HIMACHAL PRADESH NATIONAL LAW UNIVERSITY,

SHIMLA

SEMESTER- III

B.B.A. LL.B. (Hons.) PAPER CODE:

COURSE TITLE: Management Accounting

CREDITS-04

A- COURSE-CONTENT

Objectives

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The objective of the course is to give students a good understanding about the

concepts and techniques of Management Accounting as it is an essential tool

that enhances a manager's ability to make effective economic decisions. These

issues will be explained against the background of a fast changing global market.

Module-1

(Total Lectures – 16)

(Introduction to Management Accounting)

1.1: Introduction to Management Accounting: Meaning, Features and Scope

1.2: Importance and Functions of Management Accounting, Role of Management

Accountant in Decision Making

1.3: Tools of Management Accounting, Merits of Management Accounting,

Demerits of Management Accounting

1.4: Relationship of Management Accounting with Other Branches of Accounting

and Other Disciplines of Studies

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1.5: Differences between Financial Accounting, Cost Accounting and

Management Accounting

Preface

Finance and accounting have assumed much importance in today’s competitive

world of business wherein corporate organizations have to show the true and fair

view of their financial position. Thus, the application of accounting in the

business sector has become an indispensable factor. Company Secretary has to

provide the complete and accurate information about the financial operations of

the company to management for decision making. This emphasizes that the

books of account are to be maintained accurately, up-to-date and as per the

norms. The subject ‘Cost and Management Accounting’ is very important and

useful for optimum utilization of existing resources. These are branches of

accounting and had been developed due to limitations of financial accounting. It

is an indispensable discipline for corporate management, as the information

collected and presented to management based on cost and management

accounting techniques helps management to solve not only specific problems

but also guides them in decision making.

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1.1: Introduction to Management Accounting

Meaning of Management Accounting

In every business enterprise, various transactions and events take place every

day; sales are effected, purchases are made, expenses are met or incurred,

payments are received and made, assets are sold and acquired. These events,

arising out of the decisions and actions of management, exercise their effects

and impact on the operational efficiency and position of the enterprise. Most of

these transactions and events have money values or can be measured and

expressed in money values. Since they affect the operation and position of the

enterprise, they need to be measured, recorded, analysed and reported to the

management, so that the management can evaluate their effect upon the

enterprise. As compared with financial accounting and cost accounting,

management accounting is a later development. Management accounting links

management with accounting. All such information that is useful to the

management is the subject matter of management accounting. Any information

required for decision making is the concern of management accounting.

Management accounting, unlike financial accounting, provides information for

internal users, though the basic data come from the same accounting system

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i.e., financial accounting and cost accounting systems. Management accounting

collects and provides accounting, cost accounting, economic and statistical

information to the men at various managerial levels to assist them in the

performance of managerial functions and their evaluations. It is the development

and application of various techniques of recording, analysis, interpretation and

presentation, making the financial, costing, and other data active and effective

in the performance of managerial functions, viz., planning, decision-making and

control. It should be noted that management accounting makes use of not only

accounting techniques but also of statistical and mathematical techniques.

Management accounting is forward looking and should, therefore, be able to

treat economic information and data to make it suitable for use by the

management. It deals with the processing of financial and cost accounting data

for managerial decision making. It is concerned with providing information to

management in an organisation to enable them to carry out their planning,

controlling and decision-making responsibilities. This also helps the manager to

discharge their duties more efficiently and effectively.

Evolution of Management Accounting

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Managerial accounting has its roots in the industrial revolution of the 19th

century. During this early period, most firms were tightly controlled by a few

owner-managers who borrowed based on personal relationships and their

personal assets. Since there were no external shareholders and little unsecured

debt, there was little need for elaborate financial reports. In contrast, managerial

accounting was relatively sophisticated and provided the essential information

needed to manage the early large scale production of textile, steel, and other

products. After the turn of the century, financial accounting requirements grow

rapidly because of new pressures placed on companies by capital markets,

creditors, regulatory bodies, and federal taxation of income. Many firms needed

to raise funds from increasingly widespread and detached suppliers of capital.

To tap these vast reservoirs of outside capital, firms' managers had to supply

audited financial reports. Because outside suppliers of capital relied on audited

financial statements, independent accountants had a keen interest in

establishing well defined procedures for corporate financial reporting. As a

consequence, for many decades, management accountants increasingly focused

their efforts on ensuring that financial accounting requirements were met and

financial reports were released on time. The practice of management accounting

stagnated. In the early part of the century, as product line expanded operations
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became more complex, forward looking companies saw a renewed need for

management-oriented reports that was separate from financial reports. But in

most companies, management accounting practices up through themid-1980s

were largely indistinguishable from practices that were common prior to World

War I. In recent years, however, new economic forces have led to many important

innovations in management accounting.

Definitions (Given by various Authors)

The management accounting team of Anglo-American Council on Productivity

defined management accounting as: “The presentation of accounting information

in such a way as to assist management in the creation of policy and in day to

day operation of an understanding”.

 American Accounting Association defines management accounting as

under: “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”.

 J Batty defines: “Management accounting is the term used to describe

accounting methods, systems and techniques which coupled with special

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 knowledge and ability, assists management in its task of maximising

profits or minimising losses.”

 Brown and Howard define: “Management accounting is that aspect of

accounting which is concerned with the efficient management of a

business through the presentation of management of such information as

will facilitate efficient and opportune planning and control.”

 Robert Anthony has defined management accounting thus: “Management

accounting is concerned with accounting information which is useful to

management”

 According to CIMA, London: “Management accounting is an integral part

of management concerned with identifying, presenting and interpreting

information used for: (a) formulating strategy; (b) planning and controlling

activities; (c) decision taking; (d) optimising the use of resources; (e)

disclosure to shareholders and others external to the entity; (f) disclosure

to employees; (g) safeguarding assets.

Characteristics of Management Accounting

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  Decision-making system: The financial data provided by the management

accounting, is helpful to the management in framing policies and assisting

the day to day operations.

 Future-oriented: Management accounting is future-oriented as it helps in

planning and deciding the future course of action.

 Qualitative and Quantitative Information: In management accounting,

qualitative information relating to the performance of the managers and

other staff is also considered, along with the other financial data.

 No set format: There is no set format for the disclosure of the information.

Management accounting usually presents information in the form which

is easily understandable to the managers and other users.

 Discretionary activity: Management accounting is not compulsorily

required by the statute. Indeed, management accounting is done as per

the requirement of the organization and hence, it can be done weekly,

monthly, quarterly, half-yearly, etc.

 Management accounting is a technique of selective nature. It does not use

the whole data provided by financial records. It selects and picks up only

that information form different financial records (such as profit and loss

account or balance sheet), which are relevant and useful to the

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 management to arrive at important decisions on different aspects of the

business.

 Management accounting is concerned with the future. It collects and

analyses data to plan the future. The primary function of management is

to decide bout the future course of action. Management accounting, with

the help of different techniques, formats the future course of action.

 Management Accounting makes available useful information which helps

the management in planning and decision-making. It can only provide

information but cannot proscribe. It is up to management to what extent

it. It can make use of the information depending upon its efficiency and

wisdom.

 Management accounting studies the relation between causes and effects.

Financial accounting does and analyses the causes responsible for profits

or losses. Management accounting attempts to study the cause-and-effect

relationship by analyzing the different variables affecting the profits and

profitability of the business.

 Management accounting is no bound by the rules of financial accounting.

Financial accounting procedures are designed based on GAAPs.

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Objectives of Management Accounting

 Assistance in Planning and Formulation of Future Policies: Management

accounting assists management in planning the activities of the business.

Planning is deciding in advance what is to be done, when it is to be done,

how it is to be done and by whom it is to be done. It involves forecasting

on the basis of available information, setting goals, framing policies,

determining the alternative courses of actions and deciding on the

programme of activities to be undertaken.

 Helps in the Interpretation of Financial Information: Accounting is a

technical subject and may not be easily understandable by everyone till

the user has a good knowledge of the subject. Management may not be

able to use the accounting information in its raw form due to lack of

knowledge of accounting techniques. Management accountant presents

the information in an intelligible and non-technical manner. This will help

the management in interpreting the financial data, evaluating alternative

courses of action available and guiding the management in taking

decisions and having the most desired financial results.

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  Helps in Controlling Performance: Management accounting is a useful

device of managerial control. The whole organisation is divided into

responsibility centres and each centre is put under the charge of one

responsible person. He will be associated with the planning and framing

of the budgets and be required to execute the plans and standards and

deviations are analysed in order to pinpoint the responsibility. Thus,

management accountant helps in controlling the performance of the

different responsibility centres and take suitable actions in order to correct

the adverse deviations by revising the budgets if need be.

 Helps in Organizing: Thus management accountant recommends the use

of budgeting, responsibility accounting, cost control techniques and

internal financial control. This all needs the intensive study of the

organisation structure. In turn, it helps to rationalise the organisation

structure.

 Helps in Coordinating Operations: Management accounting helps the

management in co-coordinating the activities of the concern by getting

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 prepared functional budgets in the first instance and then co-coordinating

the whole activities of the concern by integrating all functional budgets

into one known as master budget. Thus, management accounting is a

useful tool in coordinating the various operations of the business.

 Helps in Motivating Employees: The management accountant by setting

goals, planning the best and economical course of action and then

measuring the performance tries his best to increase the effectiveness of

the organisation and thereby motivate the members of the organisation.

 Communicating Up-to-date Information: Management accounting assists

management in communicating the financial facts about the enterprise to

the persons who are interested in these facts so that they may be guided

to a line of action to be pursued. Management needs information for taking

decisions and for evaluating performance of the business. The required

information can be made available to the management by means of reports

which are an integral part of the management accounting. Reports are

means of communication of facts which should be brought to the notice of

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 various levels of management so that they may be guided for taking

suitable action for the purposes of control.

The main purpose of management accounting is to utilize the accounting

information in solving the business problems and taking scientific decisions.

Moreover, the scope of management accounting is very wide. Therefore, it is very

difficult of pinpoint the exact scope of management accounting.

However, the scopes of Management Accounting are listed below.

Financial Accounting

Financial accounting is relating to the recording of business transactions

immediately soon after the transaction taken place or afterwards incurring the

expenses. The business transaction may be relating to income, expenses,

inventory movement, assets, liabilities, cash receipts and payments and so on.

The process of financial accounting includes the preparation of financial

statements regularly at the end of each accounting year for knowing operating

results for a definite period. The term financial statements includes profit and

loss account and balance sheet. Management is unable to exercise the

coordination and control out of the information supplied by financial accounting

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system. But, the financial accounting system information is the basis of future

business planning and financial forecasting.

2. Cost Accounting

Cost accounting is concerned with the ascertainment of various elements of costs

for different business operation and activities. These cost data are used in the

management accounting system for further analysis so as to solve business

problems and take quality decision.

3. Budgeting and Forecasting

Management accounting includes budgetary control and forecasting techniques

also. Under budgetary control system, the budgets are prepared on functional

basis and measure the actual performance, find the difference between the

actual and standard for taking corrective actions In this way, budgeting assists

the management for identifying responsibility and ensuring coordination.

4. Revaluation Accounting

This type of accounting system is ensuring that the capital is maintained intact

in real terms. By keeping this fact in mind, correct amount of profit is calculated

and used for managerial decision making.

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5. Cost Control Procedures

Cost control procedures are an integral part of management accounting process.

In includes inventory control, cost control, time control, budgetary control,

standard costing etc.

6. Statistical Methods

In order to analyze the financial accounting data, tables, diagrams and graphs

are used in the management accounting system. These are nothing but

statistical methods.

7. Inventory Control

Inventory control refers to exercising control over the utilization of raw materials,

processing of work in progress and disposal of finished goods for a specific

period.

8. Reporting

Reporting is divided into two types. They are interim reporting and external

reporting. Interim reporting is supplying information to the top management.

External reporting is supplying information to outsiders i.e. shareholders, banks

and financial institutions. Interim reporting deals with the submission of

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financial results by means of weekly, fortnightly, monthly, quarterly or half

yearly accounts or statements to the top management.

9. Taxation

It includes the computation of corporate income tax in accordance with the tax

laws, filing of returns and making tax payments.

10. Methods and Procedures Design and Installation

Management accounting is relating to the most efficient and economic system of

accounting suitable to any size and type of undertaking. Moreover, it employ best

use of mechanical and electronic devices.

11. Internal Audit

Internal audit is conducted by the business organization with the help of paid

employee who has thorough accounting knowledge. All the relevant records are

maintained under the management accounting system so that the internal audit

is conducted in an effective manner.

12. Office Services

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It includes maintenance of proper data processing and other office management

services.

13. Financial Management

Every owner of the business concern expects fair rate of return on investments.

It is possible through the effective utilization of the finance. Hence, it is termed

as financial management and considered as separate discipline. The tools in

financial management are developed through management accounting system.

14. Interpretation

Management accounting is relating to the interpretation of financial data to

management and advising them on decision-making.

1.2: Importance and Functions of Management Accounting

Helps in Making Plans

Management accounting assists organization in making better plans for future

activities. It supplies all financial and non-financial data to management on a

regular basis. Managers through the availability of all these information are able

to perform better analysis and forecasting which enables them in framing proper

plans.
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Assist in Decision Making

Efficient decision making is a major role played by management accounting. It

collects and analyses all financial information available within organization and

present them in simplified charts, tables or graphs. Management gets better

understanding regarding organization affairs and is able to take correct decisions

at right time.

Measures the Performance

Management accounting monitors and measures the overall performance of

organization. It uses various tools like variance analysis which measures the

company performance with pre-established standards for finding out the

deviations. Managers by identifying all variations in performance of company are

able to take corrective measures accordingly for removing them.

Increases the Efficiency

This accounting branch aims at raising the overall efficiency of business

organizations. Management accounting sets target for each division in advance

and checks whether they fulfill all targets. It ensures that all resources are fully

utilized which helps in improving the efficiency.

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Better Service to Customers

Management accounting focuses on better service to customers by providing

them quality goods at fair prices. It helps in controlling the prices of products by

employing cost control devices. In addition to that, it sets various quality

standards to be met by organization for producing their goods.

Raises the Profitability

It has an efficient role in enhancing the profitability of organizations. It makes

companies cost conscious and assist in avoiding all extra expenditures.

Management accounting uses techniques such as budgetary control and capital

budgeting for reducing the expenses which helps in earning better profits.

Provides Reliability

Management accounting adds reliability to management decisions by providing

them genuine information. It uses proper scientific tools and techniques for

analysis purposes which helps managers in the proper management of business

operations.

Role of Management Accountant

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Management accountants often supervise lower-level accountants who handle

basic accounting tasks, such as recording income and expenses, tracking tax

liabilities. This information is used to prepare income statements, cash flow

statements, and balance sheets, In smaller firms, you may end up performing

these tasks yourself. A management accountant performs analysis to forecast,

budget, and measure performance and plans, then presents them to senior

management to assist in operational decision making.

Management Accountant is an officer who is entrusted with Management

Accounting function of an organization. He plays a significant role in the decision

making process of an organization. The organizational position of Management

Accountant varies from concern to concern depending upon the pattern of

management system. He may be an executive in some concern, while a member

of Board of Directors in case of some other concern. However, he occupies a key

position in the organization. In large concerns, he is responsible for the

installation, development and efficient functioning of the management

accounting system. He designs the frame work of the financial and cost control

reports that provide with the most useful data at the most appropriate time. The

Management Accountant sometimes described as Chief Intelligence Officer

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because apart from top management, no one in the organization perhaps knows

more about various functions of the organization than him. Tandon has

explained the position of Management Accountant as follows:

“The management accountant is exactly like the spokes in a wheel, connecting the

rim of the wheel and the hub receiving the information. He processes the

information and then returns the processed information back to where it came

from”.

 Management accountants work for public companies, private businesses,

and government agencies.

 Their duties include recording and crunching numbers, helping to choose

and manage company investments, risk management, budgeting,

planning, strategizing, and decision making.

 Management accountants need an aptitude for and interest in numbers,

math, business, and production processes, along with accounting skills,

knowledge in GAAP, and leadership skills.

 The minimum requirement is a bachelor's degree, but experience also

helps.

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  Management accountants can get a special designation as a certified

management accountant and as a chartered global management

accountant.

1.3: Tools of Management Accounting

A management accounting tool is a framework, model, technique or process that

enables management accountants to: improve performance; facilitate decision-

making; support strategic goals and objectives; and otherwise add value.

Tools and techniques of management accounting outlined below:

 Analysis of Financial Statements

 Budgetary Control

 Decision Accounting

 Throughput accounting

 Financial Policy

 Working Capital Management

For this purpose, the Management Accountant takes the helps from the

following:

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 (i) Financial Planning:

In order to achieve the primary objectives of a business enterprise,

financial planning helps to determine in advance the financial activities

which are necessary. Needless to mention that it includes to determine the

long-term as well as short-term financial objectives, formulating financial

policies and developing the financial proceeding to attain such objectives

of the enterprise.

Historical Cost Accounting:

Historical Cost Accounting provides financial past data relating to cost of

each job, processes and departments etc., so that proper comparison may

be made with the standard cost —which ultimately helps to control cost

and makes future planning properly.

(iii) Marginal Costing:

Marginal Costing, particularly Differential Cost Analysis, Break-Even

Analysis etc. also helps the Management Accountant to take decisions

about cost control, maximisation of profit etc.

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 Standard Costing:

Standard Costs are predetermined, or forecast estimates of cost to

manufacture a single unit or a number of units of a product, during a

specific immediate future period and are used as a measure with which

the actual cost, as ascertained, may be compared. As such, this technique,

i.e., the analysis of variance, is considered while controlling costs and

helps to take correct decisions for future.

(v) Budgetary Control:

Budgetary Control is a system of controlling and planning costs. So this

technique is widely used in Management Accounting for planning and

controlling different activities of a business unit. In other words, it helps

the management to achieve a desired return on investment.

(vi) Ratio Analysis:

We know ratios are the best tool for measuring liquidity, solvency, profitability

and management efficiency of a firm and it is also equally useful to the internal

management, prospective investors, creditors and outsiders etc. The role of

accounting ratios are very significant to increase the efficiency of the

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management. As such, it is a very important tool of Management Accounting

also.

Merits of Management Accounting

Management accounting is very useful for every business organizations. The

main advantages or merits of management accounting are interpretation of data

and information, performance comparison, planning, forecasting, controlling,

coordinating, better organizing etc. Advantages of management accounting can

be described with the help of following points.

Planning

The management can prepare the plan and execute the same for effective

operation of business. In this context, various functional budgets are prepared

and accounting information are rearranged in department wise, product wise,

section wise and the like for proper planning.

2. Controlling

The actual performance of every business activity is measured and compared

with the standard fixed or planned one. If the deviations are found that are

controllable, the management can decide the course of action to exercise control.

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Both standard costing and budgetary control system are highly help the

management in this aspect.

3. Service to Customers

Better and improved services by management to customers are assured by this

system of accounting.

4. Organizing

The scope of authority and responsibility of key executives are properly defined

and explained under management accounting system. Hence, everyone knows

who is responsible for what and to whom? It helps for proper organizing the work

in an organization.

5. Coordinating

It is the process of integrating the various work performed in an organization to

achieve the objectives effectively. Thus, perfect coordination is required for

among production, purchase, finance, personnel, sales and the like

departments. This is achieved through preparing budgets and reports of

performance.
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6. Improvement of Efficiency

The management accounting system may eliminate various types of wastage,

production, defectives and other work thereby the workers efficiency may be

improved.

7. Motivating

It helps to maintain high degree of morale among the employees. The reports of

business operation are periodically prepared and submitted before the top

management periodically. Based on the report, the management can find out

whom to demote or promote or to reward or penalize. In this way, the employees

are motivated.

8. Communication

Two way communication is followed in an organization if management

accounting system is followed. Modified accounting information and reports

regarding performance are sent to top management for decision making. In

another way, assignment of work and responsibilities over employees are

communicated to lower level executives.

9. Regulation of Business Activities

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Proper planning, organizing, coordination and motivation can bring systematic

regularity in the business activities.

10. Maximization of Profit

There is a morale among the employees. Standards are fixed and measure the

actual performance to find the deviations. If the causes for deviations are

reasonable and controllable, proper action may be taken by the management. In

this way, profit is maximized.

11. Reliability

The tools used in management accounting system are reliable. This procedure

usually makes the data supplied to management accurate and reliable.

12. Taking Corrective Measures

Management accounting often compares the actual performance with the

standard and analyze the reasons for any deviation there have and offers

suggestions to take corrective measures.

13. Motivates Employees

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Management accounting serves as a tool for motivating employees. It prepares

and presents periodic reports regarding operations of the business to the

management team. Managers are easily able to evaluate the performance of

employees and takes decision regarding promoting or demoting them

accordingly.

14. Cost Transparency

Transparency of cost is another important role played by management

accounting. It properly monitors all cash inflows and outflows of business and

ensures that there is no misuse of money. Management accounting works closely

with the IT department to ensure that all expenses are within budget.

Limitations or disadvantages of management accounting

1. Based on Financial and Cost Records

Both financial and cost accounting information are used in the management

accounting system. The accuracy and validity of management account is largely

based on the accuracy if financial and cost records maintained. These records

determine the Strength and weakness of management accounting.

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2. Personal Bias

The analysis and interpretation of financial statements are fully depending upon

the capability of the analyst and interpreter. Hence, personal prejudices and bias

of an individual can affect the objectivity and effectiveness of the conclusions

and recommendations.

3. Lack of Knowledge and Understanding of the Related Subjects

Financial accounting, cost accounting, statistics, economics, psychology and

sociology are the related subjects of management accounting. The organization

can derive more benefits of management accounting if the management

accountant has thorough knowledge over related subjects. If not so, the success

of management accounting system is questionable.

4. Provides only Data

Under management accounting system, many alternatives are developed to solve

a problem and submitted before the management. Out of the many alternatives

available, the management can select any one of alternatives or even discard all

of them. Hence, management accounting can only provide data and not prescribe

any course of action.

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5. Preference to Intuitive Decision Making

Scientific decisions can be taken with the help of using management accounting

techniques. But, majority of the management accountant and top level

executives prefer their past experience and intuition in making business

decisions. The reason is that an intuitive decision making is very simple and

easy.

Management Accounting is just a tool.

Management accounting must not be regarded as an alternative or substitute for

management. The tools and techniques of management accounting give only

information and not decisions. Decisions should be taken by management, and

implementation of decisions is also carried out by management.

Persistent Efforts

The conclusions and decisions drawn by the management accountant will not

be implemented automatically. Thus, there is a need for continuous and

coordinated efforts of each management level to execute such decisions.

Not Cost Effective

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Management accounting can exist only in those companies which are operating

a sound and appropriate system of cost accounting. While the introduction of a

system of cost accounting is in itself costly, introduction of a management

accounting system may not be beneficial when cost-benefit analysis is made.

Uncertain

Management accounting is linked to the future since it gives data for

management and planning of future activities. But, the future is uncertain and

management accounting may not provide effective results.

1.4 Relationship of Management Accounting with Other Branches

Accounting and Management

Accounting and Management are very closely related because management

depends entirely on accounting for information in financial affairs to make

decisions. Accounting provides all kinds of financial information in project

planning and implementation of a business concern. As a result, management

can take decisions comfortably regarding project planning and implementation.

The scope of Management is extended from individual life to various fields of

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social life. The overall development of trading, non-trading, government, semi-

government, autonomous bodies, etc. depends on management. In the modem

age the responsibilities of making decisions, planning and management have

been shifted from owners to professional-managerial persons. For this reason,

all functions of managers are directed to the development of business concerns.

In this respect Accounting helps the management in taking timely decisions,

interpreting and analyzing overall and information based matters. Managers

cannot take the best and most dynamic course of action for their respective

business concerns without the information-based financial statements and other

statements of accounts.

Accounting and Economics

The relation of Economics with Accounting is very close. Economics is a science

related to human activities to fulfill demand with limited wealth. Economics

analyzes how people earn and spend, how purchasers and sellers behave under

different circumstances etc. On the other hand; accounting records transactions

of income and expenditure measurable in terms of money and provides

necessary and relevant information to purchasers and sellers for taking

decisions. Economics studies the behaviors of buyers and sellers as a whole.

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Accounting provides all required financial information to individual buyers and

sellers for taking an economic decision. So, these two subjects are interrelated.

In this perspective bringing about a synthesis between the concept of economics

and accounting, the concept of social sciences is being applied.

Accounting and Law

The prevailing laws of a land control trade and commerce mostly. So, Accounting

and Law are closely related. The accountant and accounts officer must have a

clear knowledge of partnership law, company law, tax law, industrial law,

cooperative law, and other relevant laws. Because accounts of an organization

are kept following accepted principles and by relevant laws. For example,

accounts of every company are kept properly and accurately in light of company

law. In partnership business accounts are maintained in the light of the

partnership act or agreement as the case may be. Keeping accounts, auditing of

accounts of a company are mandatory as per the specific provision of the

companies act. Similarly, accounts of other organizations are to be kept by the

provisions of the relevant law. In this context, lawyers are to know the provision

of laws relating to methods of accounting, direction and controlling. Otherwise,

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it is impossible on their part to extend their help in settling conflicts and cases

properly. Therefore, both Accounting and Law are closely related subjects.

Accounting and Statistics

Accounting and Statistics are deeply related. The main objective of accounting

and statistics is to make arithmetical figures understandable and logical, then

present them in the form of statements making them useful to owner, directors

or all concerned parties. It makes the act of planning and decision-making easier.

The main duty of statistics is to collect classify, analyses the quantitative data of

various events and to present them to the parties concerned. For this reason, a

statistician presents the data in quite a short form of reports to the individuals

or organization concerned so that they can make decision depending on the

information presented to them. In Accounting, after completion of some

accounting processes of transactions, final accounts and financial statements

are prepared and on the basis of various information of such financial

statements; the owners and the directors of the business can take decisions.

1.5: Differences between Financial Accounting, Cost Accounting and

Management Accounting

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Difference between Financial Accounting and Cost Accounting

Basis of
Financial Accounting Cost Accounting
difference

Present the financial position Assess the cost of a

Emphasis and profitability of the business product, service, or

as a whole process

Serves the interests of all Serves the interests of

Purpose
stakeholders internal management

Both actual figures as

well as with pre-

Deals with Actual facts and figures
determined/ estimated

costs

Planning Does not attach any importance Focuses on proper

and control to planning and control planning, operation,

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 control, and decision-

making.

External reporting (creditors,

Nature of shareholders, government, Internal reporting

reporting investors, and persons outside (company’s management)

the management)

Daily, weekly, monthly,

Period Quarterly, half-yearly or annual
etc.

Comply with the requirements of According to

Adherence
the Companies Act, the Income management’s
to Law
Tax Act, etc. requirements

Kind of Operating results and financial

Cost reports
reports position

Stock Cost or market price, whichever

At cost
valuation is lower

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Take a look at this table below to learn more about the cost accounting and

financial accounting differences –

Parameters Cost Accounting Financial Accounting

Definition It is the branch of It is the branch of

accounting that helps to accounting that involves

compute the cost of product recording financial

and production in transactions effectively. In

general. It is mainly turn, it facilitates the

accountable for fixed costs, process of analysing the

overhead expenses, capital financial standing and

costs, selling price, etc. profitability of a firm in an

accounting period.

Purpose It accounts for cost per It represents the financial

unit of products. position of a firm

accurately.

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 Relative It provides valuable It is not useful in

Efficiency information about determining the relative

efficiency. efficiency of workers,

machinery, etc.

Reporting Time It is frequently prepared It is reported mostly at the

and monitored end of an accounting

accordingly. period.

Forecast Budgeting makes It cannot be forecasted.

forecasting possible.

Profit It only measures the It helps to measure the

measurement profitability of a product or overall profitability of a

a service. firm.

Stock Valuation It always takes into It always takes into account

account the cost price of either the cost or market

inventories. price.

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Difference Between Cost Accounting and Management Accounting

Comparison Chart

BASIS OF
COST ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

Meaning The recording, classifying The accounting in which the

and summarising of cost both financial and non-

data of an organisation is financial information are

known as cost provided to managers is

accounting. known as Management

Accounting.

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of Providing information to

production. managers to set goals and

forecast strategies.

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 BASIS OF
COST ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

Scope Concerned with Impart and effect aspect of

ascertainment, allocation, costs.

distribution and

accounting aspects of

cost.

Specific Yes No

Procedure

Recording Records past and present It gives more stress on the

data analysis of future projections.

Module-2

Ratio Analysis

(Total Lectures – 16)

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2.1: Meaning, Concept, Nature and Interpretation of Ratios

Meaning:

Ratio analysis is the quantitative interpretation of the company’s financial

performance. It provides valuable information about the organization’s

profitability, solvency, operational efficiency and liquidity positions as

represented by the financial statements. An analysis of financial statements with

the help of ‘accounting ratio’ is termed as Ratio Analysis. Ratio Analysis is a

process of determining and interpreting relationships between the items of

financial statements. Its purpose is to provide a meaningful understanding of

the performance and financial position of an enterprise. Thus, it is a technique

for analyzing the financial statements by computing ratios.

Nature:

 Ratios are designed to show how one number is related to another. It is

worked out by dividing one number by another. Ratios are customarily

presented either in the form of a coefficient or a percentage or as a

proportion.

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  Ratio analysis is a technique of analysis and interpretation of financial

statements. It is the process of establishing and interpreting various ratios

for helping in making certain decisions. However, ratio analysis is not an

end in itself. It is only a means of better understanding of financial

strengths and weaknesses of a firm.

 Calculation of mere ratios does not serve any purpose, unless several

appropriate ratios are analyzed and interpreted. There are a number of

ratios which can be calculated from the information given in the financial

statements, but the analyst has to select the appropriate data and

calculate only a few appropriate ratios from the same keeping in mind the

objective of analysis. The ratios may be used as a symptom like blood

pressure, the pulse rate or the body temperature and their interpretation

depends upon the calibre and competence of the analyst.

Interpretation of Ratios

The following are the four steps involved in the ratio analysis:

1. Selection of relevant data from the financial statements depending upon

the objective of the analysis.

2. Calculation of appropriate ratios from the above data.

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 3. Comparison of the calculated ratios with the ratios of the same firm in the

past, or the ratios developed from projected financial statements or the

ratios of some other firms or the comparison with ratios of the industry to

which the firm belongs.

4. Interpretation of the Ratios

2.2: Use and Significance of Ratio Analysis, Limitations of Ratio Analysis

The ratio analysis is one of the most powerful tools of financial analysis. It is

used as a device to analyze and interpret the financial health of enterprise. Just

like a doctor examines his patient by recording his body temperature, blood

pressure, etc. before making his conclusion regarding the illness and before

giving his treatment, a financial analyst analyses the financial statements with

various tools of analysis before commenting upon the financial health or

weaknesses of an enterprise.

‘A ratio is known as a symptom like blood pressure, the pulse rate or the

temperature of an individual.’ It is with help of ratios that the financial

statements can be analyzed more clearly and decisions made from such analysis.

The use of ratios is not confined to financial managers only. There are different

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parties interested in the ratio analysis for knowing the financial position of a firm

for different purposes.

The supplier of goods on credit, banks, financial institutions, investors,

shareholders and management all make use of ratio analysis as a tool in

evaluating the financial position and performance of a firm for granting credit,

providing loans or making investments in the firm. With the use of ratio analysis

one can measure the financial condition of a firm and can point out whether the

condition is strong, good, questionable or poor. The conclusions can also be

drawn as to whether the performance of the firm is improving or deteriorating.

Thus, ratios have wide applications and are of immense use today:

(a) Managerial Uses of Ratio Analysis:

Helps in decision-making:

Financial statements are prepared primarily for decision-making. But the

information provided in financial statements is not an end in itself and no

meaningful conclusion can be drawn from these statements alone. Ratio analysis

helps in making decisions from the information provided in these financial

statements.

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Helps in financial forecasting and planning:

Ratio Analysis is of much help in financial forecasting and planning. Planning is

looking ahead and the ratios calculated for a number of years work as a guide

for the future. Meaningful conclusions can be drawn for future from these ratios.

Thus, ratio analysis helps in forecasting and planning.

Helps in communicating:

The financial strength and weakness of a firm are communicated in a more easy

and understandable manner by the use of ratios. The information contained in

the financial statements is conveyed in a meaningful manner to the one for whom

it is meant. Thus, ratios help in communication and enhance the value of the

financial statements.

Helps in co-ordination:

Ratios even help in co-ordination which is of utmost importance in effective

business management. Better communication of efficiency and weakness of an

enterprise results in better co-ordination in the enterprise.

Helps in Control:

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Ratio analysis even helps in making effective control of the business. Standard

ratios can be based upon proforma financial statements and variances or

deviations, if any, can be found by comparing the actual with the standards so

as to take a corrective action at the right time. The weaknesses or otherwise, if

any, come to the knowledge of the management which helps in effective control

of the business.

(b) Utility to Shareholders/Investors:

An investor in the company will like to assess the financial position of the

concern where he is going to invest. His first interest will be the security of his

investment and then a return in the form of dividend or interest. For the first

purpose he will try to asses the value of fixed assets and the loans raised against

them. The investor will feel satisfied only if the concern has sufficient amount of

assets. Long-term solvency ratios will help him in assessing financial position of

the concern. Profitability ratios, on the other hand, will be useful to determine

profitability position. Ratio analysis will be useful to the investor in making up

his mind whether present financial position of the concern warrants further

investment or not.

(c) Utility to Creditors:

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The creditors or suppliers extend short-term credit to the concern. They are

interested to know whether financial position of the concern warrants their

payments at a specified time or not. The concern pays short- term creditor, out

of its current assets. If the current assets are quite sufficient to meet current

liabilities then the creditor will not hesitate in extending credit facilities. Current

and acid-test ratios will give an idea about the current financial position of the

concern.

(d) Utility to Employees:

The employees are also interested in the financial position of the concern

especially profitability. Their wage increases and amount of fringe benefits are

related to the volume of profits earned by the concern. The employees make use

of information available in financial statements. Various profitability ratios

relating to gross profit, operating profit, net profit, etc. enable employees to put

forward their viewpoint for the increase of wages and other benefits.

(e) Utility to Government:

Government is interested to know the overall strength of the industry. Various

financial statements published by industrial units are used to calculate ratios

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for determining short-term, long-term and overall financial position of the

concerns. Profitability indexes can also be prepared with the help of ratios.

Government may base its future policies on the basis of industrial information

available from various units. The ratios may be used as indicators of overall

financial strength of public as well as private sector, in the absence of the reliable

economic information, governmental plans and policies may not prove

successful.

(f) Tax Audit Requirements:

Section 44 AB was inserted in the Income Tax Act by the Finance Act, 1984.

Under this section every assesse engaged in any business and having turnover

or gross receipts exceeding Rs. 40 lakh is required to get the accounts audited

by a chartered accountant and submit the tax audit report before the due date

for filing the return of income under Section 139 (1). In case of a professional, a

similar report is required if the gross receipts exceed Rs 10 lakh.

Limitations of Ratio Analysis:

The ratio analysis is one of the most powerful tools of financial management.

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Though ratios are simple to calculate and easy to understand, they suffer from

some serious limitations:

1. Limited Use of a Single Ratio:

A single ratio, usually, does not convey much of a sense. To make a better

interpretation a number of ratios have to be calculated which is likely to confuse

the analyst than help him in making any meaningful conclusion.

2. Lack of Adequate Standards:

There are no well accepted standards or rules of thumb for all ratios which can

be accepted as norms. It renders interpretation of the ratios difficult.

3. Inherent Limitations of Accounting:

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Like financial statements, ratios also suffer from the inherent weakness of

accounting records such as their historical nature. Ratios of the past are not

necessarily true indicators of the future.

4. Change of Accounting Procedure:

Change in accounting procedure by a firm often makes ratio analysis misleading,

e.g., a change in the valuation of methods of inventories, from FIFO to LIFO

increases the cost of sales and reduces considerably the value of closing stocks

which makes stock turnover ratio to be lucrative and an unfavorable gross profit

ratio.

5. Window Dressing:

Financial statements can easily be window dressed to present a better picture of

its financial and profitability position to outsiders. Hence, one has to be very

careful in making a decision from ratios calculated from such financial

statements. But it may be very difficult for an outsider to know about the window

dressing made by a firm.

6. Personal Bias:

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Ratios are only means of financial analysis and not an end in itself. Ratios have

to be interpreted and different people may interpret the same ratio in different

ways.

7. Un-comparable:

Not only industries differ in their nature but also the firms of the similar business

widely differ in their size and accounting procedures, etc. It makes comparison

of ratios difficult and misleading. Moreover, comparisons are made difficult due

to differences in definitions of various financial terms used in the ratio analysis.

8. Absolute Figures Distortive:

Ratios devoid of absolute figures may prove distortive as ratio analysis is

primarily a quantitative analysis and not a qualitative analysis.

9. Price Level Changes:

While making ratio analysis, no consideration is made to the changes in price

levels and this makes the interpretation of ratios invalid.

10. Ratios no Substitutes:

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Ratio analysis is merely a tool of financial statements. Hence, ratios become

useless if separated from the statements from which they are computed.

11. Clues not Conclusions:

Ratios provide only clues to analysts and not final conclusions. These ratios have

to be interpreted by these experts and there are no standard rules for

interpretation.

2.3: Classification of Ratios: Liquidity Ratios, Solvency Ratios

Ratios may be classified in the following two ways:

i. Traditional classification

ii. Functional classification

1. Traditional classification

Traditional classification of ratios is done on the basis of the financial

statements from which the ratios are calculated. Under the traditional

classification, the ratios are classified as: (i) Balance sheet ratios, (ii) Income

statement ratios and (iii) Inter-statement ratios.

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(i) Balance sheet ratio

If both items in a ratio are from balance sheet, it is classified as balance sheet

ratio.

(ii) Income statement ratio

If the two items in a ratio are from income statement, it is classified as income

statement ratio.

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(iii) Inter-statement ratio

If a ratio is computed with one item from income statement and another item

from balance sheet, it is called inter-statement ratio.

2. Functional classification

Functional classification of ratios is based on the purpose for which ratios are

computed and it is the most commonly used classification. Under the

functional classification, the ratios are classified as follows:

(i) Liquidity ratios

(ii) Long term solvency ratios

(iii) Turnover ratios

(iv) Profitability ratios

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2.5: Guidelines or Precautions for Use of Ratios

The calculation of ratio is very easy. But, the interested party or analyst should

be very cautious while analyzing and interpreting the ratios. The following

guidelines or factors may be kept in mind while analyzing and interpreting

various ratios.

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1. Accuracy of Financial Statements

The stronger of the building is based on its foundation. Likewise, the accuracy

of financial statements is based on the contents of the accounting records. The

ratios are calculated on the basis of the data of financial statements. The

reliability of ratios in these statements are directly associated with the

accuracy of information. Hence, the analyst should see whether proper

accounting concepts and conventions are used for preparing financial

statements before calculating ratios. Such type of precautions enlarge the

reliability of ratios.

2. Objectives or Purpose of Analysis

The purpose of ratio analysis decides the types of ratios calculated. The

purpose is decided by the interested party or an analyst. If the purpose is

knowing long term solvency of the business concern, the long term solvency

ratios are calculated. Therefore, different objectives may require the calculation

of different ratios.

3. Selection of Ratios

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The selection of ratio should be matched with objectives of analysis.

Sometimes. large number of ratios are calculated without considering the

purpose of analysis and interpretation. In such a case, there is a possibility of

getting confusion instead of achieving the objectives.

4. Use of Standards

The financial position, strength and weakness of a business concern

is.determined if the calculated ratios are compared with standard ratios of the

concerned industry. These standards may be rule of thumb as in the case of

current ratio (2:1) and liquidity ratio (1:1) i.e. industry standards. If not so, an

analyst cannot arrive at conclusion.

5. Skill of Analyst

The skill and experience of the analyst are highly required for proper analysis

and interpretation of ratios. A wrong interpretation leads to wrong conclusion.

Finally, the top management or interested party may take wrong decision.

Hence, the utility of ratio is linked with expertise of the analyst.

6. Ratios provide a Base Only

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The calculated ratios provide only a base to the analyst. He need not rely fully

on the ratios. He should study other relevant information, situation in the

business concern, policy of the government changes, changes in the customers’

expectation, general economic condition and the like before reaching final

conclusions.

Module-3

Budgets and Budgetary Control

(Total Lectures – 16)

3.1: Meaning of Budget, Objectives of Budgetary Control and its use as a

management tool

A budget is a financial plan for a corporation that covers a specific future period.

It is an expression of income and expenditures over a certain period. Budgets

are plans that cover all functional areas of a business for a specific future period.

A budget is a system that is related to plan and control. Therefore, budgets also

include budgetary control. In a nutshell, a budget is concerned with policy

framing whereas control is the budgetary implementation of the policy. In a

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narrow sense, budgetary control is a cost control technique wherein actual cost

is compared to budgeted cost, and thus is aimed at profit.

Definitions

The main definitions of the budget are summarized as follows:

Brown and Howard: “The budget is a predetermined statement of management

policy during a given period which provides a standard for comparison with the

results actually achieved.”

George R. Terry: “A budget is an estimate of future needs arranged according to

an orderly basis covering some or all the activities of an enterprise for a definite

period of time.”

Harry L. Wyllie: “Budgets are finished products…They are formal programs of

future operations and expected results. Budgets result from forward thinking

and planning.”

Sanders: “The essence of a budget is a detailed plan of operations for some

specific future period, followed by a system of records which serves as a check

upon plan.”

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H. J. Weldon: “A budget is thus a standard with which to measure the actual

achievement of people, departments, etc.”

Hemass C. Heiser: “A budget is an overall blueprint of a comprehensive plan of

operations and actions expressed in financial terms.”

Budgetary Control

Budgetary control does not merely involve the matching of estimated expenses

to actual expenses. In addition, it involves placing responsibility for failures.

The periodic checking up of income, costs, and expenses related to the

administration of the budget is known as budgetary control.

Objectives, Importance, and Functions of Budgetary Control

The main objectives of budgetary control are as follows:

1. Production efficiency. Budgetary control is a technique marked by advanced

planning for the effective use of materials. Thus, it leads to smooth production

chains.

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2. Success of costing records. Budgetary control improves the utility of cost

accounts, which provides knowledge about future costs. Hence, cost variations

can be minimized.

3. Future planning. Every producer plans a definite output for a specific period

for which it is possible to use budgets to estimate the required amount of finance,

materials, labor, and other expenditures.

4. Cost control. Budgetary control is useful for cost control because the

production process rotates around predetermined targets. Here, actual costs are

compared to budgeted costs and any variations are corrected by the

management.

5. Helpful in policy framing. Budgeting provides a tool through which basic

policies are periodically examined, restated, and established as guidelines for the

entire organization.

6. Budgets are solutions to basic problems. Budgeting obliges management to

make an early study of its basic problems. It is useful in making rational

decisions.

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7. Control on income and expenditure. In modern times budgeting is used to

direct capital and energy into the most profitable channels. Every producer

classifies expenditure, and fixed expenses and variable expenses are useful to

learn the break-even points for output and sales.

8. Knowledge of required capital. Budgetary control provides information about

the amount of capital required for the smooth running of the organization.

9. Knowledge of potential for expansion. Every business leader aims to expand

their business. Budgetary control provides helpful information about how much

extra capital, labor, and risk will be needed for expansion efforts.

10. Administrative usefulness. Budgetary control is the eye of the managerial

staff. No other form of management control reveals weaknesses in an

organization as quickly as the orderly procedure needed for systematic

budgeting.

11. Helpful to the nation. When proper budgeting is undertaken in nearly every

enterprise, it can bolster the national economy by providing stable employment,

economical use of tools, and effective prevention of waste.

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Budgetary Control Objectives – Planning, Coordination, Control, Optimum

Employment of Capital, and Responsibility Accounting

The objectives of budgetary control system are usually summarised under five

heads:

1. Planning,

2. Coordination,

3. Control,

4. Optimum employment of capital, and

5. Responsibility accounting.

Objective # 1. Planning:

A budget is nothing but a plan. Budgeting involves drawing up detailed plans

relating to different functions like production, sales, raw material requirements,

labour requirements, research programmes, etc. When plans are made in

advance, many problems are anticipated long before they arise and solutions can

be sought through careful study.

Objective # 2. Coordination:

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Coordination is the process whereby different sections of a business work

towards achievement of the common goal. Budgets provide a means of

coordination for the business as a whole. While making budgets, various factors

like production, sales, etc., are balanced and coordinated.

Objective # 3. Control:

Control is the action necessary to ensure that planned objectives are being

achieved. Budgetary control makes control possible by comparing the actual

performance against planned performance and taking action on the basis of

variations between the two.

Objective # 4. Optimum employment of capital –

The resources required for achieving the firm’s objectives are estimated and are

made available.

Objective # 5. Responsibility accounting –

Each individual is entrusted with well-defined responsibilities and they are made

accountable.

Budgetary Control – Techniques

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The technique of budgetary control involves the following:

i. Establishment of a budget for each activity or section of the organisation.

ii. Establishment of budgets for each function like sales, production, purchase,

etc.

ii. Measurement of actual performance.

iii. Comparison of actual performance with budgeted performance to find out

variations, if any.

iv. Ascertainment of the reasons for such variations and taking suitable remedial

action.

Broadly speaking, budgetary control is a system of achieving the firm’s objectives

with minimum possible cost. Like standard costing, budgetary control also

provides a powerful tool to the management for efficient performance of its

functions.

3.2: Functions of Budgets, Planning Process, Budgetary Process and Stages

in Budget Process

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3.3: Various Types of Budgets: Sales Budget, Production Budget, Cash

Budget, Activity Based Budgeting, Fixed and Flexible Budgets Behavioral

Aspects in Budgeting

Classification of Budget:

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Budgeting is part of any business, and it’s done for control and planning. It

allows businesses to identify and set goals and objectives. This post takes a

closer look at the most common types of budgets and budget classifications.

Fixed costs along with variable costs may be present in any of these budget

configurations.

Master Budget

A master budget refers to a set of financial and operating budgets for a specific

accounting period. Typically, it is used for the following calendar year or fiscal

year. These budgets are prepared quarterly or annually. The master budget

format varies with the business nature in size. Operating budgets are used in

daily operations and serve as the basis for financial budgets.

Operating budgets include sales, production, direct labor, direct materials,

overhead, administrative expenses, selling, cost of goods manufactured, and cost

of goods sold. Financial budgets include a budgeted income statement along with

a balance sheet, cash budget, and capital expenditures budget. Budgeted income

statement and budgeted balance sheets are also known as pro forma financial

statements.

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Operating Budget

The operating budget refers to the budget for income statement elements

including revenue and expenses. Within this budget, you may have several other

smaller budgets, such as:

Production Budget: This plans the production from the number of units and cost

to the types of products, plant capacity, operating cycle, make or buy policy, etc.

for the budgeting period. This budget is typically based on the sales budget. It is

the responsibility of the production manager.

Sales Budget: The planned sales in both quantity and value. The sales are

forecasted for the period, which is the sales manager’s responsibility.

Purchase Budget: This plans for each purchased item that each department

purchases. The purchase manager has to make this budget so that each

department can make bulk purchases.

Production Cost Budget: Also known as the manufacturing cost or work cost

budget, this includes the cost of raw material, labor, direct expenses, and factory

overheads. It shows the cost of production for the units that are budgeted for

production.
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Overheads Budget: This includes the factory overheads budget, the

administrative overheads budget, and the selling and distribution budget along

with others like the plant utilization budget and research and development

budget. The factory overhead factors in things such as the indirect labor cost,

indirect material cost, and other indirect expenses.

Financial Budget

The financial budget refers to the budget for the balance sheet elements. The

financial budget sandals the expected assets, liabilities, and stockholders equity.

Understanding the types of budgets and their classifications are crucial to

successful operations and profitability.

Cash Budget

A cash budget is a budget for expected cash inflows and outflows for the

budgeted period of time. It consists of four sections:

Receipts: This area lists the beginning cash balance along with cash collections

from customers and others.

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Disbursements: This area shows all of the cash payments as characterized by

their purpose.

Cash Surplus or Deficit: In this section, the difference between the cash receipts

and cash disbursements is listed either as a surplus or a deficit.

Financing: This takes a look at the detail of expected borrowings and repayments

for the period.

It is intended to provide a picture of expected cash flow.

Static Budget

Also known as a fixed budget, this is the budget at the expected capacity level.

Because it is fixed, it is usually used by stable companies. This kind of budget

can be used by departments with operations that are independent of capacity

levels. For instance, operations of general marketing departments and

administrative departments don’t usually depend on the level of production and

sales, as procurement would. Instead, they are determined by the department’s

managers and as a result, the static budget can be used by the department.

Flexible Budget

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Also known as the expense budget, the flexible budget is the budget at the actual

capacity level. This budget is dynamic so it is commonly used by organizations.

Flexible budgets are adjusted to the actual activity of a company.

These types of budgets can easily be prepared with a computerized spreadsheet

like Excel. The relative relevant activity range is determined for the coming

accounting period. Then, costs that are to be expected as incurred over the

relevant range are analyzed. The costs are separated based on their cost Behavior

whether it be mixed, variable, or fixed. Finally, the flexible budget for variable

cost and different points throughout the range is prepared. Flexible budgets

match expenses to specific revenue levels or activity levels. For instance, the

utility costs can be correlated to the number of machines that are in operation.

Capital Expenditure Budget

The capital expenditure budget refers to the budget for expected investments in

capital assets and long-term projects. Typically it is prepared for 3 to 10 years.

Investments and capital assets include purchases of fixed assets such as

buildings, Machinery, equipment, lands, or plants. Long-term projects may be

designed to develop new products, reduce costs, expand existing product lines.

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Sometimes a Capital project committee is built to oversee the capital budgeting

process. The committee is usually separated from the budgeting committee.

Program Budgets

A program budget is a budget for a specific program or activity such as research

and development, engineering, training, marketing, or public relations. Program

budgets are created for product lines. As program budgets are typically generated

for activities across multiple departments these budgets cannot be used for

control purposes.

Zero-Based Budgeting

With zero-based budgeting (ZBB), you must determine what outcomes

management wants and develop a package of expenditures to sport that

outcome. Combining various outcome expenditure packages create a budget that

should result in a specific set of outcomes for the entire company. This approach

is most useful for service-level entities such as government where the provision

of services is crucial. It does however take a considerable amount of time to

develop compared to a static budget.

Budget Classifications
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Activity-Based Budget

Activity-based budgets are the budgets for the cost of individual activities. With

activity-based budgeting, all costs are allocated to cost centers and then assigns

to activities. Product or customers are allocated the cost based on the amount of

the activity they consume. Activity-based budgets and shirt performance

Improvement and cost reduction. 5th activity-based budgeting requires a new

budgeting model, it requires careful planning and implementation

Add-On Budget

An add-on budget is a budget based on the previous year’s budget that has been

adjusted for current information. Out on budgets can adjust for new

requirements, changes in employee wage rate, and levels of inflation.

Bracket Budget

A bracket budget is a budget at both higher and lower levels than the base

estimate. Bracket budgets are basically contingency plans for downside risks.

Budgets like this allow management to estimate and impact of decreased sales

on earnings. With bracket budgeting, managers can identify potential problems

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and acceptable profit levels. This way, management can test various alternatives

to improve the planning process.

Continuous (or Rolling) Budget

A continuous or rolling budget is a budget that is revised regularly. As the

accounting period ends a new budget period is added. For instance, the budget

can be extended for another month or quarter at the end of each month or

quarter. As a result of continuous budgets are based on the most recent info for

proper planning and performance. However, continuous budgets do require

continuous planning.

Rolling Forecast

A rolling forecast isn’t really a budget but instead of regular update to the sales

forecast. Most often, it is done on a monthly basis. The companies then model

that short-term spending based on the expected sales level. It is easy to update

and requires no budgeting infrastructure.

Incremental Budget

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Incremental what is adjusted for instrumental increases in terms of percentages

or dollar amount. Historically, incremental budgeting has been the most

common budgeting method. It is based on the previous year’s expenses. With

incremental budgeting, each line item receives the same incremental

adjustment, such as a 10% increase or decrease, for the next budget cycle. It’s

possible to separate projects into multiple increments. Each increment can be

allocated labor and other resources to finish the project. Incremental budgets

however do have multiple drawbacks. Because they are based on aggregate data

they may not always be accurate. They may not match company targets and may

lead to over or under funding in certain areas of the business.

Strategic Budget

The strategic budget is adjusted for strategic planning. They are used under

conditions that are unstable or uncertain. It uses a mixture of top-down where

top management allocates resources and bottom-up approaches where the lower

management also participates in resource allocation.

Stretch Budget

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A stretch budget is a budget based on sales and marketing forecasts higher than

estimates. They aren’t used to estimate expenses. Expenses are estimated at the

budget target. Stretch budgets are often complex and subjective.

Supplemental Budget

A supplemental budget is a budget for an area that is not included in the main

budget.

Target Budget

A target budget is a budget that matches major expenses to the company’s goals.

Any and all of these budgets are part of a company’s overall financial plan.

Companies may also have long-term or short-term budgets. Long term budgets

are for a year or more and are not for immediate use. Short-term budgets, on the

other hand, are meant for a year or less and are created with guidance from the

long-term budget. Of the budgeting models covered here, the static model is the

most common. Alternatively, companies may wish to use a rolling forecast to

adjust expenditures on the fly, to ensure it’s possible to match short-term sales

goals. It is highly flexible, so the rolling forecast approach is often the more

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productive budget model. Forecasting helps guide business decisions with real-

data, making it possible to choose the best course of action based on the current

state of affairs.

3.5: Preparation and Monitoring of Various Types of Budgets

Where does the budgeting process begin?

The budgeting process usually starts with the sales budget as everything else

that happens in a business depends on how much is sold. The quantities and

monetary values of sales set a limit on how much should be spent on buying

goods, how much should be spent on employing people to make and sell those

quantities and values and on most other operating costs such as rent and

electricity.

Where is data sourced?

Owners or managers look to information from within and outside the business

to begin this process. Internal sources of data are information that originates

from inside the organisation and external sources originate from outside the

organisation. This distinction is important to understand as internal sources of

data are always used as part of the regular budget process. However, managers
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must seek out external sources of data and then make a decision as to whether

that information is relevant for their future plans.

Examples of internal sources of data are:

From management – new or altered management policies and procedures

From the accountant - performance data from previous periods

From the marketing department – will the marketing effort change?

From the restaurant manager/chef – will the product range or menu change?

From the front office (derived demand) – will the hotel‟s occupancy change the

demand patterns of the hotel‟s restaurant?

From the restaurant manager – any planned special promotions.

However, internal sources of information must also be interpreted with care as

the following advantages and disadvantages highlight.

Advantages

The information is on the premises and accessible under normal circumstances

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Department managers and other colleagues can assist in the collation and

interpretation of the information

Disadvantages

Data reflects past rather than future activities, which is the focus of the budget.

Element 1: Prepare budget information

External data sources must also be used carefully to ensure they are reliable and

relevant for the budget that is being prepared. Sometimes owners and managers

find the time and cost involved in accessing information far outweighs the

benefits to the budget from that data.

Examples of external data sources are:

 Commercially available customer research

 Statistics on economic performance

 Direct observation of competitors

 Conversations with suppliers of goods or services to the business

1.2 Review and Analyse data

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Once owners and managers have collected internal and external sources of data,

the task begins where all sources of data must be reviewed and analysed for

applicability, relevance and readiness in the budget preparation process. The

quality of the final budget is only as good as the quality of the information that

is used to compile that budget. It is therefore important that owners and

managers devote appropriate time to this part of the budget process. To estimate

sales for the budget period requires detailed analysis and review. Beginning with

sales from previous years, owners and managers must combine the information

conveyed by both the internal and external data they have collected. Often

owners and managers find themselves answering questions such as:

 Will the product price increase or decrease?

 What, if any, will be the change to the volume of product sold?

 Will the timing of sales change from previous periods?

There are often many conversations between people in the business to help

determine what information is relevant and can be applied to sales

calculations in this budget period. Once owners and managers have a sales

goal in mind, budgeted expenses can be reviewed and analysed. Sometimes

it is simply a matter of recalculating or remodeling accounting figures. This

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 is usually when the expense increases by a set amount such as a rent

increase of 10%. Expenses such as supplies that depend on planned sales

activity may require further analysis and review. Managers once again

undertake many conversations with people inside the organisation to discuss

the external data that influences this expense over the budgeted period. It is

important to understand that this process of analysis and review takes time

and may change very often during the budget process. A well-managed budget

process can begin weeks or months before the start of the budget period.

Internal and external issues may arise which could potentially impact the

budget. These occasional and perhaps unforeseen issues must be dealt with

before or even after the budget is set.

1.3. Obtain senior management or other stakeholder input, where appropriate’

Introduction In a smaller business where there is one owner who must develop and use the

budget, there is no discussion or input from other people affected by the budget. This also

means there are no disagreements about the planned levels of activity. However, in a larger

business, say over 50 people, the process of reviewing and analysing data can lead to

disagreements over the best way to set the budget to meet the business' objectives. To manage

potential disagreements, managers attempt to include all stakeholders to discuss and then agree

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 on the budget. The most widely used way to do this is to set up a budget committee. The budget

committee The budget committee is at least made up of the owners of the business or their

representative (Managing Director, Chief Executive), department or activity centre managers

and the accountant. During the budget process, the committee meets often to discuss progress

and at the end of the process is responsible for distributing the budget throughout the

organisation. Before the budget committee can begin the budget process, the owners of the

business must communicate the objectives they hope the business to achieve in the following

year. For example, a travel company may wish to expand its tour guide business; a restaurant

may open for lunch instead of dinner as a way of increasing sales. The budget committee must

attempt to satisfy these objectives. The budget committee is required to follow approved

guidelines set out in the budget manual. These guidelines detail the time the budget process

should take, any templates that need to be used and other such information.

1.3 Communication and co-operation

Once the budget committee begins, the process of creating budgets it becomes

necessary to discuss various aspects of the budget with other colleagues who

are involved in making the budget work but not in preparing the budget. This

may be to confirm that sales targets are possible. For example, there would

be no point introducing a lunch sitting if there were no staff willing to work.

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 Communication is best by direct conversation but may also take the form of

e-mails, newsletters, and department meetings. Sometimes stakeholders

attend budget committee meetings.

It is important to note that this communication is the responsibility of the

budget committee through department or activity centre managers. It is very

important that department and activity centre managers gain the co-

operation of colleagues affected by the budget. The larger the organisation,

the more demand each department or activity centre has on the resources of

the business. Co-operation is always best when stakeholders are consulted

and included in the budget process.

Summary

Prepare budget information

 Budgets are a tool used by managers to plan for the future and monitor the performance

of their business.

 The budget provides a useful management tool in the Tourism and Hospitality

industries as revenue and expenses are particularly subject to seasonal fluctuations.

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  Time and cost of creating budgets must be balanced with the benefits derived from

budgeting.

 Businesses produce different types of budgets depending on their size, structure and

purpose for planning revenue and expenses Remember that the first budget produced

is the sales budget.

 Managers gather, review and analyse internal and external information to help prepare

budgets Communication and co-operation are essential to a successful budget process.

 A top down approach to budgeting features minimal stakeholder input.

The Budget committee is an example of a bottom up approach to budgeting, providing a forum

for all stakeholders to be included in the budget process.

Module-4

Marginal Costing

(Total Lectures – 16)

4.1: Introduction, Concept of Marginal Costing, Characteristics of Marginal

Costing

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Marginal costing is a method of costing that is concerned with changes in costs

resulting from changes in the volume or range of output and sales. An increase

or decrease in total costs that is caused by an increase or decrease in the volume

of production and sales is known as marginal cost, differential cost, or

incremental cost. Thus, marginal costs relate to future costs and can be

determined by subtracting the total at one level of output or sale from that at

another level.

Important Definitions

 D. Joseph: “Marginal costing is a technique of determining the amount of

change in the aggregate cost due to an increase of one unit over the

existing level of production.”

 Harold J. Wheldon: “Other things being equal, the fixed overhead will, in

total remain fix during changes in production achieved and the rate per

unit will consequently vary whereas that variable overhead will remain

constant per unit of production and vary in total.”

 The Institute of Cost and Management Accountants, London, has

defined Marginal Costing as “the ascertainment of marginal costs and of

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 the effect on profit of changes in volume or type of output by differentiating

between fixed costs and variable costs”.

In this technique of costing only variable costs are charged to operations,

processes or products, leaving all indirect costs to be written off against profits

in the period in which they arise. Thus, in this context, marginal costing is not

a system of costing such as process costing, job costing, operating costing, etc.

but a technique which is concerned with the changes in costs and profits

resulting from changes in the volume of output. Marginal costing is also known

as ‘variable costing’.

It should be noted that marginal costs refer to the increase or decrease in costs

on account of the block of units produced or sold. The marginal costs per unit

remain the same.

The technique of marginal costing is based on the distinction between product

costs and period costs. Only the variable costs are regarded as the costs of the

products while the fixed costs are treated as period costs which will be incurred

during the period regardless of the volume of output.

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The main characteristics of marginal costing are as follows:

a. It is a technique of analysis and presentation of costs which help management

in taking many managerial decisions and is not an independent system of costing

such as process costing or job costing.

b. All elements of cost—production, administration and selling and distribution

are classified into variable and fixed components. Even semi-variable costs are

analysed into fixed and variable.

c. The variable costs (marginal costs) are regarded as the costs of the products.

d. Fixed costs are treated as period costs and are charged to profit and loss

account for the period for which they are incurred.

e. The stocks of finished goods and work-in-process are valued at marginal costs

only.

f. Prices are determined on the basis of marginal cost by adding ‘contribution’

which is the excess of sales or selling price over marginal cost of sales.

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3. Assumptions of Marginal Costing:

The technique of marginal costing is based upon the following assumptions:

a. All elements of cost—production, administration and selling and

distribution—can be segregated into fixed and variable components.

b. Variable cost remains constant per unit of output irrespective of the level of

output and thus fluctuates directly in proportion to changes in the volume of

output.

c. The selling price per unit remains unchanged or constant at all levels of

activity.

d. Fixed costs remain unchanged or constant for the entire volume of production.

e. The volume of production or output is the only factor which influences the

costs.

Advantages and disadvantages of marginal cost pricing

Advantages

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  It is a relatively simple pricing method - quick to calculate and easy to

implement Can help to smooth fluctuations in demand.

 It can be very useful where the firm has spare capacity and may not be

able to put its resources to other, perhaps more profitable, uses.

 Can be a useful way to attract other different market segments into the

market e.g. low peak train travellers may be attracted by lower prices and

only travel during the day because of low prices - they may not otherwise

have travelled.

 Can be a good way to remain in business and price-competitive in a time

of difficult trading. Prices can then be raised later when the economic

situation improves.

Disadvantages

 Not sustainable as a long-term pricing strategy as the firm will need to

recover the full costs of production.

 Can result in lower price expectations and make it more difficult to raise

prices again at a later stage.

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  If markets are not fully separated then there can be leakage between the

markets with different prices. Customers who might have paid a higher

price may take advantage of the lower marginal cost price.

4.2 Difference between Absorption Costing and Marginal Costing

There are two alternative approaches for the valuation of inventory; they are Marginal

Costing and Absorption Costing. In marginal costing, marginal cost is determined by

bifurcating fixed cost and variable cost. Only variable costs are charged to operation,

whereas the fixed cost are excluded from it and are charged to profit and loss account

for the period. Marginal costing is a method where the variable costs are considered

the product cost, and the fixed costs are considered the period's costs. On the other

hand, absorption costing is a method that considers both fixed and variable costs as

product costs.

Converselty, Absorption costing or otherwise known as full costing, is a costing

technique in which all costs, whether fixed or variable are absorbed by the total units

produced. It is aminly used for reporting purposes, i.e. for financial and tax reporting.

There are many who say marginal costing is better, while others prefer absorption

costing. Absorption Costing is a method for inventory valuation whereby all the

manufacturing expenses are allocated to the cost centres to recognise the total cost

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 of production. These manufacturing expenses include all fixed as well as variable

costs. It is the traditional method for cost ascertainment, also known by the name Full

Absorption Costing. In an absorption costing system, both the fixed and variable costs

are regarded as product related cost. In this method, the objective of the assignment

of the total cost to cost centre is to recover it from the selling price of the product.

So, one should know the difference between marginal costing and absorption costing

to reach at conclusion, as to which one to be preferred over the other.

Comparison Chart

BASIS FOR
MARGINAL COSTING ABSORPTION COSTING
COMPARISON

Meaning A decision making Apportionment of total costs

technique for to the cost center in order to
ascertaining the total determine the total cost of
cost of production is production is known as
known as Marginal Absorption Costing.
Costing.

Cost Recognition The variable cost is Both fixed and variable cost is
considered as product considered as product cost.
cost while fixed cost is
considered as period
costs.

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 BASIS FOR
MARGINAL COSTING ABSORPTION COSTING
COMPARISON

Classification of Fixed and Variable Production, Administration

Overheads and Selling & Distribution

Profitability Profitability is measured Due to the inclusion of fixed

by Profit Volume Ratio. cost, profitability gets
affected.

Cost per unit Variances in the Variances in the opening and

opening and closing closing stock affects the cost
stock does not influence per unit.
the cost per unit of
output.

Highlights Contribution per unit Net Profit per unit

Cost data Presented to outline Presented in conventional

total contribution of way.
each product.

4.3 Cost-Volume-Profit Analysis, Break Even Chart, Break Even Point,

Profit Volume Ratio and Margin of Safety

Cost-Volume-Profit (CVP) Analysis

Profit depends upon numerous factors. The most crucial include the manufacturing cost,
the volume of sales, and the selling price of the product. These three factors of cost,
volume, and profit share a connection and are interdependent.

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Profit depends on sales, the sales price depends on the cost, and the volume of sales
depends on the volume of production. In turn, this depends on the volume of
production, which bears a relationship to the cost.

Thus, cost-volume-profit (CVP) analysis measures changes in cost in relation to

changes in volume. Volume is the most crucial factor that affects cost.

Importance of CVP

CVP analysis is important because it assists in the following areas:

(i) Determining output volume: Knowing the most profitable level of output aids
operations and ensures that production capacity is optimally utilized.

(ii) Selecting the best alternative: CVP analysis helps to clarify the most suitable
course of action.

(iii) Making purchase decisions: CVP analysis helps decide whether to buy a product
from the market or produce it. Matching the purchase price to the cost of output helps
make this choice.

(iv) Deciding between men and machinery: CVP analysis helps determine which
suitable method to adopt for manufacturing a particular product: machinery or man.

Profit-Volume Ratio (PVR)

The profit-volume ratio (PVR) helps determine the profitability of the business. This
ratio, expressed as a percentage, correlates with contribution and sales.

Formula

PVR = (C x 100) / S
C = Sales – Variable cost

Example

 Fixed expenses: $80,000

 Sale per unit: $20
 Variable cost per unit: $15
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Here, C = 20 – 15 = 5. Thus, PVR = (5 / 20) x 100 = 25%.

A high PVR indicates high profitability. PVR also helps to determine the break-even
point (BEP) profit at any volume of sales.

Margin of Safety
The margin of safety (MOS) is the excess output in units or sales over the BEP output
(units) and sales. The margin indicates profitability in a situation involving no danger of
loss.

Formula

MOS is calculated as follows:

MOS = Present sales – BEP (sales)

= (Excess sales x 100) / Total present sales

Another formula is the following:

 MOS = net profit / PVR

Example

 Present sales: $100,000

 Variable cost: $50,000
 Fixed cost: $30,000

MOS is calculated as follows:

 PVR = (C / 5) x 100 = (50,000 / 100,000) x 100 = 50%

 BEP (sales) = fixed exp. / PVR
 BEP (sales) = 30,000 / 50% = (30,000 x 100) / 50 = $60,000
 Net profit (NP) = contribution – fixed cost = 50,000 – 30,000 = $20,000
 Margin of safety (MOS) = actual sales – BEP sales
o = 100,000 – 60,000
 MOS = 40,000

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Alternatively,

 MOS = NP / PVR
o = 20,000 / 50% = (20,000 x 100) / 50 = 40,000
 Margin of safety in percentage = (40,000 / 100,000) x 100 = 40%

A high MOS indicates that a business is financially sound. When the MOS lacks strength,
the following actions are recommended:

 Reduce the fixed cost

 Reduce the variable cost
 Increase the sales price
 Improve contribution by changing the sales mix

Angle of Incidence

This angle is the reverse of the MOS and shows when output and sales will be lower
than the BEP output (units) and sales. The angle indicates loss and is formed with the
sales line and the total cost line at the BEP point.

Consider the following information:

 BEP unit: 16,000

 Present output: 15,000 units

Calculate the loss when the sale per unit is $20 and the variable cost is $15.

 Angle of incidence = Present output – BE product (15,000 – 16,000 units)

o = 1,000 units
 Loss = 1000 x C (5) = $5,000

CVP analysis looks at the effect of sales volume variations on costs and operating profit. The
analysis is based on the classification of expenses as variable (expenses that vary in direct
proportion to sales volume) or fixed (expenses that remain unchanged over the long term,
irrespective of the sales volume). Accordingly, operating income is defined as follows:

Operating Income = Sales – Variable Costs – Fixed Costs

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A CVP analysis is used to determine the sales volume required to achieve a specified profit level.
Therefore, the analysis reveals the break-even point where the sales volume yields a net operating
income of zero and the sales cutoff amount that generates the first dollar of profit.

Cost-volume profit analysis is an essential tool used to guide managerial, financial and investment
decisions.

COST-VOLUME PROFIT ANALYSIS

Contribution Margin and Contribution Margin Percentage

The first step required to perform a CVP analysis is to display the revenue and expense line items
in a Contribution Margin Income Statement and compute the Contribution Margin Ratio.

4.4: Make or Buy Decision, Change in Product Mix, Pricing Decisions,

Exploring a New Market and Shut-down Decisions

A make-or-buy decision refers to an act of using cost-benefit to make a

strategic choice between manufacturing a product in-house or purchasing from
an external supplier. It arises when a producing company faces a diminishing
capacity, experiences problems with the current suppliers, or sees changing
demand.

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 The make-or-buy decision compares the costs and benefits that accrue by
producing a good or service internally against the costs and benefits that result
from subcontracting. For an accurate comparison of costs and benefits,
managers need to evaluate the benefits of purchasing expertise against the
benefits of developing and nurturing the same expertise within the company.

Summary

 A make-or-buy decision refers to an act of choosing to develop a product in-

house or outsource its production from external vendors.
 Companies use the total transaction costs accrued in developing products to
reach a make-or-buy decision.
 Make-or-buy decisions reward firms with a competitive advantage and reduce
the cost of production and capital investment.

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Understanding Make-or-Buy Decisions

Managers must incorporate in-house production costs when considering in-

house production. It includes all the transaction costs involved in creating the
product or service. It can also include extra labor needed for production,
monitoring costs, storage requirements costs, and waste product disposal costs
resulting from the production process.

Similarly, businesses must focus on both the production and transaction

costs when considering outsourcing from outside suppliers. For example, the
product’s price, sales tax charges, and shipping costs must be factored in.
Companies must also include inventory holding costs, which comprise
warehousing and handling costs, as well as risk and ordering costs.

The make-or-buy decision is sometimes treated as a financial or accounting

decision. While it is important to conduct an accounting assessment and settle
for the low-cost approach, it is more crucial to understand the basis of the
decision.

Thus, companies must consider the strategic dimension of make-or-buy choices

because they determine the profitability of the company and play an important
role in its financial health. They can impact corporate strategy, core
competence, cost structure, customer service, and flexibility.

Make-or-Buy Decision Triggers

A company’s decision on whether to make or buy is based on its core

competence. The production cost and quality problems are the major triggers
of a make-or-buy decision. Other factors are managerial decisions and a
company’s long-term business strategy that dictate the current operations
pattern.

Historical policy decisions may also compel a company to consider in-sourcing

or outsourcing. Businesses can use such patterns to procure some parts of
services from outside suppliers regardless of the company’s capability. Within
the framework, the trend towards in-sourcing can be attributed to better quality

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control, existing idle production capacity, or unsatisfactory performance of
outside suppliers.

In contrast, factors that may trigger a company to outsource a part rather than
produce internally include the need for multiple sourcing, lack of internal
expertise, cost reduction, the introduction of a new product or modification of
an existing product or service, and reduced risk exposure. A company with a
previous reputation for successfully providing outsourcing services may be
considered to sustain a long-term relationship.

Make-or-Buy Decision Criteria

Setting up a standard make-or-buy process that applies to all companies is a

complicated process. It is partly due to companies’ distinct behavior patterns
and the fact that businesses operate in different business environments that are
unique to each business. However, cost accounting remains the primary
dimension of the make-or-buy decision.

Companies evaluate outsourcing to determine if the current overhead costs can

be minimized to access new resources. While cost remains the hallmark of any
business decision, other factors such as strategic, technological, core
competency, risks, and relationships, also constitute outsourcing decisions, not
to mention factors involved in developing and introducing a new product.

For example, managers can consider research and development (R&D), design,
engineering, manufacturing, and assembly as sources of production costs when
conducting an actual cost analysis. The competitors’ financial capabilities and
technological abilities should also be evaluated during a sourcing decision.
Companies can evade the pitfalls typical with make-or-buy decisions when the
cost is the only variable used when considering the technological aspects.

Benefits of a Make-or-Buy Decision

A make-or-buy decision framework relates to autonomy, and a company selects

from the many advanced options to account for various factors associated with
outsourcing.

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1. Lower costs and higher capital investments

One of the most notable advantages that a company enjoys when embracing a
make-or-buy decision approach is that it can lower costs and increase capital
investments, regardless of whether it decides to make materials in-house or
subcontract from an external vendor.

2. Source of competitive advantage

A rigorous make-or-buy analysis can also act as a source of competitive

advantage. For example, a company can increase the value it delivers to
customers and shareholders from its core service and skills. It can also stay
flexible by adopting a make-or-buy decision approach.

Such a company is better placed to weather the storm of a market downturn.

To realize the benefits, companies must consider the internal and external
environment in which they operate. In particular, the culture in which such
decisions are reached, and the agenda of the parties involved can influence the
decisions and their implementation, as well as the sustainability of the policy.

4.4 Application of Marginal Costing, Limitations of Marginal cost

Marginal costing technique has the following limitations:

 In marginal costing, costs are classified into fixed and variable.

Segregation of costs into fixed and variable is rather difficult and
cannot be done with precision.
 Marginal costing assumes that the behavior of costs can be
represented in straight line. This means that fixed costs remains
completely fixed over a period at different levels and variable costs
change in linear pattern i.e. the change is proportion to the change in
volume. In real life, fixed costs are liable to change at varying levels of
production especially when extra plant and equipments are introduced
and hence variable costs may not vary in the same proportion as the
volume.
 Under marginal costing technique fixed costs are not included in the
value of stock of finished goods and work-in-progress. As fixed costs
are incurred, these should also form part of the costs of the product.
Due to this elimination of fixed costs from finished stock and work-in-

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 progress, the stocks are understated. This affects the results of profit
and loss account and the balance sheet. Thus, profit may be
unnecessarily deflated.
 In the marginal costing system monthly operating statements will not
be as realistic or useful as under the absorption costing system. This is
because under this system, marginal contribution and profits vary with
change in sales value. Where sales are occasional, profits fluctuate
from period to period.
 Marginal costing fails to give complete information, for example rise in
production and sales may be due to extensive use of existing
machinery or by expansion of the resources or by replacement of the
labour force by machines. The marginal contribution of P/V ratio fails
to bring out reasons for this.
 Under marginal costing system the difficulties involved in the
apportionment and computation of under and over absorption of fixed
overheads are done away with but problem still remains as far as the
under absorption or over absorption of variable overheads is
concerned.
 Although for short term assessment of profitability marginal costs may
be useful, long-term profit is correctly determined on full costs basis
only.
 Marginal costing does not provide any standard for the evaluation of
the performance. Marginal contribution data do not reveal many
effects which are furnished by variance analysis. For example,
efficiency variance reflects the efficient and inefficient use of plant,
machinery and labour and this sort of valuation is lacking in the
marginal cost analysis.
 Marginal costing analysis assumes that sales price per unit will remain
the same on different levels of production but these may change in
real life and give unrealistic results.
 In the age of increased automation and technology advancement,
impact of fixed costs on product is much more than that of variable
costs. As a result a system that does not account the fixed costs is less
effective because a substantial portion of the cost is not taken into
account.
 Selling price under the marginal costing technique is fixed on the basis
of contribution. This may not be possible in the case of ‘cost plus
contracts’.
Thus the above limitations indicate that fixed costs are equally important in
certain cases.

Application # 1. Fixation of Selling Price:

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Marginal cost of a product represents the minimum price for that product and

any sale below the marginal cost would entail a cash loss. The price for the

product should be fixed at a level which not only covers the marginal cost but

also makes a reasonable contribution towards the common fund to cover fixed

overheads. The fixation of such a price for a product would be easier if its

marginal cost and overall profitability of the concern is known.

Application # 2. Maintaining a Desired Level of Profit:

The industry has to cut prices of its products from time to time on account of

competition, government regulations and other compelling reasons. The

contribution per unit on account of such cutting is reduced while the industry

is interested in maintaining a minimum level of its profits. In case the demand

for the company’s products is elastic, the minimum level of profits can be

maintained by pushing up the sales. The volume of such sales can be found out

by the marginal costing technique.

Application # 3. Accepting of Price Less than the Total Cost:

Sometimes prices have to be fixed below the total cost of the product. This

becomes necessary to meet the situation arising during trade depression. It will

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be enough in such periods if the marginal cost is recovered. The selling price

may be fixed at a level above this cost though it may not be enough to cover the

total cost. This is because in such periods any marginal contribution towards

recovery of fixed cost is good enough rather than not to have any contribution at

all. A price less than the total cost but above marginal cost may be acceptable

when a specific order has been received and it shall not affect the home market.

The additional sales revenue should be compared with the additional costs

(which are only marginal costs generally) and if the net revenue is greater, the

order should be accepted. In case the market is competitive and there is a fear

of adverse impact on existing sales in the long run, the decision should be taken

after careful study. Similar is the situation when order for exports is received by

the concerns. Exports at a price above the marginal cost but below the total cost

may be made since they don’t interfere in any way the sales in the home market.

Advantages of such practices are:

(i) Idle capacity of plant and machinery can be utilised and prevented

from deterioration.

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 (ii) Services of skilled labour and well trained employees could be

secured which will be difficult to obtain later, if discharged.

(iii) It prevents the competitors from securing the business of the firm.

(iv) The business would be ready to take advantage of favourable

business environment whenever it arises later.

Selling at marginal cost or even below the marginal cost may be

recommended in extraordinary situations e.g.:

(i) When it is desired to eliminate weak competitors;

(ii) When the production is to be kept continuing because otherwise

there is a danger of heavy losses on account of shut down;

(iii) When goods are likely to be perished by the passage of time;

(iv) When a new product is to be introduced in the market or an existing

one is to be made more popular;

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 (v) When one product can be sold with profit in combination with some

other product. The reduction in price of one may enable the business

to boost sales of other more profitable products;

(vi) When inventories have been piled up and recessionary trends are

there in the market leading to fall in market prices. To save the carrying

costs and safeguard against risk and uncertainty, it is advisable to sell

even below marginal cost. The risk of obsolescence is there on one hand

and uncertainty as to further fall in demand and consequently prices

is there on the other.

Application # 4. Decisions Involving Alternative Choices:

CVP analysis helps the management in making decisions involving

alternative choices.

This involves Cost Benefit Analysis as explained below:

Cost Benefit Analysis:

Cost Benefit Analysis (CBA) involves estimating the total benefits and

costs of a project in terms of their equivalent money value. It finds,

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 quantifies and adds all the positive factors of a project. These are called

as Benefits from the project. Then it identifies, quantifies and subtracts

all the Negatives i.e., Total Cost of the project.

The difference between the two indicates whether the planned action is

advisable or not. It may please be noted that cost benefit analysis could

be used for almost every decision which one undertakes, however, it is

most commonly used for taking financial decisions involving alternative

choices.

The following are the examples of such decisions:

(i) Should an additional sales person be hired or continue to work with

the existing staff by allowing them overtime?

(ii) Whether manual labour is to be replaced by machinery, wholly or

partly?

(iii) Whether free cash funds should be invested into securities or

building additional capacity?

There can be many such decisions, as discussed below:

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 (a) Determination of Product or Sales Mix:

Presuming that fixed costs will remain unaffected, decision regarding

sales/ production mix is taken on the basis of the contribution per unit

of each product. The product which gives the highest contribution

should be given the highest priority and the product, the contribution

of which is the least, should be given the least priority. A product giving

a negative contribution should be discontinued or given lip, unless

there are other reasons to continue its production.

(b) Exploring New Markets:

Decision regarding selling goods in a new market (whether Indian or

foreign) should be taken after considering the following factors:

(i) Whether the firm has surplus capacity to meet the new demand?

(ii) What price is being offered by the new market? In any case, it should

be higher than the variable cost of the product plus any additional

expenditure to be incurred to meet the specific requirements of the new

market.

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 (iii) Whether the sale of goods in the new market will affect the present

market for the goods? It is particularly true in case of sale of goods in

a foreign market at a price lower than the domestic market price. Before

accepting such an order from a foreign buyer, it must be seen that the

goods sold are not dumped in the domestic market itself.

(c) Discontinuance of a Product Line:

The following factors should be considered before taking a decision

about the discontinuance of a product line:

(i) The contribution given by the product – The contribution is different

from profit. Profit is arrived at after deducting fixed cost from

contribution. Fixed costs are apportioned over different products on

some reasonable basis which may not be very much correct. Hence,

contribution gives a better idea about the profitability of a product as

compared to profit.

(ii) The capacity utilisation, i.e., whether the firm is working to full

capacity or below normal capacity. In case a firm is having idle capacity,

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 the production of any product which can contribute towards the

recovery of fixed costs can be justified.

(iii) The availability of product to replace the product which the firm

wants to discontinue and which is already accounting for a significant

proportion of total capacity.

(iv) The long-term prospects in the market for the product.

(v) The effect on sale of other products. In some cases the

discontinuance of one product may result in heavy decline in sales of

other products affecting the overall profitability of the firm.

(d) Make or Buy Decisions:

Whether a particular part of the finished product is to be manufactured

within the industry or it has to be bought from outside will depend on

the consideration of marginal costs. The marginal cost of

manufacturing is to be compared with the purchase price of the

relevant material and if the marginal cost is more than the purchase

price, a decision as to buying it from the market can be taken. However,

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 there are certain non-cost factors also which must be taken into

account before making a final decision.

The factors are as under:

1. The part to be bought should be available whenever it is needed and

at the same price at which we are considering to buy it at present.

2. If there is difference in quality, specification etc. of the component to

be bought, it must be workable.

3. If production is not carried out, labour problems should not crop up.

The surplus labour force should be absorbed in other productive work.

(e) Shut-Down or Continue:

Sometimes a business is confronted with the problem of continuing or

suspending the business operations. Such suspension of business

operations may be of a temporary or a permanent nature. In the former

case it may be termed as ‘shut-down’ while in a latter case, it is termed

as ‘closing down’ business operations.

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 Shut-down may be necessary due to some temporary difficulties viz.,

depression in the market, inadequate availability of raw materials,

power, etc. While deciding whether to shut-down or not, a comparison

has to be made between the costs e.g., lay off or retrenchment

compensation to workers, loss of goodwill, packaging and storing, cost

of plant etc., and benefits e.g., saving of fixed costs, avoiding operating

losses etc. on account of shut-down. In case the benefits exceed the

costs it is advisable to shut-down or vice-versa.

In order to decide whether to continue operations or close down or give

up the project altogether, comparison should be made between the

revenues from continuing operations and revenues from complete

closing down and sale of the plant. In case the revenues from closing

down exceed the revenues from continuing operations of the business,

it will be advisable to close down the plant.

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 Application of Marginal Costing – In Making Short Term Decisions:

Make or Buy, Acceptance of Special Order, Discontinuing a

Product, Shut Down or Continuing

In short-term an organization is required to take many decisions to

maximise profit. The best use of existing capacity must be made to do

so. In short-term fixed costs remain same and decisions should be

made on the basis of contribution. In this situation, marginal costing

technique is used extensively.

It may be used for the following types of short-term decisions:

1. Make or Buy,

2. Acceptance of Special Order,

3. Discontinuing a Product,

4. Selection of Product Mix when there is Limiting Factor(s);

5. Shut Down / Continuation.

1. Make or Buy Decisions:

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 Many organisations buy different items from outside suppliers. For

example, in India, all automobile companies are buying different parts

or components from different suppliers – car battery from Exide, tyre

from MRF, fuel injecting system from MICO, etc. Almost all automobile

companies are buying at least 30% of parts and components from

outside suppliers.

A company may meet its own needs internally or may buy it from

external sources. The decisions on whether to manufacture

components in-house or buy them from outside suppliers are called

‘Make or Buy Decisions’.

A detailed analysis of cost and non-cost factors are to be made. Before

taking final decision, costs to ‘make’ and costs to “buy’ must be

calculated carefully.

Cost to make must be calculated on the basis of identical product

specifications, quality standard and quantity to be manufactured. Cost

to buy should include all cost to bring the product to the same condition

and location as if manufactured in-house. Freight, purchasing costs,

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 handling costs, transportation costs, inspection costs and inventory

holding cost are to be taken into consideration.

The following cost and non-cost factors must be taken into

consideration in any ‘make’ or ‘buy’ decisions.

Cost Factors:

i. Cost of materials and its availability at affordable price.

ii. Availability of labour and cost related to labour.

iii. Cost of acquisition of new technology, plant, machinery and

equipment.

iv. Cost of operation.

v. Cost of transportation.

vi. Cost of ordering and holding inventory.

vii. Cost to be paid to suppliers.

viii. Cost of stock out.

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 ix. Cost of construction of production facility.

x. Lease rent of production facility or machinery and equipment.

Non-Cost Factors:

i. Policy of the organization.

ii. Government’s policy (for example, present US government

discourage outsourcing).

iii. Trade union’s resistance.

iv. Reliability of supply.

v. Availability of suppliers with required technology.

vi. Secrecy of company production.

vii. Capability of the supplier to supply required quantity and quality.

viii. Effects on workers’ morale.

ix. Possibility of using idle capacity for other profitable purposes.

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 Faced with a make or buy decision, the manager can evaluate

alternative using marginal costing system. Based on marginal costing,

comparison is to be made between cost of buying the product or service

and the marginal cost of manufacture. Common fixed costs are

excluded from the analysis, as these are to be incurred in any way.

However, any specific fixed cost (i.e., related to decision) must be taken

into consideration.

Reasons for ‘Making’ vs. Reasons for ‘Buying’:

The following list of reasons are important to arrive at a decision to

make or buy:

Reasons for Making in-House:

i. The variable cost of manufacturing is less than the price quoted by

the suppliers.

ii. The design of the product or its processing is confidential.

iii. The technology and know-how is available with the organization.

iv. There is no shortage of skilled manpower.

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 v. The safety factor of the product is very important. If the law of the

land is very strict in safety matters, as in USA, then it is better to

manufacture in-house rather than buying from vendors. It is important

to mention here that in 2009-10 many auto companies had to call back

millions of cars for defective parts supplied by vendors. The companies

are – Toyota, Maruti, Honda, etc.

vi. It is difficult to transport the parts or products because it is too

heavy.

vii. Vendor’s failure to supply in time may upset your production and

delivery schedule which may lead to heavy penalty or even loss of future

contracts.

viii. Making will facilitate quality control and management of inventory.

ix. There is steady demand for the product.

Reasons for Buying:

i. The buying cost is less than in-house manufacturing cost.

ii. There is no idle capacity to manufacture the products or parts.

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 iii. The technology and know-how is not available with the company.

iv. The company cannot manufacture it from its own facility because of

‘environmental problem’.

v. The company wants to concentrate in its core area.

vi. The company wants that someone else to face seasonal, cyclical or

risky market demands.

vii. The government policy may not allow to manufacture 100% in-

house. Some portions must be purchased from small-scale

manufacturing enterprises.

Common Mistakes to Avoid in Decision Making:

At the time of making decision, the managers should not overlook the

following:

i. Sunk Cost – Sunk costs cannot be changed by any current or future

action, so ignore sunk cost for decision making.

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 ii. Unitised Fixed Cost – Sometimes fixed costs are divided by some

activity measure (number of units, number of machine hours or

number of labour hours) and charged to each product for product

costing purposes. At the time of making decision, the total fixed cost

should be taken into consideration rather than as a ‘per unit cost’.

iii. Common Fixed Cost – Common fixed costs are allocated to different

departments or product lines. At the time of making decision, common

fixed cost should be ignored because these are to be incurred in any

situation. It cannot be avoided.

iv. Opportunity Cost – At the time of making decision, due importance

should be given to opportunity cost. Many people treat opportunity

costs as less important than out of pocket costs. Pay proper attention

to identify the opportunity costs and include it in decision making

process.

2. Acceptance of Special Order:

A special order is a one-time order that is accepted without disturbing

the present production and sales. Generally, this type of order is

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 accepted when there is spare capacity. Sometimes special order can be

accepted even sacrificing the present sales. At the time of evaluating a

special order, many technical and non-cost factors are to be taken into

consideration but cost of executing the special order will be of

paramount importance.

The cost of executing the order must be calculated on the basis of

marginal cost. Any common fixed costs must be excluded. However,

specific fixed cost and tax benefit must be taken into consideration. For

special order, usually a lower price is charged than normal price.

However, it must be greater than the cost of executing the order.

3. Discounting a Product:

A company may produce several products. For different reasons (e.g.,

change in taste of the customers, competition etc.,) a product or more

than a product may not perform up to the expectation of the

management. In such a situation, the management may drop one / two

product(s) temporarily from production plan. At the time of dropping a

product, marginal costing technique is widely used.

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 At the time of taking decision, the following points are to be taken into

consideration:

i. No product will be discontinued if the contribution is positive.

ii. Total fixed cost (common) for the business as a whole will remain the

same or decrease.

iii. Share of fixed cost of discontinued product will have to be borne by

the remaining products.

iv. Effect on sale of other products because of discontinuation of a

product.

4. Selection of Product Mix when there is Limiting Factor(s):

Resources available to an organisation is not unlimited. Managers are

frequently faced with the problem of allocating limited resources for

maximising profits. A furniture manufacturing company, for example,

has a limited number of direct labour hours and a limited number of

machine hours.

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 In the short run, it may not be possible to recruit more staff or to install

new machinery. Because of the limited resources, the company cannot

manufacture the required quantity to satisfy the demand fully. This

limitation in terms of resources, which restricts the company’s ability

to satisfy demand, is called the Limiting Factor.

The limiting factor is also known as the Key Factor or the Principal

Budget Factor. It is called the principal budget factor because, the

influence of this factor must first be assessed at the time of making

functional budgets like production budget, purchase budget, etc.

CIMA, U.K. has defined “limiting factor” as – “The factor which, at a

particular time, or even a period, will limit the activities of an

undertaking. The limiting factor is usually the level of demand for the

products or services of the undertaking but it could be a shortage of

one of the productive resources, e.g., skilled labour, raw material or

machine capacity.”

The limiting factor may vary from time to time within an organisation.

The limiting factor is governed by both internal and external influences.

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 For example, during 2009-10 in sugar industry, the shortage of sugar

cane was a limiting factor for all sugar mills. It is an example of external

influence. It may happen that in 2010-11, the sugar cane may not be a

limiting factor but production capacity may become a limiting factor. It

is an example of internal influence.

In practice, many limiting factors are there. An organization may

produce different products which consume scarce resources (limiting

factors) in different proportions. At the time of allocation of scarce

resources, care should be taken so that the overall profit of the

organisation is maximised.

In short run, the fixed cost will remain same irrespective of the output.

Therefore, the maximisation of total contribution will lead to

maximisation of total profits. To maximise total contribution, an

organisation should not necessarily sell those products that have the

highest contribution per unit.

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 The organisation should sell those products that have highest

contribution per unit of limiting factors. It means ‘higher the

contribution per unit of limiting factor, the most profitable the product.’

For example, Tata Motors Ltd. manufactures two types of truck – 6

wheels and 10 wheels.

The selling price, variable costs and contribution are given below:

A glance at contribution per unit data suggests that 10 wheels truck is

more profitable than 6 wheels truck. However, in this case, 6 Wheels

Truck is more profitable than 10 Wheels Truck because contribution

per tyre of 6 wheels truck is Rs. 1,00,000 (Rs.6,00,000 / 6) but in case

of 10 wheels truck the contribution per tyre is Rs. 90,000 (Rs.

9,00,000/10).

Contribution per unit is to be taken into consideration only when there

is no limiting factor and there is enough demand.

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 Selection of Product Mix:

There may be one, two or more than two limiting factors.

Allocation of scarce resources is easy when there is only one limiting

factor (for example, either raw material or direct labour hours is a

limiting factor). If the number of limiting factors are two or more (for

example, both raw material and direct labour hours), the calculation of

product mix is complex.

(i) There is only one limiting factor; and

(ii) There are two or more limiting factors.

(i) There is Only One Limiting Factor:

In this case, the priority of production will depend upon the

contribution per unit of limiting factors. Product with highest

contribution per unit of limiting factor should be given first priority.

Similarly, product with lowest contribution per unit of limiting factor

should be given last priority.

(ii) There are Two or More than Two Limiting Factors:

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 Computation of product mix is very complex when there are two or more

than two limiting factors / products. In this case, it is not possible to

use the approach based on contribution per unit of limiting factors. If

the number of limiting factors are limited to two, the simultaneous

equation method can be adopted for calculating the optimal product

mix.

If the number of limiting factors as well as number of products are

several, the use of Linear Programming technique should be adopted to

get the optimal solution.

5. Shut Down / Continuation:

Temporary recession in trade or labour problem, etc., may compel the

management to take the decision whether the operating activities are

to be suspended or to be continued.

The marginal cost technique helps the management to take right

decision in this situation. Total shutdown cost is compared with the

loss to be incurred if the operation is continued. If the total shut down

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 cost is more than the loss to be incurred if the operation is continued,

then the operation should be continued.

If the total shut down cost is less than the loss to be incurred if the

operation is continued, then the operation should be suspended.

However, before taking final decision, the following factors should be

taken into consideration:

(i) The possibility of losing customers.

(ii) The possibility of losing the skilled labours.

(iii) The reaction of the labour unions and the Government.

(iv) The chance of obsolescence of raw materials in stock.

(v) The agreement with the suppliers.

(vi) The possibility of bad debts due to non-payment by the existing

customers.

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 (vii) The chance of obsolescence / over-depreciation of plant and

machinery. For example: In textile industry, the depreciation is more

during shut down period than the active period.

The shutdown cost includes the following:

(i) Unavoidable fixed cost;

(ii) Cost of maintenance of the plant and machinery;

(iii) Cost of overhauling the plant at the time of re-opening;

(iv) Cost of training of employees;

(v) Cost of new recruitment, etc.

Application of Marginal Costing – 11 Important Areas: Profitable

Product Mix, Make or Buy Decisions, Diversification of Production and

a Few Other Applications

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 One of the basic functions of management is to make decisions.

Decision-making process generally involves selecting a course of action

from among various alternatives.

Some of the important areas where marginal costing techniques are

generally applied, can be given as follows:

Application # 1. Selection of a Profitable Sales Mix or Profitable Product

Mix:

In case of a multi-product concern, there may arise a problem of the

selection of the suitable or profitable sales mix i.e., the determination

of the ratio in which various products are produced and sold.

For the purpose of determining the profitable sales mix, the amount of

contribution available under each alternative of sales mix is to be

considered and the sales mix giving maximum total contribution will be

selected. But the various problems arising out of change in the sales

mix e.g., limiting factors etc., must be properly considered.

Application # 2. Problem of Limiting Factors:

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 Limiting factor (also known as ‘key factor’) is a factor which limits

production and/or sales and thus prevents the manufacturing concern

from earning unlimited profits. The limiting factors or key factors may

be shortage of raw material, shortage of skilled labour and machine

capacity, market for sales etc.

In case of the existence of a key factor, a problem may arise as to which

product should be pushed more in order to maximise profits. Selection

of the profitable product shall be made on the basis of the contribution

per unit of limiting factor. The profitability of a product with reference

to limiting factor can be assessed as follows –

Profitability = Contribution per unit/Limiting Factor per unit

The higher the contribution per unit of limiting factor, the more

profitable is the product and vice versa.

Application # 3. Make or Buy Decisions:

Sometimes a manufacturer has to decide as to whether a certain

component or spare part should be manufactured in the factory (having

unused installed capacity) or bought from the market. In taking such a

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 ‘make or buy’ decision, the marginal cost of the component or spare

part should be compared with the market price. If the marginal cost is

lower than the market price, the component or spare part should be

manufactured in the factory itself.

However, the manufacturer must take into consideration any increase

in fixed costs or any limiting factor which may arise if the production

is undertaken in the factory. If the purchase price is lower than the

marginal cost and provided regular supply and proper quality of the

component are guaranteed by outside supplier, it should be purchased

from outside supplier.

Application # 4. Diversification of Production:

Sometimes a manufacturer may intend to add a new product to the

existing product or products to utilise the idle capacity, to capture a

new market or for some other purpose. In such a case, the

manufacturer or management is interested in knowing the profitability

of the new product before its production can be undertaken.

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 It is advisable to undertake the production of the new product if it is

capable of contributing something towards fixed costs and profit after

meeting out its variable cost of sales. Fixed costs are not to be

considered on the assumption that the new product can be

manufactured by existing resources without incurring any additional

fixed costs.

But if the introduction of a new product involves some specific or

identifiable fixed costs (which arise due to the new product), these

should be deducted from the contribution of the new product before

making any decision.

Application # 5. Fixation of Selling Price:

Marginal costing techniques assist the management in the fixation of

the selling price of different products. Marginal cost of a product is the

guiding factor in the fixation of selling price. Generally, the selling price

of a product is fixed at a level which not only covers the marginal cost

but also contributes something towards fixed costs. Hence, under

normal circumstances for a long period, the fixation of selling price is

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 done on the basis of the total cost of sales (i.e., by adding some margin

of profit to the total cost).

But in times of cut-throat competition, trade depression, in accepting

additional orders for utilising unused capacity and in exploring foreign

markets, the manufacturer may be ready to sell his products at a price

below total cost but not at a price below marginal cost. For fixing the

price at a level below total cost of sales, the manufacturer shall take

into account the overall profitability or P/V Ratio of the business

concern.

Thus, the fixation of selling price becomes easy where marginal cost,

overall P/V Ratio and the level of profits expected, are known. In case

of exports to foreign markets, the effect of various direct and indirect

benefits such as cash compensatory assistance, subsidies, import

entitlements and other special favours or benefits from the Government

should also be taken into account.

Further, pricing at or below marginal costs may be considered desirable

for a shorter period under certain special circumstances given below:

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 (i) To introduce a new product in the market or to popularise it.

(ii) To drive out weaker competitors from the market.

(iii) To maintain production in order to avoid retrenchment of

employees.

(iv) To keep the plant and machinery in gear.

(v) To avoid the loss of future markets.

(vi) To sell the goods of perishable nature.

(vii) To push up the sales of other conjoined profitable products.

Export Market vs. Home Market:

A firm engaged in supplying goods in the home market and having

surplus production capacity, may think of utilising it to meet export

orders at a price lower than that prevailing in the home market. Such

a decision is made only when the local sale is earning a profit i.e., when

its fixed costs have already been recovered by the local sales.

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 In such cases, if the export price is more than the marginal cost, it is

advisable to enter the export market. Any reduction in the selling price

in the local market to utilise the surplus capacity may adversely affect

the normal local sales.

However dumping in the export market at a lower price even below

marginal cost in order to capture future market, has no adverse effect

on local sales.

Application # 6. Alternative Methods of Manufacture:

Sometimes a manufacturer is faced with the problem of the application

of alternative methods of manufacture i.e., whether machine work or

hand work, employment of hand-driven machine or power-driven

machine or employment of one machine or another machine etc. For

the purpose of selecting the method of production to be adopted, a

comparison of the amount of contribution available under different

methods of manufacture shall be made.

The alternative providing the maximum contribution per unit shall be

considered to be more profitable. However, the limiting factor, if any,

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 involved in the method of production, must be given proper

consideration.

Application # 7. Operate or Shut Down Decision:

In case of a multi-product concern, it may be found that the production

of some of its products is being carried on at a loss. Under such a

position, the production of non-profitable products shall have to be

discontinued.

But if the choice is out of two or more products, the decision shall be

taken with reference to the amount of contribution or P/V Ratio of these

products. Production of the product giving the least amount of

contribution or least P/V Ratio should be discontinued on the

assumption that production capacity thus freed can be used to produce

other profitable products.

Application # 8. Maintaining a Desired Level of Profit:

Sometimes the management may be interested in maintaining a desired

level of profits under the conditions of a change in the sales price. The

volume of sales required to earn a desired level of profits can be

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 ascertained by applying marginal costing techniques. For ascertaining

the sales required to earn a desired level of profits, the following

formulae are applied –

Application # 9. Alternative Courses of Action:

Sometimes the management has to select a course of action from

amongst various alternative courses. Each course of action has its own

merits and limitations. The course of action to be selected should

ensure maximum profit to the business concern. The appraisal of the

various courses of action available is possible through the analysis of

contribution. The course of action ensuring highest contribution is

generally adopted by the management.

Application # 10. Profit Planning:

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 Profit planning is one of the important functions of management. It

relates to the attainment of maximum profit. Profit planning requires

the management to have the proper knowledge of the inter-relationship

of selling prices, sales volume, variable costs and fixed costs. Marginal

costing helps the management in ascertaining the profit position at the

various levels of operation through the technique of cost-volume-profit

analysis. Thus, the management can plan its operations at the

optimum level where profits are maximum.

Application # 11. Appraisal of Performance:

Cost accounting deals with costs and profits of each department,

product, branch etc., of the business separately. Marginal costing being

a technique of cost accounting, presents the comparative profitability

of each part or segment of the business to the management in an

analysed form. Thus, the management can know the efficiency or

inefficiency of each segment of the business and can plan in such a way

that the profits made by an efficient segment of the business are not

eaten away by some inefficient segment.

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 Application of Marginal Costing – Fixation of Selling Prices, Make or

Buy Decisions, Selection of a Suitable Product Mix, Alternative Methods

of Production and a Few Others

The most useful contribution of marginal costing is that it helps

management in vital decision making. Decision making essentially

involves a choice between various alternatives and marginal costing

assists in choosing the best alternative by furnishing all possible facts.

The information supplied by marginal costing technique is of special

importance where information obtained from total absorption costing

method is incomplete. Sometimes the information revealed by total

costing method is even misleading.

The following are some of the managerial decisions which are taken

with the help of marginal costing technique:

1. Fixation of selling prices.

2. Make or buy decisions.

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 3. Selection of a suitable product mix.

4. Alternative methods of production.

5. Profit planning.

6. Suspending activities, i.e., closing down.

1. Fixation of Selling Price:

Although prices are regulated more by market conditions of demand

and supply than by market conditions of demand and supply than by

management, yet fixation of selling prices is one of the important

functions of management. While fixing prices, the management has to

keep in view the level of profits to be earned.

In normal circumstances, the selling price fixed must cover total cost,

as otherwise, the profit cannot be earned. But under certain

circumstances, products may have to be priced below total cost. This

type of situation may arise in trade depression when there is a serious

fall in the demand for the products. Prices fixed during depression may

be below total cost but it should be equal to or more than marginal cost.

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 This is because fixed costs will have to be incurred even if production

is discontinued for a short period. If the products can be sold at a price

above marginal cost, the loss on account of fixed cost can be reduced

to that extent. In other words, any contribution towards the recovery of

fixed costs will reduce the losses which will be incurred if production is

stopped. As a word of caution, fixation of prices below total cost should

be made only on a short-term basis because no firm can afford losses

on a long-term basis.

However, under the following circumstances, selling prices may have to

be fixed even below the marginal cost:

i. When competitors are to be eliminated from the market.

ii. When a new product is introduced in the market and it has to be

made popular.

iii. When goods are of perishable nature and there is a stock of such

goods.

For Private Circulation

 iv. When depression seems temporary and closure of business may

mean breaking of business connections that can be re-established only

at a heavy expenditure.

v. When plant and machinery have to be kept in gear as idle machines

are liable to deteriorate.

Marginal costing presents information in such a way so as to enable

management to know the price limits within which it can operate.

2. Make or Buy Decisions:

Marginal costing helps management to decide whether the firm should

itself manufacture a component part or buy it from an outside firm.

This is particularly so when a component part is available in the market

at price below the firm’s own cost. This decision can be arrived at by

comparing the supplier’s price with firm’s own marginal cost. For

example, if total cost of making a component part is Rs. 18, consisting

of Rs. 15 as variable cost and Rs. 3 as fixed cost.

Suppose, the same component part is available in the market at Rs. 17.

The prima facie conclusion is that it is cheaper to buy the component

For Private Circulation
 part from outside. But a study of cost analysis shows that each unit

produced also contributes Rs. 3 towards the fixed cost. If purchased

from outside, it will cost Rs. 20, i.e., Rs. 17 + 3 (fixed cost). This fixed

cost has to be incurred whether to make or buy. Thus, this component

should not be purchased from outside unless it is available at below

Rs. 15, which is its marginal (variable) cost.

However, while arriving at a final decision in this regard, it should also

be considered that the production facilities (plant capacity) released by

the non-manufacture of a component may be put to some alternative

use. In such a case, the above argument does not hold good. Moreover

there should be an assurance of continued supply of the component by

the outside firm.

3. Selection of a Suitable Product Mix:

When a concern manufactures more than one product, the

management has to decide the proportion in which these products

should be manufactured. This is known as product mix or sales mix.

The production and sales of those products should be pushed up which

For Private Circulation

 give the maximum profits and production of comparatively less

profitable products should be reduced. Marginal costing helps

management in deciding the best product mix so that profits can be

maximised. The best product mix is one that yields the maximum

contribution.

4. Alternative Methods of Production:

When management is faced with the problem of choosing from amongst

alternative methods of production, marginal costing helps by

furnishing relevant cost information for taking a right decision. For

example, management may be faced with the problem of using an

automatic machinery or manufacturing entirely by manual labour. The

method of manufacture which yields the greatest contribution should

be selected, of course, keeping in view certain other factors.

5. Profit Planning:

The aim of each business is to maximise profits. Marginal costing with

the help of break-even analysis guides management about the profit

position at various levels of output so that management can operate

For Private Circulation

 the business at optimum level where profit is maximum. Thus it is

helpful in profit planning.

Application # 1. Profit Planning:

There are four important ways to improve the profit performance of a

business – (i) by increasing volume, (ii) by increasing selling price, (iii)

by decreasing variable costs, and (iv) by decreasing fixed costs. Profit

planning is the planning of future operations so as to attain maximum

profit. The contribution ratio shows the relative profitability of various

sectors of the business whenever there is a change in selling price,

variable costs or product mix.

Application # 2. Introduction of a New Product:

Sometime, a product may be added to the existing lines of products

with a view to utilise idle facilities to capture a new market or for any

other purpose. The profitability of this new product has to be found out

initially. Usually, the new product will be manufactured if it is capable

of contributing something towards fixed cost and profit after meeting

its variable costs.

For Private Circulation

 Application # 3. Level of Activity Planning:

Marginal costing is of great help while planning the level of activity.

Maximum contribution at a particular level of activity will show the

position of maximum profitability.

Application # 4. Key Factor:

A concern would produce and sell only those products which offer

maximum profit. This is based on the assumption that it is possible to

produce any quantity without any difficulty and sell likewise. However,

an actual practice, this seems to be unrealistic as several constraints

come in the way of manufacturing as well as selling. Such constraints

that come in the way of management’s efforts to produce and selling

unlimited quantities are called ‘key factors’ or ‘limiting factors’. The

limiting factors may be materials, labour, plant capacity, or demand.

Management must ascertain the extent of the influence of the key factor

for ensuring maximisation of profit.

For Private Circulation

 Normally, when contribution and key factors are known, the relative

profitability of different products or processes can be measured with

the help of the following formula –

Application # 5. Make or Buy Decisions:

A company might be having unused capacity which may be utilized for

making component parts or similar items instead of buying them from

the market. In arriving at such a ‘make or buy’ decision, the cost of

manufacturing component parts should be compared with price quoted

in the market. If the variable costs are lower than the purchase price,

the component parts should be manufactured in the factory itself. Fixed

costs are excluded on the assumption that they have been already

incurred, and the manufacturing of components involves only variable

cost. However, if there is an increase in fixed costs and any limiting

factor is operating while producing components etc. that should also

be taken into account.

Application # 6. Suitable Product Mix:

For Private Circulation
 Normally, a business concern will select the product mix which gives

the maximum profit. Product mix is the ratio in which various products

are produced and sold. The marginal costing technique helps

management in taking appropriate decisions regarding the product

mix, i.e., in changing the ratio of product mix so as to maximise profits.

The technique not only helps in-dropping unprofitable products

from the mix but also helps in dropping unprofitable departments,

activities etc.

Recommended Text books

1. Management Accounting – My Khan & P K Jain. Tata Mcgraw hill.

2. Management Accounting – Paresh shaw – Oxford University Press.

3. Management Accounting – A. Murthy and S. Gurusamy – By Tata Mcgraw

Hill.

For Private Circulation

4. Management Accounting – NM Singhvi and Ruzbeh J. Bodhanwala PHI

learning PVT Ltd.,

5. Management Accounting, Principles and Applications – HUGH Coombs,

David Hobbs and Ellis Jenkuis – By Sage www.sagepublications.com

Suggested Readings

1. Advanced Management Accounting Jawaharlal, S. Chand & Co

2. Managerial Accounting – Indian Edition Ronald W.Hicton, G. Ramesh and

M. Jayadev by Tata Mcgraw Hill.

For Private Circulation

See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/324619577

The Impact of Management Accounting Research: An Analysis of the Past and

a Look at the Future

Article  in  International Journal of Business and Management · April 2018

DOI: 10.5539/ijbm.v13n5p47

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 International Journal of Business and Management; Vol. 13, No. 5; 2018
ISSN 1833-3850 E-ISSN 1833-8119
Published by Canadian Center of Science and Education

The Impact of Management Accounting Research: An Analysis of the

Past and a Look at the Future
Marco Gatti1
1
Department of Management, Università Politecnica delle Marche, Ancona, Italy
Correspondence: Marco Gatti, Department of Management, Università Politecnica delle Marche, Piazzale R.
Martelli 8, 60121 Ancona (An), Italy. E-mail: m.gatti@univpm.it

Received: February 4, 2018 Accepted: March 9, 2018 Online Published: April 18, 2018
doi:10.5539/ijbm.v13n5p47 URL: https://doi.org/10.5539/ijbm.v13n5p47

Abstract
This paper aims to explore the impact of management accounting research through a review of the literature on
the issues related to this topic; some new avenues of research are also identified. In so doing, the paper
contributes to both theory and praxis. In fact, suggesting new areas of research it promotes research in this field
which, up to now, has been mainly focused on the determinants of the loss of impact rather than on the nature of
the impact of management accounting research and its assessment. Moreover, this work aims to stimulate new
research focused on tools and methods for measuring the impact of management accounting research; such tools
can be useful to funding institutions and evaluation agencies which can be better equipped to carry out an
ex-ante and an ex-post evaluation of the impact that management accounting research projects can have on
society.
Keywords: research impact, research relevance, management accounting, literature review
1. Introduction
In recent years, the debate on the relevance of scientific research has grown significantly (Donovan, 2011;
Holbrook & Frodeman, 2011; Morton, 2015; Nicolai & Seidl, 2010; Penfield, Baker, Scoble, & Wykes, 2014;
Reale, Nedeva, Duncan, & Primeri, 2014). Academics are under pressure as they are ever more frequently called
to demonstrate the impact that their research can have on society. This pressure stems from the fact that funding
institutions, as well as governments, need to justify the assignment of resources to scientific research, showing
how the latter can actually contribute to improving the economic, cultural, social, and environmental conditions
of a community or of a country (Donovan, 2008). Moreover, given that resources devoted to scientific research
are limited, there is also the need to utilise them to their fullest potential in order to maximise the returns to
society. In this perspective, academics are called to prove the potential impact of their research in order to
increase their chances of being funded.
In light of this, scholars have started to debate the relevance of their research in various and different disciplines
(de Jong, Barker, Cox, Sveinsdottir, & Van den Besselaar, 2014; Hammerfelt, 2014; Holbrook, 2010; Mostert,
Ellenbroek, Meijer, van Ark, & Klasen, 2010; Paolini & Quagli, 2013; Quagli, Avallone, & Ramassa, 2016;
Tucker & Parker, 2014). In some cases, the debate on relevance is still at an initial stage and it is mainly focused
on what determines its achievement or, on the contrary, on the underlying causes of its loss, in an attempt to find
solutions aimed to increase the relevance of scientific research. In other cases, the debate has evolved, leading to
the design of methods aimed to ensure a reliable assessment of the impact that scientific research can have on
society. This is the case for studies in the field of medicine which have advanced very quickly towards the
elaboration of models, such as the Payback Framework, the Canadian Academy of Health Science Impact
Framework, or the Economic Value of Medical Research, that aim to provide a reliable assessment of the impact
of scientific research (Banzi, Moja, Pistotti, Facchini, & Liberati, 2011; Buxton & Hanney, 1994, 1996, 1998;
Donovan and Hanney, 2011; Frank & Nason, 2009; Murphy & Topel, 2003).
The fact that academic disciplines have progressed toward different stages along that arduous process which
leads to the measurement of the impact of scientific research should not be understood as a “delay” of some with
respect to others. Rather, it is the consequence of their main distinctive features which can deeply impact the
process of problematizing the relevance of scientific research. When scientific research deals with societal issues,
that is, when there is a strong link between the object of research and a perceived need of society or, broadly

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speaking, a societal issue, the abovementioned problematisation process is activated very quickly and it is mainly
directed towards the development of measurement systems able to ensure a reliable assessment of the impact of
research. This is due to the fact that the closeness of the link between the object of research and its usefulness for
society is explicit; that is to say, it does not need to be debated and it is often a taken-for-granted assumption. In
other words, the usefulness does not “deserve” to be demonstrated; rather, it should be quantified.
On the contrary, academic disciplines like Social Sciences and Humanities, for example, in which the link
between the object of research and a perceived need of society is not explicit, display a preliminary need to
demonstrate that an impact can exist or to reflect on the causes for which an impact does not manifest itself. As a
consequence, the problematisation process concerning how to assess impact represents a subsequent stage which
can be reached if the existence of an impact has been already demonstrated, communicated, and acknowledged.
This paper focuses on the impact of management accounting research. In particular, it aims to analyse how
studies in the field of management accounting have progressed, up to now, with regard to the issue at stake and,
at the same time, to suggest some possible avenues which could inform future research. On the one hand, the
paper strives to contribute to existing literature by systematising what has already been studied with regard to
impact. On the other hand, it aims to stimulate reflections on how to enhance further research that could lead to
narrowing the gap with other disciplines in which studies on the impact of scientific research have achieved a
higher level of advancement.
The paper is organised as follows. The second section will introduce the concept of impact by discussing reasons
for which it is relevant to study it and by analysing how it has been interpreted by existing literature. The third
section analyses the state-of-the-art with regard to the impact of management accounting research. In particular,
it aims to provide a broad overview of studies conducted and to systematise what has already been published in
specialised literature. The fourth section suggests some avenues which could inform future research in the field
of management accounting and, lastly, the fifth provides some concluding remarks.
2. The Impact of Research: Origins and Meanings
The growing interest in the impact of scientific research finds its roots in both theory and praxis. With regard to
theory, scholars in different fields of research are ever more frequently acknowledging that a gap between theory
and practice exists and that it has been expanding over time (Kieser & Leiser, 2009; Mc Cown, 2001; Scapens,
2006; Upton, 1999; Wandersman et al., 2008). This, and the consequent risk that this gap could jeopardise the
impact of scientific research, has attracted the attention of a large number of scholars who have undertaken to
analyse the causes underlying its loss of relevance and the solutions which could be adopted to limit it. At the
same time, several specialised journals, e.g. Research Evaluation or Scientometrics, have contributed to fostering
the academic debate on the issue, showing that it represents a real “hot topic” for its concrete implications on
society as a whole.
In addition to the interest originating from theory and stimulated by researchers and academic journals, it should
be recognised that praxis has played a pivotal role in activating and carrying the debate on the impact of research.
In particular, research-funding institutions more and more frequently ask for methods that can ensure a reliable
assessment of the impact of scientific research, in an attempt to demonstrate the effects, in terms of public value
creation, of their funding decisions and to inform their future funding policies. In line with this, the European
Union has launched and funded several research projects which are focused on the design of useful methods for
assessing the impact of scientific research. Among the most relevant, the IMPACT-EV project (Note 1)
(Evaluating the Impact and Outcomes of EU SSH Research), begun in January 2014 and completed in December
2017, was designed to develop a permanent system of selection, monitoring, and evaluation of the various
impacts of research in the Social Sciences and the Humanities. Similarly, the SIMPATIC project (Note 2) (Social
Impact Policy Analysis of Technological Innovation Challenges), which started in March 2012 and ended in
February 2015, aimed to provide policy makers with a comprehensive and operational tool box that would allow
for a better assessment of the impact of research and innovation policies in Europe. Another example is the
SIAMPI project (Note 3) (Social Impact Assessment Methods for research and funding instruments through the
study of Productive Interactions between science and society) which started in 2009 and ended in 2011. The
basic assumption underlying SIAMPI was that research is impactful if it is the result of a productive interaction
between science and society. In this perspective, its assessment should entail the analysis of the relationships,
and the measurement of their intensity, that researchers establish with stakeholders in an attempt to co-create
knowledge which is useful for the latter. These are only some of the projects which, over the years, have been
launched to explore and assess the impact of scientific research. The fact that they were promoted by those who
fund research and who are, at least in theory, also its final, direct or indirect, end users, shows the importance of

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the role played by praxis in this issue.

Along a similar vein, it should also be noted that the praxis has fostered studies because of the tendency of
national research evaluation agencies to contemplate the impact of research as one of the main criteria for
evaluating the quality of academic research (Greco, 2014). In the UK, the Research Excellence Framework
(Note 4) (REF) has established that twenty percent of the research assessment activities for the year 2014 had to
be based on the impact of research outside of academia, namely on what was defined as: “an effect on, change or
benefit to the economy, society, culture, public policy or services, health, the environment or quality of life,
beyond academia”. Similarly, in the Netherlands, the Standard Evaluation Protocol 2015-2021 (Note 5)
establishes that every research unit must draw up a “narrative” which explains the relevance of the research
unit’s work for society, i.e., its impact in terms of added value for society. This provides strong evidence for the
fact that praxis is actively stimulating research on the impact of scientific research and on the way it can be
concretely assessed, in an attempt to provide a more comprehensive evaluation of academic results.
Despite all of these efforts, research on the impact of scientific research is still far from achieving a common
view of what research impact is and of how it can be assessed. Scholars’ views seem to converge towards the
idea that impact, interpreted in terms of societal impact, is different from what is called academic impact. In fact,
the latter refers to what Gibbons et al. (1994) called Mode 1 research; in this mode, research is supposed to be
produced and consumed by academics and, in line with this, its impact can be basically assessed through
citations on scientific journals or other bibliometric indexes. In fact, they measure the appreciation or recognition
achieved by a research product within the academic arena. On the contrary, societal impact refers to Mode 2
research according to which research is produced for end users which are outside of academia (Bornmann, 2013;
Ernø-Kjølhede & Hansson, 2011). Therefore, it needs to be assessed by adopting different measures which are
able to express its usefulness for different stakeholders such as governments, funding institutions, companies, etc.
Although the abovementioned distinction seems to be widely acknowledged by scholars in different academic
disciplines, there is a considerable degree of differentiation with regard to the way societal impact is interpreted
and, consequently, how it is suggested that it should be measured.
A sizeable stream of knowledge has underlined that research impact should be understood as the “consequence
of a process in which knowledge and expertise circulates to achieve certain goals that are deemed relevant for
the development of society” (Spaapen & Van Drooge, 2011, p. 212). In this perspective, impact is the effect of
what can be called “productive interaction” (de Jong et al., 2014; Molas-Gallart & Tang, 2011) between
stakeholders of research, namely its end users, and researchers, which is instrumental to allow knowledge to
circulate and to spread within society. In a similar vein, Watermeyer (2012, p. 120) underlines that: “The impact
of academic work may only be judged in terms of its effort to communicate with stakeholders and integrate and
inaugurate them as active participants in the research process”. In this view, the co-production of knowledge,
namely the participation of stakeholders in the research is seen as a way to make the output of a research process
impactful (Ozanne & Saatcioglu, 2008; Ozanne et al., 2017).
This inevitably affects also the way impact is supposed to be measured (Nielsen, 2016). In particular, given the
idea that impact results from the establishment of a relationship between researchers and stakeholders,
measurement should be focused on the quantity as well as the quality of direct, indirect, and financial
relationships established with relevant stakeholders during the research process. Moreover, according to Spaapen
and van Drooge (2011, p. 2012): “Research, in order to achieve social impact, has to cross both disciplinary
boundaries and those of other professional expertise and of social domains. Therefore, involvement of these
domains and their stakeholders in evaluation design and practice is near to a necessity for assessing and
achieving social impact”. In this view, besides assessing the intensity of the relationships established between
researchers and stakeholders, it would also be necessary to get stakeholders involved in the evaluation process.
This would ensure a reliable assessment of the impact of scientific research and could lead academics to
seriously take into consideration the practical implications of their studies, given that they will be evaluated by
those who are the end users of their research (Samuel & Derrick, 2015).
Other studies have interpreted the impact of scientific research as the effect of a communicative process aimed to
favour the diffusion of the research outputs outside the boundaries of academia. According to Bornmann and
Marx (2014, p. 2013): “Societal impact is given when the content of a report is addressed outside of science”. In
this perspective, what makes research impactful is not, or at least not only, the way it is carried out. Rather, it is
the fact that, through different meanings, its products are pushed outside of the academic arena in an attempt to
reach society. This way of interpreting the impact of research has opened a very prolific avenue of research
focused on so-called altmetrics, i.e., alternative metrics (Barbaro, Gentili, & Rebuffi, 2014; Barnes, 2015;
Bornmann, 2015a, 2015b; Bornmann, Haunschild, & Marx, 2016; Hammarfelt, 2014). According to Shema,

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Bar-Ilan and Thelwall (2014, p. 19), they refer to: “web-based metrics for the impact of scholarly material, with
an emphasis on social media outlets as sources of data”. In other words, altmetrics allow an assessment of the
impact of scientific research which is based on the number of views, downloads, clicks, tweets, likes, etc. that a
research output has received. In this perspective, the degree of impact of a research product depends on its level
of diffusion outside of academia. It should be noted that some scholars have underscored the limitations of using
altmetrics to assess the impact of scientific research (Gumpenberger, Glänzel, & Gorraiz, 2016). In particular,
according to Barnes (2015, p. 128): “It is likely therefore that altmetrics measure not the impact of research, but
its consumption”. Moreover, Bornmann (2014) is critical as concerns data quality and possible manipulation of
data, which are only two examples of factors which could hinder the adoption of altmetrics in an effort to ensure
a reliable assessment of the impact of scientific research. These reservations notwithstanding, altmetrics are
gaining high consideration within academia. Moreover, their increasing use in assessing the impact of scientific
research is demonstrated by the fact that a growing number of academic journals are showing both the altmetric
score and the number of citations, or other bibliometric indicators, for every publication.
Finally, another research stream has adopted a very broad view of impact. This is the case in those studies that
have interpreted impact as the outcome of the research process. According to Donovan (2008, p. 48): “Research
impact denotes the benefits or returns from research, which flow beyond the academic realm to ‘end users’ of
research. These end users are traditionally defined as industry, business, government, or more broadly, the
taxpayer”. Similarly, Bornmann (2012, p. 673) underlines that: “Societal impact of research concerns the social,
cultural, environmental and economic returns from publicly-funded research, be they products or ideas”. What
has been stated above with regard to the REF is aligned with this view of impact, one which is closely
intertwined with the final effects that can result from the use of research outputs. Although this way of
interpreting research impact can be considered closest to the abovementioned Mode 2 research, it should also be
underlined that adopting this view of impact makes its assessment more complex. According to Martin (2007),
criticisms primarily concern the feasibility of linking a given macro effect to a specific research output and, in
particular, of doing it in a reliable way. Moreover, there is also an evaluation timescale problem related to the
fact that it is not clear when the impact of research manifests itself; this can seriously compromise the
assessment process because determining when it should actually start is no simple matter. According to Penfield
et al. (2014) criticisms are also related to the fact that this view of impact is not static and, consequently, the
moment in which the assessment takes place can influence the degree of reliability of the measurement process
leading to over- or under-estimating the actual impact of a given research study. This explains why there are
quite diverse methods promoted and adopted to assess the impact of research in different disciplines. In some,
like the medical sciences, qualitative and quantitative methods have been suggested to ensure a reliable
assessment of the effects that research can have from a social standpoint (Buxton & Hanney, 1994, 1996, 1998;
Hanney, Watt, Jones, & Metcalf, 2013; Murphy & Topel, 2003). This variety of contributions can be largely
attributed to the fact that, in these disciplines, societal outcomes can be easily determined and their assessment
can consequently be focused on specific and clearly determined dimensions. On the contrary, in other disciplines,
like management accounting where the link with societal issues is not so strict and measurement is more
complex, the path towards attaining a reliable assessment is still long.
3. A Review of Studies on the Impact of Management Accounting Research
The debate surrounding the relevance of management accounting research finds its roots in the seminal work of
Johnson and Kaplan “Relevance Lost: the Rise and Fall of Management Accounting” (1987) in which the
authors underlined the obsolescence of management accounting practices that focused on the use of financial
information to control production processes and so, were basically unable to support the changing managerial
decision-making processes. Starting from that contribution, other scholars have highlighted the gap between
academic research and practice and, in particular, they have raised questions concerning its causes (Modell, 2014;
Scapens, 1994; Tucker & Parker, 2014). In so doing, they have acknowledged that research in the field of
accounting and management accounting is gradually losing its societal relevance and, at the same time, they
have advocated the need to put in place strategies aimed to overcome this tendency.
It should be argued that the determination of an actual loss of relevance, e.g. of impact, of management
accounting research is not deeply debated among scholars. Rather, there seems to be a widespread and general
acknowledgment that this process is evident and is on-going. Only a few contributions have explored the actual
existence of a gap between theory and practice, even from an empirical standpoint. Tucker and Parker (2014), for
instance, have carried out quantitative analyses to prove that academics in the field of management accounting
perceive that their studies are gradually losing relevance. Nevertheless, as they underline, their research is
focused on senior academics. Therefore, it does not consider the practitioners’ view which would be fundamental

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to prove that a real gap between theory and practice exists. The practitioners’ perspective has been adopted by
Tucker and Schaltegger (2016) who, in their study, contrast the perceptions of representatives of Australian and
German professional accounting bodies concerning the gap between theory and practice. The authors show that
relevance of topics and communicational problems represent two of the most significant barriers diminishing the
impact of management accounting research. Van Helden and Northcott (2010) explore the practical relevance of
public sector management accounting research by analysing research published in international accounting
journals to ascertain whether their aims are oriented towards informing practice. Basically, their findings support
the idea that the degree of orientation towards practical issues is very limited and, even when practical
implications are identified and communicated, this does not lead to the provision of specific guidelines useful to
practitioners.
Most of the extant literature has focused attention on factors which determine the loss of relevance of
management accounting research. Among them, the inconsistency of the object of research is advocated as one
of the most influential. According to Shapiro, Kirkman and Courtney (2007), management accounting
researchers seem to get lost before translation. In other words, they fail to explore phenomena which are of
interest to practitioners. Many scholars share this opinion. Drawing from the works of Ahrens and Chapman
(2007) and Seal (2012), Modell (2014) underlines the tendency of management accounting researchers to focus
on developing complex theoretical contributions rather than exploring practical and technical issues that would
be useful to practitioners. Similarly, Mitchell (2002) states that management accounting research lacks technical
richness because of the excessive relevance attributed by scholars to its social dimension. Interestingly, Malmi
and Granlund (2009) underline that this focus on social aspects related to management accounting systems is the
consequence of the inclination to interpret the pre-adopted theories, rather than the accounting phenomena, as a
basis for determining what could be of interest and, consequently, what should drive a research. This is in line
with Hopwood (2008, p. 88) who points out that “Often method-led and seemingly subject to waves of fashion,
the dynamics behind the development of the accounting research agenda appear to be internal to the academic
community itself rather than being influenced by the shifting concerns of practitioners, regulators or even the
public at large”. In essence, starting from the assumption that the impact of management accounting research
depends on its ability to be related to what managers do (Jönsson, 1998), and consequently to what they perceive
as useful, it could be argued that one of the major causes underlying loss of relevance lies in the inability to
define research questions which are in line with what practitioners expect from research. According to
Baldvinsdottir et al. (2010) this is even more surprising, and paradoxical, if we look at the intensification of
studies which, in recent times, have adopted empiricism to explore phenomena in the field of management
accounting.
Besides being lost before translation, management accounting research has underscored that the causes
underlying its loss of relevance can also be found in the researchers’ inability to adequately communicate to
practitioners, namely in the fact that they also are lost in translation (Shapiro et al., 2007). According to Tucker
and Parker (2014) this phenomenon takes place every time researchers fail to present their findings in a way that
is understandable for practitioners or when they do not make their contributions available to them through
appropriate means. As a matter of fact, Inanga and Schneider (2005) claim that the communication problem
arises even before the writing of a paper for a journal. More specifically, they underline that the lack of
communication among academics and between academics and practitioners is a barrier to the production of
relevant, i.e., impactful, research. Despite acknowledging that a communication problem exists, researchers seem
unable to make their research findings interesting for practitioners or to communicate with them (Bromwich and
Scapens, 2016). In some cases, this is due to practitioners’ unfamiliarity with quantitative and statistical methods,
for example, which are often used to analyse and interpret phenomena in the field of accounting and
management accounting (Chalmers & Wright, 2011). Moreover, the fact that management accounting research
has become ever more interpretative, rather than normative, has made it less understandable by practitioners who
often have a technical, or practical, education (ter Bogt & van Helden, 2012; Tucker & Schaltegger 2016).
According to Mitchell (2002, p. 282), these changes which occurred with regard to management accounting
research has created “semantic and syntactical barriers” between researchers and practitioners, given that the
latter often do not have an adequate background to fully understand and appreciate the contribution, especially
the theoretical one, given by a research study. That a communicational gap exists is implicitly emphasised also
by Hopwood (2008) who suggests that researchers develop marketing and communicational skills in order to
effectively be connected with the world of practice. It should also be noted that researchers are often lost in
translation (Shapiro et al., 2007) because they are forced by journals to adopt a lexicon which, according to
Chapman and Kern (2012), “frequently goes alongside theorizing”. These authors also suggest that targeting
specific journals for practitioners would help to increase the relevance of management accounting research since,

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in this case, researchers would be asked to adopt vocabulary which is more in line with the expectations as well
as the background of professionals.
Literature has also emphasised that the loss of relevance of studies can be traced back to the limited cooperation
between academics and practitioners in the field of management accounting. Cooperation goes beyond mere
communication as it entails the establishment of a relationship aimed to collect, discuss, and interpret data during
the whole research process. Literature has underlined that the absence of practitioners’ involvement in the
research process would limit the practical relevance of management accounting research. In particular, Mitchell
(2002, p. 286) clearly states that: “Academics can improve the attractiveness of their research for practitioners by
working more closely with them throughout the research process. The practitioner can become an integral
partner in research work and can therefore help in focusing it on issues of practical importance”. This does not
mean that researchers must lose their roles as independent and critical subjects within the research process
(Parker, Guthrie, & Linacre, 2011). Rather, they should start to dialogue with practitioners but also with industry
and regulatory authorities to produce relevant research outputs (Hopwood, 2007, 2008), being careful to not fall
in what Al-Htaybat and von Alberti-Alhtaybat (2013) call the “consultancy trap” (p. 21). Although the lack of a
strong cooperation between researchers and practitioners can be understood as one of the causes of the loss of
relevance of management accounting research, literature has also emphasised that this idea of co-production of
knowledge is difficult to apply in practice because of the abovementioned communicative gap. In fact, given that
practitioners and academics speak different languages and the former are not used to adopting tools, methods,
and techniques which are necessary to carry out academic research in the field of management accounting
(Chalmers and Wright, 2011), an ongoing cooperation could be problematic.
Causes behind the loss of relevance of management accounting research also concern the way research is carried
out, namely the methodological approaches and methods which are used to explore management accounting
systems and their implications. Going back to the 1980s, management accounting research acknowledged that
the gap between theory and practice needed to be filled by exploring management accounting practices and how
they work within organisations (Scapens, 2006). In this perspective, the inability of management accounting
research to be relevant was mainly attributed to the tendency to elaborate complex mathematical models aimed
to explain differences among management accounting practices (Scapens, 2006) rather than studying it in the
context in which it operated (Flamholtz, 1983; Hopwood, 1983; Laughlin, 1988). To face this situation, in the
1990s qualitative methods started to attract growing attention. In particular, case studies showed their full
potential to ensure an in-depth analysis and comprehension of management accounting practices and of their
implications (Parker, 2012). The diffusion of case studies should have represented a means of making
management accounting research more relevant since they ensure the analysis of reality as well as the
understanding of the “antecedents and consequences of managerial accounting practices” (Ittner & Larcker, 2002,
p. 789; Bromwich & Scapens, 2016). In this perspective, they should have contributed to filling the gap between
theory and practice, thus making management accounting research more relevant for practitioners. This has been
even more emphasised by the notable diffusion of interventionist studies in the most recent decade (Chiucchi,
2013; Dumay, 2010; Gatti, 2013, 2015; Giuliani & Marasca, 2011; Jönsson & Lukka, 2007; Suomala &
Lyly-Yrjänäinen, 2010) in which researchers are called to find a solution to a given (e.g. practical) problem and,
at the same time, to provide a theoretical contribution. Through interventionist case studies, scholars have tried
to demonstrate how empiricism can contribute to generate relevant and impactful research (Lukka & Suomala,
2014). Despite this growing adoption of the non-interventionist and interventionist case study method,
management accounting research seems to fall short of becoming truly relevant and impactful for society
(Baldvinsdottir et al., 2010). The reasons can be found in what Baldvinsdottir et al. (2010, p. 80) call the shift
“from a predominant focus on the technical to a predominant focus on the social”, which manifests itself in the
adoption of complex sociological frameworks to analyse empirical material. Therefore, this means that
management accounting research is far from being focused on technical practicalities (Mitchell, 2002; Modell,
2014) and from the language spoken by those who should be its consumers, even when it is based on the
adoption of methods - like the case study method - which are so very close intertwined with reality.
Finally, it must also be noted how the literature has brought to light the loss of relevance of management
accounting research due to exogenous variables, such as systems adopted by governments to assess the quality of
research carried out by universities and research centres. In their work, ter Bogt and Scapens (2012) show how
the adoption of new measurement systems more oriented towards quantitative approaches can affect universities’
performance. The authors carried out an analysis of the performance measurement systems adopted in the
Accounting and Finance groups of the University of Groningen (Netherlands) and of the University of
Manchester (UK). Empirical evidence shows that the adoption of quantitative systems generates anxiety and

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uncertainty among researchers. Moreover, the findings also showed a correlation between the use of journal
rankings, which is normally associated with the adoption of quantitative systems, and scholars publishing their
work in only a limited number of mainstream journals; this, in turn, limits the contribution that their research can
give to society (ter Bogt & Scapens, 2012). This is in line with Chalmers and Wright (2011) who point out that
reward and evaluation systems do not encourage the communication between academics and practitioners
because they push researchers to publish in peer-reviewed journals which are read only by academics. In other
words, given that careers and resources allocated to universities are strictly dependent on the quantity and
“academic” quality of research products, researchers are pressured to increase their productivity and to publish
their papers in academic journals that can enhance their career, but these works are not able to attract the
attention of practitioners. Something similar is stated by Mitchell (2002) who underlines that researchers are
constantly under pressure, feeling that they must publish in order to develop a research reputation. To achieve
this, they are more oriented towards publishing for other academics, namely in academic journals, since this is
the most immediate way to obtain academic recognition and, consequently, to have an academic career. In a
similar vein, Hopwood (2008) has also underlined that the quest for an academic career generates internal
pressure on researchers who try to increase the number of articles they publish; this often reduces the quality, and
consequently the impact, that they can have on society (Gendron, 2008; ter Bogt & van Helden, 2012).
To sum up, in the field of management accounting the literature has focused particular attention on what seems
to have contributed to generating a gap between theory and practice, namely on those factors which have
affected the impact of management accounting research by limiting it. This research has been pivotal in offering
strategies aimed to eliminate those barriers which would prevent management accounting research from
becoming more impactful (Bromwich & Scapens, 2016; Hopwood, 2008; Mitchell, 2002). Despite this, some
new avenues of research can be identified in light of what management accounting research has already
highlighted and of what has been accomplished by researchers in other disciplines.
4. The Impact of Management Accounting Research: An Agenda
The literature review presented here has shown that both the advent of a gap between theory and practice and the
fact that it is the main cause of the loss of relevance of management accounting research are widely
acknowledged by researchers. In addition, the extant literature has shed light on and deeply analysed the causes
which may have generated the abovementioned gap, showing that they can be traced back to different variables
that range from the way researchers write their papers and select topics to external pressures which come from
governments and evaluation agencies. Moreover, there appears to be a taken-for-granted assumption of the
existence of a gap, and the literature has analysed its determinants in an attempt to find and put forward some
possible solutions. Actually, what seems to be lacking and should be the object of future studies is what comes
before and after the acknowledgement of the existence of a gap between theory and practice and of the
consequent loss of relevance which results from it.
Much research is needed to clearly define what constitutes “impact” in the field of management accounting. As
previously stated, while scholars have spotlighted the loss of relevance, or impact, of management accounting
research, they have not provided a clear picture of how impact should be understood in the field of management
accounting research. This could be interpreted as a redundant question. Actually, it has relevant implications.
First, from a theoretical and a practical standpoint, the contribution that management accounting research can
give to society can strengthen its perceived relevance both within and beyond the academic arena. Literature has
emphasised that disciplines in the field of the Social Sciences and Humanities are less prone to be considered
“relevant” or “impactful” because their contribution to society is not “tangible” or “immediate” (Bastow,
Dunleavy, & Tinkler, 2014). For this reason, enhancing the theoretical and empirical debate on the way the
“impact” of management accounting research should and could be understood, interpreted, and operationalised
can be of utmost importance in order to diffuse the idea that management accounting research can actually be
useful to society. In other words, it could contribute to a reconsideration of the role that management accounting
research can play in generating public value. Second, shedding light on the nature of the impact of management
accounting research can be important to promote its assessment, as it will be discussed later. The lack of
contributions on the nature of the impact of management accounting research makes the identification of
indicators aimed to assess it more complex because there is no clear idea of the main dimensions in which the
impact of management accounting research can be defined. This can partially explain the reasons why, until now,
heavy emphasis has been placed on the antecedents, i.e., the determinants, of the loss of impact, while scarce
attention has been paid to its assessment. In light of all the above, a relevant avenue of research should entail a
deep and epistemological analysis of the multifaceted nature of the impact of management accounting research
and of the different ways in which it can be operationalised.

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In carrying out research on what constitutes “impact” in the field of management accounting, the
practitioners/professionals’ standpoint merits priority consideration. This is beginning to be evident in academic
literature as recent studies have highlighted how practitioners who have taken part in REF have been the object
of analysis to understand their expectations as well as the criteria they have adopted to assess the impact of
research (Derrick & Samuel, 2016). In this perspective, comparative studies between what constitutes impact for
academics and for practitioners should be stimulated not only to allow differences to emerge, but also to provide
useful insights for those studies which will try to define how “impact” should be understood in the field of
management accounting. Shifting from the perspective of academics to that of practitioners would also facilitate
efforts to analyse - from an empirical standpoint - the causes underlying the gap between theory and practice. In
other words, it could be important to contribute empirically to the existing literature on the causes underlying the
loss of relevance of management accounting research, showing which factors, among those identified by the
literature, have a stronger influence and identifying new ones which could be the object of future analysis.
Another interesting avenue of research concerns the analysis of the effects that the co-production of knowledge
can have on the impact of management accounting research. Drawing on the literature on “productive
interactions” (de Jong et al., 2014; Molas-Gallart & Tang, 2011; Spaapen & van Drooge, 2011), impact can be
achieved if the knowledge production process is based on the interaction between academics and practitioners.
Although the literature in the field of management accounting has emphasised that practitioners should be taken
into consideration as the main addressees of research and that this could influence the nature of the issues which
are analysed by management accounting research (Hopwood, 2008; Jönsson, 1998; Mitchell, 2002), there is a
lack of research on the consequences which can derive thereof, in terms of impact, if research is carried out
through what literature calls direct, indirect, or financial interactions between academics and society. In this view,
society is not seen as the mere addressee of research but as one of the main actors which takes part in the
knowledge creation process. Exploring how the different kinds of productive interactions can influence the
impact of management accounting research can be useful not only from an academic perspective but also from a
practical standpoint. In fact, it could foster the adoption of those interactive practices which have proven to be
able to enhance the impact of management accounting research. Moreover, comparative analysis should be
carried out to ascertain whether studies which have adopted a co-operative approach to research are actually
perceived as more useful by practitioners, that is to say, if they are understood as more impactful by the end
users.
Future analysis should also focus on the assessment of the impact of management accounting research. Although
the loss of relevance has been widely debated, literature has primarily focused attention on its causes, up to now.
In other words, while the antecedents of the loss of relevance have been questioned and possible solutions have
been suggested, there is a lack of studies on the assessment of the impact of management accounting research.
This is different from what happens in other fields where there is significant pressure to measure the actual
impact of scientific research or to assess progress to that end. The literature has deeply emphasised that the
impact of Social Sciences and Humanities research is difficult to assess (Bastow et al., 2014). Despite this,
something more should be done to identify indicators and to apply them in the context of management
accounting research. This would be useful not only to prove that the abovementioned loss of relevance is not a
mere perception but also to shed light on the actual magnitude of the gap between theory and practice in the field
of management accounting. There would be noteworthy practical implications as well, because an accurate
assessment of the impact of management accounting research should drive the identification of suitable solutions
aimed at making studies more relevant and, consequently, at bridging the gap between theory and practice.
Finally, drawing on the literature which has already adopted so-called altmetrics to assess the impact of scientific
research (Bornmann, 2014, 2015a, 2015b; Gumpenberger et al., 2016; Hammarfelt, 2014), future studies could
try to extend their adoption in the field of management accounting. This would be useful to assess the extent to
which management accounting studies are diffused outside of academia and to approximate their ability to
influence society. Moreover, this could represent a starting point for carrying out new research focused on the
comparison between indicators used to assess the diffusion of research within the boundaries of academia, like
bibliometric indicators, and those adopted to measure its influence beyond academia, like altmetrics. This has
already been done in other fields of research but the results do not seem to be completely convergent. Carrying
out the abovementioned analysis in the field of management accounting research could be important to show the
extent to which academic and social relevance are aligned and, in particular, whether the achievement of a high
level of relevance from an academic standpoint can strengthen the diffusion of a research product outside of
academic boundaries and vice versa.

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5. Conclusion
This paper has delved into the impact of management accounting research. This is an issue which had begun to
be perceived as pivotal, already in the 1980s, because of the awareness that a disconnect between theory and
practice was going to emerge (Flamholtz, 1983; Johnson & Kaplan, 1987; Scapens, 1994). Although
management accounting literature has paid growing attention to this issue, it must be underscored that the
analysis has mainly focused on the causes which are at the basis of the loss of relevance. In line with this,
removing these causes or trying to limit their negative effects has often been seen as a way to increase the impact
of management accounting research. Despite this, only limited progress have been made towards providing a
clear definition of what “impact” means in the field of management accounting, what dimensions constitute it,
what means or strategies could be adopted to increase it, how it can be assessed, and what relationships can be
found between the social and the academic impact. These represent new and highly relevant avenues of research
which should be explored to enhance knowledge on the impact of management accounting research and to
contribute to filling the abovementioned gap. Moreover, shedding light on the issues would not only further the
advancement of knowledge on the impact of management accounting research but would also foster an
alignment with other disciplines, especially those, like medicine or engineering, in which the assessment of the
impact of scientific research has become both a relevant issue from a theoretical standpoint and a useful tool in
practice.
In light of all the above, this paper contributes to the body of literature in two different perspectives. On one side,
it systematises a stream of research which has grown significantly in recent years. Contributions have been
analysed in order to provide a full comprehension of the state-of-the-art with regard to the impact of
management accounting research, shedding light on those main issues which, according to the literature, seem to
have hindered the impact of management accounting research. On the other side, the paper has tried to stimulate
new reflections which could be useful to advance knowledge and to shift attention from the analysis of the
causes of the loss of relevance to its meaning and, in particular, its assessment. From a practical perspective, the
paper has identified new avenues of research which could be useful to support both funding and research
evaluation agencies which need new and reliable methods for assessing the impact of scientific research in the
field of management accounting. In fact, by stimulating research on the design of indicators able to assess the
impact of management accounting research, the paper aims to lead scholars to develop and test methods which
can take into consideration the complex and multifaceted nature of the impact of research in the field of
management accounting.
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Notes
Note 1. http://impact-ev.eu/
Note 2. http://simpatic.eu/
Note 3. http://www.siampi.eu/
Note 4. http://www.ref.ac.uk/
Note 5. https://www.knaw.nl/nl/actueel/publicaties/standard-evaluation-protocol-2015-2021

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DIRECTIONS IN MANAGEMENT ACCOUNTING RESEARCH: AN ANALYSIS OF

CONTEMPORARY ISSUES AND THEMES

Jason Harris
School of Business
James Cook University
PO Box 6811
Cairns, Qld 4870
Australia

and

Dr Chris Durden*
Associate Professor
School of Business
James Cook University
PO Box 6811
Cairns, Qld 4870
Australia
Phone: +61-7-40421015
chris.durden@jcu.edu.au
corresponding author*

Abstract
This paper reviews some of the most recent published literature in the field of management
accounting. 116 articles were examined on management accounting taken from three leading
journals in order to analyse key issues and themes in contemporary management accounting
research. The articles were published between 2008 and 2010. This paper contributes to the
literature in several ways. First, it provides a focused analysis of research published in recent
years, allowing researchers to gain a better understanding of the direction of the contemporary
management accounting research. Second, it highlights the emergence of intellectual resource
management as a major area of management accounting research. Finally, it highlights key
emerging research themes including trust, leadership, and organisational justice.
INTRODUCTION
The field of management accounting research is dynamic and constantly evolving. Therefore
it is beneficial to step back at times and observe the key themes and patterns that are emerg-
ing. This paper seeks to do that. The aim is to provide a review of some of the recent literature
in the field of management accounting. In order to do this, we examined 116 articles on
management accounting taken from three leading journals in order to analyse key issues and
themes in contemporary management accounting research. The articles were published
between 2008 and 2010 and appeared in Management Accounting Research (MAR), the
Journal of Management Accounting Research (JMAR), and Accounting, Organizations and
Society (AOS). While previous studies have reviewed the management accounting literature
(Hesford et al., 2007; Berry et al., 2009; Lindquist and Smith, 2009), this paper covers a more
concentrated time span and therefore better represents contemporary thinking in the manage-
ment accounting field.

This paper contributes to the literature in several ways. First, it provides a focused analysis of
management accounting research published in recent years, allowing researchers to gain a
better understanding of the direction of the contemporary management accounting research.
Second, it highlights the emergence of intellectual resource management as a major area of
management accounting research. Finally, it highlights key emerging research themes in the
literature including trust, leadership, and organisational justice.

The remainder of this paper is structured as follows. In the following section, the method of
the review is set out and a taxonomy presented. Next, the findings of the review are presented.
In the discussion and analysis section, analysis of macro trends is followed by general analy-
sis. The final section summarises the paper and outlines limitations and suggestions for future
research.

METHOD
This paper reviews 116 articles on management accounting published between 2008 and 2010
and taken from three leading journals: Management Accounting Research (MAR), the Journal
of Management Accounting Research (JMAR), and Accounting, Organizations and Society
(AOS).1

This review of recent literature was an iterative process in which the taxonomy of research
themes and issues was developed and refined throughout the review and writing process.
Papers were first classified as either management accounting or not management accounting.
Where uncertainty existed in this regard, another management accounting academic was
consulted for input. Editorials, forewords, tributes, notes, and comments were not included
except when they were considered to contain substantive research material. As papers were
reviewed, they were then placed into loose and emerging classifications. Throughout the
review process the classifications were refined and adapted as new areas and insights
emerged. Previous literature review papers were also consulted throughout the process in
order to provide additional insights.

A draft research taxonomy was then developed and papers were classified within that struc-
ture. Where a paper addressed several major themes, a judgement was made and the paper
was included under the heading of the most prominent theme. Papers were not included in
                                                            
1
All articles classified as management accounting in the three listed journals between 2008 and 2010 have been
included except for those articles in 2010 which had not been published before the paper was submitted to the
AFANNZ conference.
 3 
 

more than one category. Where there was uncertainty on the classification of a paper, the
paper was classified in consultation with another management accounting academic. After
final adjustments, the taxonomy of contemporary research themes and issues that emerged
from this process is presented below.

1) MANAGEMENT CONTROL
a) Budgeting
b) Organisational control
 Corporate governance
 International control
 Interorganisational control
 Intraorganisational control
 Transfer pricing
c) Performance measurement and evaluation
 Benchmarking
 Consequences for organisational behaviour and performance
 Incentive systems
 Performance measurement systems
2) COST ACCOUNTING
a) Activity-Based Costing
b) Interorganisational cost management
3) INTELLECTUAL RESOURCE MANAGEMENT
a) Accounting information systems
b) Knowledge management
c) Management information presentation
d) Organisational learning
4) OTHER
a) Literature review/analysis
b) Research methods/methodologies
c) Risk management
d) Strategic management accounting
e) Sustainability and environmental management

The order of subheadings in the taxonomy has no significance as these are presented in
alphabetical order. Hence the ordering does not imply the level of prominence within the
literature reviewed. In terms of the classifications adopted under organisational control,
interorganisational control addresses the relationship between two cooperating firms while
Intraorganisational control deals with relationships within a single firm. International control
addresses either interorganisational or Intraorganisational control with a focus on handling
cultural or national differences between firms or divisions. The performance measurement
and evaluation systems classification includes the general concept of management control
systems. In relation to interorganisational cost management and interorganisational control it
is recognised that there is significant conceptual crossover between these two areas.

FINDINGS
This section outlines the classification of papers examined resulting from the process de-
scribed above. The classification is set out below under four major categories: ‘management
control’, ‘cost accounting’, ‘intellectual resource management’, and ‘other’.
Management control
Major themes identified under this heading are budgeting, organisational control, and perfor-
mance management and evaluation.

Budgeting is a traditional management accounting topic and is addressed by Brown et al.

(2009), Frow et al. (2010), King et al. (2010), Libby and Lindsay (2010), Schatzberg and
Stevens (2008), and Sprinkle et al. (2008).

Organisational control addresses issues of corporate governance (Baxter and Chua, 2008;
Gulamhussen and Guerreiro, 2009; and Hughes, 2009), international control (Busco et al.,
2008; Chanegrih, 2008; Hyvönen et al., 2008; Jansen et al., 2009; Li and Tang, 2009;
Masquefa, 2008; and Moilanen, 2008), interorganisational control (Boland et al., 2008; Caglio
and Ditillo, 2008; Cäker, 2008; Dekker, 2008; Free, 2008; Gosman and Kohlbeck, 2009;
Langfield-Smith, 2008; Vosselman and van der Meer-Kooistra, 2009; and Vélez et al., 2008),
intraorganisational control (Giraud et al., 2008; Jørgensen and Messner, 2009; Rowe et al.,
2008; and van der Meer-Kooistra and Scapens, 2008), and transfer pricing (Chang et al.,
2008; Cools et al., 2008; Cools and Slagmulder, 2009; Fjell and Foros, 2008; and Rossing and
Rohde, 2010).

Performance measurement and evaluation encompasses benchmarking (Deville, 2009),

consequences for organisational behaviour and performance (Chung et al, 2009; Church et al.,
2008; Demski et al., 2008; Dossi and Patelli, 2008; Hall, 2008; Hansen, 2010; Hartmann and
Slapničar, 2009; Mensah et al., 2009; Román, 2009; and Schueler and Krotter, 2008), incen-
tive systems (Budde, 2009; Dikolli et al., 2009; Homburg and Stebel, 2009; Pfeiffer and
Velthuis, 2009; Upton, 2009; Zamora, 2008), and performance measurement systems (Aber-
nethy et al., 2010; Broadbent and Laughlin, 2009; Burney et al., 2009; Cardinaels and van
Veen-Dirks, 2010; Davila et al., 2009; Demski et al., 2009; Ferreira and Otley, 2009; Kenne-
dy and Widener, 2008; Lillis and van Veen-Dirks, 2008; Malmi and Brown, 2008; Mundy,
2010; Sandelin, 2008; van Veen-Dirks, 2010; Wiersma, 2008; Wiersma, 2009; and Wouters
and Wilderom, 2008).

Cost accounting
The major classifications under cost accounting are Activity-Based Costing and interorganisa-
tional cost management.

Under Activity-Based Costing (ABC), Hoozée and Bruggeman (2010) address leadership
style and user participation in the design of an ABC system while Kallunki and Silvola (2008)
address the way in which the life cycle stage of an organisation may affect the decision to
implement an ABC system. Banker et al. (2008) focuses on attempts to measure the benefit to
the firm when adopting ABC. Englund and Gerdin (2008) provide a counterpoint to main-
stream cost accounting research pointing out the growing criticism of the mainstream ABC
research for “neglecting issues of power and politics and for viewing ABC implementations
as something inherently positive” (p.154). In order to remedy this, they call on mainstream
ABC researchers to draw on the insights of the politically oriented literature.

Agndal and Nilsson (2009), Agndal and Nilsson (2010), Rothenberg (2009), Van den Abbeele
et al. (2009) contribute to the research on interorganisational cost management.
 5 
 

Intellectual resource management

The contemporary literature reveals the emergence of what this paper calls “intellectual
resource management” (IRM) as a significant area of management accounting research. IRM,
as set out in Table 2, is a broad heading intended to cover such areas as accounting infor-
mation systems, knowledge management, management information presentation, and organi-
sational learning.

Four key areas of IRM research have been identified. Accounting information systems is
addressed by Chapman and Kihn (2009), Cobb (2009), Eldenburg et al. (2010), Hall (2010),
Lamminmaki (2008), and Ozbilgin and Penno (2008). Knowledge management is addressed
by Alcouffe et al. (2008), Berland and Chiapello (2009), and van Helden et al. (2010). Man-
agement information presentation is addressed by Cardinaels (2008) and Mouritsen et al.
(2009) and finally, organisational learning is addressed by Batac and Carassus (2009).

Other
There are five classifications under this heading: literature review/analysis, research meth-
ods/methodologies, risk management, strategic management accounting, and sustainability
and environmental management. First, Lindquist and Smith (2009) provide the literature
review and analysis which was cited earlier in this paper.

The body of literature discussing research methods and methodologies is significant and
demonstrates a maturing and self-analysing discipline (Ahrens, 2008; Birnberg, 2009; Coad
and Herbert, 2009; Gerdin and Greve, 2008; Hopwood, 2008; Johansson and Siverbo, 2009;
Kakkuri-Knuuttila et al., 2008a; Kakkuri-Knuuttila et al., 2008b; Lukka, 2010; Lukka and
Modell, 2010; Malmi, 2010; Merchant, 2010; Modell, 2009; Modell, 2010; Vaivio and Sirén,
2010; and Vollmer, 2009). Risk management is considered by Mikes (2009), Wahlström
(2009), and Woods (2009).

Strategic management accounting is addressed by Cadez and Guilding (2008), Carr et al.
(2010), Jørgensen and Messner (2010), Naiker et al. (2008), Seal (2010), Skærbæk and
Tryggestad (2010), and Tillmann and Goddard (2008).

Finally, sustainability and environmental management is addressed by Gray (2010) as well as

Henri and Journeault (2010). These findings are presented in Table 1 and summarised in
Table 2.
  

TABLE 1
Classification of papers
n Papers
Management control
Budgeting 6 Brown et al. (2009), Frow et al. (2010), King et al. (2010), Libby and Lindsay (2010), Schatzberg and Stevens (2008), Sprinkle et al. (2008)
Organisational control
Corporate governance 3 Baxter and Chua (2008), Gulamhussen and Guerreiro (2009), Hughes (2009)
International control 7 Busco et al. (2008), Chanegrih (2008), Hyvönen et al. (2008), Jansen et al. (2009), Li and Tang (2009), Masquefa (2008), Moilanen (2008)
Interorganisational control 9 Boland et al. (2008), Caglio and Ditillo (2008), Cäker (2008), Dekker (2008), Free (2008), Gosman and Kohlbeck (2009), Langfield-Smith
(2008), Vosselman and van der Meer-Kooistra (2009), Vélez et al. (2008)
Intraorganisational control 4 Giraud et al. (2008), Jørgensen and Messner (2009), Rowe et al. (2008), van der Meer-Kooistra and Scapens (2008)
Transfer pricing 5 Chang et al. (2008), Cools et al. (2008), Cools and Slagmulder (2009), Fjell and Foros (2008), Rossing and Rohde (2010)
Perf. measurement & evaluation
Benchmarking 1 Deville (2009)
Consequences 10 Chung et al. (2009), Church et al. (2008), Demski et al. (2008), Dossi and Patelli (2008), Hall (2008), Hansen (2010), Hartmann and Slapničar
(2009), Mensah et al. (2009), Román (2009), Schueler and Krotter (2008)
Incentive systems 6 Budde (2009), Dikolli et al. (2009), Homburg and Stebel (2009), Pfeiffer and Velthuis (2009), Upton (2009), Zamora (2008)
Perf. measurement systems 16 Abernethy et al. (2010), Broadbent and Laughlin (2009), Burney et al. (2009), Cardinaels and van Veen-Dirks (2010), Davila et al. (2009),
Demski et al. (2009), Ferreira and Otley (2009), Kennedy and Widener (2008), Lillis and van Veen-Dirks (2008), Malmi and Brown (2008),
Mundy (2010), Sandelin (2008), van Veen-Dirks (2010), Wiersma (2008),Wiersma (2009), Wouters and Wilderom (2008)
67
Cost accounting
Activity-Based Costing 4 Banker et al. (2008), Englund and Gerdin (2008), Hoozée and Bruggeman (2010), Kallunki and Silvola (2008)
Interorganisational cost mgt. 4 Agndal and Nilsson (2009), Agndal and Nilsson (2010), Rothenberg (2009), Van den Abbeele et al. (2009)
8
Intellectual resource management
Accounting info. systems 6 Chapman and Kihn (2009), Cobb (2009), Eldenburg et al. (2010), Hall (2010), Lamminmaki (2008), Ozbilgin and Penno (2008)
Knowledge management 3 Alcouffe et al. (2008), Berland and Chiapello (2009), van Helden et al. (2010)
Management info. pres. 2 Cardinaels (2008), Mouritsen et al. (2009)
Organisational learning 1 Batac and Carassus (2009)
12
Other
Literature review/analysis 1 Lindquist and Smith (2009)
Research methods 16 Ahrens (2008), Birnberg (2009), Coad and Herbert (2009), Gerdin and Greve (2008), Hopwood (2008), Johansson and Siverbo (2009), Kakkuri-
Knuuttila et al. (2008a), Kakkuri-Knuuttila et al. (2008b), Lukka (2010), Lukka and Modell (2010), Malmi (2010), Merchant (2010), Modell
(2009), Modell (2010), Vaivio and Sirén (2010), Vollmer (2009)
Risk management 3 Mikes (2009), Wahlström (2009), Woods (2009)
Strategic management acct. 7 Cadez and Guilding (2008), Carr et al. (2010), Jørgensen and Messner (2010), Naiker et al. (2008), Seal (2010), Skærbæk and Tryggestad (2010),
Tillmann and Goddard (2008)
Sust. & env. management 2 Gray (2010), Henri and Journeault (2010)
29
116
           

6
 
 

TABLE 2
Content summary

n % of total
Management control
Budgeting 6 5.17% (6/116)
Organisational control
Corporate governance 3 2.59% (3/116)
International control 7 6.03% (7/116)
Interorganisational control 9 7.76% (9/116)
Intraorganisational control 4 3.45% (4/116)
Transfer pricing 5 4.31% (5/116)
Perf. measurement & evaluation
Benchmarking 1 0.86% (1/116)
Consequences 10 8.62% (10/116)
Incentive systems 6 5.17% (6/116)
Perf. measurement systems 16 13.79% (16/116)
67 57.76%2 (67/116)

Cost accounting
Activity-Based Costing 4 3.45% (4/116)
Interorganisational cost mgt. 4 3.45% (4/116)
8 6.90% (8/116)

Intellectual resource management

Accounting info. systems 6 5.17% (6/116)
Knowledge management 3 2.59% (3/116)
Management info. pres. 2 1.72% (2/116)
Organisational learning 1 0.86% (1/116)
12 10.34% (12/116)

Other
Literature review/analysis 1 0.86% (1/116)
Research methods 16 13.79% (16/116)
Risk management 3 2.59% (3/116)
Strategic management acct. 7 6.03% (8/116)
Sust. & env. management 2 1.72% (2/116)
29 25.00%3 (29/116)

116 100% (116/116)

 
DISCUSSION AND ANALYSIS
The discussion and analysis is divided into two sections. In the first section, the findings above will
be placed into the context of previous literature reviews in order to highlight several macro trends.
In the second section, key themes emerging from the recent literature are analysed.

Analysis of macro trends

The purpose of this section is to give a brief summary of the broad trends in management account-
ing research over the last three decades. In order to do this, it is important to establish comparability
between the findings of this paper and the findings of previous papers. The taxonomy used in this
paper allows for a certain degree of comparability with previous content analyses. Two earlier
studies are particularly noteworthy for the purposes of this comparison. First, Hesford et al.’s
                                                            
2
A 0.01% rounding error has been ignored in this representation.
3
A 0.01% rounding error has been ignored in this representation. 

 
(2007) paper is valuable both for its breadth and its depth. Hesford et al. (2007) reviews manage-
ment accounting papers published over a period of twenty years from 1981 to 2000 in ten major
journals. The sheer volume and span of this paper makes it useful for purposes of comparison.

Second, Lindquist and Smith (2009) present an analysis of the first twenty years of JMAR (1989-
2008). While this paper is limited by its scope and its primarily North American focus, its long-term
perspective on a leading journal that deals exclusively with management accounting makes it an
appropriate point of reference for comparison of findings.

These two papers combine to provide a comparative context for drawing attention to some long-
term trends in the management accounting research. Highlighting macro trends over the last three
decades is intended to enhance the depth of this paper by placing its insights into the broader
context of management accounting research.

Table 3 compares the general topics in Hesford et al. (2007) and Lindquist and Smith (2009) with
the main headings presented in Table 2 except that IRM has been combined with other in order to
enhance comparability with previous studies. In order to properly interpret Table 3, it is important
to remember that while Hesford et al. (2007) analyses articles up until 2000, Lindquist and Smith
(2009) analyse articles up until 2008 and this study analyses articles from 2008 to 2010. Therefore
it is important, when drawing time-based inferences, to recognise the spatial and longitudinal
variances between the three studies portrayed.

TABLE 3
Comparison of article topic proportions in
literature reviews

Hesford Lindquist Harris

et al & Smith &
(JMAR) Durden
Control 70.3% 52.6% 57.8%
Cost 19.3% 23.7% 6.9%
Other 10.4% 23.7% 35.3%4
100% 100% 100%

 
All three major headings in Table 3 reveal important trends in management accounting research.

Management control
It is notable that the topic of control still dominates management accounting research, though
perhaps to a lesser degree than in past decades. Two of the three topics under management control
(budgeting and organisational control) demonstrate notable trends.

Budgeting demonstrates a small and decreasing, but vibrant body of papers. While Lindquist and
Smith (2009) found 20.4% of papers dealt with budgeting, our analysis finds only 5.2% of papers
dealt with budgeting issues. Still, while some scholars seem to be composing a requiem for budget-
ing (Gurton, 1999; Wallander, 1999), Libby and Lindsay (2010), in a survey of North American
firms, demonstrate that budgeting is far from dead and has rather proven resilient and adaptable in
corporate practice. It is worth noting that while there are myriad voices addressing concerns about
the way budgeting is often used, the voices calling for an end to budgeting per se are relatively few
and generally fall outside the mainstream of academia. Despite some weaknesses in the research

                                                            
4
This figure has been presented as an aggregate of the “intellectual resource management” and “other” classifications.
 9 
 
carried out by Libby and Lindsay (2010),5 their study seems to confirm what we know intuitively:
budgeting is far too powerful and beneficial to be disposed of at this time. Instead, it will be adapted
to the changing environment through ideas such as Frow et al.’s (2010) continuous budgeting.
Perhaps it is best to understand the decreased publication on budgeting as an indication of research
saturation in the area rather than as a decline in the relevance of budgeting in practice.

While organisational control demonstrates a significant collection of articles, there is one key trend
to be highlighted. This trend is apparent in the bulk of papers addressing both international control
and Interorganisational control. The significant increase in emphasis on these two topics seems to
be closely related to the emerging macro theme of the multinational enterprise or internationalisa-
tion. This theme is directly or indirectly addressed under international control and transfer pricing,
but also shows up under categories such as interorganisational control, Intraorganisational control,
corporate governance, performance measurement, accounting information systems, and knowledge
management. This emphasis on issues surrounding internationalisation reflects the major trends in
practice over recent decades and demonstrates that—at least in this area—researchers have attempt-
ed to keep their work connected to the issues that are important in management accounting practice.

Cost accounting
As highlighted in Table 3, cost accounting seems to be receiving a lot less attention than previously.
While Table 3 seems to suggest that JMAR has not seen this pattern of decrease in cost accounting
papers, the underlying data tells a different story. The number shown in Table 3 (23.7%) is an
aggregate of the first and second half of the period over which JMAR was analysed. The first period
covered the years 1989 to 1998 while the second period encompassed the period from 1999 to 2008.
In the first period, 29.2% of papers were classified as cost accounting papers while in the second
period, only 16.3% were classified as cost accounting papers. This demonstrates that not only has
JMAR seen a significant drop in publication of papers on cost accounting, but may also indicate that
JMAR gives more attention to cost accounting issues than other management accounting journals in
general. Future research could analyse the causes of this seeming propensity toward a higher em-
phasis on cost accounting and whether JMAR’s inclination toward quantitative research methods is
in any way correlated with this trend.

Intellectual resource management

We have identified IRM as a substantial emerging category of management accounting research.
Table 2 demonstrates that 10.34% of contemporary research is directed toward IRM issues. Not
even cost accounting, one of the key areas of management accounting research traditionally, has
received the research emphasis that IRM has received in recent years. This seems to indicate both a
decreasing emphasis on some of the more traditional areas of management accounting research
(primarily cost accounting) and an increasing emphasis on newer areas of management accounting
research, specifically IRM. Though it is too soon to know for sure whether IRM research will
continue to increase, it is reasonable to expect that it will. A combination of technological advances,
improvements in technology utilisation, internationalisation, and increasingly complex and nuanced
control systems provides a solid rationale for increasing future research on the management of
intellectual resources.

Other
Table 3 suggests a steady and profound increase in the research published under classifications
other than management control and cost accounting. It seems reasonable to infer that this reflects
the gradually changing face of management accounting research over the last three decades as new
areas such as strategic management accounting and sustainability and environmental management

                                                            
5
For instance, the response rate from the United States portion of their survey was a mere 1.5% compared to the
response rate of 13.6% in the Canadian portion.
vie for research resources. It also seems to reflect the growth in papers on research meth-
ods/methodologies as well as various areas of IRM.

Table 4 demonstrates the steady growth of strategic management accounting (SMA) from 1.6% of
published research between 1981 and 20006 to 6.0% of the research reviewed in this paper. While
SMA neither started with a bang nor exploded to dominance, it has matured into a substantial area
for management accounting research and has much to contribute to management accounting in the
future. One key area in which SMA has much to offer is the emerging area of sustainability and
environmental management (SEM) whose success arguably relies largely on its ability to influence
the strategic outlook of firms to include a broader spectrum of stakeholders. SEM research can
benefit from the insights of SMA in terms of integrating SEM-congruent strategic goals into the
management systems of the organisation.
 
TABLE 4
Growth in proportion of strategic
management accounting research

Hesford Lindquist Harris

et al & Smith &
(JMAR) Durden
SMA 1.6% 4.3% 6.0%
     
 
General analysis
This section will address seven general themes that emerge from the literature which was reviewed.
The themes addressed are performance measurement systems (PMS), trust, leadership, organisa-
tional justice, sustainability and environmental management, research methods, and the re-
search/practice dichotomy.

First, PMS continues to occupy a sizeable slice of the total research in management accounting (see
Table 2). It seems that the PMS is at the core of management accounting practice and research to
date. It also seems reasonable to suggest that PMS will remain at the core of management account-
ing practice and research because internationalisation is presenting many new challenges. Interna-
tionalisation’s influence on modifying corporate structure, increasing competition, changing strate-
gies, and raising cross-cultural concerns is likely to open new areas of research in this area for some
time to come.

Second, a theme that seems to dominate the reviewed literature is the concept of trust. While ac-
knowledging that “the issue of defining trust remains largely unresolved,” Vosselman and van der
Meer-Kooistra (2009, p. 269) give what they consider to be a fundamental element of the concept of
trust: “willingness to accept vulnerability.” This core statement captures the general reality that
parties trust each other when they believe the likelihood of the other party engaging in opportunistic
behaviour is low. Over 34.5%7 of the papers reviewed made explicit reference to trust at a concep-
tual level. These references cluster around the organisational control classification and less so
around PMSs and research methods/methodologies, but are otherwise scattered fairly evenly
throughout the papers. This suggests a widespread trend toward recognition of the critical role of
trust in management accounting generally and specifically in organisational control and PMSs.
While Free (2008), Hartmann and Slapničar (2009), Langfield-Smith (2008), Vélez et al. (2008),

                                                            
6
Within the ten journals included in the overview.
7
This number is calculated as 40/116.
 11 
 
and Vosselman and van der Meer-Kooistra (2009) each address trust directly and at some depth,
there is still much research to be done in this area, both at conceptual and empirical levels.

Third, the popular leadership literature has increasingly distinguished between leadership and
management in recent decades (e.g. Covey, 1989; Maxwell, 1998), yet few would argue that leader-
ship is not an important component of effective management. Leadership has historically attracted
only minimal attention in management accounting research; however, in recent years this has begun
to change. The construct of leadership/leadership style was addressed in 12.9%8 of papers in the
contemporary research considered in this study; however, only a handful addressed leadership in
any depth. Still, this seems to be an area pregnant with benefits for the field of management ac-
counting, especially considering that it is intimately tied to the also emerging theme of trust.

The fourth theme comes under the heading of responsibility accounting. The ideas of organisational
justice (encompassing distributive, procedural, and interactional justice) and controllability in
performance evaluation are addressed in 9.5%9 of the papers considered; however, only a few
address the issue at any length. As Cools and Slagmulder (2009, p. 155) have noted, responsibility
accounting has undergone very limited empirical research. Cools and Slagmulder (2009) cite only
Merchant (1987) and Rowe et al. (2008) as exceptions. This review of the contemporary literature
identifies several additional empirical studies that focus specifically on organisational justice and
controllability. Burney et al. (2009) focuses on how employees perceive organisational justice,
Hartmann and Slapničar (2009) consider how organisational justice affects trust, and Giraud et al.
(2008) argues that in practice, at least with respect to external factors, managers understand that
they will be held accountable for a number of factors over which they have very limited control.
While these studies constitute a significant contribution to the empirical research on responsibility
accounting, this is a field that warrants significant additional empirical research.

Fifth, only two papers classified as management accounting papers in this study addressed the issue
of SEM. This finding is surprising because this is an area that has tended to dominate the social,
political, and scientific public discussion for quite some time. The typical handling of the topic
tends to fall under the category of ‘religion’. We demonstrate this point with excerpts from one of
the two papers considered for this review. Gray (2010) addresses the issue of sustainability with
such theologically suggestive terms/phrases as “morally engaged,” “ethical perspective,” “planetary
desecration,” “moral outrage,” “right,” “spirituality,” and “religion.” He then quotes Gladwin et al.
(1997) as saying that sustainability is “a religious problem.” Finally, he overtly preaches Pantheism
when he says “as humans, we embrace… our grounding in a physicality and the inextricable en-
twining with what we call ‘Nature.’”10 While such overt preaching might be appropriate in a theo-
logical journal, should it be ‘masked’ as general academic research? The field of sustainability and
environmental management is an important one in which much research needs to be done. It is
crucial that research in this area be realistic and objective or the field will appropriately remain on
the fringe.

The final two themes fall under the ‘general’ category of research. The first theme under research is
comparative in nature. Of the three journals reviewed in this paper, AOS, MAR, and JMAR, the
North American based JMAR demonstrates a noticeable reticence to transition toward publication of
research grounded in more qualitative methods and methodologies. While it is not our intention to
survey methodological approaches to management accounting research here or to argue for the
exclusive use of qualitative research methods, the dominant use of quantitative research methods in

                                                            
8
This number is calculated as 15/116.
9
This number is calculated as 11/116.
10
That “Nature” is capitalised is not theologically insignificant.
JMAR11 is less then subtle and may be symptomatic of broader issues in US academia (cf. Mer-
chant, 2010).

The second theme under the ‘general’ research category is expressed in calls to tie management
accounting research more closely to practice. Among others (e.g. Seal, 2010), two notable names in
management accounting research and AAA-AICPA12 Lifetime Contribution Award recipients,
Anthony Hopwood (2008) and Jacob Birnberg (2009), have, in the published versions of their
acceptance talks, expressed serious concerns about the growing distance between management
accounting research and management accounting practice. Hopwood (2008) illustrates his com-
ments by alluding to the medical field where researchers tend to simultaneously carry on at least a
degree of practice. Hopwood (2008) suggests that such situations allow for the speedy transmission
of problems from practice to research and of solutions from research to practice.

SUMMARY AND CONCLUSION

The aim of this paper was to provide a review of some of the recent management accounting litera-
ture. In this regard we reviewed 116 recent articles on management accounting taken from three
leading journals. First, the research taxonomy was crafted through an iterative process of develop-
ment and refinement. Then the papers were organised within this taxonomical structure. Next, the
findings of the review were analysed both in the context of macro trends and then more generally.

In the analysis of macro trends, five key research trends emerged. The decreasing emphasis on
budgeting research was addressed while a significant increase in research surrounding the concept
of internationalisation was reported. The decreasing emphasis on cost accounting research was then
pointed out while IRM was highlighted as a major emerging area for research. Finally, a slow but
steady pattern of growth was noted in SMA research.

Next, the general analysis revealed some key themes. First, several justifications were given for the
continued relevance of research on PMSs. Then, the theme of trust was briefly outlined as a major
emerging theme and an area ripe for additional research. Next, the concept of leadership was
addressed as a significant theme in the literature, followed by the general theme of organisational
justice. SEM was then addressed as an area in which more objective, disciplined research is needed.
JMAR’s hesitance to use qualitative research methods was then noted before the analysis was
wrapped up with several thoughts on the current drive to tie management accounting research more
closely to practice.

In summary, this review and analysis suggests a field of research that is slowly evolving through a
process of self criticism and cooperative research. A slow shift is occurring in that less attention is
being given to the more traditional areas of management accounting research such as management
control and cost accounting while new areas such as IRM, SEM, and SMA are emerging as hotspots
for current and future research. Finally, key emerging themes such as internationalisation, trust,
organisational justice, and leadership are being examined from a range of angles and in a variety of
contexts.

There are several limitations to the current paper. First, it has limited scope. This study covers only
three journals over a period of three years. Future research could extend this study to review a
longer period of time and a broader range of journals. Second, while classification was carried out
through a painstaking process, there was much subjectivity involved. Accordingly it is impossible
to assure compatibility with previous classifications. As a result comparisons between this and
previous reviews and trend analysis needs to be interpreted with caution.

                                                            
11
Of the papers reviewed from JMAR, 71.4% used quantitative research methods.
12
American Accounting Association (AAA) and American Institute of Certified Practicing Accountants (AICPA).
 13 
 
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 APSKAITOS IR FINANSŲ MOKSLAS IR STUDIJOS: PROBLEMOS IR PERSPEKTYVOS
SCIENCE AND STUDIES OF ACCOUNTING AND FINANCE: PROBLEMS AND PERSPECTIVES
eISSN 2351-5597. 2019, vol. 13, no 1: 19-27
Article DOI: https://doi.org/10.15544/ssaf.2019.03

INSIGHT INTO BUDGETING PRACTICES: EMPIRICAL STUDY OF THE

LARGEST MANUFACTURING COMPANIES IN LITHUANIA
Rūta Klimaitienė1, Justina Ramanauskaitė2
1
Vilnius University, 2“Earnst&Young Baltic” Ltd, Lithuania

Abstract

Many research studies have identified an increasing number of disadvantages that arise from using traditional budgeting methods that must
be addressed in order to achieve better performance management. The aim of this research is to investigate the current budgeting practices of the largest
manufacturing in Lithuania and to find out if the budgeting practices of Lithuanian companies lead to the issues that can be observed in literature and
foreign studies. The main objective of the research is to identify the prelevant budgeting trends in the largest manufacturing Lithuania companies and
to compare these results with the results of the research accomplished in other countries.
The design of the study is based on empirical study-questionnaire. A questionnaire for the assessment of the current budgeting practices used
by the largest Lithuanian companies was created. A cross-sectional analysis of the results has been performed.
The performed questionnaire-based survey indicates certain trends in budgeting practices in Lithuania. The cross-analysis results show that
companies with highly rated budget have more sophisticated budgeting methods and, conversely, companies that rated their budget with the average
rating, have more traditional budgeting methods. The most important aspects which affect the effectiveness of budget are indicated.
The research points out the necessity of adopting more sophisticated budgeting aspects which contribute to greater satisfaction while using
budgets for better performance management. This study reveals which budgeting aspects make a significant impact on the satisfaction and the
effectiveness of budgets. The interpretations of results allowed to define the main trends of budgeting in companies of Lithuania. The results of previous
researches from Czech Republic companies, Luxembourg companies, South African Republic companies, Spain companies, Canada companies,
Malaysia companies, Australia companies and a study conducted by Quantrix, which were accomplished by other authors were presented and these
results were compared with the results of the research accomplished in Lithuania. Such course of investigation allowed to identify the the following
most important aspects that affect budgeting efficiency and satisfaction: strategic goals set in the company; the budgeting period; including employees
in the budgeting process; the period of the budget created for the operating activities of the company; flexibility of budgets; the frequency of budget
review; using and including key performance indicators.
The findings of empirical analysis revealed that Lithuanian companies do not use all listed main aspects that affect budgeting efficiency and
satisfaction. So it is important for these companies to include these aspects into budgeting process.
Keywords: budgets, management accounting, Lithuania.
JEL Codes: M10, M41.

Introduction

Budgeting is considered to be one of the most important and useful tools and techniques in management
accounting. It is used to plan, coordinate and assess performance, to motivate employees and maintain the internal control
system of an organisation. There are various traditional and modern budget models available for companies. Recently,
more and more flaws in traditional budgets have been identified, which should be addressed in order to achieve the results.
Having taken into consideration the quickly-changing external and internal corporate environment, traditional methods
are no longer sufficient, thus some companies are willing to essentially change their entire performance management
system to achieve performance efficiency. In order to address these flaws, modern models or using alternate performance
planning and coordination methods instead of budgeting are proposed.
Budget creation is usually considered to be the main element of management accounting. Budgeting is one of
the most important and useful tools and techniques in management accounting. Properly prepared budget models in
companies are used for planning, coordination and performance assessment, employee motivation and the maintenance
of the internal control system of an organisation. Almost 90 percent of companies in developed and developing countries
use budgeting in their activities to assess estimated results (Goode and Malik, 2011; Pietrzak, 2013).
The budgeting process is an essential component of management accounting and is an efficient system that
allows management to successfully plan, coordinate and control (Singh and Yadav, 2011). The entire process
encompasses setting and achieving goals as well as short-term and long-term financial plans. Companies often link their
budgets to strategies. However, the research shows that using budgets to assess efficiency is not universal and is not
suitable for each case (Libby and Lindsay, 2010; Leon et al., 2012; Sponem and Lambert, 2015).
Traditional budgets have been used in companies for a long time, but they have attracted a lot of criticism
recently. Very important investigation related to traditional budgeting usage during financial crisis have been done by
others researchers (Lorain et. al., 2014). The main reason for this criticism is the inability to adapt to unexpected market
conditions and the annual nature of the reference period which does not reflect the current, ever-changing business
environment (Libby and Lindsay, 2010; Antić and Novićević, 2011; Sandalgaard, 2012; Ilchikabir, 2013; Cardos et
al., 2013; Srinivasan and Ganapathi, 2014; Dokulil, 2016).
Studies conducted in the US, Canada, India, Denmark and other foreign countries show that almost 90 percent
of companies in developed and developing countries use budgeting in their activities to assess estimated results (Goode
and Malik, 2011; Pietrzak, 2013). It is therefore essential to address the flaws of l budgets and provide companies with
methods that could significantly affect performance results. Due to this, modern budgets have appeared on the market

Copyright © 2019 The Authors. Published by Vytautas Magnus University. This is an open-access article distributed under the Creative
Commons Attribution-NonCommercial 3.0 Unported license, allowing third parties to share their work (copy, distribute, transmit) and
to adapt it, under the condition that the authors are given credit, that the work is not used for commercial purposes, and that in the event
of reuse or distribution, the terms of this license are made clear.
(Antić and Novićević, 2011; Janjić, 2011; Ekholm and Wallin, 2011; Singh and Yadav, 2011; Ionescu, 2014; Radu and
Gîju, 2015; Sponem and Lambert, 2015; Popesko et al., 2016; Shcherbina and Tamulavičienė, 2016). The latest research
(Bogsnes, 2009; Frow et al., 2010; Poppendieck and Poppendieck, 2010; Østergren and Stensaker, 2011; Cardos et
al., 2013; Henttu-Aho and Järvinen, 2013; Bourmistrov and Kaarbøe, 2013; Heinzelmann, 2015; Mejzini and
Seidel, 2015; O‘Grady and Akroyd, 2016) shows that a company will achieve better results by using the beyond-budgeting
management system which applies 12 leadership and process principles (Vaznonienė and Bendaravičienė, 2012;
Vaznonienė ir Stončiuvienė, 2012; Benefits of Beyond…, 2013; Ton-Nu, 2014; Mejzini and Seidel, 2015).
Budgeting is often criticised for taking up a lot of time, encouraging individual logic and short-term approach as
well as providing unnecessary information to users (Østergren and Stensaker, 2011; Henttu-Aho and Järvinen, 2013;
Bourmistrov and Kaarbøe, 2013). It is, however, still widely used in many organisations and has an important role in the
corporate management system (Libby and Lindsay, 2010). Each company has to select a budget model that is best suited
to it, having assessed corporate culture, history, its IT infrastructure and other needs (Cardoş, 2014).
Nation-wide, management accounting as a whole is analysed more often than its separate elements (Strumickas
and Valančienė, 2009). Klimaitienė (2011) has carried out a study of preparation and application of budget models, the
results of which demonstrated that Lithuanian companies are not willing to stop using budgets. Vaznonienė and
Stočiuvienė (2012), Vaznonienė and Bendaravičienė (2012) have studied budget models at the company level. Klimaitienė
and Jočys (2014) have described the methodology of introducing the beyond-budgeting management in a company.
This study aims to investigate the current budgeting practices of the largest Lithuanian manufacturing companies
and to find out if the budgeting practices of Lithuanian companies lead to the issues that can be observed in literature and
foreign studies. The main objective of the research is to indentify the prelevant modern budgeting trends in the largest
Lithuania companies. The scientific novelty of the research is that study-questionnaire, which was based on the researches
carried out in different countries allowed to cover all the picture regarding budgeting process and to include into
questionnaire all the main issues which are facing large companies form different countries. Furthemore, the
interpretations of results allowed to define the main trends of budgeting in companies of Lithuania and these results were
compared with the results of the research accomplished in other countries.

Research Methods

The design of the study is based on empirical study-questionnaire. A questionnaire for the assessment of the
current budgeting practices used by the largest companies was created.
The main research method for the analysis of the survey results in this research is a cross-sectional analysis of
the results, which has been performed.

Table 1. Detailed Statistics for Respondents of the Survey

Question Generalised answers

Meeting the criteria for a large
manufacturing company 100 percent

2 – company executives
3 – financial directors
2 – accountants
4 – other:
Position at the company 1 head of the IT division
1 deputy financial director
1 manager of the economics division
1 economist
5 – up to 3 years
How long have you held this position? 4 – more than 4 years
2 – did not answer
Does your company make plans, All companies that prepare budgets make plans and predictions, 7 companies have
predictions, strategic goals? strategic goals, 1 does not and does not plan to do so in the future
9 companies use budgets
Does your company use budgets? 2 companies do not use budgets
1 company has been using budgets for 1 to 3 years
For how long has your company used 1 company has been using budgets for 4 to 6 years
budgets? 7 companies have been using budgets for more than 7 years
Do you participate in the budgeting 8 participate
process? 1 does not participate (head of the IT division)
Have budgets been used in your company
previously, but the budgeting process is Companies that do not use budgets did not provide answers
currently discontinued?

20
 In order to evaluate the budgets applied in Lithuanian companies, a group of respondents was chosen –
manufacturing companies operating in Lithuania Kaunas county. As it will be mentioned later the main problem regarding
budgeting researches is the quantity of the data gathered through the questionnaire. Kaunas county was chosen because
it was necessary to ensure for researches to get in touch easily with respondents. The responses to the questions are usually
more accurate, when it is possible to meet with the company representative. Dai et al. (2019) stressed one additional
important aspect in getting in touch with interview-based data tends to be an inspiring experience for the researcher.
Authors are sure, that spending time with people in the field who reflect on careers, trends and challenges within their
own domain is always a precious moment, allowing the researcher to connect, in some ways, with the interviewees
interpretive schemes.
The respondents of the study were selected on the basis of two criteria:
 companies that operate in the manufacturing area;
 companies registered in Kaunas county.
On the basis of the selected criteria it was determined that 22 large manufacturing companies operate in the
production sector in Kaunas county. As part of the empirical study, 22 questionnaires were sent out. 11 companies
responded. As it can be seen, the questionnaires were sent to all manufacturing companies, which are operating in Kaunas
county, still half of the companies did not answer. The main reasons for not answering the questionnaire are following:
1) these companies do not have budgets or 2) they are not willing to share the information. There is no doubt, that the
result would be more accurate, if all companies answered the questionnaire.
Secondary, it is very important to acknowledge, that the study results which are related to budgets are limited by
the quantity and quality of the data gathered through the questionnaire. Answers in the questionnaire are mostly based on
the personal opinions of the surveyed persons, which in addition did not have to be sufficiently experienced and educated
to consider objectively the actual situation inside the organization. However, the similarity of research tasks with similar
foreign studies allows accepting these results as appropriate and relevant (Popesko et al., 2015).
The questionnaire also seek to evaluate the budget system from the personal satisfaction of the respondent with
the use of budgets. In this way, selected research method – cross-sectional analysis, allows to determine if more
sophisticated methods which are used within budgeting process increases satisfaction.
The characteristics of companies that participated in the empirical study, listed in Table 1, show that 64 percent
of respondents that filled out the questionnaire hold high-level positions at their companies (heads of companies, financial
directors and their deputies, head of the IT division). The remaining 36 percent of respondents are accountants, managers
or economists. 46 percent of respondents have held their position for a short period (up to 3 years) and 36 percent have
held their position for more than 4 years.
The assessment method was developed on the basis of the questionnaire in order to offer as succinct and simple
a questionnaire as possible so that respondents would be willing to fill it out or to answer. It was decided on a questionnaire
that contains up to 20 questions. The majority of the questions are closed-ended, meaning that the respondent simply has
to choose the suitable answer. But still part of the questions were opened questions, in order to track all issues, which
companies faces while using budgets. The presentation of the questionnaire is summarised in Table 2.

Table 2. Presentation of the Questionnaire

Questionnaire
No. Research objectives/the aim of the questions
section
Questions in the general section aim to verify that the respondent represents a large manufacturing
company, to identify the respondent and find out their role in the budgeting process.
1. General section
There is also a question whether there are plans, predictions and strategic goals made in the
company since it is often closely related to budgeting.
Organisational The organisational section of the questionnaire aims to identify which divisions of the company
2.
section participate in the budgeting process.
Methodical The methodical section of the questionnaire contains questions that best identify the features of
3.
section budgets used in the company.
The technical section of the questionnaire assesses how much the company has invested into its
4. Technical section
budget models.
Respondent's The respondent's assessment section contains two questions, the responses to which assess the
5.
assessment satisfaction with the budgets and possible ways of addressing the flaws.

The questionnaire consists of 5 parts: general, organisational, methodical, technical and assessment. Questions
in the general section aim to verify that the respondent represents a large company which exceeds at least two of the
following criteria on the last day of the financial year:
 the value of the assets listed in the balance-sheet is at least EUR 20,000,000;
 net sales income during the reference financial year is at least EUR 40,000,000;
 the average annual number of employees during the reference financial year is at least 250.

21
 The general section also lists questions that allow to identify the respondent, asking for how long the respondent
has held the current position, as well as to assess if there are plans, predictions and strategic goals made in the company.
These aspects are important since budgeting is often closely related to corporate strategy and planning.

Results

The performed questionnaire-based survey shows certain budgeting trends in Lithuania. The results of previous
researches from Czech Republic companies (Popesko et. al., 2015), Luxembourg companies CFO Budgeting Survey
(2012, 2015), South African Republic companies (Maduekwe, 2015), Spain companies, Canada companies, Malaysia
companies (Ahmad, 2012), Australia companies and a study conducted by Quantrix (2012), which were accomplished by
other authors are presented below and these results are compared with the results of the research accomplished in
Lithuania.
82 percent of the respondents answered positively and 18 percent answered negatively to the question Does
your company use budgets? The further analysis of the empirical study is carried out on the basis of the answers provided
by those respondents that use budgeting. The cross-sectional analysis in this study is carried out on the basis of the
assessment of the applied budget models provided by the respondent. In response to the question Are the budget models
in the company satisfactory?, 56 percent of respondents gave the budgets implemented in their companies the highest
rating (9-10) and the remaining 44 percent gave them the average rating (6-8). Respondents did not give the lowest rating
(1-5) to the budget models. A similar distribution of satisfaction with budget models was seen in a study of Czech
companies – only 2.82 percent of respondents rated the budgets from 1 to 5, 49. 15 percent gave them the average rating
(6 to 8) and 42.9 percent of respondents have them the highest rating.
100 percent of companies that create budgets also make plans and predictions in their operating activities. 100
percent of companies that gave their budget models the highest rating also set strategic goals; however, only 50 percent
of companies that gave their budget models average rating do that. 25 percent plan to start doing so in the future and 25
percent do not.
78 percent of companies have been creating budgets for more than 7 years, 11 percent of companies have been
doing that for 4 to 6 years and 11 percent – for less than 3 years. As a result of long-term budgeting experience, companies
can make relevant decisions to improve the model. In order for the newly introduced budget model to be efficient for the
company it should be used for more than one year.
The results of the cross-sectional analysis show that 100 percent of companies that gave their budget models the
highest rating have been using them for more than 7 years. 50 percent of companies that gave their models the average
rating also have long-term experience in the budgeting process. 25 percent of companies have been creating budgets for
a short (1 to 3 years) and average period (4 to 6 years). Cross-sectional analysis has shown that long-term budgeting
experience can lead to a more efficient practical application of budgeting.
In order to assess the budgeting process in accordance with the approach to budgeting and to find out which
divisions are included in the process, the respondents were asked Which divisions participate in the budgeting process?
Only 11 percent of respondents said that employees from all levels participate in the budgeting process, meaning that
only a small part of companies follow the bottom-up budgeting approach. In 67 percent of companies only top-level
executives, including heads of companies, heads of financial divisions and their deputies, heads of all divisions and their
deputies, participate in the budgeting process. 22 percent of companies include managers and project managers in the
budgeting process. A study conducted by Quantrix (2012), has produced similar results. The results showed that despite
companies trying to include more employees in the budgeting process, it still remains a task for the top-level executives
and the financial division.
Cross-sectional analysis has shown that budgeting is more effective when as many employees and divisions are
included in the process as possible. As for the highest-rated budget models, 20 percent of respondents follow the bottom-
up approach and employees from all levels participate in the budgeting process. In 80 percent of respondents' answers it
was noted that managers and deputies of all divisions, financial director and the management of the company participate
in the budgeting process. It was also noted that the financial division is the basis of the process but production, logistics
and other divisions participate as well. With regards to the creation process of budgets with average ratings, only top-
level executives and the financial division usually participate in the budgeting process (75 percent). Based on the data of
the cross-sectional analysis, it can be concluded that the more employees are included in the budgeting process, the more
accurate and efficient the applied budget models are.
To assess the level of detail of budgets of the companies, the respondents were asked for what period budgets
for all operating activity of the company, separate projects and separate products are created. 100 percent of companies
create budgets for all operating activity of the company, out of which 67 percent create annual budgets and the remaining
33 percent create short-term budgets, using them to compile annual budgets.
Over the course of the cross-sectional analysis it was determined that 100 percent of companies that gave their
budgets average ratings create annual budgets. Budgets that were rated the highest are prepared for shorter periods (60
percent use monthly budgets and 40 percent – quarterly and half-year budgets) which are used to compile the annual
budget. Having assessed the results of the cross-sectional analysis it can be stated that budgets for all operating activities
are more effective when they are created for periods shorter than one year.
78 percent of companies create budgets for separate projects when necessary, 11 percent create monthly budgets
and the remaining 11 percent do not create a separate budget for projects. It was determined that a similar portion of

22
companies create budgets for separate projects when necessary (75 percent of companies with the average budget rating
and 80 percent of companies with the highest budget rating). 25 percent of companies with the average budget rating do
not create budgets for separate projects and 20 percent of companies with the highest budget rating create monthly
budgets. Having assessed that, it can be concluded that satisfaction with the used budget model does not depend on
whether there is a budget for each separate project.
33.3 percent of companies create budgets for separate products when necessary, 22.2 percent create annual
budgets, 11.1 percent – quarterly budgets, 11.1 percent – monthly budgets and 22.3 percent of respondents do not create
budgets for separate products. The results of the cross-sectional analysis show that a similar number of companies create
budgets for separate projects when necessary (75 percent of companies with the average budget rating and 80 percent of
companies with the highest budget rating). 25 percent of companies with the average budget rating do not create budgets
for separate products and 20 percent of companies with the highest budget rating create monthly budgets. Having assessed
that, it can be concluded that satisfaction with the used budget model does not depend on whether there is a budget for
each separate product.
In order to assess what budgets do companies create in terms of the relationship with the previous periods, the
respondents were asked What data do you use to create a new budget? 44.4 percent of companies said that they create
zero-based budgets, when the new budget is created without taking into consideration the previous budgets. 44.4 percent
of companies create budgets on the basis of relative deviations from previous periods. 11.2 percent of companies consider
the actual situation when creating a new budget and, as a result, create both zero-based and incremental budgets. The
situation regarding budgeting in terms of the relationship with the previous periods is similar – some companies create
zero-based, some companies create incremental budgets. The results in the United Kingdom and the South African
Republic were the opposite – the majority of companies that participated in the studies used the data from previous years
when creating the new budget.
In order to assess budgets of companies in terms of correcting them, the respondents had to agree with or deny
the statement 'when the budget is approved, the data can be amended'. 33 percent of companies do not amend the approved
budgets (fixed budget) while 67 percent amend them (flexible budget). Similar results were obtained in studies conducted
in Spain, Canada, Malaysia and the Czech Republic: the majority of companies that participated in these studies used
flexible budgets. The opposite was noticed in companies operating in the US and the South African Republic where the
majority used fixed budgets in their activities. It can be concluded that the ability to adapt to the quickly changing
environment is becoming an important issue in the current market.
Over the course of the cross-sectional analysis it was determined that 80 percent of companies with the highest
budget rating create flexible budgets. The distribution of companies with average budget ratings in terms of correcting
the budgets is the same – 50 percent of companies create flexible and fixed budgets each. The data allows to conclude
that quick response to the current market situation and adapting to it contributes to the effectiveness of budgets in the
company performance.
Respondents were asked How often do you review budgets? in order to find out when the budgets are reviewed
and updated. 33 percent of companies review their budgets quarterly, 33 percent – every six months. Similar results were
obtained in a study conducted in Spain: the results showed that 38 percent of companies reviewed their budgets quarterly.
17 percent of Lithuanian companies claim that they review their budgets annually (it should be noted that these companies
create their budgets monthly) and 17 percent review them when necessary. A study conducted by Quantrix (2012) –
respondents from more than 50 countries, showed that 19 percent of companies reviewed their budgets monthly and 13
percent reviewed them annually, however, larger companies said that they had to review their budgets more often than
usual.
The cross-sectional analysis has shown that budgets based on models that were given average ratings are
reviewed quarterly or when necessary. Budgets that were rated the highest are usually reviewed every six months (50
percent), 25 percent of companies review them quarterly. Companies that create monthly budgets review them annually.
The analysis allows to conclude that the frequency of budget review contributes to the effectiveness of budgets.
The question Does your company use key performance indicators (KPIs)? Are they included in the budgeting
process? aims to find out which financial and non-financial indicators are used in budgeting most often. It was determined
that 89 percent of companies include at least one KPI in their budgeting process. A study conducted in Spain showed that
71.8 percent of companies use KPIs and include them in their budgets while 83 percent of companies do the same in the
South African Republic.
In terms of KPI groups, 89 percent of respondents use at least one financial indicator and include them in their
budgets, however, 11 percent of companies neither use financial performance indicators nor include them in their budgets.
Net profit (89 percent of respondents) and EBITDA (56 percent of respondents) are financial indicators that are included
in the budgeting process most often. About a half of the respondents use ROI, ROA and ROE to assess their performance
but do not include these profitability indicators in their budgeting process. 67 percent of companies do not use the P/E
(price/earnings ratio) indicator and does not include it in their budgets. In the South African Republic, the following
financial indicators are used the most often: sales growth, cash flow, operating income, net profit margin, ROI; in
Malaysia, sales income, sales growth and ROI are used the most often.
Non-financial performance indicators were divided into three groups – customer service, marketing results and
employee performance assessment. 56 percent of respondents include at least one non-financial KPI. After distributing
the indicators according to the relevant perspectives, 23 percent of companies include at least one indicator pertaining to
customer service and marketing results in their budgets and 33 percent include employee performance assessment

23
indicators. The following non-financial indicators are included the most often: market share (33 percent), market share
growth (33 percent), income from sales per one employee (33 percent) and the number of customer complaints (23
percent). Non-financial performance indicators most often used in the South African Republic are: customer satisfaction,
employee turnover (income from sales per employee), employee satisfaction; in Malaysia, such indicators are the
production defect indicator, customer satisfaction and employee turnover.
The cross-sectional analysis has shown that 100 percent of companies that rated their budget models highly
include at least one KPI in their budgets. The following KPIs are most often included: net profit (100 percent), EBITDA
(60 percent), ROI (40 percent). Meanwhile only 75 percent of companies that assessed their budget models include
financial performance indicators, such as net profit (75 percent) and EBITDA (50 percent).
Unlike companies that gave their budget models average ratings, companies with high ratings include customer
service KPI in their budgets (40 percent) as well as indicators pertaining to marketing results (60 percent). Usually, KPIs
relating to the market share and market share growth (60 percent) and the number of customer complaints (40 percent)
are included. At least one indicator of employee performance is included by 25 percent of companies with the average
budget rating and 40 percent with a high budget rating. It can be concluded that the number of financial and non-financial
indicators used for performance and budgeting is important when assessing the effectiveness of the created budgets.
In the technical section, the question What application do you use for budgeting? shows how much the company
has invested into the budgeting process. 80 percent of companies use Excel, 10 percent of companies use Excel and
financial software to create budgets and the remaining 10 percent have invested into a specific application that is
specifically adapted to the budgeting process. Similar results were obtained in a study conducted in Luxembourg: the
majority of companies that participated in the study (69 percent) used Excel and 19 percent used specific applications.
The cross-sectional analysis has shown that all budgets that were given the average ratings are created using the
Excel application and only 10 percent of companies with the highest budget rating use special applications. This leads to
the conclusion that the technical side of the budgeting process does not significantly affect the effectiveness of budgets
in Lithuanian companies.
Budgets can be used as a diagnostic or interactive control system. A diagnostic system usually sets goals, assesses
efficiency, calculates deviations etc. An interactive control system can be defined as information that managers use to
significantly and continuously participate in the decision-making process and company activity, thus engaging and
motivating more and more employees at various levels. A study conducted in Australia (Shen and Perera, 2013) has
shown that interactive usage of budgets in a stable environment motivates employees more than diagnostic usage.
However, when the environmental stability is low, budgets should be used as a diagnostic control system in order to
achieve high employee motivation.
Budget also stimulates activity across the entire organisation (Abogun and Fegbemi, 2011). The budgeting
process defines a set of rules based on which managers from different hierarchical levels share information about projects
with each other. The creation process is also dynamic and shifting and encompasses information flow in an organisation
(Pfeiffer and Schneider, 2010). Targeted budgeting is useful in cases when a better-informed manager spreads information
to others. Targeted budgeting can also increase the motivation of managers and engage employees at all levels to achieve
the set goals (Kopel and Riegler, 2014). Considering the information provided by the analysed sources, the authors have
distinguished the main functions of budget models which are listed in Table 3.

Table 3. Main Functions of Budget Models

Function Comment
The most important task is to provide reliable information which helps to make predictions. It
would allow companies to implement an effective planning process, for example, could organise
1. Planning and structure actions to achieve strategic goals.
However, planning is one of the most criticised functions in the current ever-changing market since
budgets become obsolete and require updates.
Budget management (control) not only allows to understand business process, but also to control
2. Control resource consumption and to stay on track. The analysis of deviations helps to determine their
causes. Using resources according to the plan helps to avoid waste or inefficient consumption.
This function defines the behaviour of the manager. Having defined certain goals, project managers
3. Employee motivation are motivated to achieve them with minimum costs. Budgets help to express the commitment of a
manager to achieve the set goals.
Budgets help to coordinate all areas of activity, divisions and activities, since it integrates a plan
4. Activity coordination
that drives toward achieving the set goal.
Once a budgeting system for employees at all levels is introduced, the employees are included in
planning and coordination.
Employee
5. Employees that have the most actual knowledge are included in the budgeting process. Employees
engagement
at various levels communicate with each other so that the most accurate budget is created for the
upcoming period.
Once goals are set in a company, the budget is created according to the current situation, it is
6. Identifying problems thoroughly analysed and flaws as well as problematic areas that interfere or prevent from achieving
goals are identified.

24
 Respondents were asked For what purpose are budgets most often used in your company? Having assessed the
main goals for budgeting in the scale from 1 (not important) to 5 (very important), the following assessments can be
distinguished.
Based on the data of the questionnaire, the goals can be listed in the following order by priority: planning and
control (4.44 points), coordination of activity (4.11 points), identifying problems (3.78 points) are important, employee
motivation and engagement are neither important nor unimportant (3 points each). Companies still view budget as a tool
for planning and control (the traditional approach). The same results were obtained in studies conducted in the South
African Republic, the United Kingdom, Canada, the US, the Czech Republic, Germany, Austria and Switzerland.
However, the attitudes were different in a study of production companies in India – as many as 88.5 percent of respondents
do not link budgeting and control of corporate activity.
In accordance with the provided assessment scale, the cross-sectional analysis showed that respondents who
rated their budgets the highest found all budgeting functions to be important: planning, control and performance
coordination were seen as the most important, however, the difference between these goals and identifying problems,
employee engagement and motivation was not significant.
It is important to notice, that budgeting became more important for planning and resource allocation, but less
important for performance evaluation in companies effected more strongly by the 2008 economic crisis (Becker et al.,
2016).
Companies that gave the average rating to their budgets view planning and control as the most important
functions whereas performance coordination and identifying problems are seen as less important. Employee motivation
and engagement are focused on the least. The cross-sectional analysis allows to conclude that in order to achieve higher
budgeting efficiency, more attention should be given to employees, their engagement and motivation.

Conclusions and Discussion

The research points the necessity of adopting more sophisticated budgeting methods, which contribute to greater
satisfaction while using budgets for better performance management. This research revealed which budgeting aspects
have a significant impact on the satisfaction and the effectiveness of budgeting processes.
It should be identified and acknowledged that some limitations of a study could have impacted the findings from
this research. Considering the impact of research weakness it should be noticed, that conducting a study, it is important
to have a sufficient sample size in order to conclude a valid research result. Statistical tests require a larger sample size to
ensure that the sample is considered to be representative. The studies results which are related to budgets are usually
limited by the quantity of the data gathered through the questionnaire. However, the similarity of research tasks with
similar foreign studies allows accepting the interpretations of the results as appropriate. Still, it was critically important
to be striving to minimize this limitations throughout research process by getting as many as possible questionnaires, by
persuading companies that the results will be aggregated across all manufacturing companies, without no intention to
single out specific companies.
The interpretations of results allowed to define the main trends of budgeting in companies of Lithuania. The
results of previous researches from Czech Republic companies, Luxembourg companies, South African Republic
companies, Spain companies, Canada companies, Malaysia companies, Australia companies and a study conducted by
Quantrix, which were accomplished by other authors were presented and these results were compared with the results of
the research accomplished in Lithuania.
 A similar distribution of satisfaction with budget models was seen in a study of Czech companies.
 A study conducted by Quantrix, has showed that despite companies trying to include more employees in the
budgeting process, it still remains a task for the top-level executives and the financial division.
 The situation regarding budgeting in terms of the relationship with the previous periods is as follows – some
companies create zero-based, some companies create incremental budgets. The results in the United Kingdom
and the South African Republic were the opposite – the majority of companies that participated in the studies
used the data from previous years when creating the new budget.
 In order to assess budgets of companies in terms of correcting them, the majority used flexible budgets in
their activities. Similar results were obtained in studies conducted in Spain, Canada, Malaysia and the Czech
Republic. The opposite was noticed in companies operating in the US and the South African Republic where
the majority used fixed budgets in their activities.
 It was determined that the majority of companies include at least one KPI in their budgeting process. A study
conducted in Spain and in the showed that the majority of companies use KPIs and include them in their
budgets while the majority of companies do the same in the South African Republic.
 The majority of companies use Excel for creating budgets. Similar results were obtained in companies of
Lithuania and in the study conducted by Quantrix.
The cross-sectional analysis on the basis of the assessment of budget used in companies allows to summarise the
following most important aspects that affect budgeting efficiency:
1. Strategic goals set in the company.
2. The budgeting period.
3. Including employees in the budgeting process.

25
 4. The period of the budget created for the operating activities of the company.
5. Flexibility of budgets.
6. The frequency of budget review.
7. Using and including key performance indicators.
In conclusion, this study shows that the global trends in budgeting practices, which are confirmed by research
projects conducted worldwide, are generally followed by the Lithuanian companies. Although some of the trends were
indicated. In order to achieve higher budgeting efficiency, it is recommended for companies that they should pay more
attention to employees, their engagement and motivation. It can be concluded that the number of financial and non-
financial indicators used for performance and budgeting is important when assessing the effectiveness of the created
budgets. The analysis allows to conclude that the frequency of budget review contributes to the effectiveness of budgets.
The ability to adapt to the quickly changing environment is becoming an important issue in the current market. The
findings of empirical analysis revealed that Lithuanian companies do not use all above listed main aspects that affect
budgeting efficiency and satisfaction. So it is important for these companies to include these aspects into budgeting
process.

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The article has been reviewed.

Received in October, 2018
Accepted in March, 2019

Contact person:
Rūta Klimaitienė, Vilnius University; Muitinės street 8, LT-44280, Kaunas, Lithuania; e-mail: ruta.klimaitiene@knf.vu.lt

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Vol-7 Issue-4 2021 IJARIIE-ISSN(O)-2395-4396

A STUDY ON BUDGET AND BUDGETARY

CONTROL WITH REFERENCE TO
PARAMESWARI PAPER STORES IN PPS ARTS
AND CARDS , COIMBATORE
M. Indhuja1 Abarna .S2 Karthika .R3 Oviya .P4

Abstract
Budget and budgetary control both at management and operational level looks at the future and lays down what has
to be activated. Control checks whether or not the plans are realized and puts into effect corrective measures where
deviation or shortfall is occurring. This study examines how budget and budgetary control can impact on the
performance the PARAMESWARI PAPERSTORES(PPS) arts and cards. The question as to whether budgeting is a
relevant tool in the financial management and control of organizations has gone on for long while proponents of
beyond budgeting have stood for the eradication of budgeting in the running of organization other have stood for a
maintenance because it plays more than just the role of regulating finances of an organization. Thus, showing the
relevance of budgeting as an effective control tool. The study argues that in order for budgeting to fit well as a
control tool in organizations. The positive elements of the various budgeting school should be merged to make the
budgeting process simpler and less time consuming so as to encourage stakeholders to see its usefulness
Following the findings it is advised to managers and business operators to pay more attention to their budgetary
control systems for those without an existing budgetary control system they should put one in place and those with a
dummy or passive budgetary control system it is time they re-established a result oriented budgetary control system
as it goes a long way in repositioning the manufacturing industry from its creeping performance level to an
improved high-capacity vitalization point.
Keywords: Maintenance, Deviation, Beneficiaries

1.Introduction
A budget is a defined in the Institute of cost and management accountants 1966 edition of Terminology as a”
financial and / or quantitative statement prepare and approved prior to a defined period of the policy to be pursued
during that period for the purpose of attaining a given objective . It may include income , expenditure and
employment of capital“ . The I.C.M.A definition of budgetary control is “ the establishment of budgets relating to
the responsibilities of executives to the requirement of a policy and the continuous comparison of actual with
budgeted results either to secure by individual action the objectives of that policy or to provide a basis for its version
“.

1
Author, Assistant professor, Department of Management studies, P.S.R. Engineering College,
Sivakasi, India, indhukaviya@gmail.com
2
Co - Author, P.G Research scolar, Department of Management studies, P.S.R. Engineering College,
Sivakasi, India, abarnaabarna50@gmail.com
3
Co - Author, P.G Research scolar, Department of Management studies, P.S.R. Engineering College,
Sivakasi, India, karthikaram53@gmail.com
4
Co - Author, P.G Research scolar, Department of Management studies, P.S.R. Engineering College,
Sivakasi, India, royal121998@gmail.com

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A budget is a formal quantitative expression of Management plans. Budgets can be made by managers at any level
including a single person managing a machine or operating a machine. In the context of business, budget may have
revenue expenses and profits , all in a single statement. But one can think of a budget for revenues alone , budget for
expenses alone
A good budget is characterized by the following:

 Participation: involve as many people as possible in drawing up a budget

 Comprehensive: embrace the whole organization.
 Standards: base it on established standards of performances.
 Flexibility: Allow for changing circumstances.
 Feedback: Constantly monitor performance.
 BUDGET ORGANIZATION AND ADMINISTRATION:
 In Organization and administering a budget system the following characteristics may apply:
 Budget centers :units responsible for the preparation of budgets . A budget center may encompass several
cost centers.
 Budget committee: This may consists of senior members of the organization, e.g. departmental heads and
executives (with the managing director as chairman). Every part of the organization should be represented
on the committee, so there should be a representative from sales , production, marketing and so on.

ADVANTAGES OF BUDGETING AND BUDGETARY CONTROL

 Compels management to think about the future , which is probably the most important feature of a
budgetary planning and control system. Forces management to look ahead, to set out detailed plans for
achieving the targets for each department , operation and ( ideally) each manager , to anticipate and give
the organization purpose and direction.
 Promotes coordination and communication.
 Clearly defines areas of responsibility . Requires managers of budget centers to be made responsible for the
achievement of budget targets for the operation under their personal control .
 LIMITATIONS OF BUDGETARY CONTROL
 Despite the benefits mentioned above , the budgetary control suffers from serious limitations. Management
must keep them in mind while using the tool of budgetary control. Following are drawbacks of the
budgeting system:
 Budget estimates are often wrong as they are based on approximation and person judgement .Therefore ,
the quality of budgets is associated with the intelligence . Skills and experience of the budget persons .
 Budgeting premises change rapidly with the change in business condition is known to all.
. DEFINITION
According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation
of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the
budgeted and acting upon results to achieve maximum profitability.” Weldon characterizes budgetary control as
planning in advance of the various functions of a business so that the business as a whole is controlled.

2.BUDGETARY CONTROL METHODS

a)Budget:
A formal statement of the financial resources set aside for carrying out specific activities in a given period of time.
It helps to co ordinate the activities of the organization.
An example would be an advertising budget or sales force budget.
b) Budgetary control:

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A control technique whereby actual results are compared with budgets.

Any differences(variances) are made the responsibility of key individuals who can either exercise control action or
revise the original budgets.

CHARACTERISTICS OF A BUDGET
A good budget is characterized by the following:
Participation: involve as many people as possible in drawing up a budget
Comprehensive: embrace the whole organization.
Standards: base it on established standards of performances.
Flexibility: Allow for changing circumstances.
Feedback: Constantly monitor performance.
Analysis of costs and revenues: This can be done on the basis of product lines, departments or cost centers.
3. OBJECTIVES OF THE STUDY
The primary objectives of the project are as follows:

➢ To recognize the budget and budgetary control system of PARAMESWARI

PAPER STORES

➢ To identify variations of components of revenue budget and components of

operational budget.

➢ To analyze and compare the variation of estimated budget and actual budget

for both revenue budget and operational budget

➢ To Suggest the effective budgetary mechanism for PARAMESWARI

PAPER STORES

➢ To Suggest measures to reduce the costs and improve the financial position

4. REVIEW OF LITERATURE
Hand (1986) in his position, identified
three basic stages in budgetary control processes and they include the following:
Setting of predetermined standards
Measurements of actual performance against predetermined standards.
Corrective action if necessary to bring the actual performances in line with the predetermined standard. The concept
of budgetary control cannot be divorced from that of an executive responsibility. Furthermore, the objective of
budgetary control is to enable management to conduct business in the most efficient manner
According to Walter (1988), control involves the making of decisions based on relevant information which leads to
plans and actions that improve the utilization of the productive assets and services available to organizations
management. Effective and efficient control is said to be based on standards with which actual performance can be
compared. If there are no standards, then there can be no effective measure of attainment. Effective control is a key

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management task which ensures that efforts produced at all level are commensurate with those required to ensure
that long-term effectiveness and success of the organization
Professor Pogue (1997) in his article titled ‘Budgeting as an aid to management performance’ viewed fixed
budgeting as being based on one level of activity to which the various costs are related thus materials, labour and
overhead costs are related to this one level of activity. Control of cost is difficult with a fixed budgeting because if
actual activity is different from budgeted activity, then the budgeted costs or yardstick costs, by which actual costs
are measured by management information and action, becomes meaningless. Fixed budgets is sometime criticized
by analysts as being destructive because it establishes expense limit that cannot be exceeded and again for does not
give room for comparison between the actual performance and the budgeted result.
Scott (2000) also lends credence to this fact when he posited that budgetary control is more than an administrative
technique which aims to ensure that management functions are carried out in a well organize and co-ordinated
fashion. According to him, budgetary control rather aims at straightening communication within an organization in
other to ensure that budgetary provisions remain goal oriented.
Jensen (2003)states that the emergence of scientific management philosophy with its emphasis on detailed
information as a basis for making decision provided a tremendous impetus for the development of management
accounting and indeed budgeting techniques. In the early stage of budgeting development however, it focused on
preparation and presentation of credible information to legitimize accountability and transparency and to permit
correct performance appraisal and consequently rewards.
Onuorah (2005)however holds the view that budgeting spells out management plan in quantitative terms.
According to him, it also helps to evaluate organizational plans, while at the same time performing two vital
According to Lambe (2014), one of the effective ways to prepare for changing conditions is to provide a frame
work that contains specific plan that is sufficiently flexible to adapt to unanticipated changes. A comprehensive
process of providing such frame work is known as budgeting. It involves the setting of targets, and effectively
monitoring of actual performance against those budgeted.
Therefore, in order to N.Frow(2005) According to, achieve company objectives, there should be a budgeting system
that is appropriate to the culture of the organization. Additionally, both knowledge of management and attitude vis-
a-vis characteristics of budgeting system together with the impact of the budgeting system on employee behavior are
fundamental factors for determining the effectiveness of budgeting system
According to Chika (2006) in the case study of budgeting and budgetary Control in Business Organization,
Budgetary control is the use of the budget as an instrument for the guidance of business operations. In that case,
budgets serve as a yardstick to execute the control of operations, to determine the extent to which planned goals and
objectives are being attained and to arrest off-line drifts on "time"; on the other hand, agreeing that budgetary
control follows budget preparation. Prior studies on budget systems have ended in inconsistent results, and the cause
behind this is the result of choosing a wrong budget planning model or framework
According to Qi (2011)The budgetary control comprises of three phases namely: budgeting and planning,
modelling and control, and Analyzing and feedback. Financial performance comprises of three phases namely:
infrastructural development, service delivery and expenditure related activities. This framework also introduces
intervening variables between dependent and independent variables.

5. RESEARCH METHODOLOGY
Research methodology is the basic frame work which provides guidelines for the rest of research process. It is a map
or a blueprint according to which the research is conducted. It specifies the methods for data collection and data
analysis.
RESEARCH DEFINITION
Research is organized, systematic, database, critical, objectives, scientific enquiry or investigation into a
specific problem undertaken the purpose of finding answers or solutions to it. In research provides the needs
information that guides managers to make informed decision to successfully

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SECONDARY DATA COLLECTION

The secondary data were collected from the secondary sources, which include Annual Reports,
internal record and text book pertaining to the financial analysis.
The data thus collected is about the history and accounting policies of the organization. However,
the entire study was based on the secondary data, which are collected from the books, records journals and profiles
of the organization.
The study covers five years 2014-2019 based on the balance sheet and profit and loss account of
the company
6. Findings
Revenue Budget For 2015-16

PARTICULAR BUDGETED ACTUAL FOR THE VARIANCE PERCENTAGE

ESTIMATED FOR YEAR 2015-2016(2)
THE 2015-2016(1) (1)-(2) = (3) (3)/ (1)

AMOUNT % AMOUNT %

FIXED ASSET 2,65,000 26,500 2,55000 25,500 1,000 3.77

TOTAL OF 1 2,65,000 26,500 2,55,000 25,500 1,000 3.77

OTHER
INCOME

CLOSING 45,000 4,500 42,320 4,232 268 5.95

STOCK

LOANS 22,00,000 22,0000 2166.768 21,6676.8 3,323.2 1.5

&ADVANCES

DEBTORS 1,60,000 16,000 1,50,000 15,000 1,000 6.25

CASH &BANK 65,000 6,500 61,811 6,181.1 318.9 4.9

GRAND 27,35,000 2,73,500 26,75,899 2,67,589.9 5,910.1 2.16

TOTAL

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Revenue Budget For 2015-16

Interpretation:
The data pertaining to the generation and consumption have been obtained from the year 2015-16 and
represented.
Finally with regard to the result in revenue budget of PARAMESWARI PAPERSTORES(PPS)cards and
art totally decreased 267589.9% in the year 2015-16 respectively.

Operational Expenditure Budget

For the Year 2015-16

PARTICULAR BUDGETED ACTUAL FOR THE VARIANCE PERCENTAGE

ESTIMATED FOR THE YEAR 2015-2016(2)
2015-2016(1) (1)-(2) = (3) (3)/ (1)

AMOUNT % AMOUNT %

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CURRENT 25,00,000 2,50,000 23,36,339 2,33,633.9 16,366.1 6.5

ACCOUNT

TOTAL OF 1 25,00,000 2,50,000 23,36,339 2,33,633.9 16,366.1 6.5

LOAN
LIABILITES

EXPENSES 6,000 600 5,000 500 100 16.6

PAYABLE

CREDITOR 35,000 3,500 34,560 3,456 44 1.2

GRAND TOTAL 25,41,000 2,54,100 23,75,899 2,37,589.9 16,510.1 24.3

Operational Expenditure Budget

Interpretation:

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The data pertaining to the generation and consumption have been obtained from the year 2015-16 and
represented.
Finally with regard to the result in revenue budget of PARAMESWARI PAPERSTORES(PPS)cards and
art totally decreased 237589.9% in the year 2015-16 respectively.
7. SUGGESTIONS OF THE STUDY
Planning has become the primary function of management most of the planning relates to individual and individual
proposals. Budgets are nothing but the expressions, largely in financial terms. Budgetary control has, therefore
become and essential tool of management for controlling and maximizing profits.
The company’s objectives and how it can be achieved through budgetary control process. Time tables for
all stages of budgeting should be followed regularly by all the departments.
Reports, statements, forms and other record should be maintained if any information is needed.
Continuous comparison of actual performance with budgeted performance will result in knowing whether
the company is in profit or loss.
The unnecessary and avoidable expenditures may be reduced and controlled by the general manager to
reduce the deviations existed in the expenditure budget.
The general manager shall find the causes of the deviations existed in various budgets and take corrective actions to
reduce them in the future.
8. Conclusion
The project was carried out with the objective of analyzing the budgets. The budget targets are compared to
actual result and deviations are determined. The deviation in budgeted and actual performance will enable the
determination of weak spots. The management will be able to the corrective measures when there is a discrepancy in
performance. If creates budget consciousness among all employees. The planning of expenditure will also be
systematic and there will be economy in spending.
The finances will be put to optimum use. In the present days of competitive world budgetary control system has a
significant role to play budgetary control system also enables the introduction of incentives schemes of
remuneration.
References
WEBSITE
 www.scribd.com
 www.investopedia.com
 www.archive.org
 www.ifac.org
 www.phelpssr.com
JOURNAL
 Company’s annual reports for 2016-2020.
 C.R.Kothari, “Research methodology”, Vishwa prakashan publishers second edition.
 Dr.S.N. Maheswari “Financial and management accounting”, sultan chand & sons, fourth revised and
enlarged edition,2004.
 S.P.Jain & K.L Narang “Cost Accounting”, Kalyani publishers, seventeenth edition, 2002.
 “Management Accounting Performance Management” directorate of studies the institute of cost and
works accountants of India, first edition, January 2003.
 M.A.Sahaf, “Management Accounting”, Vikas publishing house pvt ltd, second edition,2005.
 I.M.Pandy, “Financial Management”, Vikas publication house pvt.ltd, new delhi, 2005. (9 th Edition)

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