The document provides a comprehensive overview of management accounting, emphasizing the differences between management and financial accounting. It details key concepts such as cost behavior, cost classification, and various costing methods, alongside formulas for calculating variable and fixed costs. Additionally, it discusses income statement preparation, budgeting, and techniques like the high-low method and least-square regression for cost estimation.

1. MANAGEMENT ACCOUNTING
Prepared and Presented By: Ramkumar Shah
Friday, April 18, 2014
Basic Learning Notes on

2. Introduction To Management Accounting
 Management accounting can be defined as
the process of identifying, analyzing &
communicating the managerial-cum-financial
records to the concerned authorities of
business organization for the purpose of
planning, decision making and controlling.
 It is quite different form the financial
accounting.

3. Management Accounting vs. Financial Accounting
Management and cost Accounting Financial Accounting
It focuses on the small part of the
organization. E.g. Individual product or
Activities.
Financial accounting reports refer to the
whole of the organization.
Cost and Management Accounting is
concerned with the provision of
information to managers that require for
planning, decision making and
controlling.
These reports are useful for the external
users outside the organization like
stakeholder, creditors, governmental
authorities etc.
It looks over the future as well as the past
of organization and has based on
estimation or forecasting.
It reports what has happened in the past.
These reports are made for internal
evaluation and control.
These reports are compulsorily needed
to the governmental authorities.
reports has lack of accuracy. The reports must be accurate.
This type of reports are made daily,
weekly, monthly or as per managerial
These reports are generally prepared at
the last of an accounting period

4. Objectives Of Management. Accounting
Changing role of management accountants:
 Information for planning, decision making
and controlling
 Directing and controlling the daily business
and administrative activities
 Motivating to labor and staffs
 Measuring the managerial performances
 Accumulating costs for stock valuation to
meet the requirements of external reporting

5. Cost Management: Allocation & Determination
 Cost is the price or the expenses which is
sacrificed to the acquiring of any particular
objects. We pay money or exchange the
things to get something; is called the cost.
For example, buying books, travelling
through bus, purchase of machinery or
shares etc. So, in general sense, cost is
expenses made on business activities.

6. Terminological Meanings
 Cost object: for which the cost is incurred.
 Cost unit: a unit of the basis of measurement cost.
 Cost centers: a department, a unit of concerned
authorities or a branch of the org.
 Cost accumulation: a process of collecting cost
and managerial info. from different cost centers.
 Cost allocation: assessing and apportioning units
to a cost object for the purpose of determining total
cost of the product.

7. Cost Classification On Different Basis
 On the basis of product costing:
1) Direct cost (Prime cost):
The cost which can’t be easily identifiable to a
particular cost object. It includes:
a) direct materials/ raw materials: e.g. sugarcane for
sugar manufacturing company
b) direct labor: e.g. salary and wages paid to workers
and production manager
c) other direct expenses: e.g. cost of product
designing, installation cost, royalties, cost of patient rights
etc.

8. Cost Classification On Different Basis
2) Indirect costs or overhead costs:
The cost which can’t be easily traceable to a
particular cost object. These costs do not take part
in production process but help on. It includes:
a) Indirect materials: e.g. oil and grease used in
machinery, stick and paints used in furniture etc.
b) Indirect labor: e.g. factory supervisor or managers.
c) Other overheads cost: e.g. rent, electricity cost,
stationary cost used for manufacturing purpose.

9. On The Basis Of Profit Maximizing Decisions
1) Relevant costs (Avoidable costs): the cost
which is emerged due to the managerial decisions
and it vary from one alternative to another one.
These are future and differential costs.
2) Irrelevant costs (unavoidable costs): the cost
which are emerged even the decision does not
influence to happen. Such as, the pre-committed
costs, fixed costs or the current portion of past or
long term debts etc.

10. On The Basis Of Function
1) Manufacturing cost (Factory costs):the cost
which emerged during the production process in
the factory. E.g. purchase of raw materials,
carrying and installation cost etc.
2) General administrative and legal expenses:
the cost related to daily administration. E.g.
stationary cost, salary to staffs, rent of office etc.
3) Selling and distribution costs: the cost related
to selling the products to market, R&D, marketing
strategies cost like advertisement costs etc.

11. On The Basis Of Control
1) Controllable cost: the cost which can be
controlled/ influenced or reduced within the short
period of time by managerial decision and
responsibility centers.
2) Uncontrollable costs: the costs which can’t be
controlled within the short period of time by the
managerial decisions. These are unexpected
costs directly incurred.

12. On The Basis Of Absorption
1) Absorbed costs: the cost which is charged to
the given period of time or to the production cost
of that period. E.g. paying salary, rent of current
month to this month period.
2) Unabsorbed costs: the cost related to this year
is being transferred to another period or to another
year or remaining unchanged to this year; such
costs are called unabsorbed costs. E.g.
Outstanding salary

13. On The Basis Of Expiry Of Cost
1) Expired cost: the cost which has been expensed
during the given time period and has not remain
the potentiality to produce benefit in future.
2) Unexpired cost: the cost which has not
expensed during its time period and still has the
utility of producing potential benefit in future.

14. Behavioral Classification
1) Fixed costs: the cost remaining constant at each
activity level of production. For example, rent of
office building, depreciation on machinery etc.
features of fixed cost:
a) same in cost
b) variance in cost per unit that decreases
as per the increment in activity level.

15. Behavioral Classification
2) Variable costs: the cost which vary according to
the increment or decrement of production units.
These are caused to use the capacity. E.g.
manufacturing costs, selling and administrative
costs etc.
features of variable cost:
1) Change in production amount
2) Same in cost per unit

16. Behavioral Classification
3) Semi-variable or mixed costs: that cost which
has neither the features of variable nor of the fixed
cost. At the beginning, it is characterized by fixed
cost and later changes to variable cost. E.g.
payment of landline phone, postpaid phone,
electricity charge etc.

17. Identification Of Cost Behavior
Activity Level (in
units}
10,000 units 20,000 units 30,000 units
Total costs: (in Rs.)
Direct materials Rs. 20,000 Rs. 40,000 Variable cost
Cost per unit= Rs. 2 Rs. 2
Direct labor Rs.30,000 Rs. 60,000 Variable cost
Cost per unit= Rs.3 Rs. 3
depreciation Rs. 30,000 Rs. 30,000 Fixed cost
Cost per unit= Rs. 3 Rs. 1.5
Supervision Rs. 25,000 Rs. 45,000 Variable cost
Cost per unit= Rs. 2.5 Rs.
2.25
Rent of factory
building
Rs. 20,000 Rs. 20,000 Fixed cost
Cost per unit= Rs. 2 Rs. 1
Repairing costs Rs. 20,000 Rs. 30,000 semi-variable cost
Cost per unit= Rs. 2 Rs. 1.5
Heat, light & power Rs. 20,000 Rs. 25000 semi-variable cost

18. COST EQUATION
Total costs= total fixed costs + total variable cost
Or,
Y=a + b*X
Where,
a= fixed costs
y= total costs
b= variable cost per unit (VCPU)
X= activity level or production level or machine
hours

19. Cost Estimation Technique: segregation of cost
 High-low point method:
Variable cost per unit(VCPU)
b= high cost─ low cost
high unit ─ low unit
Total cost= fixed cost+ VCPU* activity volume
or, Y=a + b*X,
This method only consider and apply two points
of production process i.e. high and low point. On
the absence of any one of these points of cost
or unit, the total cost can’t be segregated to
apportionment- the fixed cost and variable cost.

20. Cost Estimation Technique: segregation of cost
 least-square regression method:
VCPU (b)= n*∑ x y ─ ∑ x. ∑ y
n. ∑x2— (∑x)2
Total cost function: Y=a + b * x
Fixed cost(a)=∑y/n─ ∑b/n*x
This method considers various activity level of
production. We prepare a table and find out VCPU
and the fixed cost accordingly.

21. Illustration: High-low Point Method
VCPU(b)= difference in cost/ difference in unit
or, (1000000—800000)/(100000—50000)
=Rs. 4 per unit.
Now, total fixed cost(a)= Y—b*x
At high activity level,
a= Rs.1000000—Rs. 4*100000 =Rs. 600000
Production in units 50,000 1,00,000
Total cost at Rs. 8,00,000 10,00,000

22. Illustration: Least-square Regression Method
Machine hour (x)
‘000
Maintenance cost
(Y) ‘000
X*y x2
110 235 25850 12100
100 215 21500 10000
140 260 36400 19600
130 255 33150 16900
120 235 28200 14400
∑x= 600 ∑y= 1200 ∑ x.y = 145100 ∑x2= 73000

23. Illustration: Least-square Regression Method
Now, VCPU (b)= 5*145100– 600*1200
5*73000– (600)2
= Rs. 1.1 per machine hour
And, a= ∑Y/n-- b. ∑x/n
=1200/5—1.1*600/5 = Rs. 108000

24. Preparation Of Income Statement
 Absorption costing method:
 Variable costing method:
Absorption costing method includes both
type of variable and fixed costs to its product
cost.
but, the variable costing method only
considers the variable cost item.
there is difference in answer of these two
distinct methods.

25. Income Statement As Per Absorption Costing
Particulars Amt Rs. Amt Rs.
Sales revenue xxxx
Less: cost of goods sold (@rs….*sales unit)
direct materials Xxx
direct labor ( @Rs…. *actual output ) Xxx
direct expenses xxx
variable manufacturing expenses xxx
fixed manufacturing overhead cost (SFMOR* actual output) xxx
Add: beginning inventory (beg. Inv. unit*total product cost rate) Xxx
Less; closing inventory (closing inv. * total product cost rate) xxx xxx
Add: under absorption and less: over absorption
Gross
profit……………………………………………………………………......
..........
xxxx
Less: non manufacturing costs:
variable administrative, selling and marketing cost Xxx
fixed administrative, selling and marketing cost xxx xxx

26. Income Statement As Per Variable Costing
Particulars Amt. Rs. Amt. Rs.
Sales revenue Xxxx
Less: variable cost of goods sold
opening inventory Xxx
Add: direct materials Xxx
direct labor Xxx
direct expenses Xxx
variable manufacturing costs Xxx
Less: closing inventory Xxx Xxxx
Gross contribution
margin……………………………………………………..
xxxx
Less: variable administrative and selling costs Xxx
net contribution
margin…………………………………………………………….
Xxxx
Less: fixed costs
Fixed manufacturing cost Xxx
Fixed administrative, selling and marketing cost xxx xxxx

27. Things To Remember (TTR)
Standard fixed manufacturing overhead(SFMOR)
is always calculated under average or normal
production level. And,
SFMOR= fixed manufacturing cost/normal output
Product or inventory cost include only the
manufacturing or factory fixed and variable
costs. In variable costing, other fixed and
variable administrative and selling costs are
deducted under the headings of fixed cost from
net contribution margin.

28. Preparation Of Reconciled Statements
Reconciliation statement from absorption
costingParticulars Amount Rs.
Net income from absorption costing xxxx
Add: fixed manufacturing cost on opening inventory
(opening inv. Units * SFMOR)
xxxx
Less: fixed manufacturing cost on closing inventory
(closing inv. Units * SFMOR)
xxxx
xxxx
Net income from variable
costing……………………………………………
xxxxxx
Note: while preparing from the variable costing, the fixed
manufacturing cost on opening inv. Must be less and the
another one should have added.

29. Reconciliation Statement
particulars Amt. Rs.
Net income from absorption costing 110000
Net income from variable costing 90000
# Difference in net
income
20000
Closing inventory 6000
Opening inventory 2000
Change in inventory/
stock (a)
4000
Standard fixed manufacturing overhead rate (SFMOR)
(b)
Rs. 5 per unit
Change in stock valuation (a*b) # 20000

30. Cost, Volume And Profit Analysis
To maximize the profit,
the company either
should have increased
the TR or decrease the
VC as much as possible
(but it does not decrease
even after the FC line).
Two distinct method has
different technique of
recording product costs.
Due to effect on product
cost, that also effects on
contribution margin and
accordingly on net
profit.

31. Things To Remember (TTR)
1) VCPU= VC/ sales unit
2) Required sales in units to earn desire profit
in % of SPPU= FC/ (SPPU—VCPU---
PPU+LPU)
3) PV ratio (CM ratio)=difference in profit
difference in sales revenue
4) CV ratio= 1– PV ratio= 1—(VCPU/SPPU)
5) Margin of safety (MOS)= Actual sales– BEP
sales and,

32. Things To Remember (TTR)
6) PV ratio (CM ratio)=CMPU/SPPU
7) CMPU=(TCM/total sales unit) = SPPU—VCPU
8) While applying equation,
sales= FC+ VC+ profit
9) Cash BEP in Rs. = cash FC only/ PV ratio
10) MOS in Rs.= MOS in units* SPPU
11) Incremental Profit= Incremental sales* PV
ratio, or,
Profit=(new sales revenue after increment * PV
ratio)--FC and, incremental sales= New—old.

33. Things To Remember (TTR)
12) BEP in units= FC/(SPPU—VCPU)
=FC/CMPU
13) Net profit= sales revenue(TR)– VC—FC
and,
CM= sales revenue– VC
14) CMPU= SPPU—VCPU
15) CM ratio(PV ratio)= CM/sales =
CMPU/SPPU=(SPPU-VCPU)/SPPU
16) profit= (sales revenue* PV ratio)– FC
17) profit= (sales units*CMPU)– FC

34. Things To Remember (TTR)
19) Required sales in units to earn desired
profit(before tax)=(FC + desire profit)/CMPU
20) Required sales in Rs. to earn desired
profit(before tax)=(FC + desire profit)/PV
ratio
21) Required sales in units to earn desired
profit after tax=(FC + (desire profit/(1-
taxrate))/CMPU
22) Required sales in Rs. to earn desired profit
after tax=(FC + (desire profit/(1-tax rate))/PV

35. Things To Remember (TTR)
23) Overall (composite, weighted average)
BEP:
Composite CMPU= CMPU* sales mix, For individual BEP:
composite PV ratio= PV ratio*sales mix, A’s BEP= Overall BEP*sales mix
sales ratio A:B= 2:3, TFC= Rs. 180000. =36000*2/5=14400 units
Overall BEP in units= TFC/ Composite CMPU and, for B’s
BEP=36000*3/5
=Rs. 180000/Rs. 5= 36000 units =21600 units
Product SPP
U
VCPU CMPU PV
ratio
Sales
mix
Composi
te CMPU
Composi
te PV
ratio
A 15 10 5 0.3 2/5 2 0.12
B 20 15 5 0.25 3/5 3 0.15
Total 5 0.27

36. Flexible Budget
 Budget is a specimen of costs that is
systematically prepared for future use. In every
decision making the budget should have
prepared. We need to classify and segregate
cost into fixed and variable cost before drafting
the budget sheet. Flexible Budget is the total of
fixed and variable costs. To segregate cost we
generally use high-low point method as
simplicity.
 Types:
1) Static Budget (Not Changeable)
2) Flexible Budget (Changeable)

37. Preparation Of Flexible Budget
Particulars 70000 units 80000 units
Variable costs: In Rs. In Rs.
Maintenance cost @ Rs. 0.7 49000 56000
Various costs @ Rs. 0.15 10500 12000
Total Variable
costs:…………………………………………………..
59500 68000
Fixed costs:
Salary 300000 300000
depreciation 60000 60000
Total Fixed
costs:……………………………………………………
…
360000 360000