Managerial Accounting

Learning Outcomes
At the end of the session, students should be able to:
• Define management accounting in terms of value creation.

• Explain the basic concepts of strategy and how

management accounting systems can support strategies.

• Identify the organizational responses and management

accounting responses to change in the business environment.
Accounting?
Communication of economic information related to an organization
to the interested parties

3
 Branches of Accounting? Financial MA
Financial Accounting Accounting Costing
Communication of economic information
related to an organization to the external parties

Cost Accounting
Cost accounting is an area under the broader scope of Management
Accounting. Cost accounting deals with ascertaining the cost of a unit,
department or processes, establishing standards and variance analysis

Management Accounting
Communication of economic information related to an organization to the
internal parties specially to the managers
4
The Way Management Accounting add value to organizations

Source – CIMA Global

Strategic Planning and Control System

Strategic Management Process adapted from Ward (1992)

Basic Concepts of Strategy
• Vision – a forward-looking statement that outlines an
organisation's long-term aspirations and ultimate goals.
• Mission – A statement that defines the purpose and the
boundaries of the organization
• Objectives – Specific statements of what the organization
aims to achieve, often quantified and relating to a specific
period of time.
Basic Concepts of Strategy cont…
• Strategies – the direction that the organization intends to take over
the long term, to meet its mission and achieve its objectives
• Corporate Strategy – decision about the types of businesses in which
to operate, which businesses to acquire and divest, and how best to
structure and finance the organization
• Business (or competitive) strategy – the way a business competes
within its chosen market
• Strategy implementation – putting plans into place to implement and
support a chosen business startegy
Management Accounting and Strategy

Management Accounting in Support of the Strategic Management Process

– A CIMA Publication
Management Accounting Responses to the Changing
Environment
Changing Environmental Factors Management Accounting Responses
- Cost analysis to identify areas of cost reduction and efficiency
improvements.
Increased Competition - Pricing analysis to set competitive pricing strategies.
- Profitability analysis for different products/services and customer
segments.
- Investment appraisal for new technology adoption.
Technological Advancements - Budgeting for technology upgrades and IT expenses.
- Performance measurement of technology-based processes.
- Scenario planning and sensitivity analysis for financial forecasts.
- Risk assessment and management to address currency fluctuations and
Global Economic Changes market uncertainties.
- Financial reporting to provide insights into global operations'
performance.
Management Accounting Responses to the Changing
Environment
Changing Environmental
Factors Management Accounting Responses

- Compliance monitoring and reporting for new regulations.

Changing Regulatory
Environment - Cost-benefit analysis of compliance efforts.

- Environmental accounting to track and manage sustainability practices.

- Market research and analysis to understand customer needs.

Shift in Customer Preferences - Product costing to determine the profitability of different products/services.

- Investment in research and development to meet customer demands.

 Let's deep-dive into
Management Accounting
 Cost Object Vs Cost Centre

Cost Concepts Cost Object is a cost carrier such as Cost element which is used for posting of
transaction and transferring of expenses or revenues. Whereas Cost Center is an
organizational unit which specifies total cost of a department. It may be production
or service deptt.
Cost - Cost can be defined as the expenditure (actual or notional) incurred on or
attributable to a given thing.

Cost Object – any activity for which a separate measurement of cost is undertaken.
eg: cost of a product, cost of a service, and cost of a particular department.

Cost Centre - is a production or service location, person, function, activity or item

of equipment where costs are accumulated and whose costs may be attributable
to cost units.

Cost Unit - is a unit of product or service in relation to which costs are ascertained
or expressed. It is a unit of measurement

13
 Different cost classifications for different purposes
Type of Cost Classification Purpose of Classification

1. Direct & Indirect 1. Assigning costs to products or services

2. Fixed & Variable 2. CVP analysis and Budgeting
3. Relevant and Irrelevant 3. Decision making
4. Purchasing/Ordering/Holding 4. Inventory management
5. Production & non-production 5. External reporting and Ratio analysis
(periodic)
6. Financial & Non-financial 6. Balanced scorecard
7. Life cycle costs 7. Target and Lifecycle costing

Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm's profit.

Companies can use CVP to see how many units they need to sell to break even (cover all costs) or reach a certain minimum profit margin.

CVP analysis makes several assumptions, including that the sales price, fixed, and variable costs per unit are constant.

Lifecycle costing is the maintenance of physical asset cost records over entire asset lives. This means decisions around the acquisition, use or disposal of
assets can be made in a way that achieves the optimum asset usage at the lowest possible cost to the entity.
Methods of Cost Accounting
- Job Costing
- Batch Costing
- Contract Costing
- Process Costing

15
Techniques of Cost Accounting
- Direct Costing
- Absorption Costing
- Marginal Costing
- Standard Costing
- Activity Based Costing

16
If my suit is tailor made, the seller or tailor created it according to my
preferences or instructions. The seller created it just for me. The terms
custom made, made to order, and bespoke also refer to goods that were
made specifically for one customer.

Job costing
• The company produces tailor-
made products/services
• Customer-driven approach
• Short term
• Cost can be individually
identified
 Batch costing
• Lot/batch manufacturing
• Each lot/batch contains number
of similar items
• Each lot/batch is different
• Cost can be identified with the
lot/batch
Contract costing
• Long-term duration

• Work done at customer’s site

• A higher proportion of direct costs and low indirect cost

• Difficulties of cost control

 Contract costing - Special features

• Progress payments
Customer to make payments when the contract is proceeding

• Architect’s certificate
A surveyor or architect will visit the site, inspect the progress and issue a
certificate which states the sales value of work completed

• Retention money
Customer usually pay only a percentage of the value of work certified
Process costing
Continues process with more than one process involved
Process manufactures now need to:
1. Calculate cost per unit
To price the product

2. Prepare the process account

To record the costs

When inputs are processed losses/gains happen commonly

 Absorption Costing
Cost
Manufacturing cost Non-manufacturing cost

Direct Direct Direct Overheads

Materials Labour Expenses Period cost

Finished goods Cost of goods sold Profit and loss account

Marginal Costing
Cost
Manufacturing cost Non-manufacturing cost

Direct Direct Direct Variable Fixed

Materials Labour Exp. Overheads overhead Period cost

Finished goods Cost of goods sold Profit and loss account

22
 Income Statement
Absorption costing Marginal costing
Rs.
Rs. Sales X
Less: Variable cost of
Sales X Goods sold X
Product contribution margin X
Less: Cost of goods sold X
Less: variable non- manufacturing
Gross profit X expenses
Less: Expenses Variable selling expenses X
Selling expenses X Variable admin. expenses X
Admin. expenses X Other variable expenses X
Other expenses X X Total contribution expenses X
Less: Expenses
Variable and fixed manufacturing Fixed Production overhead x
Fixed selling expenses X
Net Profit X Fixed admin. expenses X
Other fixed expenses X
Net Profit X
Overhead cost accounting systems
The emergence of Modern Costing techniques

More refined approach for assigning overheads to

products and computing product costs were
developed
by
Cooper And Kaplan
Called
Activity Based Costing
 Nature of Modern operating environment

Traditional Operating Environment Vs. Modern Operating Environment

More direct costs More overheads

Volume based costs Multiple reasons based costs
Single product Multiple products
More manufacturing oriented More service oriented
Labour intensive Operations mostly computer controlled
 Stages of ABC

Identifying the major activities

Cost centers / cost pools for each major activity

Cost driver for each major activity

Calculate cost per driver

&
Relate to the product

End Product
 Example:
A company manufactures two products, L and M, using the same
equipment and similar processes, an extract of the production data for
these products in one period is shown below.
L M Overhead Cost Rs.
Quantity produced(Units) 5,000 7,000 Relating to machine activities 220,000
Direct labour hours per unit 1 2 Relating to production run set ups 20,000
Machine hours per unit 3 1 Relating to handling of orders 45,000
Set-ups in the period 10 40
No. orders handled in the period 15 60 Total 285,000
If Traditional Method was used
Total Overhead cost 285,000 5,000x3+7,000x1=22,000

Total Machine hours 22,000 Assumption: Overheads are absorbed into the
OH/Machine hour 12.95 products based on the machine hours

Product L per unit Product M per unit

Machine hours per unit 3 1

Overhead cost per unit 38.85 12.95

3x12.95=38.85
 If ABC was used…
Activity Cost Pool Cost Driver Total activities Cost per Driver

Machine Activity 220,000 No. of machine hrs 22,000 10

Production run setup 20,000 No. of setups 50 40+10 400

Handling of orders 45,000 No. orders handled 75 15+60 600

Activity Product L per unit Product M per unit

Machine Activity 150,000 70,000

3x5,000x10 1x7,000x10
Production run setup 4,000 16,000
10x400 40x400

Handling of orders 9,000 36,000

15x600 60x600

Total Overhead cost 163,000 122,000

Total No. Units 5,000 7,000

OH cost per unit 32.60 17.43

Thank You