Management AccountingNature And Scope

Classification of Accounting

Fin. Accounting

Cost Accounting

Management Accounting

Financial Accounting Fin. Acc is concerned with

recording, classifying and summarising the
business transaction so that at the end of the
year profit or loss can be calculated and its effect
on owned capital, assets and liabilities can be
ascertained.
Principles of Financial Accounting
A. Accounting Concepts
Business Entity Concept
Going Concern Concept
Money Measurement Concept
Cost Concept
Dual Aspect Concept
Accounting Period Concept

B. Accounting Conventions : Convention of Consistency

Convention of Materiality and Disclosure
Convention of Conservatism
Limitations of Financial Accounting
o Provision of Historical Information
o Fails to meet the information needs of Different
levels of Management
o Consideration of only Monetary information
o Less Importance of Budgeting and Planning

Cost Accounting
Cost Accounting is the next stage in the development of
accounting. Under cost accounting total cost of goods
and
the elements of total cost are studied.
Definition :ICWA London :- Cost Accounting is the technique and
process of ascertainment of costs.
Objectives of Cost Accounting
(1) Cost Determination
(2) To help Management in Cost Control
(3) To determine Selling Price
(4) To facilitate Management Decision Making

Management Accounting
Management needs detailed information on different aspects
to arrive at meaningful decisions. Financial accounting
provides some informations but these are not adequate.
Management accounting removes these limitations of
financial accounting. Thus, management accounting
means- Accounting for Management to discharge its
functions including organising, planning, directing and
controlling.
Definition :- According to American Accountng Association,
Management accounting includes the methods and
concepts necessary for effective planning, for choosing
among alternative business actions and for control through
the evaluation and interpretation of performance.
R.N. Anthony :- Management accounting is concerned with
accounting information that is useful to management

Functions of Management
Accounting
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)

Provides data
Modifies Data
Analysis and interpretation of data
Use of Qualitative Information also
To help in Planning
To help in Organising
To help in Co-ordination
Communication
To help in Control
To help in Decision Making

Scope of Management Accounting

Fin. Acc
Cost Acc

Interim
Reporting

Internal
Audit

Budgetary

Inventory

Scope of
Mgt Acc

Statistical

Revaluation
Taxation
Acc

Distinction Between Management

Accounting and Financial Accounting
Mgt Accounting

Objectives :- To help mgt in

planning & decisionmaking. It is an Internal
reporting system.
2.

3.

4.

Subject Matter :- It
reveals the profitability or
performance or different
departments products etc in
detail.
Nature of Data used :Mgt Acc uses detailed,
statistical, relative, past and
future data and information.
Accuracy :- Need not to be
completely accurate.

Fin. Accounting
1. Provides
information
to
creditors,
shareholders,
banks, investors, govt. It is
an
external
reporting
system.
2. Fin acc deals with the
overall position of business
because fin.
Statements
explain the position the
position of business in
totality.
3. Fin acc presents monetary
information
of
historic
events and transactions.
4.

Completely accurate.

Mgt. Accounting
6. Compulsion : Mgt
Accounting
is
voluntary and has no
legal compulsion.
7. Legal Formalities :There is no legal form
or
rules
for
the
statements or reports
under mgt accounting.
8. Monetary Transactions
:- Mgt acc. Records
financial
and
nonfinancial information.

Fin. Accounting
6. Fin. Acc is necessary
for every business due
to legal provisions.
7.

Fin. Accounts are

prepared under the
provisions of Company
act, 1956.

8. Fin. Acc records only

those
transactions
which can e expressed
in money form

Distinction between Cost Accounting

and Management Accounting
Cost Accounting
1. Objective : to determine
the cost and control it.

2.

Subject Matter :- Cost

accounting deals mainly
with cost data

3. Scope :- Cost accounting

provides
information
relating to cost of products
only , so its scope is
narrow.

Mgt Accounting
1. Mgt
Acc
helps
the
management in decision
making through cost and
financial information.
2. Mgt acc considers both
cost and income aspects.

3.

Mgt acc has a wide scope

as it collects information
from fin. Acc, cost acc
and busine4ss finance.

Utility of Management
Accounting
1.
2.

3.
4.

5.

It helps the mgt in effective planning and decisionmaking.

Mgt accounting helps the mgt in control through
budgetary control, standard costing, marginal
costing.
Reporting system of management accounting helps
in establishing co-ordination.
Management accounting helps in creating cost
centre and profit centres and establishing internal
audit and internal control systems for these centres.
Communication plays most important role in
decision making and management accounting helps
in this regard through its reporting system.

Limitations of Management Accounting

1. Limitations of Cost and Financial
Accounting System
2. Wider Scope
3. Costly System

Techniques of Management Accounting

i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.

Analysis of Financial Statements

Ratio Analysis
Fund Flow Statement
Cash Flow Statement
Marginal Costing and Cost-volume Profit Analysis
Budgetary Control and standard costing
Management Reporting
Statistical Techniques
Value Added Statement
Accounting Price Level Changes
Human Resource Accounting

COST ACCOUNTING
Features Process of accounting for costs
Records income & expenditure relating
to production of goods and services
Concerned with cost ascertainment, cost
control and cost reduction
Established budgets and standards so
that actual cost may be compared to find
out variances
14

Scope of cost accountancy

Cost ascertainment
Cost accounting
Cost control

15

Advantage of cost
accounting
Profitable and unprofitable activities
are disclosed
Guides future production policies
Help in increasing profit
Provides reliable data for comparing
Disclose the relative efficiencies of
different workers
16

cost concept

Cost object
Cost
Cost unit
Cost centre
Profit centre

17

Cost object
It is an activity or item or operation
for which a separate measurement of
costs is desired
E.g. the cost of operating the
personnel department of a company,

18

Cost
It is the amount of expenditure
incurred on a specific cost object
Total cost = quantity used * cost per
unit (unit cost)

19

Cost unit
It is a quantitative unit of product or
service in which costs are
ascertained, e.g. cost per table
made, cost per metre of cloth

20

Cost centre
It is a location or function of an
organisation in respect of which costs
are ascertained
E.g. the rent, rates and maintenance
of buildings; the wages and salaries
of strorekeepers

21

Profit centre
It is location or function where
managers are accountable for sales
revenues and expenses
E.g. division of a company that is
responsible for the sales of products

22

Cost classification
Direct cost
Indirect cost (overhead)

23

Direct cost
Cost that can be identified
specifically with or traced to a given
cost object
The direct costs consist of the
following three elements:
Direct materials
Direct labour
Direct expenses
24

Direct materials
The cost of materials the cost of
materials used entering into and
becoming the elements of a product
or service
E.g. fabrics in garments

25

Direct labour
The cost of remuneration for working
time
E.g. assembly workers wages in toy
assembly

26

Direct expenses
Other costs which are incurred for a
specific product or service
E.g. royalties

27

Indirect cost (overhead)

Cost that cannot be identified
specifically with or traced to a given
cost object
They are identified with cost centres
as overheads
Indirect materials
Indirect labour
Indirect expenses

28

Indirect materials
Such as stationery, consumable
supplies, spare parts for machine
that assist to the production of final
products

29

Indirect labour
Such as salaries of factory
supervision and office staff that do
not directly involve in production of
the final product

30

Indirect expenses
Such as rent, rates, depreciation,
maintenance expenses that do not
have instant relationships with the
manufacturing processes

31

Cost accumulation

Prime cost = direct materials + direct labour + direct exp

Works or factory cost = Prime cost+ works or factory
overheads
cost of production = work cost + administration
overheads
total cost or cost of sales = cost of production +
selling and distribution overheads

32

Cost behaviour
Costs can be classified into variable,
fixed, semi-variable, or step-costs
according to how they behave with
respect of changes in activity levels

33

Variable cost
It increases or decreases in direct
proportion to levels of activity, but
the unit variable cost remains
constant
E.g. cost of food served in a
restaurant

34

Fixed cost
Total fixed cost remains constant
over a relevant range of activity level
but unit fixed cost falls with an
increase in activity volume

35

Semi-variable cost
It processes characteristics of both
fixed and variable cost
It increases or decreases with activity
level but not in direct proportion

36

Comparison of cost,
management and financial
accounting

37

Meanings
Financial accounting
Cost accounting
Management accounting

38

Financial accounting
Provides information to users who
are external to the business
It reports on past transactions to
draw up financial statements
The format are governed by law and
accounting standards established by
the professional accounting policies

39

Cost accounting
Is concerned with internal users of
accounting information, such as
operation managers
The generated reports are specific to
the requirement of the management
The reporting can be in any format
which suits the user

40

Management accounting
Comprises all cost accounting
functions
The accounting for product and
service costs, management
accounting extends to use various
internal accounting reports for
planning, control and decision
making
41

Cost and management

accounting
Vs.
Financial accounting

42

Management
Financial
(cost)accountin accounting
g
Nature

Records company
Records
material, labour
transaction events
and overhead
External financial
costs in product
statements are
or job
produced
Reports
produced are for
internal
management and
contol

Accountin Not based on the Follows the double

entry system
g system double entry
system

43

Management
Financial
(cost)accounting accounting
Accountin No need to use
accounting
g
principles principles

Adopt any
accounting
techniques that
generates useful
accounting
information

Users of
informati
on

Used by different
levels of
management or
departments
responsible for

Use Generally
Accepted Accounting
Principles for
recording
transactions

Used by external
parties:
shareholders,
creditors,
government, etc

44

Management
Financial
(cost)accountin accounting
g
Operation
guideline
s or
standards

Based on
management
instructions and
requirements

Time
span

Reports are
prepared
whenever needed
They may be
prepared on a
weekly or daily
basis

Conforms to
company
Ordinances, stock
exchange rules,
HKSSAPs
Reports are
prepared for a
definite period,
usually yearly and
half yearly

45

Management
Financial
(cost)accountin accounting
g
Time
focus

Perspecti
ve

Future
orientation:
forecasts,
estimates and
historic data for
management
actions

Past orientation:
use of historic data
for reporting and
evaluation

Detailed analysis Financial summary

of parts of the
of the whole
entity, products,
orgainisation
regions, etc
46

Cost accounting
vs.
Management accounting

47

Management
accounting

Cost accounting

To provide
information for
planning and
decision making
by the
management

Concerned with
Basic of
recording transactions

Objective

related to the
future

To ascertain and
control cost

Based on both
present and future
transactions for cost
ascertainment

48

Management
accounting

Cost accounting

Coverage

Covers a wider
area: financial
accounts, cost
accounts,
taxation, etc.

Utility

Only the needs

of internal
management

Covers matters
relating to
ascertainment and
control of cost of
product or service
The needs of both
internal and external
interested groups

49

Management
accounting
Deals with both
Types of
transactio monetary any
non-monetary
ns

transactions,
covering both
quantitative and
qualitative
aspects

Cost accounting
Deals only with
monetary
transactions,
covering only
quantitative aspect

50

Cost Components

Costing P&L Account

No.

Particulars

Amount

Per Unit

Office and Admin Expenses

(on number of units produced)

Cost of Goods Produced = (F + G)

(on number of units produced)

FG Stock Adjustment
+ Opening Stock of FG
- Closing Stock of FG

Cost of Goods Sold = (H + I)

(on number of units sold)

Selling & Distribution Expenses

(on number of units sold)

Cost of Sales = (J + K)

(on number of units sold)

Profit

(on number of units sold)

Sales = (L + M)

(on number of units sold)

Costing P&L Account

No.

Particulars

Amount

Per Unit

Office and Admin Expenses

(on number of units produced)

Cost of Goods Produced = (F + G)

(on number of units produced)

FG Stock Adjustment
+ Opening Stock of FG
- Closing Stock of FG

Cost of Goods Sold = (H + I)

(on number of units sold)

Selling & Distribution Expenses

(on number of units sold)

Cost of Sales = (J + K)

(on number of units sold)

Profit

(on number of units sold)

Sales = (L + M)

(on number of units sold)