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About author

About author :

 

Dr.Mustafa Ahmed  ( DMS-Doctorate of Management studied in taxation management ) has obtained 257 Degrees certificates Include one Doctorate degree,3 Master degrees,one under graduate ( B.COM ), Two Advance Diploma ,22 Diplomas and 229 certificates details as Doctorate of Management Studies ( DMS-Taxation Management ) ,Master in commerce ( M.COM –Accountancy ), Master of Business Administration ( MBA –Finance ) ,Chartered certified Accountant ( CCA ),Graduate in commerce ( B.COM),Advance Diploma in Tax Consultancy ,Advance diploma in work force re-entry skills,Diploma in project Management,Diploma in business management & entrepreneurship,Diploma in Human resource ,Diploma in quality Management,Diploma in supply chain management,Diploma in Accounting-Advanced control and transactions,Diploma in Business process Management ,Diploma in operations Management,Diploma in Business and legal studies,Diploma in Accounting-core and practices ,Diploma in business communication,Diploma in Six-sigma,Diploma in statistics,Diploma in Risk Management,Diploma in Basic English grammer,Diploma in modern human resource Management,Diploma in applied operations Management,Diploma in change management,Diploma in E-Business,Diploma in modern project management Theory and practice,Diploma in Customer service ,Diploma in Strategic Management.

Advance certificate in Taxation Management,Certified Cost Accountant,Certified International financial reporting standard ( IFRS ),Certified Tally ERP9 Accountant,Certified  Tally ERP9 Service Tax Master,Certified Tally ERP9 TDS Master ,Master certification in Buusiness Management ,Certified Internal Auditor,Certified ISO 9001 QMS Auditor /Lead Auditor ,Certified Information System Auditor ( CISA ),Project Management Professional ( PMP ),Corporate cybersecurity Management  .

I am the records holder of 1.Record holder republic India ,record title-Most Degrees achieved by a person ( set new records total 201 degrees ),2.India Book of records ,Record Title-Certified Most Online courses in a calendar year-2015 ( set new records total 169 Certifications ),3.World record India ,record title-Most Number of education qualifications earned ( set records 205 degrees ),4.Associate world record,record title The most online courses completed in a calendar year ( set records 169 certifications ),5.Universal records forum ,record title-Most degrees achieved by an individual ( set records 235 degrees ) and 6.Online world records ,Record title –most number of education qualifications earned ( set records 244 degrees ).

 

I am working as an accountant from the year 2003 to at present as 14 years of experience in accounting fields in Ajmal perfumes and Ajmal & sons .

                                                                 

                                                                        Mustafa Ahmed

                                                              

                                                                October ,2016

 

Course Description

Course Description :

 

With the help of financial data ,managers make decisions regarding day to day activities in the organization.Management Accounting helps in taking the right decisions.it is concerned with providing information to managers,that is ,people in an organization who direct and control its operation.

Management accounting is much broader than financial accounting because it includes aspects of managerial economices,industrial engineering ,and management science.However,Management accounting and financial accounting are part of the total accounting information System.The content of Management accounting system is driven by the needs of the financial accounting system. A firm’s profitability is of interest to investors but managers need to know the profitability of individual products.

Thus ,it has become essential for all students planning a career in business management to have a strong foundation of the concepts and techniques in financial and management accounting.

 

Course Objectives :

 

1.Develop Planning skills and monitoring skills in financial and management accounting functions effectively so that they can apply  the appropriate Management strategy to face the challenges in the company

2.Analysis Fund flow ,Cash flow analysis ,Budgetary Control ,standard costing and strategies involved in decision alternative choices.

 

 

Unit  1 - Introduction to Management Accounting

 

Meaning of Management Accounting ,Roles of Management Accounting

The Decision Making Process ,Management Accounting Framework

Functions of Management Accounting,Difference Between Financial Accounting and Management Accounting,Objectives of Management Accounting ,Scope Of Management Accounting ,Advantages of Management Accounting,Limitations of Management Accounting Characteristics or Nature of Management Accounting ,Important tools and techniques used in management accounting,Balanced scorecard ,Strategy Mapping,Cost Management System (CMS) ,Differences between financial accounting and strategic cost management,Management information and control systems ,Cost management system,Gap Analysis and assess improvements and Value added

 

Unit 2- Financial Statement Analysis

 

Techniques of Financial Statement Analysis, Meaning and Classification of ratios, Du pont chart, Advantages of Ratio Analysis , Limitations of Ratio Analysis

 

Unit 3- Funds Flow Analysis

 

Examples of Current Assets and Current Liabilities, Meaning of Funds Flow Statement, Objective of Preparing a Fund Flow Statement, Significance and Importance of Funds Flow Statement, Limitations of Funds Flow Statement, General Rules for Preparing Funds Flow Statement, Analysing changes in working capital , Computing funds from operations

Identifying sources and applications of funds , Preparing the Fund Flow Statement

Interpretation of Funds Flow Statement

 

Unit 4- Cash Flow Analysis

 

Meaning of Cash Flow Analysis , Objectives of Cash Flow Analysis , Preparation of Cash Flow Statement , Format of Cash Flow Statement, Cash Flow from Operating Activities, Direct Method, Indirect Method , Cash generated from operations , Computation of net cash flow from operating activities ,Computation of net increase in cash and cash equivalent , Difference Between Cash Flow Analysis and Fund Flow Analysis

 

Unit 5- Understanding Cost

Meaning of Cost, Costing, Cost Accounting and Cost Accountancy, Difference between Costing and Cost Accounting, Objectives of Cost Accounting, Objections Against Cost Accounting, General Principles of Cost Accounting, Evolution and Development of Cost Accounting, Methods of Costing, Cost Center, Profit centres, Investment centres

Cost compared to budget, Cost/unit, Techniques of Costing, Classification of Cost, Elements of Cost, Cost Sheet

 

Unit 6- Marginal Costing and Break – Even Analysis

 

Marginal Costing , Assumptions of Marginal Costing , Theory of Marginal Costing, The principles of marginal costing, Features of Marginal Costing, Advantages and Disadvantages of Marginal Costing Technique, Marginal cost proforma, Differences between Absorption Costing and Marginal Costing, Contribution , Cost Volume Profit (CVP) Analysis , Profit Volume Ratio (MCSR or C/S ratio) , Break-Even Point (BEP) , The Break-Even Chart, Target Profit , Margin of Safety (MOS), Marginal Costing Application  .

 

Unit 7- Decisions Involving Alternative Choices

 

Cost Identification for Decision Making , Differential (Incremental) Analysis , Steps Involved in Incremental Analysis, Effective use of Incremental Analysis, Types of Decision Situations, Make or Buy Decisions, Sell or Process Further , Maintaining a Desired Level of Profit

 

Unit 8-  Budgetary Control

 

Budget, Budgeting, Budgetary Control, Objectives of Budgetary Control, Merits of Budgetary Control, Essential Features of Budgetary Control, Steps in Budgetary Control, Classification of Budgets, Zero Based Budgeting (ZBB) and Limitations of Budgeting

 

Unit 9-Standard Costing

 

Steps in Standard Costing, The need for standards (advantages), Types of standards, Establishment of Standards, Cost Variance Analysis

 

Unit 10-Managing working Capital

 

Meaning of Working Capital , Components of Current Assets and Current Liabilities, Concepts of Working Capital , Need for Working Capital, Importance Of Working Capital , Determinants of Working Capital, Operating Cycle , Approaches for Working Capital Management , Inventory Management ,Cash Management and receivables Management.

Table of contents

Tables

Pages

 

 

 

Unit  1 - Introduction to Management Accounting

6

28

Unit 2- Financial Statement Analysis

29

62

Unit 3- Funds Flow Analysis

63

92

Unit 4- Cash Flow Analysis

93

112

Unit 5- Understanding Cost

113

144

Unit 6- Marginal Costing and Break – Even Analysis

145

166

Unit 7- Decisions Involving Alternative Choices

167

181

Unit 8-  Budgetary Control

182

212

Unit 9-Standard Costing

213

230

Unit 10-Managing working Capital

231

269

 

 

Unit 1- Introduction to Management Accounting

 

Unit 1- Introduction to Management Accounting

 

 Introduction

 

In the previous unit we have learnt the components of financial accounts and the adjustments. We have also analysed the adjusted trial balance and final accounts of joint stock companies. The financial statements serve the informational needs of the external users. The internal user, that is, the management is the planning and the decision making body of the organisation. It requires more detailed information, some times in advance. Such informational requirements of the management are not met by the financial accounts. In order to fill this gap, management accounting or accounting for management was developed. In this unit, we will learn more about the functions of management accounting and the tools provided by the management accounting to assist the management in planning and decision-making.

 

Objectives:

 

After studying this unit, you should be able to:

 

 1.explain the meaning of management accounting

 

 2.analyse the strategic roles of management accounting

 

 3.compare management accounting and financial accounting

 

4.analyse the decision making process in business organisations

 

5.describe the functions of management accounting

 

6.explain the traditional tools of management accounting

 

Meaning of Management Accounting

 

The American Accounting Association has defined management accounting as “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 in the making of rational decisions with a view towards achieving these objectives.”

 

Management Accounting is the process of analysis, interpretation and presentation of accounting information collected with the help of financial accounting and cost accounting, in order to assist management in the process of decision making, creation of policy and day to day operation of an organization. Thus, it is clear from the above that the management accounting is based on financial accounting and cost accounting.

 

 

 

Roles of Management Accounting

 

Management accounting helps the management in the following:

I.It guides the management to fix most appropriate objectives for the company and also ensures that the objectives set at different levels are aligned.

II.It helps in developing alternative courses of action.

III.It provides data or information about the alternative courses of action.

IV.It provides tools to evaluate the alternative courses of action.

V.It guides the management in implementing the best course of action.

VI.It provides tools for performance measurement.

VII.It provides information and tools for taking corrective action.

 

The Decision Making Process

 

The most important functions of management are decision making, planning, and controlling. The future of a company is a result of the

decisions taken today by the management. A wrong decision may take the company to a dead end. Hence, being cautious is of utmost importance before taking a decision. Two things in this context are:

I.Adopting a systematic methodology or process for taking decisions.

II.Obtaining full information relevant and required for the decision.

 

In this section, we will look at these two aspects of decision making and also see how management accounting helps to achieve this. The quantity, quality, relevance, dependability, and timeliness of the information produced and provided by the management accounting are of vital importance to the management in taking correct decisions. Therefore, understanding the decision making process is a necessary precedent to understanding management accounting

 

Let us now discuss the steps in detail.

 

 

  1. Identify objectives:

 

The objectives are the starting point. They provide direction to decisions and actions. The objectives have to be set at all levels, that is, strategic level, tactical level, and operational level. For example, at the strategic level, the objective can be ‘maximisation of shareholder value’. At the tactical level, the objective can be ‘to increase turnover by 10%’. At the operational level, the objective can be “to reduce cost by 15%’. Irrespective of the level, the process remains the same. Before proceeding, one has to be clear about the objectives.

 

  1. Search for alternative courses of action

 

The second stage in the decision making process is the range of alternative courses of action (or strategies) that are relevant to the objective on hand. It is better to list out all possible courses of action so that the best alternative can be finally selected.

As an example, the possible alternative strategies for the above mentioned objectives are given below.

Objective: ‘maximisation of shareholder value’

Alternative strategies:

Expansion in the form of new investment

 Expansion by taking over

 Diversification

Capitalisation on brand image

 

Objective: ‘increase turnover by 10%’

Alternative strategies:

Increase selling price

Aggressive selling in the existing territories

Capture new territories

Improve quality

 

Objective: ‘reduce cost by 15%’

Alternative strategies:

Reduce wastage

Buy inputs at lower prices

Use inferior quality inputs

Change composition

 

  1. Gather data about alternatives

 

Having developed the alternative, the next step is to collect all the data or information about them. It must be ensured that the complete information about all alternatives is obtained before proceeding with their evaluation. Facts and figures based on scientific forecasts must be obtained. Prejudices, biases, opinions, etc. must be avoided. Accurate figures about variables like costs, prices, quantity to be consumed, etc. must be calculated.

 

  1. Select the best course of action

 

The data gathered must be put in a useful form so that sensible analysis and interpretation can be done. In order to do a proper financial evaluation of the alternatives, management accounting provides tools such as marginal costing, incremental analysis, budgetary control, etc. Using an appropriate tool, the different course of actions may be compared and the best one may be finalised.

 

 

  1. Implement the decision

 

The next step is to implement the course of action that was finalised. It basically involves commitment of resources to the decision taken for a known or unknown period of time in the future.

 

 

 

 

 

  1. Compare the actual and planned outcome

 

The actual outcome (sales, production, quality, performance, cost, etc.) must be compared with the planned outcome. The reasons for the divergences must also be analysed.

 

  1. Respond to divergences from the plan

 

The reasons for analysing the divergences are to enable the management to take corrective actions.

 

While steps 1 to 5 relate to the planning process, steps 6 and 7 relate to the controlling process.

 

Management Accounting Framework

 

For offering accounting and financial advice as well as for capitalising the available opportunities for future development, it is necessary for an effective framework to be designed. The management accountant must organise the whole accounting division. There must be a prompt and

immediate recording of the entire information flow into the department from the functional and service departments. The framework must concentrate on the following:

 

Getting rid of routine work

Reporting actual and planned performance

Fixing organisational responsibilities

Applying modern and modified practices of analysing and interpreting results

Designing a sound and an efficient organisation taking into account the nature and size of the business unit

 

Functions of Management Accounting

The management process implies the four basic functions of: (1) Planning. (2) Organising (3) Controlling, and (4) Decision-making.

Management accounting plays a vital role in these managerial functions performed by managers.

(1) Planning:

Planning is formulating short term and long-term plans and actions to achieve a particular end. A budget is the financial planning showing how resources are to be acquired and used over a specified time interval.

 

Management accounting is closely interwoven in planning both because it provides information for decision-making and because the entire budgeting process is developed around accounting-related reports. Management accounting helps managers in planning by providing reports which estimate the effects of alternative actions on an enterprise’s ability to achieve desired goals. For example, if a busi­ness enterprise determines a target profit for a year, it should also determine how to reach that target.

For example, what products are to be sold at what prices? The management accountant develops data that help managers identify the more profitable products. Similarly, the effects of alternative prices and selling efforts (say, what will profit be if we cut prices by 5% and increase volume by 15%, etc.) can easily be determined by the management accountant. As part of the budgeting process, management accountants prepare budgeted (forecasted) financial statements, often called proforma statements.

(2) Organising:

Organising is a process of establishing an organizational framework and assigning responsibility to people working in an organization for achieving business goals and objectives. The type of organizational structure differs from one business enterprise to another. In the organising process, departmentalization can be done by setting up divisions, departments, sections, branches.

Organising requires clarity about each manager’s responsibility and lines of authority. The various departments and units are interrelated in a hierarchy, with a formal communication structure in which information and instructions are passed downwards to lower level management and upwards to top management level.

Management accounting helps managers in organising by providing reports and necessary information to regulate and adjust operations and activities in the light of changing conditions. For example, the reports under management accounting can be prepared on product lines on which basis managers can decide whether to add or eliminate a product line in the current product mix. Similarly management accountant can provide sales report, production report to the respective manager for taking suitable action about the sales and production position.

(3) Controlling:

Control is the process of monitoring, measuring, evaluating and correcting actual results to ensure that a business enterprise’s goals and plans are achieved. Control is accom­plished with the use of feedback. Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan. Feedback allows the managers to decide to let the operations and activity continue as they are, take remedial actions to put some actions back in harmony with the original plan and goals or do some rearranging and re-planning at midstream.

 

 

Management accounting helps in the control function by producing performance reports and control reports which highlight variances between expected and actual performances. Such reports serve as a basis for taking necessary corrective action to control operations. The use of performance and control reports follows the principle of management by exception. In case of significant differences between budgeted and actual results, a manager will usually investigate to determine what is going wrong and possibly, which subordinates or units might need help.

(4) Decision-making:

Decision-making is a process of choosing among competing alterna­tives. Decision-making is inherent in each of three management functions described above, namely, planning, organising and controlling. A manager cannot plan without making decisions and has to choose among competing objectives and methods to carry out the chosen objectives. Similarly in organising, managers need to decide on an organization structure and on specific actions to be taken on day-to-day operations. In control function managers have to decide whether variances are worth investigating.

The decision-making process includes the following steps:

(i) Identifying a problem requiring managerial action.

(ii) Specifying the objective or goal to be achieved (e.g. maximising return on investment).

(iii) Listing the possible alternative courses of action.

(iv) Gathering the information about the consequences of each alternative.

(v) Making a decision, by selecting one of the alternatives.

Difference Between Financial Accounting and Management Accounting

Accounting’ is a process of systematically identifying, recording, classifying, reporting, analyzing and interpreting the results thereof to the users of the financial statement. The two principal branches of Accounting are Financial Accounting and Management Accounting. The former is an accounting system which gives true and a fair view of the financial position of the company to various parties. The latter is an accounting system which provides both the quantitative and qualitative information to the managers. Here we are going to discuss the differences between Financial Accounting and Management Accounting.


Key Differences Between Financial Accounting and Management Accounting

The following are the major differences between financial accounting and management accounting:

1.Financial Accounting is the branch of accounting which keeps track of all the financial information of the entity. Management Accounting is that branch of accounting which records and reports both the financial and nonfinancial information of an entity.

2.Users of financial accounting are both the internal management of the company and the external parties while the users of the management accounting are only the internal management.

3.Financial accounting is to be publicly reported whereas the Management Accounting is for the use of the organization and hence it is very confidential.

4.Financial Accounting is done in the prescribed format, whereas there is no prescribed format for the Management Accounting.

5.Financial Accounting focuses on providing information about the functioning of the entity’s business to its users, whereas Management Accounting focuses on providing information to help them in evaluating the performance and devising plans for the future.

6.The Financial Accounting is mainly done for a specific period, which is usually one year. On the other hand, the management accounting is done as per the needs of the management say quarterly, half yearly, etc.

7.Financial accounting is a must for any company for auditing purposes. On the contrary, management accounting is voluntary, as no editing is done.

Financial Accounting and Management Accounting are of great significance, in fact, they help the organization in various ways. As financial accounting is helpful in the proper record keeping of innumerous transactions and comparison of the performance of two periods of an entity or between the two entities, while the management accounting is helpful in analyzing the performance, making a strategy, taking an effective judgement and preparation of policies for the future.

Objectives of Management Accounting

The basic objective of management accounting is to assist the management in performing its functions effectively. The functions of the management are planning, organizing, directing and controlling.

Management accounting helps in the performance of each of these functions in the following ways: 

Provides data: Management accounting serves as an important source of data for management planning. The accounts and documents are a store-house of a vast quantity of data about the past progress of the enterprise, facilitating forecasts for the future. 

Modifies data: The accounting data required for managerial decisions is properly collected and classified. For example, purchase figures for different months may be classified to know total purchases made during each period product-wise, supplier-wise and territory-wise. 

Analyses and interprets data: The accounting data is probed meaningfully for effective planning and decision-making. For this purpose the data is presented in a comparative form. Ratios are calculated and likely trends are projected.

Serves as a means of communication: Management accounting provides a means of communicating management plans upward, downward and outward through the organization. Initially, it means identifying the feasibility and consistency of the various segments of the plan. At later stages it keeps all parties informed about the plans that have been agreed upon and their roles in these plans. 

Facilitates control: Management accounting helps in translating given objectives and strategy into specified goals for attainment by a specified time and secures effective accomplishment of these goals in an efficient manner. All this is made possible through budgetary control and standard costing which is an integral part of management accounting. 

Uses  qualitative information: Management accounting does not restrict itself to financial data for helping the management in decision making but also uses such information which may not be capable of being measured in monetary terms. Such information may be collected form special surveys, statistical compilations, engineering records, etc.

Scope Of Management Accounting

 

The scope or field of management accounting is very wide and broad based and it includes a variety of aspects of business operations. The main aim of management accounting is to help management in its functions of planning, directing, controlling and areas of specialization included within the admit of management accounting. The scope of management accounting can be studied as follows

 

  1. Financial Accounting

 

Financial accounting forms the basis for analysis and interpretation for furnishing meaningful data to the management. The control aspect is based on financial data and performance evaluation, on recorded facts and figures. So, management accounting is closely related to financial accounting in many respects.

 

  1. Cost Accounting

 

Cost accounting is the process and techniques of ascertaining cost. Planning, decision making and control are the basic managerial functions. The cost accounting system provides the necessary tool for carrying out such functions efficiently. The tools includes standard costing, inventory management, variable costing etc.

 

  1. Budgeting And Forecasting

 

Budgeting means expressing the plans, policies and goals of the firm for a definite period in future. Forecasting on the other hand, is a prediction of what will happen as a result of a given set of circumstances. Forecasting is a judgement whereas the budgeting is an organizational object. These are useful for management accounting in planning.

 

 

 

 

 

  1. Inventory Control

 

Inventory is necessary to control from the time it is acquire till its final disposal as it involves large sum. For controlling inventory, management should determine different level of stock. The inventory control technique will be helpful for taking managerial decisions.

 

  1. Statistical Method

 

Statistical tools not only make the information more impressive, comprehensive and intelligible but also are highly useful for planning and forecasting.

 

 

  1. Interpretation Of Data

 

Analysis and interpretation of financial statements are important part of management accounting. After analyzing the financial statements, the interpretation is made and the reports drawn from this analysis are presented to the management. Interpreting the accounting data to the authorities in the management is the principal task of management accounting.

 

 

  1. Reporting To Management

 

The interpreted information must be communicated to those who are interested in it. The report may cover Profit and Loss Account, Cash Flow and Funds Flow statements etc.

 

  1. Internal Audit And Tax Accounting

 

Management accounting studies all the tax matters to assist the management in investment decisions vis-a-vis tax planning as a resource to enjoy tax relief.

Internal audit system is necessary to judge the performance of every department. Management is able to know deviations in performance through internal audit. It also helps management in fixing responsibility of different individuals.

 

  1. Methods Of Procedures

 

This includes maintenance of proper data processing and other office management services. It may have to deal with filing, copying, duplicating, communicating and management information system and also may have to report about the utility of different office machines.

 

Advantages of Management Accounting

1.It helps to increase the efficiency of all functions of   management

2.It helps in target-fixing, decision-making, price-fixing, selection of product-mix and so on

3.Forecasting and Budgeting help the concern to plan the future and financial activities

 

4.Various tools and techniques provide reliability and authenticity to carry out the business functions

  1. It is useful in controlling wastage and defects

6.It helps in complete communication between all levels of management

7.It helps in controlling the cost of production thus increasing the profit percentage

8.It  is proactive-analyses the governmental policies and  socio-economic scenario which helps to assess the external environmental impacts on the organization

Limitations of Management Accounting

1.It is concerned with financial and cost accounting. If these records are not reliable, it will affect the effectiveness of management accounting.

2.Decisions taken by the management accountant may or may not be executed by the management.

3.It is very expensive. Only big concerns can adopt this method of accounting.

4.New rules and regulations are to be framed, hence there is a possibility of opposition from the employees.

5.It is only in the developing stage.

6.It provides only data and not decisions.

7.It is a tool to the management and not an alternative of management.

Characteristics or Nature of Management Accounting

The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organizational goals. The following are the main characteristics of management accounting:

1.Providing Accounting Information: Management according is based on accounting

information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in away it suits managerial needs. The accounting data is used for reviewing various policy decisions. Management accounting is a service function and it provides necessary information to different levels of management.

 2.Cause and effect analysis: Financial accounting is limited to the preparation of profit and loss

account and finding out the ultimate result, i.e., profit or loss management accounting goes a step further.

The ‘cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors different expenditures, current assets, interest payables, share capital, etc. So the study of cause and effect relationship is possible in management accounting.

3.Use of Special Techniques and concepts: management accounting uses special techniques

and concepts to make accounting data more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will be determined according to the situation and necessity.

4.Taking Important Decisions: Management accounting helps in taking various important

decisions. It supplies necessary information to the management which may base its decisions on it. The historical data is studied to see its possible impact on future decisions. The implications of various alternative decisions are also taken into account while taking important decisions.

5.Achieving of Objectives: In management accounting, the accounting information is used in

such a way that it helps in achieving organizational objectives. Historical data is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. In case there are deviations between the standards set and actual performance of various departments corrective measures can be take at one. All this is possible with the help of budgetary control and standard costing.

 6.Increase in Efficiency: The purpose of using accounting information is to increase efficiency

of the concern. The efficiency can be achieved by setting up goals for each department. The performance appraisal will enable the management to pin point efficient and inefficient spots. An effort is made to take corrective measures so that efficiency is improved. The constant review of working will make the staff cost – conscious. Every one will try to control cost on one’s own part.

 7.Supplies Information and not decision: The management accountant supplies information to the management. The decisions are to be taken by the top management. The information is classified in the manner in which it is required by the management. management accountant is only to guide and not to supply decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management.

8.Concerned with forecasting: The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information is used to plan future course of action.

 

 

Tools of Management Accounting

Management accounting provides several tools or techniques to the management for managing its functions, particularly planning and controlling.

Important tools and techniques used in management accounting

Some of the important tools and techniques are briefly explained below.

  1. Financial Planning: The main objective of any business organization is maximization of profits. This objective is achieved by making proper or sound financial planning. Hence, financial planning is considered as best tool for achieving business objectives.
  2. Financial Statement Analysis: Profit and Loss account and Balance Sheet are important financial statements. These statements are analyzed for different period. This type of analysis helps the management to know the rate of growth of business concern. This analysis is done through comparative financial statements, common size statements and ratio analysis.
  3. Cost Accounting: Cost accounting presents cost data in product wise, process wise, department wise, branch wise and the like. These cost data are compared with predetermined one. This comparison of two costs enables the management to decide the reasons responsible for the difference between these costs.
  4. Fund Flow Analysis: This analysis find out the movement of fund from one period to another. Moreover, this analysis is very useful to know whether the fund is properly used or not in a year when compared to the previous year. The working capital changes and funds from operation are also find out through this analysis.
  5. Cash Flow Analysis: The movement of cash from one period to another can be find out through this analysis. Besides, the reasons for cash balance and changes between two periods are also find out. It studies the cash from operation and the movement of cash in a period.
  6. Standard Costing: Standard costing is predetermined cost. It provides a yard stick for measuring actual performance. It is used to find the reasons for the deviations if any.
  7. Marginal Costing: Marginal costing technique is used to fix the selling price, selection of best sales mix, best use of scarce raw materials or resources, to take make or buy decision, acceptance or rejection of bulk order and foreign order and the like. This is based on the fixed cost, variable cost and contribution.
  8. Budgetary Control: Under Budgetary control techniques, future financial needs are estimated and arranged according to an orderly basis. It is used to control the financial performances of business concern. Business operations are directed in a desired direction.
  9. Revaluation Accounting: The fixed assets are revalued as per the revaluation accounting method so that the capital is properly represented with the assets value. It helps to find out the fair return on capital employed.
  10. Decision-making Accounting: A business problem can be solved by choosing any one of the best and most profitable alternative. To select such alternative, the relevant costs are compared. Thus, accounting information are used to solve the business problem which are arising out of increasing complexity of nature of business.
  11. Management Information System: The free flow communication within the organization is essential for effective functioning of business. Hence, the management can design the system through which every employee of an organization can assess the information and used for discharging their duties and taking quality decisions.
  12. Statistical Techniques: There are a lot of statistical techniques used in removing management problems. Methods of least square, regression and quality control etc. are some examples of statistical techniques.
  13. Management Reporting: The management accountant is preparing the report on the basis of the contents of profit and loss account and balance sheet and submit the same before the top management. Thus prepared reports disclose the strength and weakness indifferent areas of operating activities and financial activities. These identification are highly useful to management for exercising control and decision-making.
  14. Historical Cost Accounting: It means that costs are recorded after being incurred. This is used for comparing with predetermined costs to evaluate performance.
  15. Ratio Analysis: It is used to management in the discharge of its basic functions of forecasting, planning, coordination, communication and control. It paves the way for effective control of business operations by undertaking an appraisal of both the physical and monetary targets.

Balanced scorecard

 

The balanced scorecard is a contemporary performance measurement system for an organisation. Traditionally, a company’s performance was measured only by using certain financial ratios like Return on Investment (ROI), Net Profit Ratio, Earning Per Share (EPS), working capital turnover, etc.

However, a company’s performance or success cannot be completely measured from a single view point (perspective). No doubt, financial performance is an important aspect, but certain other aspects are also important. Financial performance includes customer satisfaction, efficiency of internal systems, opportunity for learning in the organisation, corporate governance, etc. Hence, a performance measurement system should be holistic and should provide for evaluation of the company based on all these perspectives.

One such holistic performance measurement system was developed by Dr. Robert Kaplan and Dr. David Norton. They called it the balanced scorecard.

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

Perspectives

The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

The Learning & Growth Perspective

This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.

Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems."

The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants.

The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

 

 

The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.

Strategy Mapping

Strategy maps are communication tools used to tell a story of how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain. Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows)

Principles behind strategy Maps :

1.Strategy balances contradictory forces.

2.Strategy is based on a differentiated customer value proposition.

3.Value is created through internal business processes.

4.Strategy consists of simultaneous ,complementary themes.

5.Strategic Alignment determines the value of intangible assets.

 

Creation Process

 

1.All of the information is contained on one pages; this enables relatively easy strategic communication

 

2.There are four perspectives : Financial, Customer,Internal ,Learning and growth.

 

3.The financial perspective looks at creating long-term shareholder value ,and builds from a productivity strategy of improving cost and asset utilization and a growth strategy of expanding opportunities and enhancing customer value

 

4.These last four elements of strategic improvement are supported by price ,quality,availability,selection ,functionality ,service ,partnerships and branding

 

5.From an internal perspective ,operations and customer management process help product and service attributes while innovation ,regulatory and social processes help with relationships and image

 

6.All of these processes are supported by the allocation of human ,information and organizational and organizational capital .organizational capital is comprised of company culture ,leadership,alignment and teamwork .

 

7.Finally ,cause and effect relationships are described byy connecting arrows.

 

By connecting such things as shareholder value creation,customer management ,process management,quality management,core capabilities ,innovation ,human resources,information technology,organizational design and learning with one another in one graphical representation ,strategy mapping help greatly in describing the strategy and to communicate the strategy among Executives and to their employees.

 

Cost Management System (CMS)

 

The explosion in technology coupled with increasing worldwide competition, is forcing managers to produce high quality goods and services in order to provide outstanding customer service and at the lowest possible cost.

Horngren and others define a CMS as “a collection of tools and techniques that identifies how management’s decisions affect costs”.

Many companies have moved away from a historical cost accounting perspective towards a proactive cost management perspective. A cost management system is a management planning and control system with the following objectives.

 

  1. To provide cost information for strategic management decisions.
  2. To provide cost information for operational control.
  3. To provide a measure of inventory value and cost of goods sold for financial reporting.
  4. To measure the cost of the resources consumed in performing the organisation’s significant activities.

 

  1. To identify and eliminate non-value added costs. These are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value.
  2. To determine the efficiency and effectiveness of all major activities performed in the organisation.
  3. To identify and evaluate new activities that can improve the future performance of the organisation.

 

 

 

 

Differences between financial accounting and strategic cost management:

1.Financial accounting : cost information can be highly aggregated, and historical and must be consistent with GAAP

2.Strategic cost management: cost information may be segregated, current and relevant to a particular purpose.

 Cost management systems are needed to enable cost accountants to provide managers with the cost and benefit information that they need. A cost management system is a part of a management information and control system.

Management Information and control system

 A management information system (MIS) is a structure of interrelated elements that that collects, organizes and communicates data to managers so that they can pan, control, make decisions and evaluate performance. It emphasizes internal demands for information rather than external demands. The MIS is part of a management control system (MCS) which has the following for components:

1.A detector or sensor, which measures what is actually happening in the process being controlled

2.An assessor, which determines the significance of what is happening

3.An effector (or feedback) which alters behavior when the assessor indicate a need for doing so

4.A communications network, which transmits information between the detector and the assessor and between the assessor and the effector.

 A management control system also requires the application of judgment. It can be referred to as a black box (an operation whose exact nature cannot be observed).  

 

 

Defining a cost management system

 A cost management system (CMS) consists of a set of formal methods developed for planning and controlling an organization’s cost-managing activities relative to its short-term activities and long-term strategies. It should provide information to meet two major challenges: profitability in the short term and maintaining a competitive position in the long term.

 Organizational role of a CMS:

1.Managing core competencies so as to exploit opportunities and fend off threats

2.Linking plans and strategies to actual organizational performance

 

Dual focus of a cost management system:

 

Short Run

Long Run

Objective

Organizational efficiency

Survival

Focus

Specific costs:

manufacturing

service

marketing

administration

Cost categories:

customers

suppliers

products

distribution channels

 

Important characteristics of information

 

Timely

Accurate

Highly specific

Short term

 

Periodic

Reasonably accurate

Broad focus

Long term

 Six primary goals of a cost management system:

1.Develop reasonably accurate product costs

2.Assess product/service life-cycle performance

3.Improve understanding of processes and activities

4.Control costs

5.Measure performance

5.Allow pursuit of organizational strategies

 Primarily a CMS should provide means to develop accurate product or service costs. Traceability has been made easier by bar codes and radio frequency identification (RFID). Product and service costs are used to plan, prepare financial statements, assess individual product/service profitability and period profitability, to establish process for cost-plus contracts and create a basis for performance measurements.

 The CMS should provide information about life-cycle performance of a product or service. This is not provided by the financial statements. This information gives managers a basis to relate costs incurred in one stage of the to costs and profitability of other stages.

 A CMS should help managers understand processes and activities, so that they can make cost-beneficial improvements in the production and processing systems.

 Control of costs, the original purpose of cost management systems, is still important. Costs can only be controlled when the related activity is monitored, the cost driver is known and the information is available.

 The CMS should generate information helping managers measure and evaluate performance, including not only human and equipment performance but also future investment opportunities.

 The Cost management system should generate information needed to define and implement organizational strategies.  In the current global market, firms must be certain that a link exists between goals, objectives and organizational activities: organizational strategy is this link.

Determine desired outputs of CMS

Three primary elements compose a cost management system:

Motivational

Information

Reporting

Under  the motivational element, performance rewards for top management may  encourage recipients to focus either on the short term (cash) or the long term (stock options).

 Under the informational element, the CMS should provide a sound basis for the financial budgeting process, cost information about the earliest stages of the product life-cycle and cost information about capital spending. All the cost information provided should be as free as possible from distortions, inaccurate allocations, and improper exclusions resulting from the influence of GAAP  requirements on financial reporting.

Under the reporting element, the CMS must still provide fundamental financial statement information, even though this is of limited value for internal purposes.

Decentralization  increases the importance of an effective reporting system: top managers must depend on it to keep subunits aligned with their missions and organizational goals. The role of a reporting system is to compare actual performance to benchmark performance for each manager, recognizing the different informational needs of each manager.

 Perform GAP Analysis and assess improvements

 Gap analysis is the study of the differences between two information systems. Methods of reducing the gaps should be expressed, quantitatively and qualitatively, in terms of costs and benefits.

Resources being limited, management must prioritize the gap issues to be addressed and in which order.

Enterprise resource planning (ERP) systems make it possible to link a company’s feeder systems into a truly integrated cost management system, by allowing companies to do the following:

Standardize information systems and replace different “legacy” systems

Integrate information systems and automate the transfer of data among systems

Improve the quality of information, including purchase preferences of customers

Improve the timeliness of information by providing real-time, on-line reporting.  

Value added

 

Instead of selling a piece of wood as it is, think of converting it into a chair and then selling it. Which one would fetch more money to you? Obviously, it is the chair. By converting the piece of wood into a chair you have added value to it. You have increased the realisable value of the wood.

This is called the ‘Value Added’. The value added can be quantified and used as a measure of performance. Considering this example, the wood could be sold for Rs.1000 but the chair made out of that wood could be sold for Rs.2,500, the value added is Rs.1,500 (i.e., Rs.2,500 - Rs.1000).

Hence, we may conclude that the value added is the increase in the realisable value by altering the form of a raw material by converting it into a finished product.

According to ICAI, the term value added refers to the increase in value of a product or service resulting from an alteration in the form, location, or availability excluding the cost of bought out materials and services. It is calculated by deducting the value of goods and services purchased from sales revenue.

Value added = sales – cost of goods and services used in producing those sales.

Value added concept is applicable to both manufacturing and service industry. It shows the value addition made by using the organisation’s own resources. It may also be expressed as profit before tax, inclusive of employee costs, interest, and depreciation.

 

Value added ratios

 

It expresses the value added per unit of an input or any other measure. The following are the most

Impressum

Verlag: BookRix GmbH & Co. KG

Texte: Mustafa Ahmed
Bildmaterialien: Mustafa Ahmed
Lektorat/Korrektorat: Mustafa Ahmed
Übersetzung: Mustafa Ahmed
Tag der Veröffentlichung: 19.10.2016
ISBN: 978-3-7396-7939-6

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Course Description : With the help of financial data ,managers make decisions regarding day to day activities in the organization.Management Accounting helps in taking the right decisions.it is concerned with providing information to managers,that is ,people in an organization who direct and control its operation. Management accounting is much broader than financial accounting because it includes aspects of managerial economices,industrial engineering ,and management science.However,Management accounting and financial accounting are part of the total accounting information System.The content of Management accounting system is driven by the needs of the financial accounting system. A firm’s profitability is of interest to investors but managers need to know the profitability of individual products. Thus ,it has become essential for all students planning a career in business management to have a strong foundation of the concepts and techniques in financial and management accounting. Co

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