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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 deals with future. It is a kind of planning for the future because
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 financial statements to enable the management to formulate
future policies.
5. To help the management at frequent intervals by providing operating
statements and short-term financial statements.
6. To arrange for the systematic allocation of responsibilities for the
implementation of plans and budgets.
7. To provide a suitable organization 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
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costing, differential and opportunity cost analysis.
3. Budgeting and forecasting: Covers budgetary control
4. It reports financial results to the management
5. It provides statistical data to various departments.

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. Collection of data
2. Analysis
3. Presentation of data
4. Planning: A management accountant plans the entire accounting
functions.
5. Controlling: Examines the performance against the set standard and
reports it to the management.
6. Reporting: He reports to the management and advises them on future
decisions.
7. Coordinating: preparation of master budget
8. Decision making

Standard costing

 What is Material Cost Variance? What are its sub-divisions?

Material Cost Variance or Material Total Variance is the Variance 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:

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a) Material Rate Variance or Material Price Variance is the variance in
the rate or price of material actually spent and the material rate/price
estimated.
Thus, even if there is no change in quantity consumed, if 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 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 Mix Variance: The difference between actual quantity of
material and revised standard quantity of material is the Material 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 = Standard Rate (Revised Standard Quantity – Actual
Quantity)

b) Material Yield 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:
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MYV = (Actual Output – Standard Output) x Total Cost / unit

(Note: Labour Variances can be answered in the same manner as Material

Variances. Incase of any doubt or query, please put your queries on:
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.
Marginal costing is used to assess whether it is financially feasible to
increase manufacturing volume or to calculate the effect of reducing
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
manufacturing volume changes. Following factors are calculated 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 cost. The organisation starts earning profit when the sales
cross the Break Even Point. Break Even Point can be calculated 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-Volume Ratio expresses the relationship between contribution 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
available, these resources become limiting factor. If there are limiting
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 the contract is almost at the stage of completion, profit can be

calculated in four ways. It is upon the company to adopt any of the four
methods. The four methods are as follows:
1. Profit = Estimated Profit x Work Certified___
Total Contract Price
2. Profit = Estimated Profit x Cost incurred to date
Total estimated cost
3. Profit = Estimated Profit x Cash Received___
Total Contract Price
4. Profit = Estimated Profit x Cash Received___ x
Cost incurred to date
Total Contract Price Total
estimated cost

Explain the terms:

Contractor: A party who agrees to provide supplies or services 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 gives the contract.

Running Bill: It is a bill raised by the contractor for periodical payments.

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Retention 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: It refers to that part of the running bill, which is

rejected by the architect of the contractee. It is always valued at cost.

Basic Rate Concept: Basic Rate concept refers to the method in which a
fixed rate is maintained for the raw materials throughout the contract
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
circumstances in the factory. For Ex, labour strike, break down of
machinery. It is avoidable and controllable by mgmt. Abnormal loss occurs
in addition to normal loss.

Normal loss: It is part of process cost which is caused under normal

circumstances. It is inevitable. Example, weight loss, scrap loss, pilferage.
Normal loss is calculated at a certain % of input in unit in respective
process. It may have scrap value.

Process Costing

Write a note on “Inter process profits”.

While transferring the outputs of one process to another, the company

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 process, it would be inclusive of profits. But, at the 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 - 12000

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 Additional Processing cost- 12000
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 50 percent complete are the equivalent of
one unit fully completed.

Budgetary Control

What is Budgetary Control? What are the steps involved in

Budgetary Control?
Budgetary control is the management process of using budgets to monitor
and control the performance of the organization. This is done by comparing
the planned values (in the budget) with the actual values as they occur
during the year.
A budget has been defined as a financial and quantitative statement
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 information provided in this document on each topic is

limited. We do not guarantee an inclusion of the whole scope of
management accounting or of the whole syllabus of N.M.S.Y.B.M.S. We
suggest you to refer to the books recommended by your professor.