ADVANCED MANAGEMENT ACCOUNTING

MBA 3rd Semester

Module-1

Ms. Anjali Prava Mishra

Assistant Professor in Finance
Biju Patnaik Institute of IT and Management Studies, Bhubaneswar
Email Id: anjalipravamishra@gmail.com
Contact No.- 9437622604
 CONTENTS

Module - I

Introduction to Cost Accounting & Management

Accounting: Basic Concepts: Scopes, Types of Cost,
Financial Accounting, Cost Accounting & Management
Accounting, Methods of Costing, Techniques of Costing,
Classification of Costs, Cost Centre, Cost Unit, Profit
Centre, Investment Centre, Preparation of Cost Sheet, Total
Costs and Unit Costs.
ACCOUNTING
The term Management Accounting refers to accounting for
the management.
Management accounting provides necessary information to
assist the management in the creation of policy and in the
day-to-day operations.
It enables the management to discharge all its functions, i.e.,
planning, organization, staffing, direction and control
efficiently with the help of accounting information.
 Objectives of Management Accounting

To assist
To To Facilitate
formulate
To interpret in To help To
financial Decision- Coordination
Planning in provide of
documents making control report
and policy Operations
process
Scope of Management Accounting
Tools & Techniques of Management Accounting
Financial Policy & Accounting

Analysis of Financial Statements

Historical Cost Accounting

Budgetary Control

Standard Costing

Marginal Costing

Decision Accounting

Control Accounting

Management Information System

Function of Management Accounting

Planning & Forecasting

Modification of Data

Financial Analysis and Interpretation

Facilitates Managerial Control

Communication

Use of Qualitative Information

Coordinating
Financial Accounting V/S Management Accounting
BASES FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
The supply of information about Information is supplied with the
the enterprise through P&L A/c purpose of making decisions –
Objectives
and balance sheet to outside for internal use only.
parties – Mainly for external use.
It extends over the total It deals with detailed analysis of
Analysis of
performance of the firm in performance of each and every
performance
general. department of the organisation.
Utilisation of It handles only the past data of It envisages the future policies
Data the enterprise. and plans.
It is a measurement of It is a judgment of
Nature
performance, i.e. more objective. performance—more subjective.
It has to ensure the accuracy It need not, instead it is mainly
Accuracy of
forever. for internal use depends upon
results
approximation.
Compulsory for joint stock It is not compulsory but
Legal
companies – Accounting period optional.
responsibility
concept.
It provides room only for the It considers both - Qualitative
Limitation
monetary transactions. changes are considered.
 Role of Management Accountants
 His main job in the organization is planning and control.
 Planning is of two types. One is a short-term plan (budget) and another
one is long-term plan or corporate plan or strategic plan.
 He has to prepare both the type of plans and watch their actual
performance. For this purpose, he has to re-classify the accounting data
and assemble them to suit the user department’s need.
 He should arrange for various reviews of the budget and corporate plan in
order to take action on deviations.
 He will undertake a number of special studies for capital expenditure;
make or buy decisions, lease or buy decisions.
The management accountant’s role is that of processor and presenter of
information and also a planner for the achievement of corporate goals both short
and long-run.’
Limitations of Management Accounting

Based on Accounting Information

Lack of Knowledge

Top Heavy Structure, Resistance

Personal Bias

Intensive Decision

Its only a tool. Not an Alternative to Administration

Costly Installation
 Cost Accounting
 Cost- “the amount of expenditure incurred, or attributable to a specified
thing or activity.”
 Costing-The process and technique of ascertaining the cost of a product
or services is known as costing.
 Cost Accounting- a specialised branch of accounting which involves
classification, accumulation, assignment and control of costs.
 Cost Accountancy- “the application of costing and cost accounting
principles, methods and techniques to the science, art and practice of
cost control and the ascertainment of profitability. It includes the
presentation of information derived there from for the purpose of
managerial decision making”.
Objectives of Cost Accounting
Scope of Cost Accounting
 Cost Accounting V/S Financial Accounting
BASES COST ACCOUNTING FINANCIAL ACCOUNTING

The main objective is to provide costing

The main objective is to ascertain income
Purpose information for cost control &
and financial position
ascertainment

Statutory It is not statutory obligation to maintain It is statutory obligation to maintain

Obligation cost accounting financial accounting

The users of cost accounting are internal The users include both internal and
Users
to the organisation external

Pattern of It analyses the business affairs on the

It analyses the business affairs as a whole.
Analysis basic of product, services, activity, etc.

Cost It aims at controlling cost such as It does not have any provision of cost
Control material, labour and overhead. control, it merely records the cost

Period of It provides costing reports to the It generally reports the result of business
Reporting management as & when required on annual basis

It is historical as well as futuristic in It is historical in nature as it records only

Orientation
nature past data

Inventory Inventory is valued at cost price or market

Inventory is valued at cost price
Valuation price whichever is less.
Cost Accounting V/S Management Accounting
BASES COST ACCOUNTING MANAGEMENT ACCOUNTING
It is concerned with the recording of It is concerned with assisting the
cost, ascertainment of cost of management in planning, decision
Meaning
product and services and analysis of making and controlling.
cost.
Ascertainment, analysis and control It provides necessary information to
Objectives of cost the management for planning, decision
making and control.
It is both historical an futuristic in It is futuristic in nature
Nature
nature
It is concerned with quantitative It deals with both quantitative &
Data
figures qualitative data
Its scope is narrow since it does not Its scope is wide since it include all
Scope include financial accounting and tax branches of accounting and tax
accounting planning.
It has evolved to overcome the It has evolved for planning, controlling
Evolution limitations of financial accounting and decision making.

It can be installed without It needs bot financial and cost

Installation
management accounting accounting for its installation
 Limitations of Cost Accounting

More Complex

Inapplicability

Not Suitable for the small organisation

Intensive Decision

Costly Installation
 Cost Classification
Classification on basis of :
1. Nature/Element

2. Relation to the Product

3. Variability/Behavior

4. Controllability

5. Normality

6. Financial accounting classification

7. Time

8. Planning and control

9. Managerial decision making

1. ON THE BASIS OF NATURE
 Materials
 Labor
 Expenses
2. ON THE BASIS OF RELATION TO THE PRODUCT
Direct costs
Indirect costs

3. ON THE BASIS OF VARIABILITY

 Fixed costs
 Variable costs
 Semi variable costs
 Elements of Cost

Material Labour Expenses

Direct Indirect Direct Indirect

Direct Indirect

Overhead
4. ON THE BASIS OF CONTROLLABILITY
 Controllable costs
 Uncontrollable costs
5. ON THE BASIS OF NORMALITY
 Normal costs
 Abnormal costs
6. ON THE BASIS OF FINANCIAL ACCOUNTS:
 Capital costs
 Revenue costs
 Deferred revenue costs
7. ON THE BASIS OF TIME:
 Historical costs
 Pre determined costs

8. ON THE BASIS OF PLANNING AND CONTROL:

 Budgeted costs
 Standard costs
9. ON THE BASIS OF MANAGERIAL DECISION MAKING

 Marginal costs
 Out of pocket costs
 Imputed costs
 Sunk costs
 Replacement costs
 Opportunity costs
 Avoidable costs
 Unavoidable costs
 Relevant and irrelevant costs
Terms in Cost Accounting
 Cost Unit
 Cost Centre
 Cost Estimation
 Cost Ascertainment
 Cost Allocation
 Cost Apportionment
 Cost Reduction
 Cost Control
 Responsibility Center
 A responsibility center is an operational unit or entity within an
organization, that is responsible for all the activities and tasks structured
for that unit.
 A responsibility center is a part or subunit of a company in which the
manager has some degree of authority and responsibility.
 These centers have their own goal, staffs, objectives, policies and
procedures, and financial reports. And are used to balance
responsibilities related to expenses incurred, revenue generated, and
funds invested to an individual.
 In a multinational or large corporation, the organization tasks are divided
into a subtask, and each task is given to various small division or groups.
In this context, all groups in that organization are responsibility centers.
Examples of Responsibility Centres
Responsibility centres are often categorized by the degree of
authority and responsibility given to the manager:
 Cost centres.
 Profit centres.
 Investment centres.
 Revenue Centres
Cost Centre
 In a Cost Centre the manager is responsible only for costs.
Examples of cost centers include a production department,
maintenance department, accounting department, human resource
department, etc. A typical cost center is the janitorial department.
 Profit Centre

 In a profit center the manager is responsible for its costs and revenue.

 For example, a company may have a consumer products division and

an industrial division to more effectively market the company's

products. Each division's manager is responsible for sales and

expenses.

 However, if the company's executive team makes all of the investment

decisions, the divisions are considered to be profit centers.

 A typical profit center is a product line, for which a product manager

is responsible.
 Investment Centre
 In an investment center the manager is responsible for investment

decisions as well as costs and revenues.

 For instance, in a large corporation with many subsidiary companies,

the corporation may give authority to the head of each subsidiary to

make decisions on the needed investments. In that situation the

manager is the head of an investment center.

 A typical investment center is a subsidiary entity, for which the

subsidiary's president is responsible.

 Revenue Centre

 This center is accountable for initiating and monitoring revenue.

 The management does not have any control over the cost or

investment but can monitor a few of the expenses in the marketing

section.

 The production of the revenue center is calculated by analyzing the

budgeted revenue with actual revenue and actual marketing

expenses with budgeted marketing expenses.

 A typical revenue center is the sales department.

FORMAT OF COST SHEET
Particulars Details Amount Per Unit
Cost
 FORMAT OF COST SHEET
Particulars Details Amount
Opening stock of raw materials XXXX
+ purchase of raw materials XXXX
+ expenses relating to purchase XXXX
- Closing stock of raw materials XXXX
COST OF RAW MATERIAL CONSUMED / DIRECT MATERIAL XXXX
+ Direct labour/ Wages XXXX
+ Direct expenses XXXX
PRIME COST XXXX
+ Works overhead / Factory Overhead XXXX
WORKS COST XXXX
+ Office and administration overhead XXXX
COST OF PRODUCTION XXXX
+ Selling and distribution overhead XXXX
COST OF SALES XXXX
+ Profit (-Loss) XXXX
SALES XXX
 Methods of Calculating Different Costs

PRIME COST = Direct Materials+ Direct Labour+ Direct Expenses

WORKS COST = Prime Cost+ Works Overhead

COST OF PRODUCTION = Works Cost + Office & Administrative

Overhead

COST OF SALES = Cost of Production + Selling & Distribution

Overhead

SALES = Cost of Sales + Profit

Profit = Sales - Cost of Sales
 Method of Calculating Prime Costs
PRIME COST = Direct Materials+ Direct Labour+ Direct
Expenses
PARTICULARS Details Amount
DIRECT MATERIAL XXXX
e.g. Timber used in furniture, steel used in machines, leather used
in shoes, cotton used n textile mills, etc. .

+ Direct Wages/ Productive Wages/ Direct Labour XXXX

e.g. Labour engaged in converting raw materials into finished
goods.

+ Direct Expenses/ Chargeable Expenses XXXX XXXX

e.g. Cost incurred for a particular product or process, cost of
special design made for a specific product, etc..

PRIME COST XXXX

 Method of Calculating Works Costs
WORKS COST = Prime Cost+ Works Overhead
PARTICULARS Details Amount
Prime Cost XXXX
+ Works / Factory Overheads
e.g. Indirect material, indirect labour, rent of factory, factory
lighting, power, water, gas, repairs, factory equipment,
depreciation, foreman’s salary, factory manager’s salary,
factory supervisor’s salary, consumable stores, motive power,
etc. .

+ Opening Stock Of Work In Progress XXXX XXXX

- Closing Stock Of Work In Progress XXXX

WORKS / FACTORY COST XXXX
 Method of Calculating Cost of Production

PARTICULARS Details Amount

Works / Factory Cost XXXX

+ Office & Administrative Overhead

e.g. Office rent, office lighting, office staff salary,
manager’s salary, director’s fees, printing & XXXX XXXX
stationery, postage and telephone, general charges,
depreciation on office furniture, etc. .

COST OF PRODUCTION XXXX

Method of Calculating Cost of Goods Sold

PARTICULARS Details Amount

Cost of Production XXXX

+ Opening Stock of Finished Goods XXXX

- Closing Stock of Finished Goods XXXX

COST OF GOODS SOLD XXXX

 Method of Calculating Cost of Sales

COST OF SALES = Cost Goods Sold + Selling & Distribution Overhead

Particulars Details Amount

Cost Goods Sold XXXX

+ Selling & Distribution Overhead

e.g. advertisement, travelling expenses, salaries of
salesmen, commission on sales, market research,
carriage outward, warehouse charges, show room XXXX XXXX
expenses, cost of packing, delivery and
maintenance, etc. .

COST OF SALES XXXX

 CALCULATION OF PROFIT

Profit = Sales - Cost of Sales

SALES = Cost of Sales + Profit

Particulars Details Amount

Cost of Sales XXXX

+ Profit / - Loss (Balancing figure) XXXX

SALES XXXX
 CASE-1
 Mr. Arjun furnishes the following data relating
to the manufacture of a standard product for
the month of March 2020.
PARTICULARS AMOUNT

Materials 90,000
Direct Wages 61,000
Depreciation of Machinery 11,500
Power and Consumables Stores 12,000
Indirect Wages at Factory 15,000
Lighting of Factory 5,500
Selling Overhead 39,000
Sales 3,16,000
PREPARE COST SHEET
 COST SHEET / STATEMENT OF COST
PARTICULARS Details Amount
Direct Materials 90,000
Direct Wages 61,000
PRIME COST 1,51,000
Add: Factory Overhead:
Depreciation of Machinery 11,500
Power and Consumables Stores 12,000
Indirect Wages at Factory 15,000
Lighting of Factory 5,500 44,000
WORKS COST 1,95,000
Add: Office & Selling Overhead 39,000
COST OF SALES 2,34,000
Profit 82,000
SALES 3,16,000
 CASE-2
The following particulars have been obtained from the
cost records for the year 1997:
Reference
1. Cost and Management Accounting – By Ravi M Kishore

2. Cost and Management Accounting – By M.B.Shukla

3. Cost and Management Accounting – By SP Jain, Narang

& Simmi Agarwal

4. Management Accounting – Atkinson,Kaplan and Young

5. Management Accounting – Shashi K Gupta & Sharma

6. Management Accounting- M. N. Arora

THANK YOU