Management Accounting(MA)

Chapter 1: Introduction to Management Accounting

Prescribed Textbook: Lal, Srivastava and Singh

 Course Content
• Introduction to Management Accounting
• Difference between Management Accounting & Financial
Accounting
• Introduction to costing terms
• Direct Material and Direct Labour
• Cost classification and allocation of overheads
• ABC Costing
• CVP relationship
 Course Learning Outcomes

• CLO 1: Students will be able to understand the managerial

cost concepts.

• CLO 2: Students will be able to demonstrate the use of C-V-P

Analysis in decision making (PLG 2)

• CLO 3: Students will be able to understand the difference

between traditional and activity-based costing.
 Assessment Scheme & Weightage
Open/closed
Evaluation Weightage (%) Duration (in minutes) CLO Tested
Book

Mid -Term 20% 60 Closed Book CLO1

End-Term 40% 120 Closed Book CLO2 & CLO 3

Evaluation Unit of
S. No. Weight Time
Type Evaluation

1 Quiz Individual 10% After session 12

2 Class Participation Individual 10%

3 Group Assignment Group 20% After session 26

TAPMI - MA - Savitha Heggede

Accounting is the process
of identifying, measuring
and communicating
economic information
to permit informed
judgements and
decisions by users of
information.
 Accounting Discipline Overview

• Financial accounting—focuses on reporting to external users

including investors, creditors, banks, suppliers, and
governmental agencies. Financial statements must be based on
GAAP.

• Management accounting—measures, analyzes and reports

financial and nonfinancial information to help managers make
decisions to fulfill organizational goals. Management
accounting need not be GAAP compliant.
 What is Managerial Accounting?

• Process of providing financial and other related information to

managers to help them make good decisions.

• Evaluating decision alternatives (What product or services should we

offer to the market; how much should we charge for those products or
services; should we outsource the making of products to other
organization)

• Evaluating the performance of the business (actual results vis-à-vis

planned results)

• Evaluating managers and employees to achieve the organization goal

Management Accounting Report
 Solution

• MA report has included

• Non-monetary information [on jobs and number of employees]
• Future [planned] as well as past [actual] information

• MA report focuses on a segment [service department] has less

emphasis on precision [planned numbers are rounded]

• The information in the MA report is not an end in itself- It is

means to the end.
 Financial Accounting

Few Limitations

➢Can be too aggregated; not enough detail.

➢Can be misleading for some decisions.

➢Based on historical costs, not current or estimates future costs.

➢Often not timely enough for ongoing projects.

Relationship between Cost Accounting and Management
Accounting

Cost Accounting

Provides Data
Purpose of
for Performance Profit Planning
Appraisal
Control

Management
Accounting
 Financial, Management and Cost Accounting
Financial Accounting Management Accounting Cost Accounting

Focuses on reporting to Measures, analyzes and Measures, analyzes and

external users including reports financial and reports financial and
investors, creditors, nonfinancial information nonfinancial
banks, suppliers, and to help managers make information related to
governmental agencies. decisions to fulfill the costs of acquiring or
Financial statements organizational goals. using resources in an
must be based on GAAP. Management accounting organization.
need not be GAAP
compliant.

• Today, most accounting professionals take the position that cost information is part of
management accounting; therefore, the distinction between the two is not clear-cut and in
this course, we often use the terms interchangeably.
 https://www.businessinsider.in/5-
brilliant-strategies-that-make-honda-
one-of-the-worlds-most-innovative-
companies/articleshow/39248379.cms
 Mission Statement
• The mission statement is a statement in writing that describes the overall
aims of an organization. In other words, it sets out the whole purpose of
the business.
• There are four key elements to a mission statement:
• Purpose – why does the business exist and who does it exist for?
• Strategy – what does the business provide and how is it provided?
• Policies and culture – how does the business expect its staff to
act/behave?
• Values – What are the core principles of the business?

Facebook's mission is to give people the power to build community and

bring the world closer together.
 Mission Statements
Honda
Maintaining a global viewpoint, we are
Costing
dedicated to supplying products of the
Benchmarking highest quality, yet at a reasonable price t a nda rd
r gina l S
for worldwide customer satisfaction i on Ma
Absorpt
Project Infosys
Accounting To be a globally respected corporation
that provides best-of-breed business
solutions, leveraging technology,
delivered by best-in-class people. Profitablity
Performance Eval Geography Product Division
TCS
To help customers achieve their business
objectives by providing innovative, best-
C-Sat in-class consulting, IT solutions and
services. To make it a joy for all
stakeholders to work with us.
C
O Bud APEX &
T Ford get OP E
S To become the world's most trusted vs X
nning company, designing smart vehicles for a
Ac t
uals
Pla smart world.
M&A
 MAC Activities
# Activities, Techniques & Performance measures ACCURATE
1 Costing - Absorption, Marginal, Standard, ABC
2 Benchmarking
3 Budgeting - CAPEX / OPEX Information
4 Profitability analysis - Goegraphy, Product, Division..
5 Strategic Planning
6 C-Sat
7 Balanced Scorecards
8 Mergers, Acquisition
10 Performance evaluation
11 Compliance reporting
12 Project Accounting
13 Process improvement
 Attributes of Good Information - ACCURATE
• A – Accurate: The degree of accuracy depends on the reason why the
information is needed
• C – Complete: Give all the information they need, avoid excessive.
• C – Cost-effective: The value of information should exceed the cost of producing it
• U – Understandable: Avoid Jargons
• R – Relevant: Avoid redundant information
• A – Authoritative: Information should be trusted and provided from reliable sources
• T – Timely
• E – Easy-to-use
GOAL OF MANAGERIAL ACCOUNTING : Planning,
Control and Decision-making:
The Five-step Decision-making Process

1. Identify the problem/uncertainties

2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing among alternatives
5. Implement the decision, evaluate performance and learn.
 Planning and Control Systems

Planning consists of
1. Selecting an organization’s goals and strategies
2. Predicting results under various alternative ways of achieving those
goals
3. Deciding how to attain the desired goals, and
4. Communicating the goals and how to achieve them to the entire
organization.
Management accountants serve as business partners in these planning
activities because they understand the key success factors and what creates
value.
During the planning process the mission statement of a business is used to
produce effective aims and objectives for employees and the company.
✓ Specific – are the objectives well defined and
understandable?
SMART ✓ Measurable – can achievement of the objectives
Planning be measured so that completion can be
confirmed?
✓ Attainable/Achievable – can the objectives set
be achieved with the resources and skills
MAC available?
✓ Relevant – are the objectives relevant for the
people involved and to the mission of the
Decision
Control business?
Making
✓ Timed – are deadlines being set for the
objectives that are achievable? Are there any
stage reviews planned to monitor progress
towards the objective?
 Planning and Control Systems

Control comprises taking actions that implement the planning decisions

evaluating past performance and providing feedback and learning to help
future decision making.

The most important planning tool when implementing strategy is a budget.

A budget is the quantitative expression of a proposed plan of action by
management and is an aid to coordinating what needs to be done to execute
that plan.
Timeline
Purpose
Users ST

LT

D2D
 Characteristics Strategic Tactical Operational
Long-term (3-5 years Medium-term (1-2 Short-term (daily to 1
Time Horizon
or more) years) year)
Implementation of Execution of tactical
Focus Direction and vision
strategy plans
Entire organization Departments,
Functional areas,
Scope or major business divisions or smaller
teams or individuals
units business units
Periodic (annually or Ongoing (quarterly Frequent (daily or
Frequency of Review
bi-annually) or semi-annually) weekly)
High-level, broad Detailed, specific Very specific, granular
Level of Detail
goals objectives tasks
Lower-level
Involvement of
Top-level leadership Middle management management and
Leadership
employees
Moderate, tactical
High, strategic Low, operational
decisions with
Level of Risk decisions with long- decisions with
shorter-term
term implications immediate impact
implications
Low, as strategic Moderate, as
High, as operational
decisions may tactical decisions
Degree of Flexibility decisions may require
require long-term can be adjusted as
immediate adjustments
commitments needed
 Examples
Strategic Tactical Operational

Deciding on a new market to enter or product line Optimizing production schedules and supply Prioritizing tasks and projects for a team or
to develop chains department
Determining the organization's vision, mission, Troubleshooting equipment failures or process
Determining staffing levels and work assignments
and core values bottlenecks
Allocating resources across business units or
Budgeting and forecasting financial performance Negotiating with suppliers or customers
functional areas

Implementing new policies, procedures, or Adjusting marketing campaigns or sales

Merging with or acquiring another company
technologies strategies based on real-time data
 Goals

Revenue – 30%
Strategic Operating Profit – 10%

1. One
2. Two
Tactical 3. Three
4. …..

1. One
Operational 2. Two
3. Three..
 Strategic Decisions and Management Accounting
• There are two board strategies

• Cost leadership strategy

• Product differentiation strategy

• Management Accountants work closely with managers in various

departments to formulate strategies by providing information about the
sources of competitive advantage.
• Company’s cost, productivity and efficiency advantage relative to
competitors
• Premium prices a company can change relative to the costs by adding
features that make the product and service distinctive.
Cost & Strategy
1. What did it Cost and Why?

2. What should it have cost?

3. How can we improve?

4. What is our next strategic move?

 Strategic Decisions and the Management Accountant
Management accounting information helps managers formulate strategy by
answering questions such as the following:

• Who are our most important customers and what critical capability do we
have to be competitive and deliver value to our customers?
• What is the bargaining power of our customers?
• What is the bargaining power of our suppliers?
• What substitute products exist in the marketplace and how do they differ
from our product in terms of features, price, cost and quality?
• Will adequate cash be available to fund the strategy, or will additional
funds need to be raised?
 M3 / M4 / M5 8 Hours Rest Rooms RM 5 - 3
P2 2,200
RM 6 - 7 P3
F RM 3 - 20
RM 4 - 15 1,200
RM 7 - 6
15 Hours TOTAL 109 56,88,000
A M1 / M2
Employees # Salaries
C P1
M6 / M7
HR 6 6,00,000

T RM 1 - 10
Factory Manager
Security 8 2,50,000
RM 2 - 20
O FM 6 10,00,000

800 Accounts 8 12,00,000

R Accounts
QC
Maint 12 7,00,000

Y 10 Hours
QC 8 5,00,000

Packing 33 7,36,000
Factory Maintenance
RM-WH 13 3,31,000
S FG-WH 15 3,71,000
PACKING
E RM WH
HR , IR & Admin

Other Costs
T
Factory Rent 3,00,000
U Electricity 12,00,000

P FG
FG
1
2
Factory running cost 1,00,000
FG WH FG 3
FG 4
Security
 1 Unit
Process RM QTY Rate Amount Hrs Rate Amount
DM – 127,300
TOTAL 1,27,300 50,600 DL - 50,600

RM1 10 120 1,200 DC - 1,77,900

P1 10 800 8000
RM2 5 180 900

RM3 20 270 5,400

1 Unit of P2 8 1,200 9600
FG RM4 15 320 4,800

RM5 3 5,000 15,000 3 Units ..???

P3 RM6 8 8,000 64,000 15 2,200 33000 5 Units …?

RM7 6 6,000 36,000 8 Units…?

Distribution channels

1. Aaaaaaaaa
2. Bbbbbbbb
3. Cccccccccc
4. Dddddddd….

S&D Overheads
Elements of Cost
 Cost Centre

Responsibility Centres

• Responsibility centre is an
individual part of a business Profit
Responsibility Centre
Investment
Centre Centre
whose manager has personal
responsibility for its performance.

Revenue Centre
 Basic Cost Terminology

• Cost—a sacrificed or forgone resource to achieve a specific

objective.

• Actual cost—a cost that has occurred

• Budgeted cost—a predicted cost

36
 Cost Concept

• Cost is the amount of expenditure actual (incurred) or notional

(attributable) relating to a cost object.

• When cost is incurred, it can be in the form of deferred cost (asset) or

expired cost (expense)

• Deferred costs are capitalized costs and are known as assets. Example –
Plant, equipment, building, prepaid rent and insurance

• When these deferred costs are used or give up their usefulness, they are
written off or expensed and to that extent they become expense
 Basic Cost Terminology

• Cost object—anything for which a cost measurement is desired.

38
 Cost Object Examples at BMW
Cost Object Illustration

Product A BMW X6 sports activity vehicle

Telephone hotline providing information and assistance to

Service BMW dealers

R&D project on DVD system enhancement in BMW cars

Project

Herb Chambers Motors, a dealer that purchases a broad

Customer range of BMW vehicles

Setting up machines for production or maintaining

Activity production equipment

Department Environmental, Health and Safety department

39
 Basic Cost Terminology
• Cost unit – is defined as a ‘Unit of product or service in relation
to which costs are ascertained’. The cost unit is the narrowest
possible level of cost object. It is the unit of quantity of product,
service of time (or combination of these) in relation to which
costs may be ascertained or expressed.

40
 Costs Classification – Based on Purpose

• Costs classification

1. Natural classification – Direct Material, Direct Labour, Direct

Expenses, Factory Overheads, SDA Overheads.

2. Cost behavior in relation to changes in output activity –

Variable costs or Fixed costs

3. Degree of traceability to a cost object – Direct costs or Indirect

costs
 Costs Classification – Based on Purpose

4. Classification by element – Material, labor or expenses.

5. Timing of charges against sales revenue – Product costs vs

Period costs (Manufacturing costs Vs non-manufacturing costs)

6. Functional classification – Manufacturing, Selling and

Distribution, Administrative Costs

7. Relationship with accounting period – Capital cost, Revenue

Cost
 Costs Classification – Based on Purpose

7. Costs for decision making & planning – Opportunity cost,

Sunk cost, Relevant Cost, Differential Cost, Imputed Cost, Out-
of-pocket cost, Fixed, Variable and Mixed cost, Shutdown cost

8. Costs for control – Controllable and Uncontrollable cost,

Standard cost, Fixed, variable and mixed cost.

9. Other costs – Joint Cost and Common Cost

 Natural Classification of Costs

• Direct Material is the costs of materials which are conveniently

and economically traceable to specific units of output.

• Direct Labour is the cost of employees which can be attributed

to a cost object in an economically feasible way.

• Direct or Chargeable Expenses are expenses relating to

manufacture of a product or rendering a service which can be
identified or linked with the cost object other than direct
material cost and direct employee cost.

44
 Natural Classification of Costs
• Factory Overheads comprise of indirect materials, indirect employee
cost and indirect expenses which are not directly identifiable or
allocable to a cost object. Overheads may defined as the aggregate of
the cost of indirect material, indirect labour and such other expenses
including services as cannot conveniently be charged directly to
specific cost units.

• SDA Overheads - Selling costs are indirect costs related to selling of

products are services and include all indirect costs in sales
management for the organization. Distribution costs are the costs
incurred in handling a product from the time it is completed in the
works until it reaches the ultimate consumer. Administration costs
are expenses incurred for general management of an organization

45
 Cost Behaviour

• Variable costs—change in total in proportion to changes in the

related level of activity or volume of output produced.

• Fixed costs—remain unchanged in total, for a given time

period, despite changes in the related level of activity or volume
of output produced.
• Costs are fixed or variable only with respect to a specific activity
or a given time period.

46
 Cost Behaviour Summarized

Total Dollars Cost per Unit

Total Rupees Cost Per Unit
Change in
Changewith in Unchanged in
proportion
proportion with relation to
Variable Costs
Variable Costs output
output
More output = More cost output
More output = More cost

Change
Change
Fixed Costs Unchanged in inversely
inversely with
with
relation to output
Unchanged in output
output
Fixed Costs More output = lower
relation to output More output = lower
cost per unit cost
per unit

47
 Cost Behaviour

• Stepped fixed costs • Semi Variable

48
Problem
Jughead Jones LLP has the following information relating to one of its
products:
• Direct material cost per unit $1
• Direct labour cost per unit $3
• Variable production cost per unit $3
• Fixed production overhead $30,000 per month
• Budgeted production 15,000 units per month

Calculate the cost per unit and the total cost of the budgeted monthly
production?
Separating a semi-variable cost - High Low Method

The total cost of a semi-variable cost is:

Total costs = Total fixed costs + (Variable cost per unit × Activity level)

Assumptions
• The only thing causing any change in cost is the change in activity.
• The cost under consideration is potentially semi-variable (i.e. it has both
fixed and variable elements).
• The linear model of cost behaviour is valid.
 High Low Method

Output (units) Total cost (INR)

200 7000
300 8000
400 9000

Required:
(a) Calculate the variable cost per unit. (b) Calculate the total fixed cost. (c)
Estimate the total cost if output is 350 units. (d) Estimate the total cost if
output is 600 units.
 High Low Method with Stepped Fixed Costs

Samsonite has the following total costs at three activity levels

Activity level (units) 4000 6000 7500

Total cost (INR) 40,800 50,000 54,800

Variable cost per unit is constant within this activity range and there is a
step up of 10% in the total fixed costs when the activity level exceeds 5,500
units. What is the total cost at an activity level of 5,000 units?
 High Low Method - Changes in variable cost per unit

The following information relates to the manufacture of Product LL:

Output (units) Total cost (INR)

200 7000
300 8000
400 8600

For output volumes above 350 units the variable cost per unit falls by 10%.
Estimate the cost of producing 450 units of Product LL.
Problem
The total costs incurred in 20X3 at various output levels in a factory have been measured as
follows:

Month Output Total cost (units) ($)

Jul 20X3 26 6,510
Aug 20X3 30 6,566
Sep 20X3 33 6,800
Oct 20X3 44 6,985
Nov 20X3 48 7,310
Dec 20X3 50 7,380

When output is 80 units or more, another factory unit must be rented and fixed costs
therefore increase by 100%. Variable cost per unit is forecast to rise by 10% in 20X4.
Calculate the estimated total costs of producing 100 units in 20X4.