Management Accounting

1. Management Accounting SCDL By Prof. AUGUSTIN AMALADAS M.COM ., AICWA.,PGDFM.,B.Ed.

2. 1.Production Prime Cost 1.Godown 1.canteen 2 Cost of sales 6.sales 5.profit 1.Factory administration 4.Sales and distribution 3.General administration Total cost Bin card Stores ledger Cost calculations/operating activity + + = + + Danger Facility department Factory cost/ works cost

3. FLOW OF CASH/SHORT TERM AND LONG TERM information Accounts payable RAW mATERIAL ADR Long term loans Preference Shares Bad debts Accounts receivable Debtors Work in progress information Overheads Labour Equity shares CASH GDR information Information

4. FLOW OF CASH - LONG TERM ADR Long term loans Preference Shares Equity shares CASH Short term GDR land furniture investments goodwill building Patent rights Know how Copy right

5. FLOW OF CASH-SHORT TERM information Accounts payable RAW mATERIAL Bad debts Accounts receivable Debtors Work in progress information Overheads Labour information Information Discounting bills creditors Cash credit Bank overdraft Sale of investments Bad debts Bad debts Issue of long term funds Sale of fixed assets Bank overdraft cash cash

6. Accounting Labour laws marketing Costing technical technology political production statistical Share market MANAGEMENT ACCOUNTS INFORMATION INFORMATION INFORMATION INFORMATION INFORMATION

7. Techniques in management accounting Management Accounting Cost accounting Mathematics operation research statistics Ratios Financial accounts Budgetary control Cash flow statement FFS Trend percentages Marginal costing Variance analysis Comparitive statement Common size statements

8. Structure of the syllubusChapter-1 Financial accounting 1. Introduction 2. Basic Accounting 3. Process of accounting 4. BRS 5. Rectification of Errors Final accounts

9. Cost Accounting 6. CONCEPTS 7. ELEMENTS OF COST 8. MATERIAL 9. LABOUR 10. OVER HEADS 11. MARGINAL COSTING techniques 12. BUDGETARY CONTROL 13.STANDARD COSTING TECHNIQUES 14. UNIFORM COSTING CONTROL

12. Differences between cost accounting/Management Accounting/financial accounting Financial Accounts Cost Accounts Management Accounts 1.Recording 2.Outsiders 3.Past 4.Statutory 5.Preparation of profit/loss A/c And balance sheet 6.Audit& reporting 1.Estimation and control 2.Internal 3. Future 4. Not all organisations 5.Costing records 6.Cost audit once in two years 1.Collection Analysis and decision making 2.Management 3.Future 4.Non-statutory 5.Using various techniques 6.Supply the required information To correct persons on time

13. Users of information organisation shareholders public Benefactors government banks Debenture holders Loan vendor Preference shareholders creditors debtors customers dividend liquidity Dividend/value in the share market Interest/return of capital Interest/return of capital Timely payment Timely supply Good product Less pollution Good name tax

14. Techniques in management accounting Management Accounting Cost accounting Mathematics operation research statistics Ratios Financial accounts Budgetary control Cash flow statement FFS Trend percentages Marginal costing Variance analysis Comparitive statement Common size statements

38. Terms(page-27) Account Debit Credit Journal Ledger Narration casting Polio Brought forward(B/f) Trail balance Assets Liabilities Capital Drawings Debtors depreciation Creditors Balance sheet Accounts receivable Accounts payable Debit note Credit note Trade discount Cash discount Debentures Equity shares Preference shares

39. Terms used in costing(unit 7) Factory over heads Office and administration overheads Direct material Direct labour Direct expenses Prime cost Raw material; cost per unit can be identified, in the individual cost centre; Engaged in manufacturing process Hire charges of machinery-direct expenses Factory Indirect material Indirect labour Indirect expenses + Works cost Consumable stores, cotton waste ,oil Wages to storekeeper, foremen, works manager’s salary, repairs to factory building, insurance to machinery factory lighting Factory Indirect material Indirect labour Indirect expenses + Total cost Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation Administration section

40. Selling and distribution Indirect material Indirect labour Indirect overheads Cost of sales+ Profit Sales Packing material, samples,salaries to sales personnel,commission to sales manager, warehouse charges,advertisement,repairs to distribution van, discount to customers Sales department

83. Problem:6 page-138 particulars amount amount 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 1100 2700 400 700 400 2700 400

84. 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. 700 900 600 18200 700 900 600 17000 1200

85. Life education Thomas Cooper –Dictionary

88. 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

93. 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

111. Treatment of period and product costs Product code Period code Manufacturing cost Non manufacturing costs Recorded as an asset In the balance sheet And becomes an Expense in the P/L A/C When the product Is sold Recorded as an Expense in the P/L A/c In the current Accounting year sold unsold

114. 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. Variable costs Semi variable cost direct material, direct labour and direct expenses. Both fixed and variable elements in the costs.

117. Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Ended March, 20xx 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 used direct labor Manufacturing overhead Indirect materials Indirect labor

126. Terms used in costing(unit 7) Factory over heads Direct material Direct labour Direct expenses Prime cost Raw material; cost per unit can be identified, in the individual cost centre; Engaged in manufacturing process Hire charges of machinery-direct expenses Factory Indirect material Indirect labour Indirect expenses + Works cost Consumable stores, cotton waste ,oil Wages to storekeeper, foremen, works manager’s salary, repairs to factory building, insurance to machinery factory lighting Factory Indirect Office and administration overheads material Indirect labour Indirect expenses + Total cost Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation Administration section

127. Selling and distribution Indirect material Indirect labour Indirect overheads Cost of sales+ Profit Sales Packing material, samples,salaries to sales personnel,commission to sales manager, warehouse charges,advertisement,repairs to distribution van, discount to customers Sales department

129. ABSORPTION COSTING PRO-FORMA ££Sales Revenue xxxxx Less Absorption Cost of Sales Opening Stock (Valued @ absorption cost) xxxx Add Production Cost (Valued @ absorption cost) xxxx Total Production Cost xxxx Less Closing Stock (Valued @ absorption cost) (xxx) Absorption Cost of Production xxxx Add Selling, Admin & Distribution Cost xxxx Absorption Cost of Sales (xxxx) Un-Adjusted Profit xxxxx Fixed Production O/H absorbed xxxx Fixed Production O/H incurred (xxxx) (Under)/Over Absorption xxxxx Adjusted Profit xxxxx

133. Operating activity Non- operating activity Dealers in furniture Dealers in houses My house is for sale My furniture is for sale ? ? Profits are operating profits Non operating profit

134. Operating/ Non operating Operating (OP) Non operating (NOP) 1.Profits derived by doing basic functions 2.Efficiency depends on operating profit 3.Gross Profit- Office and administration overheads- selling and distribution overheads=OP 1.Profits derived other than basic functions 2.We should not consider NOP to study efficiency except on sale of company/firm. 3. Sale of asset-cost of such asset=NOP

135. BPOs Self-less service canteen Self help room What activity?

138. Exercise:6/177 particulars Units 500 @ old price Units500@current price) Units 600 Direct Material[(40,000*600/500)*120/100] Direct labour[(60,000*600/500)*105/100] Prime Cost Manufacturing Cost[25% on prime cost] Factory cost Administration cost: Management expenses Rent General Expenses TOTAL COST Selling expenses Cost of sales Profit [20% on sales=25% on cost] sales 40,000 60,000 1,00,000 25,000 1,25,000 30,000 5,000 10,000 1,70,000 15,000 1,85,000 15,000 2,00,000 48,000 63,000 1,11,000 27,750 1,38,750 30,000 5,000 10,000 1,83,750 15,000 1,98,750 49,688 2,48,438 57,600 75,600 1,33,200 33,300 1,66,500 30,000 5,000 10,000 2,11,500 15,000 2,26,500 56,625 2,83,125

139. Material cost- stages in the movement of material 1.Purchase requisition 3.Purchase order 4.Receipts and inspection 5.Cheking invoice 6.Accounting for purchase 7.Receipt of material 8.Issue of material 9.Return of material 10.Transfer of material 2.Selection of source of supply

165. Payment by results(page-261) Payment by results a) Straight piece rate No. units*units produced b) Piece rate with guaranteed time rate c) Differential piece rate 1.Taylor differential piece Rate(page262 ) No guaranteed wage Below standard-low piece rate Above standard-high piece rate 2.Merrick differential rate plan No guaranteed wage Efficiency Piece rate Upto 83% Normal Upto 100% 110% of normal rate Above 100% 130% of normal piece 3. Gantt task bonus Below standard -time rate At standard- time wage+ increase in rate Above std .-High piece rate

166. Individual Incentive systems Halsey premium system 50-50 AH* HR+ (Time saved/2)* HR Time rate guaranteed Halsey-weir system 1(W):2(ER) AH* HR+ (Time saved/3)* HR Time rate guaranteed Rowan plan The more you save The more the incentives (AH*HR)+(SH-AH)/SH* (AH*HR) W ER AH-Actual hours SH-Standard Hours HR-Hourly rate

167. Other Wage payment system a.Barth premium system Wage=Hourly rate* Root of SHR.*AH Emerson’s Efficiency Bonus System Guaranteed wages Wage=(AH*HR)+ Bonus%*(AH*HR) Below 66 2/3%-No bonus 66 2/3 to 100%- upto 20% Above 100%-Bonus20%+1% for every1% increse in efficiency Bedaux Point system Wage=AH*HR+ (75%Of BS*HR)/60 Every hour there are Standard points=BS Accelerated premium system 2 Wage (Y)=.8*X Where Y=Earnings X=Efficiency

174. Overhead absorption rate(page-307) Amount of overhead/direct Material cost or /Direct Wage cost or /Prime Cost or /labour hours or /Number of machine Hours Prob.-pages 309,336

175. Unit-11 Marginal Cost-Volume-Profit Analysis and Relevant Costing

183. The Breakeven Point (BEP) The level of activity, in units or dollars, at which REVENUES = COSTS

185. Basic Assumption: Revenue Total revenue fluctuates in direct proportion to level of activity or volume. On a per unit basis, the selling price remains constant. Total $ Activity Level

186. Basic Assumption: Variable Costs Total variable costs fluctuate in direct proportion to level of activity or volume. On a per unit basis, variable costs remain constant. Total $ Activity Level

187. Basic Assumption: Fixed Costs Total fixed costs remain constant relative to activity level changes. Per-unit fixed costs decrease as volume increases and increase as volume decreases. Total $ Activity Level

188. Basic Assumption: Mixed Costs Mixed costs must be separated into variable and fixed elements. Total $ Activity Level

189. Cost Behavior Example

200. CVP Analysis - Multiple Products

201. Continuing . . . CVP Analysis - Multiple Products

202. Continuing . . . CVP Analysis - Multiple Products Total fixed costs BEP in sales dollars = ----------------------- CM ratio per bag ($120,000 + $30,000*) BEP in sales dollars = ---------------------------- .419 = $357,995 *$30,000 of additional fixed cost is incurred to produce both units

203. Scarce Resource -- Machine Hours

204. Sales Mix Decisions How many of each product?

206. Exhibit 6-12: Partial Product Line Income Statement

207. Exhibit 6-13: Product Margin for the Electric Skillet Product Line

208. CVP Graph Total $ Volume Total Costs Total Revenues BEP

209. Profit-Volume Graph BEP Fixed Costs Volume Profit or Loss Total $

212. Absorption Costing Income Statement Sales XXX Cost of Goods Sold: Beginning inventory XXX Cost of goods manufactured XXX Cost of goods available XXX Ending inventory XXX Cost of goods sold XXX Gross Margin XXX Operating Expenses: Selling XXX Administrative XXX XXX Income before Taxes XXX

213. Variable Costing Income Statement Sales XXX Cost of Goods Sold: Beginning inventory XXX Cost of goods manufactured XXX Cost of goods available XXX Ending inventory XXX Variable cost of goods sold XXX Product Contribution Margin XXX Variable Selling Expense XXX Total Contribution Margin XXX Fixed Expenses: Factory XXX Selling XXX Administrative XXX XXX Income before Taxes XXX

214. Absorption Costing vs. Variable Costing Income Statements

215. Costs and Budgeting

216. Costs

218. Cost Centres

224. Total Revenue

227. Break Even

228. Break Even Analysis Costs/Revenue Output/Sales Initially a firm will incur fixed costs, these do not depend on output or sales. FC As output is generated, the firm will incur variable costs – these vary directly with the amount produced. VC The total costs therefore (assuming accurate forecasts!) is the sum of FC+VC TC Total revenue is determined by the price charged and the quantity sold – again this will be determined by expected forecast sales initially. TR The lower the price, the less steep the total revenue curve. TR Q1 The break even point occurs where total revenue equals total costs – the firm, in this example, would have to sell Q1 to generate sufficient revenue to cover its costs.

229. Break Even Analysis Costs/Revenue Output/Sales FC VC TC TR (p = £2) Q1 If the firm chose to set price higher than £2 (say £3) the TR curve would be steeper – they would not have to sell as many units to break even TR (p = £3) Q2

230. Break Even Analysis Costs/Revenue Output/Sales FC VC TC TR (p = £2) Q1 If the firm chose to set prices lower (say £1) it would need to sell more units before covering its costs. TR (p = £1) Q3

231. Break Even Analysis Costs/Revenue Output/Sales FC VC TC TR (p = £2) Q1 Loss Profit

232. Break Even Analysis Costs/Revenue Output/Sales FC VC TC TR (p = £2) Q1 Q2 Assume current sales at Q2. Margin of Safety Margin of safety shows how far sales can fall before losses made. If Q1 = 1000 and Q2 = 1800, sales could fall by 800 units before a loss would be made. TR (p = £3) Q3 A higher price would lower the break even point and the margin of safety would widen.

233. Costs/Revenue Output/Sales FC VC TR Eurotunnel’s problem High initial FC. Interest on debt rises each year – FC rise therefore. FC 1 Losses get bigger!

237. Budgets

248. Flexible Budget-Sample-1 Particulars 50% Capacity 60% Capacity 80% Capacity A)Number of units sold Selling Price per unit Sales B) Cost 1) Material cost 2) Direct wages 3) Variable Overheads a) Factory b) Selling and Distribution 4) Fixed Overheads a)Factory b) Selling and distribution C) Profit ie A-B

249. Flexible Budget-sample-2 Particulars 50% Capacity 60% Capacity 80% Capacity A)Number of units sold Selling Price per unit Sales B) Cost 1) Material cost 2) Direct wages 3) Variable Overheads a) Factory b) Selling and Distribution 4) Fixed Overheads a)Factory b) Selling and distribution C) Profit ie A-B

251. Standard Costing System Unit-13 Managerial Accounting

254. Management Accounting-Module-II Marginal costing, Budgeting, standard costing and Uniform costing

259. Analysis of variances Material Labour Overheads price Mix yield usage cost + = yield Mix Rate efficiency cost Variable Overhead variances Fixed Overhead variances + = Price+ Mix+ Yield=Cost Rate+ Mix+ Yield=Cost

260. Material Variance Actual Quantity* Actual cost per unit Actual Quantity* Std. cost per unit Revised std. Quantity For input* Std. cost per unit Revised std Quantity For output* Std. cost per unit 1 2 3 4 Price(2-1) Mix(3-2) Yield(3-2) Usage(4-2) Cost(5-1)

261. Exercise: Material Variances Actual Quantity* Actual cost per unit 400*6=2400 500*3.6=1800 400*2.8= 1120 5320 Actual Quantity* Std. cost per unit 400*6=2400 500*3.75=1875 400 *3= 1200 1300 5475 1300(5:4:3)/12 Revised std. Quantity For input* Std. cost per unit 541.66*6=3250 433.33*3.75=1625 325*3= 975 5850 Revised std Quantity For output* Std. cost per unit 500*6=3000 400*3.75=1500 300*3= 900 5400 1 2 3 4 Price(2-1) Mix(3-2) Yield(3-2) Usage(4-2) Cost(5-1) +155 +375 (450) (75) +80

264. Labour Variances(Page-191 prob.8 Actual Hours* Actual cost per Hour 28*40*4=4480 18*40*3=2160 4*40*2= 320 6960 Actual Hours* Std. cost per Hour 28*40*3=3360 18*40*2=1440 4*40*1= 160 2000 4960 2000*(30:10:10)/50 Revised std. Hours For input* Std. cost per Hour 1200*3=3600 400*2= 800 400*1= 4 00 4800 Revised std Hours For output* Std. cost per Hour 1152*3=3456 432*2= 864 216*1= 216 4536 1 2 3 4 Rate(2-1) Mix or gang(3-2) Yield(3-2) Efficiency(4-2) Cost(5-1) -2000 -160 -264 -424 -2424

266. Variable overhead Variances(Page-156) Actual Hours* Actual Rate per Hour Actual Hours* Std. Rate per Hour Revised std Hours For output* Std. cost per Hour 1 2 3 4 Expenditure(2-1) Efficiency(4-2) Cost(5-1) Empty EGG

267. Fixed overhead Variances(Page-157) Actual Over heads Budgeted overheads Revised std. Hours For actual input* Std. cost per Hour Revised Std Hours For output* Std. cost per Hour 1 2 3 4 Expenditure Efficiency(4-2) Cost(5-1) Std. Hours* Std.fixedOH Rate per hour

268. “ Learning gives creativity Creativity leads to thinking Thinking provides knowledge Knowledge makes you great” - A.P.J.Abdul Kalam