Management Accounting SCDL

By Prof. AUGUSTIN AMALADAS M.COM., AICWA.,PGDFM.,B.Ed.

Structure of the syllubusChapter-1

Financial accounting
2. Basic Accounting
Final accounts 3. Process of accounting 5. Rectification of Errors

1. Introduction
2

Cost Accounting
6. CONCEPTS

13. UNIFORM COSTING 12.STANDARD COSTING TECHNIQUES CONTROL

7. ELEMENTS OF COST

11. BUDGETARY CONTROL

10. MARGINAL COSTING techniques 9. OVER HEADS

8. MATERIAL

9. LABOUR
3

Management accounting

Costs and Budgeting

information

information

FLOW OF CASH/SHORT TERM AND LONG TERM

Debtors
Information Work in progress information

Accounts receivable Labour Bad debts RAW mATERIAL CASH ADR GDR Overheads Accounts payable

Equity shares

Preference Shares

Long term loans

FLOW OF CASH - LONG TERM

Know how
Patent rights

goodwill

Copy right

building

investments

land furniture CASH Short term Equity shares Preference Shares ADR GDR

Long term loans

information

information

FLOW OF CASH-SHORT TERM

Debtors
Information Work in progress information

Accounts receivable Labour Overheads Accounts payable

Bad debts Bad debts Bad debts

RAW mATERIAL cash cash

Sale of fixed assets Bank overdraft Bank overdraft

Issue of long term funds creditors

7 Discounting bills Sale of investments

Cash credit

INFORMATION

INFORMATION

technical

marketing

MANAGEMENT ACCOUNTS
INFORMATION

INFORMATION

Costing

INFORMATION
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Costs
Anything incurred during the production of the goods or service to get the output into the hands of the customer The customer could be the public (the final consumer) or another business Controlling costs is essential to business success Not always easy to pin down where costs are arising!
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11

Differences between cost accounting/Management Accounting/financial accounting

Financial Accounts 1.Recording 2.Outsiders 3.Past 4.Statutory 5.Preparation of profit/lossA/c And balance sheet

Cost Accounts

Management Accounts 1.Estimation 1.Collection and control Analysis and decision 2.Internal making 3. Future 2.Managemen 4. Not allorganisation t 3.Future s 4.Non5.Costing 12 statutory records

Users of information
liquidity banks Dividend/value in the share market shareholders Good name Benefactors tax government

Debenture holders Interest/return of capital

organisation

Less pollution public

Loan vendor Interest/return of capital

customers
Preference shareholders dividend Good product creditors Timely payment debtors Timely supply
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Techniques in management accounting

Variance analysis Cost accounting operation research Financial accounts Ratios statistics

Management Accounting
Budgetary control

Mathematics

Marginal costing Cash flow statement

FFS

Trend percentages Comparitive statement

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Common size statements

Chapter-2: Basics of financial accounting

1.Concepts 2.system of accounting 3.Types of Expenditure 4.Terms used in financial accounts 5.Double entry / Single entry 6. Depreciation methods 7. Practical consideration relating to depreciation
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1.concepts& conventions
Meaning: Basic assumptions upon which the basic process of accounting based.
a] Business entity conceptb] Dual aspect concept c] Going concern concept d] Accounting period concept e] Cost concept f] Money measurement concept g] Matching Concept

Conventions
Coservativism Materiality Consistency

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a] Business entity concept Business is different from the owner We pass Journal entry when owner contributes towards capital. When amount / goods withdrawn for personal use we make an entry in the business When Income tax paid by the owner out of business money we make an entry In the books of accounts.
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b] Dual aspect concept

Every debit has equal amount of credit Asset =Liability Liability creates asset If asset>Liability= profit If Liability> Assets= loss

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c] Going concern concept

Business will go for at least for a reasonable period. Depreciation is provided based on this assumption. If this assumption is not made all Fixed assets will be valued at realised value like current assets.

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d] Accounting period concept

Fixing time limit for accounts Profit for the period It can be one week or two weekor 6 months/one year or 5 years But to find profit we normally consider 12 months period Financial year for income tax point of view 1st April-31st March of the following year Calendar year January to December Divali to Divali
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e] Cost concept

The cost to the organisation (Actual) is recorded in the books Assets are not recorded according to the market price every year. Depreciation is calculated on cost not based on market price Accounting records may not show the real worth of the business Market price may be disclosed with in bracket in the balance sheet
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f] Money measurement concept

Every thing which can be expressed in terms of Money is recorded in the books Beautiful women are working /Handsome boys working in this company/Efficient engineers worth 5000 crores How do you record?. Good working environment? Highly motivated employees?
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g] Matching Concept

Matching Cost with revenue It is used to estimate correct profits Accrual/ cash basis of accounting
Even cash paid /received if it belongs to accounting period we consider them as expenditure /income Salary outstanding for the last month? Income from Investments yet to be received? Rent received in advance for next year?

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Conventions
Customs and traditions that are followed by the accountants while preparing the financial statements. Why do we respect elders? Why do we shake hands? Why do Young Indians hate receiving dowry?

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Coservativism
To be on the safer side Expect future losses as current year loss not future income is treated as current year income. Stock is valued cost price / market price which ever is lower Making provision for bad debts is based on this assumptions.
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Materiality
Material impact on profitability are considered Insignificant transactions ignored from recording Pen purchased, pencil purchased? Wine purchased regularly?

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Consistency
Accounting policies and proceedures should be followed consistently Method of depreciation should be followed consistently. Stock valuation- cost/market price whichever is lower is consistently followed If not followed it amount to change in the policy of the company
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2.system of accounting (18)

1.Cash system: unless cash received /paid in the accounting year can not be considered as income/expenses respectively
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2.Mercantile
Mercantile/Accrual/due concept: Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered. If last year expenditure paid this year? If you receive/paid in advance ? Last year I loved her? Next year I shall love him depends !!!!

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Mercantile love!!!!???

Last year I loved her? Next year I shall love him depends on type of bike model!!!!

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3.Types of Expenditure(19)

A) Capital expenditure B) Revenue expenditure C) Deferred Revenue expenditure

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A) Capital expenditure(19)

Expenditure incurred which will : a) Increase Production capacity b) Increase earning capacity c) Reduction in the cost of operation. Example: purchase of fixed assets Purchase of Machinery purchase of investment If such expenditure is not to do with the basic functions of the business such expenditure is capital expenditure. How do you consider if you buy goodwill, copy right or patent right?
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Capital expenditure-continue(page-19)

Both tangible and intangible assets included Intangible assets such as patent right, copy right, technical know-how, francises, goodwill etc., Depreciation is provided on fixed assets which will appear in the profit and loss account They appear in the Balance sheet The life is more than one year

They should not appear in the profit and loss account

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Revenue Expenditure(page-19)
Expenditure incurred which will : a) Not Increase Production capacity b) Not Increase earning capacity c) maintain the capacity No Depreciation is provided on fixed assets which will appear in the profit and loss account They appear in the profit and loss account The life is not more than one year They should not appear in the balance sheet
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Deferred revenue expenditure(page-19)

Deferred means- postponed Heavy revenue expenditure Vodafone incurred 200 crores for advertisement after merger with Hutch It can not be written off within a year It appears in the balance sheet as last item Every year some portion is written off in the profit and loss account. Research and deveopment expenditure, initial advertisement expenditure, preliminary expenditure are example

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Terms(page-20)
Account Debit Credit Journal Ledger Narration casting

Polio Brought forward(B/f ) Trail balance

Assets Liabilities Capital Drawings Debtors depreciatio n Debentures Equity shares Preference shares

Creditors Balance sheet Accounts receivable Accounts payable

Debit note Trade Credit note discount Cash discount

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Terms used in costing

Direct material Direct labour Direct expenses Raw material; cost per unit can be identified, in the individual cost centre; Engaged in manufacturing process Hire charges of machinery-direct expenses Consumable stores, cotton waste ,oil Wages to storekeeper, foremen, works managers salary, repairs to factory building, insurance to machinery factory lighting Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation

Factory

Prime cost
Factory over heads

Indirect material Indirect labour Indirect expenses +

Office and administration overheads

Factory

Works cost

Indirect material Indirect labour Indirect expenses +

Administr ation 37 section

Selling and distribution

Indirect material Indirect labour Indirect overheads

Cost of sales+ Profit Sales

Packing material, Sales department samples,salaries to sales personnel,commiss ion to sales manager, warehouse charges,advertise ment,repairs to distribution van, discount to customers

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Life education
Lady in a seashore

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5.Double entry / Single entry(22)

Is Accounting based on business concept or religious concept? Giving first and receiving later. Giving cash receiving machinery We consider both aspects such as debit and credit

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Rules of acccounting(23)
Personal rule/Account-supplier debtors, owner, banker, outstanding wages Real rule/Account- cash, bank, building, furniture, goodwill, patent rights Nominal rule/account: income and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses.

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Personal rule

Debit the receiver credit the giver

Example: Computer chips purchased on credit from wipro Here credit Wipro as Wipro is the giver of computer. Sold goods to Meena Meena is the receiver-debit
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Excercise
Amount collected from debtors? Amount deposited to bank?

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Real rule
These are the accounts of assets and liabilities Rule:

in

debit what comes

Credit what goes out

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Excercise
Goods supplied for cash Cash withdrawn from bank Cash withdrawn from bank for personal use Land purchased by giving a cheque Building sold on credit

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Nominal rule
Related to Expenses and income

Debit all expenses and losses Credit all incomes and gains
Rule:
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Excercise
Rent paid Rs 50,000 Wages paid Rs.1,00,000 Wages outstanding-Rs.60,000 Commission received-25,000 Discount allowed to customer Rs.1,000 Telephone bills paid-Rs.2500 Shares issued at premiumRs.2,00,000

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Suitable questions to pass journal entry

If cash transaction, person is not important Every birth of an account there is a death of the account Ask what comes in? Or what goes out?

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Depreciation Accounting(24)
Reduction in the value of assets Use factors, time factor,obsolescence are the factors Statutory requirement AS(6) Fixed assets are depreciated Current assets are not depreciated Land and cattle are not depreciated.
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Depreciation methods
Straight line method Written down value method Sinking fund method Machine Hour rate method Unit cost method Depletion asset method Depreciation Fund method Sum of digits method Accelerated depreciation method
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Impact on books
Depreciation Expense Net income Asset Equity Return on assets Return on Equity Turnover Ratios Cash flow NPV IRR Pay back

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Impact of Tax
Block asset method Purchase of Asset Sale of Asset Short term/Long-term Capital asset Asset used less than 180 days during the previous year Asset purchased preceding previous year but put into use less than 180 days during the current previous year

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Divisible profit and depreciation(Page:30-31)

Profit after adequate depreciation[Sec.205(2)] Profit after interest-depreciation of the current year- Depreciation of the previous year- loss of the previous year Depreciation as per Schedule XIV of the Companies Act Section 350 calculated on WDV
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Methods(25)
1. straight line method: Cost (- )estimated scrap value Estimated life in years 2. written down value or diminishing balance method. cost of the asset=1,00,000; rate of depreciation =10% #Depreciation for the 1st year=1,00,000*10%=10,000 Value at the end of first year= 1,00,00010,000= 90,000 ##Second year depreciation=90,000*10%=9000
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Methods(26)
3. production unit method:
Depreciation= year) (cost-scrap)(units produced during the

no of units the machine can produce during its life Suppose cost=1,00,000; scrap=5000; total life in units=10000 units. No. of units produced during the year=3000 Depreciation=(1,00,000-5000)(3000)/10,000 =Rs 28,500
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Production hour method

It depends on number of hours produced instead of units produced We calculate production hour rate Multiply the no.of hours used during the year with the rate gives depreciation

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Joint factor rate method(27)

Both fixed element and variable elements are considered Cost is divided into fixed and variable Fixed part is divided based on time Variable elements are divided by total units which gives rate per unit

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Annuity method
C*r Depreciation= n 1- 1/(1+r) - 1 Depreciation is constant It depends on future cash inflows It assumes that the capital invested would have earned interest had been invested otherwise
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Sinking fund method(29)

Amount available would be equivalent to the original cost C*r Depreciation=

n
(1+r) 1

Calculation of 26380 is wrong. I should be 16380.

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Endowment policy method

Insurance policy is taken to replace the asset. The depreciation is equal to the insurance premium paid

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Renewal method(29)
When asset is renewed full amount is written off.

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By-by to chapter-2

Life education
Chineese tree

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Chapter-3
Journalising Ledger (subsidiary books) Posting Trial balance Trading and profit and loss account Balance sheet

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Final Accounts Adjustments

Direct expenses Indirect expenses Opening stock given in adjustment Closing stock given in the adjustment Wages outstanding in trail balance Income from investment due given in trail balance Meaning of adjustment Income tax Life insurance premium Goods drawn by the owner

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Final Accounts Adjustments

Domestic house hold Expenses Income tax refund Income from house property Accrual basis of Accounting Un expired insurance Income received in Advance Interest on Capital Provision on Doubtful debts provision for Discount on debtor Deffered revenue expenditure

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Final Accounts Adjustments

Reserve Fund Goods Distributed as free sample Managers Commission Goods on sale or approval basis Hidden adjustments

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Terms used in final accounts

Trading account Profit and loss account Profit and loss appropriation account Balance sheet Capital Long term liabilities Current liabilities Fixed assets
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Terms
Investments Current assets Adjustments Closing stock Depreciation Outstanding expenses Prepaid expenses
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Terms
Accrued income Income received In advance Bad debts Provision for doubtful debts Interest on capital Drawings Deferred revenue expenses
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Terms
Abnormal expenses Goods distributed as free sample Goods sent on approval Commission payable to manager

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Important adjustments In various problems

Illus:2 page-59 i) repairs tp plant ii)Income tax of X Iii) Provision for bad debts Iv) adjustment no.b,e and f V) calculation of works managers commission and general managers commission

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Important adjustments In various problems

Illustration and sales Illustration Illustration Illustration Illustration Illustration Illustration Illustration 3: i) adju.e and I and trading account purchases 4: bank loan, adj. a,d and g. 5: loan, adj.b and c. 6: adj: b,f and h 7: adj:b and d 8: adj.f 9: adj. d and e 10: loan, adj.a

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See you in the next chapter BRS

Life education
God and Poor man
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Bank reconciliation statement

Cash book Pass book Cheques issued but not debited Cheques deposited but not cleared Bank charges entered in the pass book Income from investments entered in the pass book Electricity, water, telephone , internet bills paid directly by bank entered in the pass book Clerical errors in the pass book or cash book
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Exercise:-23 page124
Q.2 page-115 and questions no6 page-117 and q.25 page-126

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Life education

Child likes to hug in the evening

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Chapter 5: Rectification of Errors(page-129)

Reasons for errors in accounting: 1.error of omission 2.error of commission 3.Error of principle 4. Compensating error

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Errors not affecting trial balance

1.error of omission 2.Error of principle 3.compensating error 4. complete omission 5.error of commission

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Suspense Account
If trial Balance does not tally ie debit is not equal to credit then temporarily to close down we open a suspense Account on the deficit side known as suspense account.

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Rectification: Steps
Rectify only the account in which error is committed. Book means complete set of accounts Accounts means mistake only in the account If suspense account is given and if one side error suspense account has to be either debited or credited accordingly.
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Problems in errors Problem:7 page139

1. Drawings A/c debit to General expenses a/c credit 2. Sales Account debit to Machinery A/c credit 3. Rent a/c debit To land lord a/c 4. Repairs a/c To Building

250 0

2500

130 0 160

1300 160
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particulars

Problem:6 page-139
1100

amount

amount 700 400

a.Machinery Dr. To Purchases a/c To Wages a/c

b.Suspese a/c Dr. to Mohan a/c Cash a/cDr. To Mohan

2700 2700 400 400

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particulars
Mohan a/c Dr. To sales susp.
c. Suspensea/c ToYogesh a/c d.Furniture a/cdr To P/L a/c e.Machi.a/cdr. To Purchases To trade exp.

700
700 900

900
600 600 18200 17000 1200

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Life education

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Chapter-6 Cost Accountancyterms

Cost centre Impersonal and personal cost centre production and service cost centre Concept of cost

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Terms in costing
Accounting Costs :

These are costs that impact an organizations general ledger. For example, buying a product results in a chain of events wherein a purchase order is processed, a product/service is received, then an invoice arrives from the vendor
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The bottom line is that the organization is out "hard" or "real" money.[1
Examples: Hardware and software purchases Professional services Maintenance Labor Medical benefits Insurance Internet Service Provider fees
Wide area network fees

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Economic Costs
Economic costs are "opportunity costs." Instead of doing X, you had to do Y. These are not hard-currency costs and it is dangerous to lump them into the costsavings category with accounting costs because their effects will not necessarily show up on the bottom line.

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Example

: Reducing firefighting on incidents related to problematic changes is robbing resources from planned work (projects) and applying them to unplanned, reactive work (incidents). If you say that better change management reduced unplanned work by 20 percent, that is not an accounting cost savings, but it did free up resources to work on projects. It would be wise to identify what project progress was enabled through the action.
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Example-2
By training users, incidents handled by the service desk decreased 5 percent. Again, this is not an accounting cost savings unless a resource is dismissed, thus impacting labor, benefits and so on.

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mixing accounting and economic cost

mixing accounting and economic cost savings together and instead wrap both types of costs with a business case explaining the benefits of the proposal.

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Overhead
These are indirect costs that are absorbed by IT. For example, a portion of building rent is often allocated to IT based on some cost driver such as percent of floor space allocated.

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illustration
If IT occupies 10 percent of a building, then accounting will likely allocate 10 percent of the rent to IT. This overhead cost must then be factored into the services that IT offers in order for proper charge backs, pricing and so on

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Sunk Costs
These are costs that, once spent, cannot be changed. If something is purchased that cannot be returned or sold off, then that item should be considered a sunk cost. Sunk costs need to be factored into costing, but it also should recognized that altering them may not be possible by definition.
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Cost Drivers

When determining costs, it is worthwhile to understand what drives the costs. In other words, if you do X, then you see a corresponding increase in cost Y. To illustrate, if you must buy a PC and software licenses for each new person hired, then the addition of new users is one of the cost drivers for the associated PC and software expense accounts.
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Salvage Value/Salvage Costs

If you can sell an asset for more than its book value, then you are actually booking another form of income. On the other hand, if the salvage value is lower than the book value, then accounting will need to write the asset off. If you have to pay someone to take things away due to hazardous materials laws, then you may even incur expenses relating to the disposal of the asset.
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Differential cost
Increased or decreased cost due to the increased or decreased volume of operations. Additional cost due to operation.

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Normal cost and abnormal cost(150)

Normal costs incurred at a certain level of output Abnormality in cost due to unforeseen situations

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Relevant cost and relevant benefit

Required for decision making Costs that are affected by by the decision Costs and benefits that are independent of a decision are not relevant and need not be considered. Future cash inflows and future outflows are relevant. Sunk costs are irrelevant Allocated common costs are irrelevant Opportunity costs are relevant (shadow price) Incremental costs are relevant incremental benefits are relevant. Avoidable costs are relevant and unavoidable costs are irrelevant for decision making.
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Relevant and irrelevant

Five engineers already employed on monthly salary but will not be sent out if not employed in an another project. The salary paid to those engineers are relevant or irrelevant to estimate the price for the project? Two more engineers are selected exclusive to the new project-are the costs relevant to take decision for new project?

100

Direct and indirect costs

Direct Costs are costs that can be specifically and exclusively identified with the particular object (product) Salary of processing associate Indirect Costs are costs that can not be specifically and exclusively identified with the particular object (product) Salary of team leader Direct costs are allocated. Indirect costs are apportioned.
101

product costs Period costs

Product cost are those costs that are identified with goods purchased or produced for resale. Period costs are those costs that are not included in the inventory valuation and as a result are treated as expense in the period in which they are incurred. Product costs will generate income.but period costs do not generate income.
102

Treatment of period and product costs

Recorded as an asset In the balance sheet And becomes an Expense in the P/L A/C unsold When the product Is sold

Manufacturing cost

Product code

Non manufacturing costs

Period code

Recorded as an Expense in the P/L A/c In the current Accounting year

103

Variable, fixed, semi variable and semi fixed

Cost Variable cost cost Out put

fixed cost
Activity level
104

Step fixed cost

Total Fixed cost

Activity level
105

Variable, fixed, semi variable and semi fixed.

Fixed cost Supervisors salary, leasing charges for cars, depreciation on building In the long run all costs are variable. direct material, direct labour and direct expenses. Both fixed and variable elements in the costs.
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Variable costs Semi variable cost

Incremental costs and Marginal cost

Differential costs and revenues are the difference between costs and revenues for the corresponding item under each alternative being considered. Marginal cost/revenue - one extra unit of output cost/revenue.

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108

Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Ended December 31, 20X0

Direct materials used Beginning raw materials inventory Add: Cost of raw materials purchased Total raw materials available Less: Ending raw materials inventory Total raw materials usedDirect laborManufacturing overhead Indirect materials Indirect labor Depreciationfactory building Depreciationfactory equipment Insurance factory Property taxes

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