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