Visit allmbastuff.blogspot.com for more notes, project reports etc. Nature of Management Accounting Characteristics of Management Accounting: 1. It is a selective technique. It compiles only the data from balance sheet and profit and loss, which is relevant and useful. 2. It is concerned with data not decisions. It can inform but not prescribe. 3. It deal deals s with with futu future re.. It is a kind kind of plan planni ning ng for for the the futu future re beca becaus use e decisions are taken for future course of action. 4. It examines the cause and effect of relationship. Normally, a profit and loss account will show the amount of profit or loss for the year but does not tell us the reasons for it. Management accounting studies the causes of profit or losses. 5. It does not follow rigid rules and formats like financial accounting. The necessary info is provided in the shape of various statements or reports in order to meet the needs of the management. Objectives of Management Accounting: 1. To help the management in promoting efficiency. 2. To finalize budgets covering all functions of a business. 3. To study the actual performance with plan for identifying deviations and their causes. 4. To analyze analyze financial financial statements statements to enable the management management to formulate formulate future policies. 5. To help the management at frequent intervals by providing operating statements and short-term financial statements. 6. To ar arra rang nge e for for the the syst system emat atic ic allo alloca cati tion on of re resp spon onsi sibi bili liti ties es for for the the implementation of plans and budgets. 7. To provide a suitable organization or ganization for discharging the responsibilities. Scope of Management Accounting: 1. Financial accounting: Related to the recording of business transactions including income, expenditure, inventory movement, assets, liabilities, cash receipts, etc. 2. Cost accounting: Costing is a branch of accounting. It is the process of and technique of ascertaining costs. It includes standard costing, marginal 1
costing, differential and opportunity 3. Budgeting and forecasting: Covers budgetary control 4. It reports financial results to the management 5. It provides statistical data to various departments.
cost
analysis.
Functions of Management Accounting: 1. It assists in planning and formulating future policies. 2. It helps to interpret and analyze the financial information. 3. It controls and monitors performance. 4. It helps to organize various functions of an organization. 5. It offers solution for strategic business problems. 6. It coordinates various departmental operations. 7. It motivates employees. Functions of management Accountant: 1. 2. 3.
Collection of data Analysis Presentation of of da data 4. Plan Plannin ning: g: A manag managem emen entt acco account untan antt plans plans the the enti entire re acco accoun unti ting ng functions. 5. Controlling: Examines the performance against the set standard and reports it to the management. Reporting: Reporting: He reports to the management management and advises advises them on future 6. decisions. 7. Coor Co ordi dina nati ting ng:: prep prepar arat atio ion n of of mast master er budg budget et 8. Decision making Standard costing
What is Material Cost Variance? What are its sub-divisions?
Materi Material al Cost Cost Varian Variance ce or Ma Mate teria riall Tota Totall Varia Variance nce is the the Vari Varianc ance e in material cost actually incurred on material and the material cost estimated on material. Material Cost Variance can be derived as follows: MCV = (Standard Quantity x Standard Rate) – (Actual Quantity x Actual Rate) Material Cost Variance can be sub-divided as follows: 2
a) Material Rate Variance or Material Price Variance is the variance in the the ra rate te or pric price e of mate materi rial al actu actual ally ly spen spentt and the the mate materi rial al rate/ rate/pr pric ice e estimated. Thu Thus, s, even ven if there here is no chang hange e in quant uantit ity y cons consum umed ed,, if the there is a difference in the total cost, then it is due to the difference in the rate at which material is consumed. Material Rate Variance can be derived as a s follows: MRV = Actual Quantity (Standard Price – Actual Price) b) Material Usage Variance is the variance in the usage of material in actual production and the estimated usage of material. Thus, even if there is no change in the rate of material, if there is a change in the total cost, then it is due to the change in consumption of material. Material Usage Variance can be derived as follows: MUV = Standard Rate (Standard Quantity – Actual Quantity)
What is Material Usage Variance? What are its sub-divisions? Material Usage Variance is the variance in the usage of material in actual production and the estimated usage of material. Thus, even if there is no change in the rate of material, if there is a change in the total cost, then it is due to the change in consumption of material. Material Usage Variance can be derived as follows: MUV = Standard Rate (Standard Quantity – Actual Quantity)
Material Usage Variance can be further sub-divided into: a) Material Material Mix Variance Variance:: The difference between actual quantity of mate materi rial al and and re revi vise sed d stan standa dard rd quan quanti tity ty of mate materi rial al is the the Ma Mate teri rial al Mix Mix Variance. Revised Standard Quantity is the Actual Quantity of Material divided in the standard raw material ratio. Material Mix Variance can be derived as follows: MMV = Stan tandard Rate (Revised Stan tandard Quantity ity – Actua tual Quantity) b) Material Yield Variance: Variance: The difference between the actual output and the standard expected output is the Material Yield Variance. There are two methods of calculating Material Yield Variance. They are as follows: Input Method: MYV = (Standard Input – Actual Input) x Average Cost / unit Output Method: 3
MYV = (Actual Output – Standard Output) x Total Cost / unit (Note: Labour Variances can be answered in the same manner as Material Vari Varian ance ces. s. Inca Incase se of any any doub doubtt or quer query, y, plea please se put your your quer querie ies s on: on: www.sigmaforum.tk)) www.sigmaforum.tk Marginal Costing What is Marginal Costing? Why is it calculated? The marginal cost of a product is defined as the change in cost that occurs when the volume of output is increased or reduced by one unit. Marg Ma rgin inal al cost costin ing g is used used to asse assess ss whet whethe herr it is fina financi ncial ally ly feas feasib ible le to incr increa ease se manu manufa fact ctur urin ing g volu volume me or to calc calcul ulat ate e the the effe effect ct of re redu duci cing ng volume, perhaps due to a decline in the market. It is based on variable costs because fixed costs are fixed. They occur and do not change if manufac manufacturi turing ng volume volume change changes. s. Follow Following ing factor factors s are calcul calculate ated d on the basis of marginal costing: production planning pricing make or buy close-down accept or reject dropping a production line accepting additional order Write a note on Break Even Point.
Break Even Point is the level of sales required to reach a position of no profit, no loss. At Break Even Point, the contribution is just sufficient to cover the fixed fixed cost. The organisatio organisation n starts earning earning profit when the sales sales cross the the Break Even Even Point. Break Even Even Point can be calculat calculated ed either either in terms of units or in terms of cash or in terms of capacity utilization. It can be calculated as follows: BEP in units = Fixed Cost / Contribution per unit BEP in cash = Fixed Cost / P.V. Ratio BEP in terms of capacity utilization = BEP in units / Total capacity x 100
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Break Even Volume can be better explained with the diagram above.
Explain the concept of Margin of Safety.
The positive difference between the operating sales volume and the break even volume is known as the margin of safety. The larger the difference, the safer the organization is from a loss making situation. It can be calculated either in cash or in units. Margin of Safety can be derived as follows: Margin of Safety = Actual Sales – Break even Sales Margin of Safety (in cash) = Profit___ P/V Ratio Margin of Safety (in units) = Profit______ Contribution/unit What is Profit/Volume Ratio? Profit Profit-Vo -Volum lume e Ratio Ratio expres expresses ses the relati relationsh onship ip betwee between n contri contribut bution ion and sales. It indicates the relative profitability of diff products, processes and departments. Formulae: P/V ratio = S – V/ S X 100 = Cont / Sales X 100 = Change in profit or loss / Change in sales
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Short note on :Limiting factor
Whenever some resources required for products and are not adequately avai availa labl ble, e, thes these e re reso sourc urces es beco become me limi limiti ting ng facto factor. r. If ther there e are limi limiti ting ng factors, then the product which gives more contribution per unit may not give more amount of total contribution because, it may not make more profitable use of limited resources. In such cases, we can calculate contribution per unit of limiting factor and the product which offers more contribution per unit of limiting factor is to be treated as more profitable product and the product priority order is to be accordingly calculated. Contract Costing
What are the various methods of calculating profits on almost completion of contract?
When When the the cont contrac ractt is almo almost st at the the stag stage e of comp comple leti tion, on, profi profitt can can be calculated in four ways. It is upon the company to adopt any of the four methods. The four methods are as follows: x Work Certified ___ 1. Profit = Estimated Profit Total Contract Price x Cost incurred to date 2. Profit = Estimated Profit Total estimated cost x Cash Received ___ 3. Profit = Estimated Profit Total Contract Price Estimated Profit x Cash Received Received ___ x 4. Profit = Estimated Cost incurred to date Total Contract Contract Price Total Total estimated cost Explain the terms: Contractor: A par artty who agre agree es to pro rovi vide de supp suppli lies es or serv serviices ces in accordance with a valid and legal contract. A contractor executes the work. Contractee: A party who orders supplies or services in accordance with a valid and legal contract. A contractee co ntractee gives the contract. Running Bill: It is a bill raised by the contractor for periodical payments. 6
Retention Retention Money: Money: It refers to that part of the contract amount which is certified but not paid. Work Certified: It refers to that part of the running bill, which is approved by the architect of the contractee. Work Uncertified: Uncertified: It re refe fers rs to that that part part of the the runn runnin ing g bill bill,, whic which h is rejected by the architect of the contractee. It is always valued at cost. Basic Basic Rate Concept: Concept: Basic Rate concept refers to the method in which a fixe fixed d rate rate is main mainta tain ined ed for for the the ra raw w mate materi rials als throu througho ghout ut the the cont contrac ractt irrespective of the fluctuations in the market price of the material. Escalation Clause: Escalation clause is a provision of a contract which calls for an increase in contract price in the event of an increase in certain costs beyond a certain percentage and viceversa. Abnormal Loss: It is the part of the process loss caused due to abnormal circu ircum msta stance nces in the the fact factor ory. y. Fo Forr Ex, Ex, lab labour our stri strike ke,, bre reak ak down own of machinery. It is avoidable and controllable by mgmt. Abnormal loss occurs in addition to normal loss. Normal Normal loss: loss: It is part part of proc proces ess s cost cost whic which h is caus caused ed unde underr norm normal al circumstances. It is inevitable. Example, weight loss, scrap loss, pilferage. Norm Normal al loss loss is calc calcul ulat ated ed at a cert certai ain n % of inpu inputt in unit unit in re resp spec ecti tive ve process. It may have scrap value. Process Costing Write a note on “Inter process profits”. Whil While e tran transf sfer errin ring g the the outpu outputs ts of one proc proces ess s to anoth another er,, the the comp company any might add some amount of profits to it. This is to get the actual cost of finished product as, if the company would have bought the inputs for the next next proc proce ess, ss, it woul ould be inclu nclusi sive ve of pro rofi fits ts.. But But, at the end end of an accounting period, this inter process profit has to be excluded in order to get the real valuation of closing stock. E.g.: Process I: Cost- 10000 Profit- 2000 Transferred Price- 12000 Process II: Inputs from Process I 7
-
12000
Additional Pr Processing co cost12000 Total Cost incurred 24000 Sales 21600 Closing Stock 2400 Inter-process profit of P-I 200 Value of Closing Stock 2200 What is equivalent production?
At the end of a financial period, all the stock of a company needs to be assessed. All the partially completed units are valued through the method of equivalent production. The units of production are calculated according to the percentage of completion of processing on the partially completed units. For example, two units that are ar e 50 percent complete are the equivalent of one unit fully completed.
Budgetary Control What is Budgetar tary Control? What are the the steps eps inv involve lved in Budgetary Control? Budgetary control is the management process of using budgets to monitor and control the performance of the organization. This organization. This is done by comparing the planned values (in the budget) with the actual values as they occur during the year. A budg budget et has has been been defi define ned d as a fina financ ncia iall and and quan quanti tita tati tive ve stat statem emen entt prepared and approved prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective. The following steps are involved in Budgetary Control: 1. Establishment of Budgets: Targets are fixed for each function relating to the responsibilities of individual executives. 2. Measurement of actual performance. 3. Comparison of actual performance with budgeted performance to detect deviation. 4. Analysis of the causes of variations and reporting
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What are the uses of diff budgets? It serves a declaration of policies Defines the objectives/ targets for executives, at all levels. Means of coordination of activities Means of communication Facilitates centralised control Helps in planning activities Note: The infor informa mati tion on provi provide ded d in this this docu docume ment nt on ea each ch topi topic c is limited. We do not not guara rant nte ee an inclusi usion of the whol hole scope of manag managem emen entt acco accoun unti ting ng or of the the whol whole e syll syllab abus us of N.M. N.M.S. S.Y.B Y.B.M .M.S .S.. We suggest you to refer to the books recommended by your professor.
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