Introduction to Management Accounting MBA

1. Introduction to
Management Accounting
Part-I

2. • It is the process of identifying, measuring , accumulating, analyzing, preparing,
interpreting, and communicating information that managers use to fulfill organizational
objectives.
• The branch of accounting that produces information for managers within an organization
is termed as Managerial Accounting.
• The term Managerial accounting refers to accounting for the management, ie.,
accounting which provides necessary information to the management for discharging its
functions. The functions of the management are planning, organizing, directing and
controlling.
• Thus, Managerial accounting provides information to management so that planning ,
organizing, directing and controlling of business operation can be done in an orderly
manner.
What is Managerial Accounting?

3. Definition
 Management Accounting is that branch of
Accounting Providing which deals with presenting and
accounting information to the
management in a systematic way so that it can
perform its management functions of planning,
controlling and decision-making in an effective
and efficient manner.
 According to American Accounting
Association, Management Accounting is ''the
application of appropriate techniques and concepts
in processing historical and projected economic
data of an entity to assist management in
establishing plans for reasonable
economic
objectives and in the making of rational decisions
with a view towards these objectives".

4. Scope of Management Accounting
Financial Accounting: Financial Accounting
Provides historical information useful for future planning and financial forecasting
Cost Accounting: It provides various techniques of which are used in the process of planning and
decision-making.
Forecasting and budgeting: Management Accounting exercises the tool of forecasting and budgeting in
the process of planning, controlling and decision-making
Tax accounting and tax planning: The analysis of implication of tax provisions on future projects comes
under management accounting.
Internal Control & Audit: Management Accounting depends on internal control system existing in the
organization to identify the weaker sections of the organization.
Cost Control Procedures: Include inventory control, rot control, budgetary control, variance analysis etc.

5. Contd.
Financial Analysis and Interpretation: Various financial analysis techniques such as Ratio Analysis, Fund Flow
Analysis, Trend analysis are used to analyze and interpret financial data.
Reporting to Management: The Management Accountant is required to submit reports to the management as
per their requirements.
Office Services: Management Accountant is expected to maintain and control office routines and procedures
like filing, copying, communicating, data processing etc.
Statistical Tools: Various statistical tools like graphs, charts, diagrams are used in the process of planning,
controlling and decision-making.

6. Objectives of Management Accounting
 Analysis and Interpretation of Financial Statements:
 Planning and policy-making
 Decision-Making
 Controlling
 Coordinating
 Communicating
 Helps in evaluating the efficiency and effectiveness of
policies
Tools & Techniques of Management
Accounting
 Financial Statement Analysis
 Fund Flow Analysis
 Cash Flow Analysis
 Budgetary Control
 Standard Costing
 Marginal Costing
 Management Reporting
 Statistical and Operations Research techniques

7. Advantages of Management Accounting
 Planning
 Controlling
 Coordination
 Performance Evaluation
 Organizing
 Motivating
 Communicating
 Decision-making
Limitations of Management Accounting
 Reliance on accounting
 Based on historicaldata
 Highly Expensive
 Complicated application
 Lack of objectivity

8. Distinction between Financial Accounting
Cost Accounting and Management
Accounting
Financial Accounting:
It is systematic knowledge and the art of recording business transaction in
the books of business. It is a basic accounting which helps the persons to
know financial position of business concern.
Managerial Accounting:
It is the process of identifying, measuring, accumulating, analyzing,
preparing, interpreting, and communicating information that managers use
to fulfill organizational objectives
Cost Accounting:
Cost Accounting is the process of a accounting for costs which begins with
recording of income and expenditure or the bases on which they are
cal cu lated and ends with the preparation of statistical data.

9. DIFFERENCE BETWEEN COST ACCOUNTING, MANAGEMENT
ACCOUNTING &FINANCIAL ACCOUNTING
Basis Financial Cost Accounting Management Accounting Cost Accounting
Objects
Nature
Principle Followed
Data Used
Reporting Frequency
Publication
Information Recorded
Forms of Account
Basis Financial Cost Accounting Management Accounting Cost Accounting
Objects Record Transactions and
determine financial position
of profit and loss
Ascertaining , allocation,
accumulating and accounting
for cost
To assist the management in
decision-making & policy
formulation.
Nature Concerned with historical
data.
Concerned with both past
and present records.
Deals with projection of data
for the future.
Principle Followed Governed by GAAP Certain principles followed for
recording costs.
No set of principles are
followed in it.
Data Used Qualitative aspects are
not recorded.
Only quantitative aspects is
recorded.
Uses both quantitative and
qualitative concepts.
Reporting Frequency Generally at the end of year
Publication Published in case of
companies.
NOT published NOT published
Information Recorded Monetary transaction only. Both monetary and non
monetary information
Both monetary and non
monetary information
Forms of Account Accounts are prepared to
meet the legal requirements.
Kept Voluntarily to meet the
requirements of management
Kept Voluntarily to meet the
requirements of management

10. COST ACCOUNTING
Part-II

11. MEANING
 "Cost is the amount of resource given up in exchange for some goods and
services. The
resource given up are money and money’s equivalent expressed in monetary
units".
 "Cost accounting is concerned with recording, classifying and summarizing
cost for determination
of cost of products or services, planning , controlling and reducing such costs
and furnishing of
information to management for decision making".

12. DEFINITION
"Cost accountancy" as the application of costing
and cost accounting principles, method and
techniques to the science, art and practice of cost
control and the ascertainment of profitability.

13. SCOPE OF COST ACCOUNTANCY
Scope
Costing
Cost
Accounting
Cost Control
Technique
Budgeting Cost Audit
o Costing: "the technique and process of ascertaining the cost."
o Cost accounting: "that branch of accounting dealing with the classification, recording, allocation, summarisation and
reporting of current and prospective costs."
o Cost control techniques: "the guidance and regulation by executive action of operating an undertaking."
o Budgeting: "an overall blue print of a comprehensive plan of operations and actions expressed in financial terms."
o Cost audit : "the verification of the correctness of cost accounts and of the adherence to the cost accounting plan."

14. NATURE OF COST ACCOUNTING
Cost accounting
is a science
Cost accounting
is a profession
Cost accounting
is an art
Cost accounting
is a branch of
knowledge

15. COST CLASSIFICATION
 Material cost
 Labour cost
 Direct expenses
 Overheads
 Production cost
 Administration cost
 Selling cost
 Distribution cost
 Finance cost
 Research and Development cost
 Variable cost
 Fixed cost
 Semi-variable cost
 Normal cost
 Abnormal cost
On the basis of element of cost:- On the basis of function:-
On the basis of controllability: On the basis of normally:
•Need for cost
classification:
•Ascertainment of
profits periodically
•In budgeting and
planning process
•Controlling cost
Current
application of
plans and policies
Pricing policy

16. COST CLASSIFICATION
 Direct cost
 Indirect cost
 Capital cost
 Revenue cost
 Product cost
 Period cost
On the basis of time:
 Historical cost
 Predetermine cost
 Sunk cost
 Out-of-pocket cost
 Opportunity cost
 Imputed cost
 Marginal cost
 Replacement cost
 Avoidable and unavoidable cost
 Differential cost
 Relevant and irrelevant cost
 Conversion cost
On the basis of identify ability: On the basis of investment:
On the basis of association with the product: On the basis of decision-making:

17. COMPONENT OF TOTAL COST
 Prime cost:
Prime cost = direct material cost+ direct labour cost + direct expenses
 Factory cost or Work cost:
Factory cost= prime cost+ factory overhead
 Office cost or Cost of production:
Office cost= factory cost+ office and administrative overhead
 Total cost or cost of sales:
Total cost or cost of sales = office cost+ selling overhead

18. COST SHEET
 A Cost Sheet is an analytical statement of expenses
relating to the production of an article that informs
regarding total cost, per unit cost and quantity of
production.
 According to Wheldon, "Cost sheets are prepared
for the use of management and consequently, they
must include all the essential details which will
assist the manager in checking the efficiency of
production."

19. COST SHEET FORMAT

20. PURPOSES OR OBJECTS OF COST ACCOUNTS
•PURPOSES OR
OBJECTS OF COST
ACCOUNTS
•Ascertainment of
cost
•Determination of
selling price
•Controlling cost
Frequent preparation
of account and other
reports
To provide a basis for
operating policy

21. ESSENTIALS OF COST ACCOUNTING
Accuracy
Simplicity
Elasticity
Uniformity
Equity
Economy
Comparability
Promptness
Periodical preparation of accounts
Reconciliation with financial accounts
ADVANTAGE OF COST ACCOUNTING
 Benefits to the Management
 Benefits to the Employees
 Benefits to Creditors
 Benefits to the Government
 Benefits to Consumers/Public

22. LIMITATIONS OF COST ACCOUNTING
 It is expensive
 The system is more complex
 Inapplicability of same costing method and technique
 Not suitable for small scale units
 Lack of accuracy
 It lacks social accounting
ROLE OF COST IN COST ACCOUNTING
 It helps in choosing from among various alternative course of action.
 It helps in pricing decisions.
 It helps in matter relating to replacement of capital equipment by a new one.
 It is useful in deciding the acquisition of fixed assets.
 It helps in deciding whether an assents to be bought or hired.

23. COST UNIT AND COST CENTRE
“Cost unit is a quantitative unit of product or service
in relation to which costs are ascertained".
“Cost centre is a location, person or item of
equipment (or group of these) in respect of which
cost may be ascertained and related to cost units".
TYPES OF COST CENTRE
Production
and
service
cost centre
Personal
and
impersonal
cost centre
Operation
and
process
cost centre

24. COST TECHNIQUES
COSTING SYSTEM
Historical
cost system
Estimated
cost system
Standard
cost system
Absorption costing
Marginal costing
Historical costing
Standard costing
Uniform costing
Differential costing
COST
TECHNIQUES

25. COSTING METHODS
Methods
Specific
Order Costing
Job Costing Batch Costing
Contract
Costing
Cost Plus
Costing
Operation
Costing
Output
Costing
Process
Costing
Service
Costing
Composite
Costing

26. Thank You
Presented By:-
Yogesh Meena