shown in the appendix) responded. Therefore, my research is
based on these 47 listed manufacturing companies. The following table shows the 10 different types
of industries along with the sample size.
Manufacturing Industries Sample Size
1. Cement Industry 04
2. Ceramic Industry 03
3. Food & Beverage Industry 05
4. Jute Industry 04
5. Paper & Printing Industry 01
6. Phar. & Chemicals Industry 07
7. Tannery Industry 01
8. Textiles Industry 06
9. Garments Industry 10
10. Steel Industry 06
Total 47
After getting responses from 47 manufacturing companies, I putted the data in the MS
EXCEL and SPSS.
I used the following tools for analyzing the data:
(1) Likert Scale
(2) Descriptive statistics
(3) Factor analysis
And I used Microsoft Excel & SPSS 16 for analyzing.

Usage Level of Management Accounting Tools in Bangladeshi Manufacturing Sectors

Usage Level of Management Accounting Tools in Bangladeshi Manufacturing Sectors

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