Management Accounting

• It refers to a system of collection and presentation of relevant information, financial as well as other, relating to an enterprise for helping managers in planning, controlling and decision making.

• Management accounting may be defined as the process of identification, measurement, accumulation, interpretation and communication of information that assists managers in specific decision- making with in the framework of fulfilling the organizational objectives.

Comparison between Financial and Management Accounting

• Internal and External uses• Emphasis on the future• Generally accepted accounting standards• Relevance and Flexibility of information• Emphasis on precision• Organizational focus• Freedom of choice• Use of other disciplines

Cost Accounting and Management Accounting

• Sometimes these two terms are used interchangeably.

• But these two are quite different from each other.

• Cost accounting is mainly concerned with the techniques of product costing and deals with only cost and price information.

• The scope of management accounting is wider than cost accounting

Cost Concepts• Cost Unit – A unit of quantity of product ,

service or time , in relation to which cost may be ascertained or expressed

• Examples

Industry Cost Unit

Building House or Square Foot area

Cement Tonne

Cables Meter

Power Kilowatt Hour

Automobiles Number

Cost Centre

• For the purpose of ascertaining costs, the whole organization is divided into small parts or sections. Each small section is treated as cost centre of which cost is ascertained.

• Technically cost centre is defined as ‘ a location, person or item of equipment for which costs may be ascertained and used for the purpose of cost control’

Mini Case • Bakoya is a japanese company that makes

packages which hold the silicon chip in electronic computers. The packages or containers are made from alumina powder

• The powder is first made into sheets and wiring patterns are then screen printed on the sheets. The sheets are next converted into interconnected stacks and the stacks are baked in ovens. The final step is quality control.

• Identify the main cost centers of Bakoya Factory

Following are the various cost centres of bakoya factory

Sheet making department Screen Printing Department Stack making department Baking department Quality Control department

Classification of the cost

• Basic Classification: Direct Material Direct Labor Overheads• Factory overheads• Office overheads• Selling and distribution overheads

On the basis of Cost Behavior

Fixed Cost Variable Cost Semi Variable cost

Fixed Cost – Fixed costs are those which remain fixed in total with increase or decrease in the volume of output or activity for a given period of time or for a given range of output.

Fixed cost per unit vary inversely with the volume of production

Variable Cost - Variable costs are those costs that vary directly and proportionately with the output. There is a constant ratio between the change in the cost and the change in the level of output.

However it should be noted that it is only the total variable costs that change as more units are produced; the per unit variable cost remains constant.

• Semi Variable – These costs are made up of fixed and variable elements.

Because of the variable component, they fluctuate with volume; because of the fixed component, they do not change in direct proportion to output.