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The more the development of the market economy, the more the significance of management
accounting. To keep pace with this increasing market economy, it becomes imperative for the
organizations to adopt new management accounting tools and techniques. It is also important
for the Bangladeshi organizations. This paper seeks to obtain an overview of the management
accounting practices in the listed manufacturing companies of Bangladesh. Data has been
gathered by a questionnaire survey from eight manufacturing sectors. The analysis has
revealed that though there is difference in extent of practices among the sectors, all sectors
fail to practice some newly developed techniques. If this trend continues, Bangladeshi
organizations will lag behind in the race of global competitiveness and comparative
advantages. It is therefore, some policy recommendation has been made to improve and
fasten the management accounting practices.

This thesis attempts to examine the status of use of management accounting techniques
practice in Bangladesh. A list of traditional and modern management accounting tools was
identified and the extent of their use was evaluated. It is discovered that modern techniques
like Activity-Based Costing, Target Costing, Just-in-Time, Total Quality Management,
Process Reengineering and The Theory of Constraints, are not used in public and private
sector manufacturing enterprises but a few Multinational Corporations, are using some of
techniques like JIT and TQM. However, traditional techniques like Financial Statement
Analysis, Standard Costing, and Cash Flow Analysis are found widely used followed by CVP
Analysis, Marginal Costing, and Fund Flow Analysis etc. Respondents enterprises use the
management accounting techniques in Bangladesh is either moderate (30%) or unsatisfactory
(45%). 15% of the respondents consider it satisfactory and another 15% consider it not at all
satisfactory. All respondents consider the use of management accounting techniques is
necessary but pointed out a number of reasons of its limited use such as lack of awareness by
top management, more emphasis on financial information, involvement of extra cost etc.
However, they suggested some measures to improve the situation like taking measures to
create awareness among top management, organizing seminar, symposium, ensuring trained
personnel etc. In the current global competitive market enterprises must be cost and quality
conscious where the role of management accounting cannot be over emphasized. Thus the
extent of use of management accounting techniques specially the new ones be emphasized
and all concerned authorities need to give attention to this matter. This thesis seeks to obtain
an overview of the management accounting practices in the companies of Bangladesh. Data
has been gathered by a questionnaire survey from eight sectors. The analysis has revealed
that though there is difference in extent of practices among the sectors, all sectors fail to
practice some newly developed techniques. If this trend continues, Bangladeshi organizations
will lag behind in the race of global competitiveness and comparative advantages. It is
therefore, some policy recommendation has been made to improve and fasten the
management accounting practices.
This thesis explains the use of target costing as a strategic profit planning and cost
management tool. This will identify its key principles, contrast it with traditional cost
management tools, show the critical steps in the process, and demonstrate its functioning in



This report has been prepared to make a study on the “An overview of the management
accounting practices in the listed manufacturing companies of Bangladesh’’.as a part of
the fulfillment of thesis program required for the completion of the BBA program of the
Accounting Faculty of Business Administration of Stamford University Bangladesh.
The report was prepared under the supervision of Mahmuda Nasrin, lecturer of Business
Administration, Stamford University Bangladesh. I am very much thankful to him for
assigning me such types of project work.


Globalization or Free market economy is now world’s major challenge to every business
industry. Recent business world as well as Bangladesh faces highly economic recession, with
this situation the present economy of Bangladesh demands immediate development of
business technique, tools and proper decision making policy. This report has been prepared in
the light of emerging management accounting technique “An overview of the management
accounting practices in the listed manufacturing companies of Bangladesh’’. as a part of
the fulfillment of thesis program required for the completion of the BBA program Major in
Accounting under the Faculty of Business Administration of Stamford University
This thesis report is a mandatory requirement of my BBA program, and prepared by
supervision of thesis supervisor. The report was prepared under the supervision of Mahmuda
Nasrin, lecturer of Business Administration, Faculty of Business Administration, Stamford
University Bangladesh. The thesis supervisor authorized me to submit the report of “An
overview of the management accounting practices in the listed manufacturing companies
of Bangladesh’’
The purpose of the study is to make an analysis of Financial Statements of The companies in
terms of the Paints Industry. This study attempted to understand the financial conditions of
The companies on different segments such as liquidity, profitability & solvency. The purpose
is also to make recommendations for improving the financial stability and soundness of
different services provided to the shareholders of BPBL. It is also the purpose of the
researcher to help the management by providing an idea to take appropriate decisions about
the quality of the investing & financing in future.


The main objectives of the study are to see whether the business enterprises in Bangladesh
are using management accounting technique in order to assist the managers with information

relevant to decision making and day-to-day operational activities and the extent or degree of
such use.
In broader sense the objectives to be covered under the study are:

 To find out the using status of Management Accounting Techniques;

 To evaluate the conception of managers as to importance of use and problems, if any,

they face in using the techniques;

 To identify the Management Accounting information structure; and

 To highlight suggestive measures to the users of management accounting information

for its extensive use.


The scope of this study was strictly confined to the annual report & personal contact with the
employees of Bangladeshis companies. To collect the information I worked in the finance
section & cost & budget section of those companies. All other data related to the financial
analysis was collected from web sites of those companies & other related co.
Investigative study method is used in writing this report. This study method was significant
for me because before this study I have not enough understanding to proceed with such type
of research project also on this topic.
This study is characterized by flexibility and resourcefulness with respect to the methods,
formal research method employed by investigating various business industries in Bangladesh
and obtaining information by asking question to qualified personnel.
The study involves structured questionnaire, large sample and probability sampling plans.
Under the study once a new idea or insight is discovered, they may shift their exploration in
that direction. Observation method is used to complete this qualitative research.
Finally the purpose of this study is to determine whether management accounting technique
is used by the Bangladeshi manufacturing companies and whether those companies using the
technique apply the application process in their customer expectation, profit margin, cost and
price determination, cost reduction and management operations.

For smooth and accurate study every one have to follow some rules & regulation. The study
impute were collected from two sources:

Primary sources
Practical desk work
Face to face conversation with the officer
Direct observations
Face to face conversation with the client
Secondary sources
Annual report of companies
Files & Folders
Daily diary (containing my activities of practical orientation of companies) maintained by me,
Various publications of companies,
The details of the work plan are furnished below:
Data collection method: Relevant data for this report has been collected primarily by direct
investigations of different company personnel.
Data sources: The information and data for this report have been collected from primary sources.
The secondary sources of information are article reports, websites and different manuals. Some
textbooks, journals, newspapers etc. have bee consulted in order to build up the framework of the
Data processing: Data collected from secondary sources have been processed manually and
qualitative approach in general and quantitative approach in some cases has been used throughout
the study.
Data analysis and interpretation: Qualitative approach has been adopted for data analysis and
interpretation taking the processed data as the base.


On the way of my study, I have faced some problems that termed as the limitations of the study. In
all respect following limitation and weakness remain within which I failed to escape by any means.
These are follows:
Budgeted time limitation: - It was one of the main constraints that hindered to cover all aspects of
the study.
Confidentiality of data: - Because of some divisional and confidential problem, I could not get
enough information. Every organization has their own secrecy that is not revealed to others. While
collecting data some company personnel did not disclose enough information for the sake of
confidentiality of the organization.
Data Insufficiency: - Especially there is a lack of information about the determination of the
companies applying different costing method and the level of costing applications in these
companies. Sufficient books, publications, fact and figure are not available. These constrains
narrowed the scope of accurate analysis. If these limitations had not been there, the report would
have been more useful and attractive.




Management accounting is concerned with the provisions and use of accounting information to
managers within organizations, to provide them with the basis in making informed business
decisions that would allow them to be better equipped in their management and control functions.
Unlike financial accountancy information, management accounting information is used within an
organization “typically for decision-making” and is usually confidential and its access available
only to a select few.
According to The Chartered Institute of Management Accountants (CIMA) - Management
Accounting is the process of identification, measurement, accumulation, analysis, preparation,
interpretation and communication of information used by management to plan, evaluate and
control within an entity and to assure appropriate use of and accountability for its resources.
Management accounting also comprises the preparation of financial reports for non-management
groups such as shareholders, creditors, regulatory agencies and tax authorities.
The American Institute of Certified Public Accountants (AICPA) states that management
accounting practice extends to the following three areas:

• Strategic Management— advancing the role of the management accountant as a strategic

partner in the organization.

• Performance Management— developing the practice of business decision-making and

managing the performance of the organization.

• Variable costing— contributing to frameworks and practices for identifying, measuring,

managing and reporting risks to the achievement of the objectives of the organization.
The Institute of Certified Management Accountants (ICMA) states - "A management
accountant applies his or her professional knowledge and skill in the preparation and presentation
of financial and other decision oriented information in such a way as to assist management in the
formulation of policies and in the planning and control of the operation of the undertaking."
Management Accountants therefore are seen as the - "value-creators" amongst the accountants.
Management accounting knowledge and experience can therefore be obtained from varied fields
and functions within an organization, such as information management, treasury, efficiency
auditing, marketing, valuation, pricing, logistics, etc.

• Formulating strategies;

• Planning and constructing business activities;

• Helps in making decision & Optimal use of resources;

• Supporting financial reports preparation; and Safeguarding asset

Management accounting is concerned with the provisions and use of cost accounting information
to managers within organizations, to provide them with the basis to make informed business
decisions that will allow them to be better equipped in their management and control functions.
From different significance - management accounting information is used within an organization,
typically for decision-making. In contrast to financial accountancy information, management
accounting information is:

• Designed and intended for use by managers within the organization, whereas financial
accounting information is designed for use by shareholders and creditors.

• Usually confidential and used by management, instead of publicly reported;

• Forward-looking, instead of historical;

• Computed by reference to the needs of managers, often using management information

systems, instead of by reference to financial accounting standards.
The distinction between ‘traditional’ and ‘innovative’ management accounting practices can be
illustrated by reference to cost control techniques. Cost accounting is a central method in
management accounting, and traditionally, management accountants’ principal technique was
variance analysis, which is a systematic approach to the comparison of the actual and budgeted
costs of the raw materials and labor used during a production period. While some form of variance
analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with
innovative techniques such as life cycle cost analysis and activity-based costing, which are
designed with specific aspects of the modern business environment in mind. Life-cycle costing
recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest
when the product is still at the design stage of its product life-cycle, since small changes to the
product design may lead to significant savings in the cost of manufacturing the product. Activity-
based costing recognizes that, in modern factories, most manufacturing costs are determined by the
amount of ‘activities’ and that the key to effective cost control is therefore optimizing the
efficiency of these activities. Activity-based accounting is also known as Cause and Effect
Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the
avoidance of disruptive events reducing the costs of raw materials. Activity-based costing also
deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs,
such as the provision of a service or the production of a product component.


Managerial accounting has its roots in the industrial revolution of the 19th century. During this
early period, most firms were tightly controlled by a few owner-managers who borrowed based on
personal relationships and their personal assets.
Since there were no external shareholders and little unsecured debt, there was little need for
elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and
provided the essential information needed to manage the early large scale production of textile,
steel, and other products.
After the turn of the century, financial accounting requirements burgeoned because of new
pressures placed on companies by capital markets, creditors, regulatory bodies, and federal taxation

of income. Many firms needed to raise funds from increasingly widespread and detached suppliers
of capital.
To tap these vast reservoirs of outside capital, firms' managers had to supply audited financial
reports. And because outside suppliers of capital relied on audited financial statements,
independent accountants had a keen interest in establishing well defined procedures for corporate
financial reporting.
The inventory costing procedure adopted by public accountants after the turn of the century had a
profound effect on management accounting. As a consequence, for many decades, management
accountants increasingly focused their efforts on ensuring that financial accounting requirements
were met and financial reports were released on time. The practice of management
accounting stagnated.
In the early part of the century, as product line expanded operations became more complex,
forward looking companies saw a renewed need for management-oriented reports that was separate
from financial reports. But in most companies, management accounting practices up through the
mid-1980s were largely indistinguishable from practices that were common prior to World War I.
In recent years, however, new economic forces have led to many important innovations
in management accounting.

Maher states: Management accounting has a short but exciting history: - While
management accounting concepts can be traced back at least to the beginning of the Industrial
Revolution, management accounting as a teaching discipline appears to have got off the ground in
the late1940’s.
Parker concurs: - Management accounting has historical antecedents that stretch back longer than
we might expect and certainly accounting historians have not yet concluded their investigations of
its earliest genesis.
Cunagin and Stancil believe:
Management accounting with its lack of generally accepted accounting practice has not yet had the
exposure afforded to financial accounting. The history of management accounting is one of
innovation based on necessity. Innovation therefore continues without constraints imposed by
preconceived ideas of what constitutes “proper” accounting.


To achieve the above objectives Management Accounting employs three principal devices from
cost accounting -
1. Forward looking principle: Based on the past and all other available data, forecasting, the
future and recommending wherever appropriate the course of action for the future.
2. Target setting principle: Fixation of an optimum target which is variously known as
standard, budget etc. and through continuous review ensuring that the target is achieved.
3. The principle of exception: Instead of concentrating on voluminous masses of data
management accounting concentrates on deviations from targets and continuous and prompt
analysis of the causes of these deviations on which to base management action.


THE BASE OBJECTIVE of management accounting is to assist the management in carrying out
its duties efficiently. The objectives of Management Accounting are: -

• The computation of plans and budgets covering all aspects of the business. Example:
production, selling, distribution, research and finance.

• The systematic allocation of responsibilities for implementation of plans and budgets.

• The organization for providing opportunities and facilities for performing responsibilities.

• The analysis of all transactions, financial and physical, to enable effective comparison to be
made between the forecasts and actual performance.

• The presentations of up to date information, at frequent intervals, to management in the form

of operating statements.

• The statistical interpretation of such statements in a manner which will be of utmost

assistance to management in planning future policy and operation.
THE FUNDAMENTAL OBJECTIVE of management accounting is to enable the management
to maximize profits or minimize losses. The evolution of management accounting has given an
approach to the function of accounting. The main objectives of management accounting are as

1. Planning and policy formulation:

Planning involves forecasting on the basis of available information, setting goals; framing polices
determining the alternative courses of action and deciding on the program of activities.
Management accounting can help greatly in this direction. It facilitates the preparation of
statements in the light of past results and gives estimation for the future.
2. Interpretation process:
Management accounting is to present financial information to the management. Financial
information is technical in nature. Therefore, it must be presented in such away that it is easily
understood. It presents accounting information with the help of statistical devices like charts,
diagrams, graphs, etc.

3. Assists in Decision-making process:
With the help of various modern techniques management accounting makes decision-making
process more scientific. Data relating to cost, price, profit and savings for each of the available
alternatives are collected and analyzed and provides a base for taking sound decisions.
4. Controlling:
Management accounting is a useful for managerial control. Management accounting tools like
standard costing and budgetary control are helpful in controlling performance. Cost control is
affected through the use of standard costing and departmental control is made possible through the
use of budgets. Performance of each and every individual is controlled with the help of
management accounting.
5. Reporting:
Management accounting keeps the management fully informed about the latest position of the
concern through reporting. It helps management to take proper and quick decisions. The
performance of various departments is regularly reported to the top management.
6. Facilitates Organizing:
“Return on Capital Employed” is one of the tools of management accounting. Since management
accounting stresses more on Responsibility Centers with a view to control costs and
responsibilities, it also facilitates decentralization to a greater extent. Thus, it is helpful in setting
up effective and efficiently organization framework.
7. Facilitates Coordination of Operations:
Management accounting provides tools for overall control and coordination of business operations.
Budgets are important means of coordination.


Management accounting involves furnishing of accounting data to the management for basing its
decisions. It helps in improving efficiency and achieving the organizational goals. The following
paragraphs discuss about the nature of management accounting.
1. Provides accounting information:
Management accounting is based on accounting information. Management accounting is a service
function and it provides necessary information to different levels of management. Management
accounting involves the presentation of information in away it suits managerial needs. The
accounting data collected by accounting department is used for reviewing various policy decisions.
2. Cause and effect analysis:
The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss;
management accounting goes a step further. Management accounting discusses the cause and effect
relationship. The reasons for the loss are probed and the factors directly influencing the
profitability are also studied. Profits are compared to sales, different expenditures, current assets,
interest payables, share capital etc.

3. Use of special techniques and concepts:
Management accounting uses special techniques and concepts according to necessity to make
accounting data more useful. The technique usually used include financial planning and analyses,
standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.
4. Taking important decisions:
It supplies necessary information to the management which may be useful for its decisions. The
historical data is studied to see its possible impact on future decisions. The implications of various
decisions are also taken in to account.
5. Achieving of objectives:
Management accounting uses the accounting information in such away that it helps in formatting
plans and setting up objectives. Comparing actual performance with targeted figures will give an
idea to the management about the performance of various departments. When there are deviations,
corrective measures can be taken at once with the help of budgetary control and standard costing.
6. No fixed norms:
No specific rules are followed in management accounting as that of financial accounting. Though
the tools are the same, their use differs from concern to concern. The deriving of conclusions also
depends upon the intelligence of the management accountant. The presentation will be in the way
which suits the concern most.
7. Increase in efficiency:
The purpose of using accounting information is to increase efficiency of the concern. The
performance appraisal will enable the management top in-point efficient and inefficient spots.
Effort is made to take corrective measures so that efficiency is improved. The constant review will
make the staff cost–conscious.
8. Supplies information and not decision:
Management accountant is only to guide and not to supply decisions. The data is to be used by the
management for taking various decisions. ‘How is the data to be utilized’ will depend upon the
caliber and efficiency of the management.
9. Concerned with forecasting:
The management accounting is concerned with the future. It helps the management in planning and
forecasting. The historical information is used to plan future course of action. The information is
supplied with the object to guide management for taking future decisions.


One of the most significant steps to improve managerial performance is the development of the
new discipline. Management accounting it is still very much in a state of evolution. However, the
following advantages are claimed for it:-

1. The main contribution of management accounting is the elimination of initiative
management. With the help management accounting, the business activities are regulated
systematically by means of efficient planning and organization thereby avoiding over working in
busy periods and slackness in slump periods.
2. It enables the business to get the maximum return on capital by helping it in planning,
distribution and controlling activities.
3. It helps the management to improve its service to its customers by resorting to a continuous
method of comparing the results with the standards.
4. It helps in improving the relations between the management and labor by avoiding
unreasonable standard of work which is the main cause of labor unrest.

Limitations of Management Accounting:

Management Accounting is in the process of development. Hence, it suffers form all the limitations
of a new discipline. Some of these limitations are:
1. Limitations of Accounting Records:
Management accounting derives its information from financial accounting, cost accounting and
other records. It is concerned with the rearrangement or modification of data. The correctness or
other wise of the management accounting depends upon the correctness of these basic records. The
limitations of these records are also the limitations of management accounting.
2. It is only a Tool:
Management accounting is not an alternate or substitute for management. It is a mere tool for
management. Ultimate decisions are being taken by management and not by management
3. Heavy Cost of Installation
The installation of management accounting system needs a very elaborate organization. This
results in heavy investment which can be afforded only by big concerns.
4. Personal Bias:
The interpretation of financial information depends upon the capacity of interpreter as one has to
make a personal judgment. Personal prejudices and bias affect the objectivity of decisions.
Psychological Resistance
The installation of management accounting involves basic change in organization setup. New rules
and regulations are also required to be framed which affect a number of personnel and hence there
is a possibility of resistance form some or the other.
4. Evolutionary stage:

Management accounting is only in a developmental stage. Its concepts and conventions are not as
exact and established as that of other branches of accounting. Therefore, its results depend to a
very great extent upon the intelligent interpretation of the data of managerial use.
7. Provide sonly Data:
Management accounting provides data and not decisions. It only informs, not prescribes. This
limitation should also be kept in mind while using the techniques of management accounting.
8. Broad-based Scope:
The scope of management accounting is wide and this creates many difficulties in the
implementations process. Management requires information from both accounting as well as non-
accounting sources. It leads to in exactness and subjectivity in the conclusion obtained through it.


Management accounting may be said to include all activities connected with collecting, processing,
interpreting and presenting information to management. The management accounting satisfies the
various needs of management for arriving of appropriate business decisions. They may be
described as modification of data, analysis and interpretation of data, facilitating management
control, formulation of business budgets, use of qualitative information, and satisfaction of
informational needs of management.
Listed below are the primary tasks performed by management accountants generated by different
cost accounting tools. The degree of complexity relative to these activities is dependent on the
experience level and abilities -

 Variance Analysis
 Rate & Volume Analysis
 Product Profitability
 Cost Analysis & Cost Benefit Analysis
 Cost-Volume-Profit Analysis
 Life cycle cost analysis
 Capital Budgeting
 Strategic Planning Strategic Management Advise
 Internal Financial Presentation and Communication
 Sales and Financial Forecasting & Annual Budgeting
 Cost Allocation
 Resource Allocation and Utilization


 Customer Orientation

 Cross-functional Perspective

 Global Competition

 Total Quality Management

 Time as a Competitive Element

 Advances in Information Technology

 Advances in the Manufacturing Environment

 Deregulation and Growth in the Service Industry

 Activity-based Management


Practitioners of management accounting and financial management have an obligation to the
public, their profession, the organization they serve, and themselves, to maintain the highest
standards of ethical conduct. In recognition of this obligation, the Institute of management
Accountants has promulgated the following standards of ethical conduct for practitioners of
management accounting and financial management. Adherence to these standards internationally is
integral to achieving objective of management accounting. Standards of Ethical Conduct for
Management Accountants are:-

 Competence

 Confidentiality

 Integrity

 Objectivity

Practitioners of management accounting and financial management have a responsibility to:

 Maintain an appropriate level of professional competence by ongoing development of their

knowledge and skills.

 Perform their professional duties in accordance with relevant laws, regulations and technical

 Prepare complete and clear reports and recommendations after appropriate analysis of
relevant and reliable information
Practitioners of management accounting and financial management have a responsibility to:
o Refrain from disclosing confidential information acquired in the course of their work except
when authorized, unless legally obligated to do so.

o Inform subordinates as appropriate regarding the confidentiality of information acquired in
the course of their work and monitor their activities to assure the maintenance of that
o Refrain from using or appearing to use confidential information acquired in the course of
their work for unethical or illegal advantage either personally or through third parties.
Practitioners of management accounting and financial management have a responsibility to:

 Avoid actual or apparent conflicts of interest and advise all appropriate parties of any
potential conflict.

 Refrain from engaging in any activity that would prejudice their ability to carry out their
duties ethically.

 Refuse any gift, favor, or hospitality that would influence or would appear to influence their

 Refrain from either activity or passively subverting the attainment of the organization's
legitimate and ethical objectives.

 Recognize and communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity.

 Communicate unfavorable as well as favorable information and professional judgment or


 Refrain from engaging or supporting any activity that would discredit the profession.
Practitioners of management accounting and financial management have a responsibility to:

♦ Communicate information fairly and objectively

♦ Disclose fully all relevant information that could reasonably be expected to influence an
intended user's understanding of the reports, comments, and recommendations presented.


In applying the standard of ethical conduct, practitioners of management accounting and financial
management may encounter problems in identifying unethical behavior or in resolving an ethical
When faced with significant ethical issues practitioners of management accounting and financial
management should follow the established policies of the organization bearing on the resolution of
such conflict. If these policies do not resolve the ethical conflict, such practitioner should consider
the following course of action.

 Discuss such problems with immediate superior except when it appears that superior is
involved, in which case the problem should be presented to the next higher managerial level. If a
satisfactory resolution cannot be achieved when the problem is initially presented, submit the issue
to the next higher managerial level.

 If the immediate superior is the chief executive officer or equivalent, the acceptable
reviewing authority may be a group such as the audit committee, executive committee, board of
directors, board of trustees, or owners. Contact with a level above the immediate superior should
be initiated only with the superior's knowledge. Assuming the superior is not involved. Except
where legally prescribed, communication of such problems to authorities or individuals not
employed or engaged by the organization is not considered appropriate.

 Clarify relevant ethical issues by confidential discussion with an objective adviser to obtain a
better understanding of possible course of action

 Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

 If the ethical conflict still exists after exhausting all levels of internal review, there may be no
other recourse on significant matters than to resign from the organization and to submit an
informative memorandum to an appropriate representative of the organization. After resignation,
depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.


When management accounting information is used for control, management accountants may find
themselves in complex situations, fraught with conflict.

 Especially when it is used for performance evaluation

Pressure may be exerted to influence the numbers to make a favored product, customer, or line of
business appear more profitable than it actually is. Department managers may distort information
so that unfavorable factors are not revealed in a management accounting report.

 The cost of inefficient processes

 The existence of substantial amounts of excess capacity

Senior executives whose incentive compensation is based on the reported financial numbers may
put pressure on accountants.

 To recognize revenue from a customer early

 To defer until subsequent periods the recognition of an expense

In some circumstances, to recognize certain expenses early so that much higher earnings may be
reported in future periods.
All of these behaviors were evident in the frauds dominating the financial news in recent years.
Organizational leadership plays a critical role in fostering a culture of high ethical standards.
The way an individual responds to pressure derives from inner values and beliefs, but individuals
are strongly influenced by their view of organizational standards. If individuals see unethical or
illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel
that such behavior is accepted and sanctioned. An individual without a strong set of personal
beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and
participate in this behavior when a difficult or conflicting situation arises.

 Such as being asked to misrepresent an organization unit’s performance potential when the
unit is being offered for sale.
Beyond the example set by senior executives, companies may use two types of control systems to
foster high ethical standards among their employees.

 Beliefs systems

 Boundary systems
A beliefs system is the explicit set of statements, communicated to employees, of the basic values,
purpose, and direction of the organization:

• Credos

• Mission statements

• Vision statements

• Statements of purpose or values

The statements in a beliefs system are intended to inspire and promote commitment to the
organization’s core values and its purpose for being in business.
When conflicting situations arise, however, the lofty rhetoric in the statements will only have true
meaning and serve as guides to actions if employees observe senior managers acting according to
the statements. In this way, employees learn that the company’s stated beliefs represent deeply
rooted and actionable values. Articulate and actionable beliefs systems may inspire people to
higher values and aim at higher missions but they may not communicate clearly what behavior and
actions are unacceptable.
Companies also need boundary systems that communicate what actions must never be taken.
Boundary systems are stated in negative terms, or in minimal standards of behavior


Every organization-large and small-has managers. Someone must be responsible for making plans,
organizing resources, directing personnel, and controlling operations. Every where, mangers carry
out three major activities-planning, directing and motivating, and controlling.
Planning involves selecting a course of action and specifying how the action will be implemented.
The first step in planning is to identify the alternatives and then to select from among the
alternatives the one that does the best job of furthering the organization's objectives. While making
choices, management must balance the opportunity against the demands made on the company’s
The plans of management are often expressed formally in budgets, and the term budgeting is
applied to generally describe the planning process. Budgets are usually prepared under the
direction of controller, who is the manager in charge of the accounting department. Typically,
budgets are prepared annually and represent management's plans in specific, quantitative terms.
Directing and Motivating:
In addition to planning for the future, managers must oversee day-to-day activities and keep the
organization functioning smoothly. This requires the ability to motivate and affectively direct
people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot
problems, and make many small decisions that affect customers and employees. In effect, directing
is that part of the manager's work that deals with the routine and the here and now. Managerial
accounting data, such as daily sales reports are often used in this type of day-to-day decision
In carrying out the control function, managers seek to ensure that the plan is being followed.
Feedback, which signals operations are on track, is the key to effective control. In sophisticated
organizations, this feedback is provided by detailed reports of various types. One of these reports,
which compares budgeted to actual results, is called a performance report. Performance report
suggests where operations are not proceeding as planned and where some parts of the organization
may require additional attention.
The Planning and Control Cycle:
The work of management can be summarized in a model. The model, which depicts the planning
and control cycle, illustrates the smooth flow of management activities from planning through
directing and motivating, controlling, and then back to planning again. All of these activities
involve decision making. So it is depicted as the hub around which the activities revolve.

Tools for Management Support: -

A wide variety of accounting tools address that “why” and “how” of entity success or failure.
Many tools are proactive, helping us make sound decisions, and some are predictive, peering into
the future. When one develop an understanding of cost and revenue structure, the interaction of
encounters with revenue and expenses, and the amount and rate of change from volume changes.

The single most important concept for management is cost-volume-profit. Understanding the cost
structure of an organization allows proper management decisions. Standard financial statements do
not provide the proper cost separation, that is - variable costs versus fixed costs.
Variable cost: a cost that moves up or down as volume of service changes
Fixed cost: a cost that remains the same despite volume (within a relevant range)
A typical fixed cost is space rental. Whether five patients a day or 50 a day for lease is probably the
same amount. A typical variable cost is medical supplies. The more patients cause the more
supplies use. In real life some of these costs are considered “mixed” but for most management
purposes we consider only two cost behaviors.

Break-even point:-
Break-even point becomes a key benchmark; being defined as the point at which fixed and
variable costs equal revenue, or the point at which profit is zero. The break-even formula is as
follows: (Revenue – variable cost) = fixed costs
Contribution margin = fixed costs
As volume grows we get to leverage the fixed costs, revenue climbs but variable costs climb little
and fixed costs not at all.
CVP is critical for decision making, for example adding a new service. Usually the only relevant
numbers are the new revenue versus the new expenses, assuming adequate capacity. Understanding
which numbers are relevant is the key to a sound decision. With a relatively low variable cost line,
additional services require very little incremental spending.

Cost-Benefit Issues:-
There are plenty of accounting tools at for one’s disposal, but those tools should only used when
there is a positive cost-benefit relationship. Modern systems and one’s own creativity allow us
plenty of information options, but not all options are worth the work involved. The ideal is to
create enough information to improve management, without spending so much as to wipe out the
Cash Flows:-
Any business organization exists for one reason, to generate positive cash flow for the owners. The
devil of business is in the details. Effective cash flow management is a key task for senior
management, and anticipating cash flow ups and downs is critical.
A budget is a management plan expressed in numbers. Decisions are more important than
calculations. Spreadsheets have made budgeting much easier and more flexible. Once a budget
model is developed, numerous options can be calculated very quickly. Budgets should be flexible

rather than static. If one budget for 10,000 patient visits and you reach 15,000 patient visits, his
static budget is worthless.

Chapter 4:

Analysis of management accounting Technique

Challenges of Managerial Accounting in the Global Context:-

Trend in Management Accounting:-
The usefulness of the management accounting information system has been challenged by a
changing economic environment coupled with increased global competition and the emergence of
new manufacturing technologies. Management accounting contribution is going to loss the
competitiveness of Bangladesh in the global economy. It has been said about the management
accounting practices utilized in some of the developing economies of the Asian-Pacific region. At
present the challenge for management accounting techniques and practices by globally situated
manufacturing firms faced critically.

Over the last decade, critics of management accounting have questioned the relevancy of many
traditional techniques and practices. Traditional accounting techniques may no longer be valid as
the production process changes. These techniques fail to provide relevant, useful, and timely
information about processing activities that management needs for planning and control purposes.
Traditional management accounting systems are often considered incompatible with modem
production. Also, traditional systems have typically used direct labor as an allocation base, often

Nowadays managerial accounting analysis is considered so crucial in managing an enterprise that

in most cases, far from playing a passive role as information providers, managerial accountants
take a proactive role in both the strategic and day-to-day decisions that confront an enterprise.
Although much of the information they provide is financial, there is a strong trend toward the
presentation of substantial non-financial data as well. Moreover, the business environment is
changing rapidly. For managerial accounting to be as useful a tool in the future as it has been in the
recent past, managerial accounting has to be studied and improved.
In the 21st century the business environment is changing very rapidly. These changes are reflected
in global competition, rapidly advancing technology, and improved communication systems, such
as the Internet. The activities that make an enterprise successful today may no longer be sufficient
next year. A crucial role of managerial accounting is to continually assess how an organization
stacks up against the competition, with an eye towards continuously improving. In fact, moving
away from a historical cost accounting perspective and towards a proactive cost management is the
challenge that an enterprise has to face. Assigning the costs to a larger number of cost pools that
better represent those activities that are responsible for their birth, portrays the general idea upon
which future managerial accounting will evolve.
One result of the changing economic environment has been the emergence in the literature
of cost management technique. Cost management as an integrative area & combines elements

from three other fields: management accounting, production, and strategic planning. This
broadening of the traditional management accounting environment involves emphasis on
activity based costing, cost management systems, advanced manufacturing technologies, cost
planning and control, quality costs, performance measurement, and strategic cost management.

Challenges for Managerial Accounting System:-

The new challenges facing management accounting systems have been a subject of vivid debate in
recent years. Much of the literature seems unfortunately to have ignored such noteworthy issues as
the specific domestic competitive settings or economic conditions like recessions, which may
ultimately prove to be nation specific in their consequences. Moreover, these studies have largely
tended to discuss market changes and competition in a new environment
Another concern raised here is the interaction occurring between corporate cultural changes and
accounting. Cultural change is actually a phenomenon which might be assumed to occur more
commonly than is generally assumed, for instance, when companies strive for a true customer-
orientation. How to successfully implement corporate cultural change, or of how to respond to
exceptionally aggressive market attacks by domestic competitors may prove fatal. Modern
Management Ideas like TQM, BPR, and ABM have been proposed as feasible solutions to these
new challenges.
Especially in conditions of large scale changes, these ideas may indeed possibly provide potential
parts for new manuscripts to be used in a novel situation. As regards corresponding information
needs, it seems to be justifiable to argue that under these conditions management accounting
information plays an even more important role than usual.
The new challenges and requirements for management accounting and control systems are actually
experienced by the organizational actors in a complex multidimensional change setting. Another
major issue examined was the role of management accounting and control systems, particularly in
a cultural-ideological change process.

Challenge for Merging Management Accounting Tools with Different Discipline:-

With the competitiveness of today’s business world, several of new model going to developed for
using many useful management accounting tools with human resource management, that create the
challenges for management accounting tools as self-governing technique . For some insufficiency
of management accounting technique, merging developed by following process:-
Step 1: Identifying relevant product profitability models. Product profitability models come in all
shapes and sizes. The relevant product profitability models to use in human resource management
should involve sales productivity as a key element in determining total profitability.
Step 2: Applying marginal profitability to actual sales results. Product profitability models that
break down the product's profitability on per unit of sales basis can then be applied to actual sales
Step 3: Using regression techniques to analyze trends and predict future sales. Historical sales and
profitability information provide a basis for careful examination of trend. Regression analysis,
especially represented in a graphical format, enables management to quickly grasp the true trend
direction of sales production and efficiencies
Step 4: Comparing regression forecasts to management objectives. If the forecasted sales
production developed by the regression analysis falls short of management objectives, then
management needs to take pro-active steps to meet revenue objectives or revise their projections
Step 5: Working with human resources to resolve projected revenue variances. Recognizing
revenue variances using management accounting tools is one thing; identifying the cause of the
variances is quite another.
Carefully analyzing the characteristics surrounding sales production trends could suggest reasons
behind the variances. Different management accounting tools is used to help better understand
business, but we shouldn't limit using our tools to just management accounting. Many techniques
used to other functional areas, but certainly not limited at one root, in fact, the applications are
limitless. Taking the initiative to use these tools outside of the accounting and finance area can
have a profoundly positive impact on the value of the management accounting profession.

Challenges for Managerial Accounting Research: -

With the continuing development of business processes, whether the change in various
manufacturing processes, or the automation of most business activities, the cost accounting
procedures that companies use to calculate for the cost of an individual product, service or activity
have also become outdated.
From a managerial accounting perspective, the changes in the economy, in industries and
individual firms alike, must be supported by the firm's accounting and control infrastructure.
Accounting is a financial model of business. When changes occur in the business, accounting
should change to reflect them. Managers of companies that fail to make appropriate modifications
in their accounting systems will find they have inaccurate product/service/activity cost figures and
lack data for making decisions. They may lose their competitive edge because they do not have the
necessary information for operating in the constantly changing business environment.
Systems for accounting for costs date back several centuries. Accounting for management -
accounting done for management to meet its information needs. One basic difficulty in costing is
that an individual product, service or activity does not drive all the company expenses. Even within
a factory, there are many questionable costs, not directly driven by the type, number or volume of
products. In addition, there are costs that are driven by substantial material vendors and customers.
How to go about calculating the cost of an individual product, service or activity, in par with the
marked changes in the field of management accounting to maximize the benefits that effective
costing has to offer.
New Challenges for Managerial Accounting Research:- The traditional cost accounting model
developed for mass production of standardized products needs to be updated to support new
operating concepts such as just-in-time, zero defects, zero inventory, a cooperative workforce,
flexible manufacturing systems, computer aided design and manufacturing, and computer -
integrated manufacturing.

Management accounting must serve the strategic objectives of the company & emphasizes on
financial measurements, needs to include an explicit recognition of the need for information and
measurements in such soft areas as product quality, productivity, product innovation, employee
morale, and customer satisfaction. If management accounting research is to progress, information
needs to be collected from company various updated sources.

Challenges in Organizational Performance:-

Under the discipline of management accounting - how budgets, cost models, management control
panel and continuous improvement are used today and what needs to change:-
The challenges in organizational performance related to budgets, cost models, management control
panel and continuous improvement experienced at present by a variety of firm & how effective the
management accounting techniques contribute to organizational performance management.
The rationale for the management accounting techniques tended to hold the objectives of
organization by the four techniques –
 Budgets were frequently used solely to project financial results; their contribution to the
implementation of corporate strategy was very weak.
 The cost models were reduced to simple pricing systems intended to evaluate inventories,
rather than true models representing the organization's activities.
 Indicators found in management dashboards are identified and developed by the company
functions and are in no way integrated in financial management.
 The same is true of continuous improvement projects or Kaizen projects, which are
implemented completely outside the finance function.
The challenge in this regard was to encourage organizations to use budgets to apply corporate
strategy. Two major roles associated with budgets: monitoring financial projections and managing
strategy, it involve - in forecasts and plans. The budget also has an impact on manager motivation
in that budget targets are often used to establish compensation.
Budgets are used to monitor financial results in nearly all companies. Only when the anticipated
results are stable and easily predictable were, this would not change anything. The budget thus
contributes to managing financial resources by tracking financial projections. One such practice
that was evaluated favorably is that of the continuous budget, whereby at the end of each month,
not only are the projections of the following months adjusted but the budget of the twelfth
following month is added.
However, the data we gathered shows that, for the majority of companies, costs are calculated as
part of financial accounting, and companies haven't developed or implemented a system of
management accounting distinct from financial accounting. In addition, in the context of an
innovation and growth strategy that centers on acquisitions, executives aren't aware of the potential
benefits of a cost model that goes beyond associating direct production costs with products. In
addition, executives at companies that have implemented an integrated management information
system don't feel the need for other cost-related information.
Problem Foundations in Management Accounting:-

Fundamental objective of management accounting is to facilitate and support all the aspects of an
organization's decision making. To accomplish this objective, management accountants should be
aware of the kinds and levels of problems and decisions involved in order to identify those
particular areas where management accounting techniques and information would be most relevant
and useful. For this purpose, different conceptual frameworks for viewing problems, decisions, and
decision systems have been proposed in the management, accounting, and information systems
literature. They provide a good basis for viewing the types of problems, decisions and decision
systems, the types of information needed, and the useful role of management accounting.
It is a fact that accounting executives spend a great proportion of their time defining, formulating,
classifying, and solving problems -
The concept of a problem in business, management accounting, or any other context lends itself to
three major phases - Problem definition, Problem formulation, and Problem classification, which
precede the problem solving. The way executives approach each of these phases can substantially
affect information processing, decision making, and behavior. A moderating effect on this impact
is management accounting playing a crucial role of facilitator by providing the right information
needed for the execution of each of the three stages. Without the right execution of three phases
management accounting facing challenges to exist their acceptance.

Faced with new wealth creation standard, triggered by technology and relentless globalization of
markets, increasing number of companies are becoming knowledge-based enterprises. Internet and
e-commerce have changed forever the way companies conduct their businesses. Virtual enterprise
and efficient supply chain management systems will shape the future of these enterprises.
Organizations are trying to become agile enterprises with the help of strategic alliances of firms
and integration using information technologies.

Five challenges are identified for management accounting, and in particular for planning and

 The first is to foster multiple perspectives

 The second is the coordination of complexity

 The third concerns competitor analysis and

 The fourth concerns resource allocation

 The fifth is to overcome centrifugal tendencies, developing a clarity of strategic intent,

binding managers together worldwide and rewarding behavior in the corporate, as opposed to local
Traditional performance and cost measures are no longer suitable for developing and managing
enterprises in the so-called new environment. In order to remain relevant and to add value, cost and
performance measures must be designed and systematically evaluated to reduce the often-
unnoticed mismatch between strategic goals and operational tactics. Managerial accounting
researchers and practitioners should develop new costing and Performance Measurement Systems
(PMS) taking into account the new enterprise environment.

Pushing the Art of Management Accounting: -

Management accounting practice has developed substantially over the past century, but it suggests
that the practice is no longer making the strides that it once did. Unless management accountants
take a hard look at the effectiveness of current practice, this situation isn’t likely to improve. In
some companies, radical changes are needed to the structure of the finance function, the nature of
the interactions management accountants have with other managers and the performance metrics
used to guide the function itself.
Today’s management accounting information, driven by the procedures and the cycle of the
organization’s financial reporting system, is too late, too aggregated and too distorted to
be relevant for managers’ planning and control decisions. Management accounting reports are of
little help to operating managers as they attempt to reduce costs and improve productivity.
Strategic cost management techniques, such as attribute costing, seem little known outside
academia. The majority of firm’s measures apparently don’t use them significantly.
Balanced Scorecard researchers have concluded that most users make little attempt to link
their non-financial performance to strategy and that only a small minority attempt to validate the
cause and effect linkages included in their models. Moreover, Balanced Scorecard practice seems
to have developed an independent momentum, excluding the finance function altogether in
some organizations. There is even pressure for management accountants to do less.
These indications of a slowing pace of management accounting change may be due to a range of
factors. In some cases, new management accounting tools aren’t adapted to organizational strategy
or structure and can’t be used. And in some cases, innovation has failed due to implementation-
related factors. However, the main problems aren’t technical or structural; they lie in the need
for a better management of the management accounting process itself.
Last the management accounting process requires new metrics. Most accounting functions measure
timeliness, in terms of the delay between the end of the reporting cycle and the
issuing of the report, and many measure the cost of the finance function relative to revenues.
Few organizations measure the use or the usefulness of the management accounting
information provided. The absence of such measures guarantees that things will remain the

Application of Inefficient Techniques in Decision Making: -

As time went on, standard cost lost its usefulness for management decision making due to a variety
of reasons:-
The practice of paying workers on a set-piece basis changed in favor of paying on an hourly rate.
Modern companies tend to have relatively low truly variable costs and very high fixed costs.
Equipment has become more complex and specialized and may be a very significant proportion of
total costs. Changes in the level of full cost inventory create swings in profitability that is difficult
to explain or understand.
An increase in inventory can "absorb" costs of production and increase profits, while a decrease in
inventory level will decrease profits. Organizations with a wide range of products or services have
processes which are common to several finished items, making cost allocation irrelevant or

As a result of the above, using standard cost accounting to analyze management decisions can
distort the unit cost figures in ways that can lead managers to make decisions that do not reduce
costs or maximize profits.
Weaknesses of management accounting: - Management accounting discipline is still very much in
a state of evolution. It comes across the same obstacle as a relatively new discipline has to face
sharpening of analytical tools and improvements of techniques creating uncertainty about their
1. There is always a temptation to make an easy course of arriving at decisions by intuition rather
than taking the difficulty of scientific decision making.
2. It derives its information from financial accounting, cost accounting and other records.
Therefore strength and weakness of management accounting depends upon the strength and
weakness of basic records.
3. It is one thing to record, interpret and evaluate an objective historical event converted into
money figures, while it is something quite different to perform the same function in respect of past
possibilities, future opportunities and unquantifiable situation. Execution of the conclusions drawn
by the management accountant will not occur automatically. Therefore, a continuous effort to
achieve the goal must be made at all levels of management.
4. Management Accounting will not replace the management and administration. It is only a tool of
management. Of course, it will save the management from being immersed in accounting routine
and process the data and put before the management the facts deviating from the standard in order
to enable the management to take decision by the rule of exception.
An alternative view of management accounting: - A very rarely expressed alternative view of
management accounting is that it is neither a neutral or benevolent influence in organizations,
rather a mechanism for management control through observation. This view locates management
accounting specifically in the context of management control theory. Stated differently
Management Accounting information is the mechanism which can be used by managers as a
vehicle for the overview of the whole internal structure of the organization to facilitate their control
functions within an organization.
Throughput Accounting: - The most significant, recent direction in managerial accounting is
throughput accounting; which recognizes the interdependencies of modern production processes.
For any given product, customer or supplier, it is a tool to measure the contribution per unit of
constrained resource.
Transfer pricing: - Management accounting is an applied discipline used in various industries. The
specific functions and principles followed can vary based on the industry. Management accounting
principles in banking are specialized but do have some common fundamental concepts used
whether the industry is manufacturing based or service oriented.
For example, transfer pricing is a concept used in manufacturing but is also applied in banking. It is
a fundamental principle used in assigning value and revenue attribution to the various business
units. Essentially, transfer pricing in banking is the method of assigning the interest rate risk of the
bank to the various funding sources and uses of the enterprise.

Chapter 5: Findings of the Study
Management decisions are basically based on some measures/techniques traditionally designed
based on quantitative data. However, in recent past to cope with global business environment,
change in business, increase in competition and complexity of decision making some advanced
quantitative techniques like Activity – based Costing and Target Costing and some improved
programs like Just-in-Time (JIT), Total Quality Management (TQM), Process Reengineering and
Theory of Constraints (TOC) have been introduced for application. Now both traditional and
advanced management accounting techniques are shown in the following chart:-

Traditional Advanced Techniques


 Financial  Activity-Based
Statement Analysis Costing
 Fund Flow  Target Costing
Analysis  Just-in-Time
 Cash Flow (JIT)
Analysis  Total Quality
 Marginal Management (TQM)
Costing  Process
 Absorption Reengineering
Costing  The Theory of
 Differential Constraints(TOC)
 Standard
 Opportunity
 Budgetary
 Inter-firm
 Cost-Volume-
Profit Analysis
 Management
Chart Showing the Management Accounting Techniques
Extent of Use of Management Accounting Techniques
Against the background of identification of generally used management accounting techniques the
following table shows the use of management accounting techniques in the sample manufacturing
business firms in Bangladesh. A list of techniques was provided to the respondents and they were
asked to point the techniques they use and which they do not use. The responses have been
tabulated and the summarized picture is shown in the table.
The table shows the extent of use of different management accounting techniques in sample firms.
It is seen that the traditional techniques like financial statement analysis, cash flow analysis,
budgetary control and management reporting are being widely used (100%) by all types of firms
followed by standard costing and absorption costing (80% in public, 90% in private and 100% in
MNC). Marginal costing and cost-volume-profit analysis are used to some extent by the 50% in
public sector enterprises, 60% by private sector and 70% by multinational corporations (MNC).
Some enterprises of public (30%) and private (20%) sectors use fund flow statement analysis
though it has now been almost replaced by cash flow statement analysis. Modern techniques yet to
be introduced by Bangladeshi firm – both in public and private sector. Few MNC uses JIT (40%)
and TQM (20%). None of public or private Bangladeshi enterprises or MNC found to use some
traditional technique like differential costing, opportunity costing and inter-firm comparison as
well as the modern techniques like activity-based costing, target costing, process reengineering and
the TOC. Thus it is seen that management accounting techniques yet to get a firm footing in
Bangladeshi firms and thus depriving these firms in better decision making.

Techniques PB PV MNC
(N = (N = (N =
15) 15)
“Table Showing the Summarized Picture of Management Accounting Techniques Used 5) the

Financial 100% 100% 100%

Analysis 100% 100% 100%

Cash Flow 100% 100% 100%

100% 100% 100%
80% 80% 80%
80% 80% 80%
Reporting 50% 50% 50%
Standard 50% 50% 50%
30% 30% 30%
Costing --- --- ---

Marginal --- --- ---

--- --- ---
Volume-Profit --- --- ---
Analysis --- --- ---
Fund Flow --- --- ---
--- --- ---
(JIT) --- --- ---
Total Quality --- --- ---
Based Costing
Costing 28

The Theory of
Now a discussion about the techniques in brief and extent of the use of the same is being examined
i) Financial Statement Analysis
Financial statement is essentially historical document which provides organized data according to
logical and consistent accounting procedure and conveys an understanding of some financial
aspects of a business firm. Careful analysis of financial statements can help decision makers to
evaluate an organization’s past performance and predict its future financial health. Financial
statement therefore, refers to such a treatment of the information contained in the Income
Statement and the Balance Sheet so as to afford full diagnosis of the profitability and financial
soundness of the business. This analysis is accomplished by examining trends in key financial data,
comparing financial data across companies, and analyzing key financial ratios. All the sample
firms use it.
ii) Fund Flow Analysis
Fund flow analysis does not carry any extra meaning basically after the implementation of
International Accounting Standards (IAS)–7 in revised form. Nevertheless, some business
organizations are still considering this as an important tool for managerial and financial decision
making. Working capital being life-blood of the business, analysis of fund flow is thus extremely
useful. Financial analysts also have an understanding of changes in the distribution of resources
between two balance sheet dates by analyzing the fund flow statements. Few sample firms (30% in
public and 20% in private sector) still use this statement.
iii) Cash Flow Analysis
Until recently, many decision makers focused primarily on the income statement and the balance
sheet. But in the IAS-7 (revised), FASB has prescribed for compulsory reporting of another
important statement, the statement of cash flows. A statement of cash flows reports the cash
receipts and cash payments of an organization during a particular period. It is widely used as a tool
for assessing the financial health of an organization. Other important purposes of maintaining this
statement are to predict future cash flows, to evaluate management’s generation and use of cash
and to determine a company’s ability to pay interest, dividends, and to pay debts when they are
due. All the sample enterprises found to use it.
iv) Marginal Costing
Marginal costing is a technique where only the variable costs are considered while computing a
cost of a product. The fixed costs are met against the total fund arising out of excess of selling
price over total variable cost. This fund is known as ‘contribution’ in marginal costing. Marginal
costing system is however not a system of cost finding such as job, process or operating costing,
but it is a special technique concerned particularly with the effect of fixed overheads on running
the business. It is an important decision making tool. However, it is found not being widely used in
sample enterprises. Over 50% of public and 60% of private sector enterprises and 70% of MNC
found to use it.
v) Absorption Costing
Though absorption costing is a traditional approach for costing products for the purposes of
valuing inventories and cost of goods sold, the vast majority of companies throughout the world
use this technique for managerial accounting purposes. Absorption costing, which is also known as
Total, or Full costing, treats all costs of production as product costs, regardless of whether they are
variable or fixed. It allocates a portion of fixed manufacturing overhead cost to each unit of
product, along with the variable manufacturing costs. It is found widely used in sample firms (80%
in public, 90% in private and all MNC) followed by some traditional techniques like financial
statement analysis, cash flow analysis etc.
vi) Differential Costing
In decision-making, the management always compares two or more alternative courses of action.
Making or buying decision, accepting or rejecting certain orders, deciding whether to discontinue
an existing product or launce new one, expanding the existing business etc. are the decisions
required to be taken by the management. In such a case the best alternative that will maximize
profit or minimize loss can be obtained by determining the differential costs and revenues.
Differential cost (revenue) is the difference in total cost (revenue) between two alternatives. The
use of this technique found absent in sample enterprises.
vii) Standard Costing
A standard is a benchmark or “norm” for measuring performance. Standards are found everywhere
and are also widely used in managerial accounting where they relate to the quantity and cost of
inputs used in manufacturing goods or providing services. Standard costing is a budgetary control
technique with three components: a standard, or predetermined, performance level; a measure of
actual performance; and a measure of the difference, or variance, between the standard and the
actual. All sample MNCs, 90% of private sector enterprises and 80% of public sector enterprises
reported to use it.
viii) Opportunity Costing
Sometimes a proposed investment project may use the existing resources of the firm for which
explicit, or adequate, cash outlays may not exist. The opportunity costs of such projects should be
considered. Opportunity costs are the expected benefits which the company would have derived
from those resources if they were not committed to the proposed project. In addition to the
accounting costs that are explicit as labor, raw materials, supplies, rent, interest and utilities, some
implicit costs are also required for managerial decision making purpose. The objective in such case
is to determine the present and future costs of resources associated with various alternative courses
of action. Such an objective requires that one considers the opportunities foregone/ sacrificed
whenever a resource is used in a given course of action. The implicit costs, however, consist of the
opportunity costs of time and capital that the owner-manager has invested in producing the given
quantity of output. But none of sample enterprises use it.
ix) Budgetary Control
Budgetary control is the system of management control in which all the operations, as sales,
purchase, production etc. are forecasted in advance and the results, when known, are compared
with the planned targets. The difference between the planned targets and actual results are analyzed
and corrective steps are taken according to the original causes. By budgetary control attempts are
made to make the best uses of resources under the circumstances and all efforts are coordinated by
pin-pointing responsibility. The Budget Performance and Variation Reports act as communication
in between top management and financial management as also in between functional management
and sub-ordinate management. The system makes everyone conscious and responsible, and thus it
is also termed as Responsibility Accounting. All the sample enterprises reported to use it. But some
research report indicated that this technique is not rigorously followed and thereby the enterprises
are deprived of its benefit.
x) Inter-firm Comparison (IFC)
IFC is another technique of Management Accounting which is made by some inter-firm
comparison ratios based on the financial and other records of the business. Top management can
make decision by applying this technique and comparing the performance of two or more similar
types of industry. The idea of inter-firm comparison was felt in the year 1889 when the National
Association of stove manufacturer in U.S.A introduced first the scheme of Uniform Costing. In
order to know whether one business/firm is making sufficient profit or not; whether it is efficient in
purchase, sales and production, it is required to compare its own performance with the
performances of other similar concerns and it is easily possible by applying the technique IFC. But
this technique is found not in use by the sample enterprises.
xi) Cost-Volume-Profit Analysis
The relationship between cost-volume-profit is ascertained by the technique “Cost-Volume- Profit
Analysis”. This technique attempts to find out the impact of change in price, cost, and volume on
the profitability of the business. It aids management to take its decision on planning and control.
The CVP analysis is also termed as Break-even Analysis which determines the equilibrium point of
cost and revenue. The equilibrium point indicates “no profit no loss” stage. 50% of sample public
sector enterprises, 60% of private sector enterprises and 70% of MNC reportedly use the technique.
xii) Management Reporting
Management reporting acts as a ‘media’ which helps the management to take its decision
accordingly. It is an organized method of providing each manager with all the data which he needs
for his decisions. A good management reporting will include six factors:
a) Evaluation of each manager’s area of responsibility,
b) Proper flow of information,
c) Proper form & Proper time,
d) Cost benefit analysis, and
e) Flexibility. Large concerns found to have a separate Management Information Division.
This division may be headed by the Accountant himself or the Management / Cost Accountant or
Information Manager, depending on the size of the business. All the samples reported to use it in
the form of performance report. But the contents found to vary and in many cases one report
includes a variety of information like production, procurement, sales, financial aspects i.e. these are
not segregated and thus pin point reporting for specific responsible persons is being hampered.
This adversely affects intent of the reporting.
xiii) Activity-Based Costing
Activity-based costing (ABC) developed to provide more accurate ways of assigning the costs of
indirect and support resources to activities, business processes, products, services, and customers
(Kaplan and Atkinson, 2001:97). Activity-based costing is a method of assigning costs that
calculates a more accurate product cost by identifying all of an organization’s major operating
activities. The goal of ABC is not to allocate common costs to products but to measure and then
price out all the resources used for activities that support the production and delivery of products
and services to customers. For this why, ABC is important to activity-based management. Since its
introduction as a viable cost allocation technique, organizations in the United States and
throughout the world have adopted ABC. This modern technique is found not in use by sample
xiv) Target Costing
Target costing is a costing tool for decision making. Stratton defined target costing as a cost
management tool for making reduction a key focus throughout the life of a product. They added
that the target cost is based on the product’s predicted price and the company’s desired profit.
Managers must then try to reduce and control costs so that the product’s cost does not exceed its
target cost. Target costing is most effective at reducing costs during the product design phase when
the vast majority of costs are committed. None of the sample firms use this modern technique.
xv) Just-in-Time (JIT)
One of the management-forged operating philosophies for the new manufacturing environment is
JIT. The JIT approach can also be used in merchandising companies. The JIT operating philosophy
requires that all resources, including materials, personnel, and facilities, be acquired and used only
as needed. It has most profound effects on the operations of manufacturing companies, which
maintain three classes of inventories – raw materials, work-in-process, and finished goods. That
means according to JIT concept raw materials are received just in time to go into production,
manufactured parts are completed just in time to be assembled into products, and products are
completed just in time to be shipped to customers. Only 40% of sample MNCs use it and none of
Bangladeshi sample firms found to use it.
xvi) Total Quality Management (TQM)
The most popular approach to continuous improvement is known as total quality management.
There are two major characteristics of total quality management (TQM): (I) a focus on serving
customers and (ii) systematic problem solving using teams made up of front-line workers. TQM is
an approach to improving the competitiveness, effectiveness and flexibility of a whole
organization. It is essentially a way of planning, organizing and understanding each activity, and
depends on each individual at each level. TQM is also a way of ridding people’s lives of wasted
effort by bringing everyone into the process of improvement, so that results are achieved in less
time. The methods and techniques used in TQM can be applied throughout any organization. They
are equally useful in the manufacturing, public service, health care, education and hospitality
industries. Only 20% of sample MNCs reported to use it but none of Bangladeshi sample firms use
xvii) Process Reengineering
Process reengineering focuses on simplification and elimination of wasted effort. A central idea of
process reengineering is that all activities that do not add value to a product or service should be
eliminated. Basically, in process reengineering a business process is diagrammed in detail,
questioned, and then completely redesigned in order to eliminate unnecessary steps, to reduce
opportunities for errors, and to reduce costs (Garrison and Noreen, 2004-2005:20). None of sample
enterprises use it.

xviii) The Theory of Constraints (TOC)
A constraint is anything that prevents one from getting more of what he/she wants. Every
individual and every organization faces at least one constraint. The Theory of Constraint (TOC)
maintains that effectively managing the constraint is a key to success (Garrison and Noreen, 2004-
2005:22). In TOC, an analogy is often drawn between a business processes – the weakest option is
always identified first and then improvement efforts are shifted over to that option in order to bring
the biggest benefit. This simple sequential process provides a powerful strategy for continuous
improvement. None of sample enterprises reported to use it.
The above findings reveal that some traditional techniques are being used by sample enterprises.
Modern techniques are yet to be introduced. In the use of management techniques MNCs rank high
followed by private sector and public sector enterprises. Due to utmost importance of use of
modern techniques, concerned authorities need to pay attention to this. Against the backdrop of the
extent of use of management accounting techniques, means status of management accounting
practice in Bangladesh, now an attempt is made below to show the attitude of concerned
management personnel, the reasons for low use and prospect of improving the situation in the
5.00.2 Extent of Use of Management Accounting Information by the Sample Enterprises for
Various Decision Making
Decision MAI FAI OI
areas (%) (%) (%)

Production 10 30 60
Purchase 5 30 65
Sales 10 25 65
Control 30 20 50
Direction 20 10 70
Motivation 10 15 75
(MAI=Management accounting Information, FAI=Financial accounting Information, OI= Other

5.00.3 The Respondents as to Use Status of Management Accounting Information Techniques

in Sample Firms
It was desired to know from the respondents as to whether management accounting information
systems are satisfactorily used in Bangladesh, what are the problem of optimum use and
suggestions they can offer for adequate use of the techniques. The summarized version of their
opinion is tabulated below.

Satisfactory Moderate Unsatisfactory


15(14.28%) 30(28.57% 45(42.85%)

The table above clearly depicts that the respondents consider the use of management accounting
techniques in our manufacturing business firms as very much unsatisfactory. Only 14.28% of them
consider it satisfactory and 28.57% considers it moderately satisfactory and seemingly most of
them belong to MNC group. The majority (42.85%) considers it unsatisfactory and 14.28%
considers the position as precarious/worse. They put forwarded some reasons for low use of
management accounting techniques.
Reasons for Low Use of Management Accounting Techniques
Respondents recognize the importance of the use of management accounting techniques in the
factories. But they pointed out some reasons that act as barriers to this. The reasons pointed out by
them are shown in the following table.

Reasons N %

Historical Information is given more 2 2

importance 0 6
Lack of awareness, understanding the 2 6
benefit of its use 5 7
Consider involvement of extra cost 2 3
0 3
Lack of trained and experienced personnel .
1 3
Reluctant to use it and base decision on 5
personal experience 3
3 2
Lack of skilled personnel 5 6
2 .
2 6




(N=Frequency of the respondents) (%to total respondents)

The above table indicates that reluctance of use is the main cause. This contradicts the opinion as
to considering the importance of management accounting as an important tool of decision- making.
This indicates that actually our business firms do really not feel the importance of management
accounting information for decision-making. Only lip service is given to it.

5.00.5 Suggestions to Overcome the Problem of Low Use

The respondents also offered some suggestions in the way to overcome the flaws and improvement
of the positions. These are now shown in the following table.

Suggestions N %

Organizing seminar, symposium of 7 9

professional bodies 0 3
Creating awareness by respective 4 3
Manufacturing Association 0 3
Ensuring training and skill 4 5
development 0 3
Introducing management audit more 3
extensively 0
Creating awareness among top 3
management 0
(N = Frequency) (%= To total respondents)

Summary of the Findings:-

After the analysis and review the role of various management accounting costing technique in
various Bangladesh industries the following findings are observed during the study:-

 Rather than Textile & food manufacturing industries, the percentage of implementation of
new management accounting technique in Bangladesh is very poor.

 Chemical & Pharmaceutical industries are unaware of the new useful technique. Electronics,
Construction, Telecom & beverage industries use little bit of new technique, whether this sector is
the most useful prospect for using other costing technique.

 Lacking of using the wrong or inefficient technique, almost fifty percent of the respondent
business under the survey faced high risk for the competition in their business at home & abroad,
they are poorly satisfied with their current management accounting technique.

 Whether the users who use new costing techniques are highly satisfied & they express that
this is very much efficient, & they strongly agreed that they will stay with new costing techniques.
Almost all the respondent company under the survey agreed with that a developed management
accounting technique helps in achieve business growth.

 Majority percent of respondent who don’t use new costing techniques mention that they are
unknown about the all developed new technique, others mention that new are costly & take
excessive time.

Problem-Solving Tools for the Challenge of Management Accounting:-

Management accountants should conduct frequent analyses of their communications processes.
Tools for the challenge of management accounting, the management accountant mush solve the
following questions include: -

• What changes to management accounting practice initiated in the recent years?

• How many accounting personnel are committed to real change & do accounting personnel
regard themselves as members of the operating team?

• How much time do management accountants spend with non-financial personnel?

• Is management accounting personnel physically located in such a way as to bring them in

regular contact with non- financial managers?

• Do management accountants have a reporting responsibility to operational managers?

• Are accountants given responsibilities that can only be discharged by working

with operational people & the accountants who have these responsibilities have sufficient
status to maintain working relationships on the basis of mutual respect?

• How many accounting personnel do not have significant routine reporting responsibilities?

• How much financial training is provided for operating management? Does this training
explain the links between financial and operational events?

• Are operating managers required to systematically prepare and present the financial analysis
of their unit?

• Do performance measures other than cost and timeliness exist for the management
accounting function?
The more management accountants can respond positively to these questions, the better
organizations will become at managing the communications processes that underlie management
accounting. This will create a better understanding of the role that management accountants can
play in achieving success and it is in this context that significant management accounting change
will occur.
Every organization wants to initiate an accounting system and strategies for effective decision on
derive profit by maintain the organization’s capability, strength and competitiveness. The dramatic
changes and advances in communications and information technology facilitated the way towards a
sustained progress in the international business and finance environment. The low cost and the
efficiency as well as the attractiveness of conducting and entering any business venture – local or
international in nature were made available by these technological advances which characterize the
global marketplace. Today, greater challenges are faced by accountants as opportunities for growth
as well as possibilities of risks increase in the current and more attractive business world.
Management accounting generates the proper flow of accounting information that are accumulated,
analyzed, and presented in the organization. Furthermore, this information are used in making
imperative decisions, served as basis for predicting and solving specific problems, and utilized in
the daily operations in business management. Management accounting is more oriented toward
internal decision making and purposively channels relevant and timely information to internal
managers. As to its relationship with financial management, both are production processes of
different accounting data for different problem-solving situations.
Management accounting, however, reflects the use of techniques from different disciplines,
including accounting, for internal problem solving. Therefore, management accounting techniques
may differ from Generally Accepted Accounting Principles techniques and from one firm to
another. They do not conform to any set of prescribed rules, and much may be left to the decision-
maker's philosophies. Management accounting should go beyond cost accounting and integrate
various materials from organization theory, behavioral sciences, information theory, and so on, in a
multidisciplinary approach aimed at facing challenge & facilitating the production of information
for internal decision making.


The more the development of the market economy, the more the significance of management
accounting. To keep pace with this increasing market economy, it becomes imperative for the
organizations to adopt new management accounting tools and techniques. It is also important for
the Bangladeshi organizations. This paper seeks to obtain an overview of the management
accounting practices in the listed manufacturing companies of Bangladesh. Data has been gathered
by a questionnaire survey from eight manufacturing sectors. The analysis has revealed that though
there is difference in extent of practices among the sectors, all sectors fail to practice some newly
developed techniques. If this trend continues, Bangladeshi organizations will lag behind in the race
of global competitiveness and comparative advantages. It is therefore, some policy
recommendation has been made to improve and fasten the management accounting practices.
The challenge in implementation of management accounting change constitutes much more than
the selection of what may be perceived as being optimal accounting systems and techniques
following by a technical process of implementation.
Selecting and implementing the right accounting systems and techniques and the technical aspects
of implementation are important, but challenges for change implementation and change
management also involves important behavioral and cultural issues that must be understood and
The challenge of management accounting change is on understanding the processes involved in the
implementation of management accounting change and the complexities of and difficulties
involved in changing management accounting systems, techniques and roles in the world.
Modern techniques are being used to face complex situation. Bangladeshi manufacturing business
firms remain far behind the expected situation due to lack of awareness as to benefit of using the
management accounting techniques for better decision making. All concerned people need to
realize the situation and take appropriate action from every corner to overcome this unwarranted
situation. To keep pace with the world changing management accounting environment,
Bangladeshi firms should use the newly developed techniques such as target costing. The soon it is
done, the better it will be, otherwise we shall perish in this competitive world.
To solve the problem, a framework need for interpreting and understanding management
accounting change as an on-going process and a range of case studies are used to point up both
successful and unsuccessful implementations, drawing out the various cause-effect analyses that
can be learned and suggesting some pointers for those embark on a program of management
accounting change.
Though privatization and authoritative pronouncement has contributed a lot in the development of
management accounting in Bangladesh, the practices of management accounting technique in
listed manufacturing sector reveals that state of use of developed techniques (like target costing,
throughput costing, life cycle costing) is not satisfactory.


Square Pharmaceuticals Ltd is the flagship company of Square Group. In stark contrast to its
present stature, Square had a rather humble beginning. In 1958, the Company started out as a small
scale pharmaceutical venture at Pabna, a small town in Northern Bangladesh. It was a partnership
effort of four young and enterprising men under the leadership of the Chairman, Mr. Samson H
Chowdhury, whose determination and passion saw it through the turmoil of the early days.

In 1964, the Company was turned into a Private Limited Company. After the independence of
Bangladesh, 1975 was quite a significant year for Square as it established a technical collaboration
with Janssen Pharmaceuticals of Belgium; a subsidiary of Johnson & Johnson, USA. In its
relentless quest for higher technology, Square signed a technological collaboration agreement with
F. Hoffman-La Roche & Co. Ltd in 1982.

1985 was another historical year for Square as the Company gained the market leadership for the
first time in Bangladesh pharmaceuticals market and since then it has been maintaining its position
as the leading pharmaceutical Company of the country. In 1987, Square became the first
Bangladeshi company to export its product abroad.

The Company stepped into a new era when it was transformed into a Public Limited Company in
1991 and subsequently it was publicly listed at both the stock exchanges in the year 1995. Square
Pharmaceutical Ltd has been successfully retaining its market leader position in Bangladesh for the
last consecutive 22 years and its current market share is approximately 16%.

About Square Pharmaceuticals Limited

SQUARE today symbolizes a name – a state of mind. But its journey to the growth and prosperity
has been no bed of roses. From the inception in 1958, it has today burgeoned into one of the top
line conglomerates in Bangladesh. Square Pharmaceuticals Ltd., the flagship company, is holding
the strong leadership position in the pharmaceutical industry of Bangladesh since 1985 and is now
on its way to becoming a high performance global player.

SQUARE Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it has
been continuously in the 1st position among all national and multinational companies since 1985. It
was established in 1958 and converted into a public limited company in 1991. The sales turnover
of SPL was more than Taka 7.5 Billion (US$ 107.91 million) with about 16.92% market share
(April 2006– March 2007) having a growth rate of about 23.17%.

SQUARE Pharmaceuticals Limited has extended her range of services towards the highway of
global market. She pioneered exports of medicines from Bangladesh in 1987 and has been
exporting antibiotics and other pharmaceutical products. This extension in business and services
has manifested the credibility of Square Pharmaceuticals Limited.



We view business as a means to the material and social wellbeing of the investors, employees and
the society at large, leading to accretion of wealth through financial and moral gains as a part of the
process of the human civilization.


Our Mission is to produce and provide quality & innovative healthcare relief for people, maintain
stringently ethical standard in business operation also ensuring benefit to the shareholders,
stakeholders and the society at large.

Our objectives are to conduct transparent business operation based on market mechanism within
the legal & social frame work with aims to attain the mission reflected by our vision.

Square’s Quality Policy

SQUARE is committed to ensure better life through quality medicine. Ensure strict compliance
with WHO standards and local regulatory norms in every phase of sourcing & procuring quality
materials, manufacturing, quality assurance and delivery of medicines.

Ensure all activities through documented Quality Management System (QMS) complying
International Standard requirements of ISO 9001 through continuously developing Human
Resources by regular training and participation.

SQUARE is committed to undertake appropriate review, evaluation and performance measurement

of processes, business activities and Quality Management System for continual improvement to
ensure highest standard, customer satisfaction, developing human resources and company's growth.

Overview of Variable Costing and Absorption Costing

At least two methods can be used in manufacturing companies to value units of product for
accounting purposes - absorption costing and variable costing. These methods differ only in how
they treat fixed manufacturing overhead costs.

Variable Costing

Variable costing includes only variable production costs in product costs. Direct materials, direct
labor and variable manufacturing overhead costs would ordinarily be included in product costs
under variable costing. Fixed manufacturing overhead is not treated as a product cost under this
method. Rather, fixed manufacturing overhead is treated as a period cost and is charged against
income each period. This costing system is used for the internal purpose. So, variable costing
considered the following—

• Under variable costing, no fixed overhead is assigned to inventory

• Fixed overhead is a period expense which enters the income statement as a line item every
period regardless of the number of units sold

• Variable costing excludes fixed manufacturing overhead from inventorial costs.

Absorption Costing

Absorption costing treats all production costs as product costs, regardless of whether they are
variable or fixed. Under absorption costing, a portion of fixed manufacturing overhead is allocated
to each unit of product. Absorption costing is treated as full cost and this costing system is used for
the external purpose. So, variable costing considered the following—

• Under absorption costing, fixed overhead is assigned to units of inventory and shows up in
the income statement as part of the cost of goods sold (COGS) when the units are sold.

• When units are produced and not sold, fixed overhead stays in finished goods inventory

• Absorption costing includes fixed manufacturing overhead in inventoriable costs.


Cost Classifications—Absorption costing versus Variable Costing

Under absorption costing and variable costing, cost can be classified into two ways,
1. Product cost, and
2. Period cost

The cost categories under this two cost classification in case of absorption costing and variable

Under absorption costing method, all manufacturing costs, variable and fixed, are included when
determining the unit product cost. Direct materials, direct labor, variable manufacturing overhead,
fixed manufacturing overhead costs are included for determining the product costs under
absorption costing, and variable selling and administrative expenses and fixed selling and
administration expenses are included for determining the period costs.

Under the variable costing method, only the variable manufacturing costs are included in product
costs and fixed manufacturing overhead, variable and fixed selling and administrative expenses are
included for determining the period costs.

Comparison between Absorption Costing and Variable Costing
Rating: When comparing absorption costing and variable costing income statements, a number of
points should be noted:

1. Deferral of fixed manufacturing costs under absorption costing

Under absorption costing, if inventories increase then a portion of the fixed manufacturing
overhead costs of the current period is deferred to future periods in the inventory account. When
the units are later taken out of inventory and sold, the deferred fixed costs flow through to the
income statement as part of cost of goods sold.

2. Differences in inventories under the two methods

The ending inventory figures under the variable costing and absorption costing methods are
different. Under variable costing, only the variable manufacturing costs are included in inventory.
Under absorption costing, both variable and fixed manufacturing costs are included in inventory.

3. Suitability for CVP analysis

An absorption costing income statement is not well suited for providing data for CVP
computations since it makes no distinction between fixed and variable costs. In contrast, the
variable costing method classifies costs by behavior and is very useful in setting-up CVP

Extended Comparison of Income Data

The comparative income statement’s effects under the variable costing and absorption costing are
as follows—

1. Production equals sales (no change in inventories)

When production equals sales, inventories do not change. If inventories do not change, then there
is no change in the fixed manufacturing overhead costs in inventories under absorption costing.
Therefore, under both costing methods all of the current fixed manufacturing overhead will flow
through to the income statement as an expense. In the case of absorption costing it will be part of
cost of goods sold. In the case of variable costing, it will be a period expense.

2. Production exceeds sales (inventories increase)

When production exceeds sales, inventories grow. If inventories grow, then some of the current
fixed manufacturing overhead costs will be deferred in inventories under absorption costing. Since
all of the current fixed manufacturing overhead costs are expensed under variable costing, the net
operating income reported under absorption costing will be greater than the net operating income
reported under variable costing.

3. Sales exceed production (inventories decrease)

When sales exceed production, inventories shrink. If inventories decrease, then some of the fixed
manufacturing overhead costs that had been deferred in inventories in previous periods will be
released to the income statement as part of cost of goods sold as well as all of the current fixed
manufacturing overhead costs. Since only the current fixed manufacturing overhead costs are
expensed under variable costing, the net operating income reported under absorption costing will
be less than the net operating income reported under variable costing.

Relation Effects on Relation

Between Inventories Between
Production Absorption
and Sales and Variable
for the Costing Net
Period Operating
Production = No change Absorption
Sales costing NOI =
costing NOI
Production > Increase Absorption
Sales costing NOI >
costing NOI
Production < Decrease Absorption
Sales costing NOI <
costing NOI

Figure: Comparative income effects— Absorption Costing and Variable Costing

4. Long-term differences in income

Over an extended period of time, the cumulative net operating income figures reported under
absorption costing and variable costing will be about the same; they will differ only by the amount
of fixed manufacturing overhead cost in ending inventories under absorption costing. Cumulative
net operating income figures will be identical whenever ending inventories are reduced to zero.

5. Changes in production volume

Variable costing net operating income is not affected by changes in production volume. On the
other hand, absorption costing net operating income is affected by changes in production volume.
For any given level of sales, net operating income under absorption costing will increase as the
level of output increases and hence inventories increase.

The Matching Principles & Advantages of Variable Costing

The Matching Principles

Accountants and managers have been arguing for decades concerning the relative merits of
absorption and variable costing. In practice, absorption costing is used far more than variable
costing even for internal reports. The reasons for this are not entirely clear, although the perception
that absorption costing is required for external reporting undoubtedly plays a key role. The
argument for using absorption costing in external reports seems to be based on the matching

1. Argument for absorption costing

Advocates of absorption costing argue that all manufacturing costs must be assigned to units of
product so as to properly match costs with revenues. They argue that fixed manufacturing overhead
costs are essential to the production process and must be included when costing units of product,
regardless of how the cost behaves.

2. Argument for variable costing

Advocates of variable costing argue that fixed manufacturing overhead costs are incurred in order
to have the capacity to produce. Moreover, they will be incurred regardless of whether anything is
actually produced. Since these costs are not caused by any particular unit of product and are
incurred to provide capacity for a particular period, the matching principle would dictate that fixed
manufacturing overhead costs must be expensed in the current period.

Advantages of Variable Costing

Advantages of Variable Costing and the Contribution Approach

There are a number of advantages to using variable costing (and the contribution approach) in
internal reports and analysis.

1. More useful for CVP analysis

Variable costing statements provide data that are immediately useful for CVP analysis since they
categorize costs on the basis of their behavior. In contrast, it is often difficult to rework absorption
costing data so that they can be used in CVP analysis and in decisions.

2. Income is not affected by changes in production volume

Under absorption costing, reported net operating income is affected by changes in production since
fixed costs are spread across more or fewer units. This can distort income and may even result in
income moving in an opposite direction from sales. This does not occur under variable costing.

3. Avoids misunderstandings concerning unit product costs

Absorption costing unit product costs can be easily misinterpreted as variable costs since they are
stated on a per unit basis. Such a misperception can lead to serious errors in making decisions.
Variable costing avoids this problem since unit costs include only variable costs.

4. Fixed costs are more visible

The impact of fixed costs on profits is emphasized because the total amount of such costs for the
period appears separately and is highlighted in the income statement rather than being buried in
cost of goods sold and ending inventory.

5. Understandability

Managers should find it easier to understand variable costing reports because data are organized by
behavior and because variable costing is much closer to cash flow.

6. Control is facilitated

Variable costing ties in with cost control methods such as flexible budgets.

7. Incremental analysis is more straight-forward

Variable cost corresponds closely with the current out-of-pocket expenditure necessary to produce
and sell products and services and can therefore be used more readily in incremental analysis than
absorption costing data. And since variable costing net operating income is closer to net cash flow
than absorption costing net operating income, it is likely to be more useful to companies that have
cash flow problems.

However, variable costing is not generally accepted by auditors for external financial reports and is
not permitted by the IRS in the United States and by tax authorities in many other countries for
income tax calculations. There is some question about whether variable costing is actually
prohibited in the United States by official pronouncements and some companies do use some form
of variable costing in their external reports, but absorption costing must be considered the most
generally accepted practice.

Impact of Just in Time JIT & Absorption Costing Variable Costing

Impact of (just in time) JIT

Impact of JIT Inventory Methods

When companies use JIT methods for controlling their operations, the distortions of income that
can occur under absorption costing largely (or completely) disappear.

1. The cause of distortions in net operating income

Erratic movements in net operating income under absorption costing and the differences in net
operating income between absorption and variable costing can be traced to changing levels of
inventory. When inventory levels are constant or negligible, absorption costing and variable
costing methods yield the essentially same net operating income.

2. The JIT solution

Under an ideally functioning JIT system, goods are produced strictly to customers’ orders. Finished
goods inventories almost disappear and work in process inventories are kept to a minimum. With
little or no inventories, fixed manufacturing overhead costs cannot be shifted between periods
under absorption costing. As a result, both variable and absorption costing will show essentially the
same net operating income figure, and the net operating income under absorption costing will
move in the same direction as movements in sales.

Absorption Costing (External reporting) and Income Taxes

Absorption costing is required for external reporting for a company. A company that attempts to
use variable costing on its external financial reports runs the risk that its auditors may not accept
the financial statements as conforming to generally accepted accounting principles (GAAP). Tax
law on this issue is cleat cut. A company must use absorption costing for its external reports; a
manager can also use variable costing income statements for internal reports. No particular
accounting problems are created by using both costing methods- the variable costing method for
internal reports and the absorption costing method for external reports. Top executives are typically
evaluated based on the earnings reported to shareholders on the company’s external financial

Format Differences Under Two Methods

Format (Technical) Differences

Absorption costing makes a primary classification of costs according to manufacturing and non
manufacturing functions, emphasizing the gross margin (that is, Sales COGS) available to cover all
fixed and variable selling and administrative expenses.

Direct costing makes a primary classification of costs into variable and fixed categories,
emphasizing the contribution margin (that is, sales ? variable costs) available to cover all fixed

Report Formats

The formats for profit reporting under direct costing and absorption costing are different.


Revenues ………………………… ***

Less cost of goods sold ………….. ***

Gross margin ………………..…… ***

Less selling and administration expenses:

Variable ……………………….. ***

Fixed …………………………... ***

Net operating income (NOI) ***


Revenues ………………………… ***

Less variable cost:
Manufacturing cost …………..….. ***
Selling and administration cost ….. ***

Contribution margin (CM) ....….… ***

Less fixed costs:

Manufacturing costs ………….. ***

Selling and administration costs.. ***

Net operating income (NOI) ***

The figures under the two approaches will not always be the same.

Interpretation of the Difference

The difference between the two income measurement approaches is essentially the difference in the
timing of the charge to expense for fixed factory overhead cost. In the absorption costing method,
fixed factory overhead is first charged to inventory; thus, it is not charged to expense until the
period in which the inventory is sold and included in cost of goods sold (an expense). In contrast,
in the variable costing method, fixed factory overhead is charged to expense immediately, and only
variable manufacturing costs are included in product inventories. Therefore, if inventories increase
during a period (i.e., production exceeds sales), the variable costing method will generally report
less operating income than will the absorption costing method; when inventories decrease, the
opposite effect will take place.

Rules & Calculation of Absorption Costing Versus Variable Costing

Rules Regarding Absorption Costing Versus Variable Costing

Rules about unit sales and production under the two costing methods are as follows:

If sales are variable and production constant

a. When production is equal to sales, then absorption costing and variable costing will give the
same amount of net income.

b. When production is greater than sales, then Net Income under absorption costing will be greater
than net income under variable costing because a portion of the fixed costs was deferred to other
years under the absorption method.

c. When production is less than sales, then Net Income under absorption costing will be less than
net income under variable costing because a portion of the fixed costs that were deferred from
previous years will be absorbed into this year’s cost of goods sold.

d. The value of inventory will be greater under the absorption method because of the deferred
costs; however the total unit count will be the same for each accounting method.

e. Over the long-term, net income will be equal under both methods.

If sales are constant and production is variable then

a. Net income under variable costing is not influenced by the fluctuations in sales (given a constant
production) because none of the fixed manufacturing costs are deferred.

b. Net income under absorption costing is influenced by the fluctuations in sales (given a constant
production) because a portion of the fixed manufacturing costs are deferred and may be used each
year to increase costs.



Calculation of product and period cost of SQUARE PHARMACEUTICALS LTD. by using both
Absorption Costing and Variable Costing Methods for the 2007 are shown in the following two

Calculation of Product Cost under Absorption Costing and Variable Costing:

Particulars Total (TK.) Per Unit Cost (TK.)

Production in 3,076,850,000 Absorption Variable

Costing Costing

Direct 3,569,146,000 1.16 1.16

Material note-
1 215,379,500 0.07 0.07

Variable 523,064,500 0.17

4,307,590,000 1.40 1.23


Calculation of Period Cost under Absorption Costing and Variable Costing:

Particulars Total (TK.) Per Unit Cost (TK.)

Sales in units 3,076,620,000 Absorption Variable

Costing Costing

Fixed 523,064,000 ----- 0.17

399,960,600 0.13 0.13

selling and
distribution 615,324,000 0.20 0.20
92,298,600 0.03 0.03

307,662,000 0.10 0.10

Fixed selling
and 1,938,309,200 0.46 0.63





Direct material includes the raw materials, packaging materials, and purchase of finished goods.


Fixed manufacturing includes the salaries, allowances and wages, factory employee’s fees lunch,
rental expenses, depreciation and others.

Reconciliation of Net Operating Income

The reconciliation of the variable costing and absorption net operating income are shown in the
following figure -

Particulars Amount Amount

(TK.) (TK.)

Year 2007 2006

Variable costing net operating income 1,968,998,200 1,627,059,370

Add fixed manufacturing overhead costs 31,452,210 31,413,110

deferred in inventory under absorption costing

Deduct fixed manufacturing overhead costs

released from inventory under absorption 31,413,110 29,356,500

Absorption costing net operating income note-1 1,969,037,300



Absorption costing income statement show that the Net operating Income of SQUARE
PHARMACEUTICALS LTD. for the year 2007 is tk. 1,969,036,800 but in reconciliation it shows
that the company’s Net Operating income is 1,969,037,300. This difference is tk. (1,969,037,300
— 1,969,036,800) =500 and in 2006 absorption costing Net Operating Income is tk. 1,629,116,436
but in reconciliation we see that this is tk. 1,629,116,436. Difference is tk. (1,629,116,436—
1,629,115,980) = 456. These differences occurred due to the fractions in different figure.

Summary Result at a Glance

The total result of our calculation for the comparison of net effect on net operating income under
both methods Absorption Costing and Variable Costing are shown in the following:

Particulars Year-2007 Year-2006

Costing method Absorption Variable Absorption Variable

Product cost 1.40 1.23 1.4181865 1.23

Period cost 0.46 0.63 0.4933804 0.6823099

Net operating income 1,969,036,800 1,968,998,200 1,629,116,436 1,627,059,370


Inventories Increased during the year Increased during the year

Absorption costing net operatingAbsorption costing net operating

income > Variable costing netincome > Variable costing net
operating income operating income
Net operating income

Net operating income 1,969,036,800>1,968,998,200 1,629,116,436>1,627,059,370

Overall Comments

From the calculations of net operating income of variable costing and absorption costing of Square
Pharmaceuticals Limited we see that, in 2006 their net operating income under absorption costing
is Tk. 1,629,116,436 and under variable costing net operating income is Tk. 1,627,059,370. Here a
question arise that why this difference is occurred. This difference is occurred due to use of
different accounting method. We know that if inventory increase during the year then the net
operating income is increased under absorption costing than that of viable costing net operating
income statement. Because when inventory increase then fixed manufacturing overhead cost of
these ending inventories is deferred to the next period, as a result total cost during the year is
decreased. Here fixed manufacturing overhead cost is treated as product cost, but in case of
variable costing method fixed manufacturing overhead cost is treated as period cost. So total
manufacturing overhead cost is charged in the period regardless their sales volume. As a result net
operating income under this method is lower than that of absorption costing method. In 2006
opening inventory is 173,850,000 units and ending inventory is 184,783,000 units. Here we see
that inventories are increased (184,783,000 – 173,850,000) = 10,933,000 units during the year, as a
result net operating income is increased under the absorption costing method than the variable
costing method.

In the same way in 2007 opening inventory is 1847

To enhance the management accounting practices and to gain competitiveness of the Bangladeshi
companies the following recommendations have been made after analyzing all major and
1. Higher percentage of labor in Jute, Paper & Printing, Tannery and Textile sectors implies that
the factory is not automated enough. So, automation is recommended in order to reduce production
costs and to increase profitability.
2. A higher percentage of firms in all sectors use absorption or full costing principle for product
costing but absorption costing is not useful for internal decision-making. So it is suggested to
use variable costing for internal decision making.
3. Throughput costing and target costing should be used to increase the competitiveness of the
firms within the industry and in the global market.
4. A larger percentage of firms in Cement, Food and Allied, Jute, Paper & Printing and Tannery
do not distinguish between fixed and variable overhead costs, which sometimes lead to misleading
decision. It is recommended to make proper distinction between fixed and variable portion of
manufacturing overhead.
5. As the factories are not automated to a larger extent, it will be appropriate to use direct labor
hours as overhead allocation basis instead of machine hours.
6. Some of the firms do not use CVP for short- term decision-making. It will be helpful to use
CVP to analyze break-even, margin of safety and to increase profitability.
7. It is suggested to assign operational budgetary systems to the controller or director- finance and
accounts instead of managing director because managing director may not have enough expertise
in this area.
8. Frequency of revision of operational budget should be increased to evaluate efficiencies of the
operational level managers and control costs.

9. Instead of actual costing, firms are suggested used. If standard costing is used individual
variance can be helpful for performance evaluation and initiate cost reduction program.
10. Standards are usually set based on average past performance but past is not always the
reflection of future as future is always uncertain. So, it is suggested to set standards based on
expected actual or estimation of future circumstances.
11. Very few firms review standard costs when materials or technology changes or variances
indicates problem. It is recommended to review standard costs under above situations unless
standard costs will become absolute and performance evaluation will not make sense.
12. Very few firms use residual income as a performance indicator but from the goal congruence
perspective it is beneficial to use residual income instead of return on investment. So it is
suggested to use residual of the sectors may be enhanced through compulsory enactment of cost
and management accounting audit in Bangladesh.


Globalization and the increasing complexity of business, together with high-powered computing
technology, have contributed to the development of new management accounting techniques all
over the world. The present study shows that though privatization and authoritative pronouncement
has contributed a lot in the development of management accounting in Bangladesh, the survey
result of the present practices of management accounting in listed manufacturing sector reveals that
state of use of sophisticated techniques (like target costing, throughput costing, life cycle costing
and probabilistic CVP) is not satisfactory.
Modern techniques are being used to face complex situation. Bangladeshi manufacturing business
firms remain far behind the expected situation due to lack of awareness as to benefit of using the
management accounting techniques for better decision making. All concerned people need to
realize the situation and take appropriate action from every corner to overcome this unwarranted
situation. To keep pace with the world changing management accounting environment,
Bangladeshi firms should use the newly developed techniques such as target costing. The soon it is
done, the better it will be, otherwise we shall perish in this competitive world.
In Bangladesh until 1994 there was no statutory enactment as to maintenance of cost accounting
records of any sort and audit thereof by manufacturing companies. Two sections have been
provided in the Companies Act, 1994 requiring certain companies to maintain specific cost
accounting records and audit of the same as and when desired by the overnment. So long, as there
was no statutory obligation regarding maintenance of specific cost accounting records and audit of
the same, companies particularly manufacturing companies are maintaining their cost accounting
records to suit the purposes and equirements of their internal management and the requirements of
their external financial audit by chartered accountants.

Section 220 of Companies Act 1994 speaks about cost audit of records, maintained under section
181 (1) (d) of the Act. Gazette Notification/ Government order dated 11.12.2001 having number
Commerce Ministry PTM/AP/17/87/397 made it mandatory for mills under Bangladesh Sugar and
Food Industries Corporation and for all Public Limited Companies, required to maintain cost
accounting records as per the above stated section. The report is to be prepared and submitted in
accordance with Cost Audit (Report) Rules (1997). In line with the above Gazette Notification the
government issued another order dated 26.12.2002 to do cost audit in 5 companies of fuel and
power sector and in 6 companies of Jute sector.
In pursuant to the above Government orders all the mills of Bangladesh Sugar and Food Industries
Corporation (BSFIC) have already brought under cost audit. Some other companies as specified in
the order-dated 26.12.2002 had also completed cost audit of its cost books for one or more years.


[1] McWatters, C.S., Morse, D.C.
[2] Johnson, H. T., & Kaplan, R. S., Relevance lost, Harvard Business School Press, Harvard,
USA (1987).
[3] Ashton, D., Hopper, T. and Scapens, R.W., Issues in Management Accounting, Prentice-
Hall, Hemel Hempstead, (1991)
[4] Parker, L. D., Budgetary incrementalism in a Christian bureaucracy. Management
Accounting Research, 13, 71-100, (2002).
[5.I] Longmuir, p.” Recording and interpreting foundry costs”, Engineering Magazine,
pp. 887-894, (1902).
[5.II] Garry, H.S. “Factory Costs”, The Accountant ,pp. 954-961, (1903)
[5.III] Whitmore, J. “Shoe Factory Cost Accounts”, Journal of Accountancy, (1908).
[6] Solomon, D., “The historical development of costing”, Studies in Cost Analysis, 2nd
Edition, Sweet and Maxwell, pp. 3-49, (1965).
[7] Russell, K.A., Siegel, G.H. & Kulesza, C.S. Counting more, counting less.
Strategic Finance 81, 9, 39-46, (1999).
[8] Boer, G.B., Management accounting education: Yesterday, today, and tomorrow. Issues in
Accounting Education, 15, (2), 313-333, (2000)
[9] Harris JN. , What did we earn last month? N.A.C.A. Bulletin 17 (Sect. 1):
1–527, (1936).
[10] Kohl, C.A. “What is wrong with most profit and loss statements?”, N. A. C. A.
Bulletin, July, pp. 1207-1219, (1937). [11] Smith, M., Management Accounting for
Competitive Advantage (First Edition ). Sydney: LBC Information Services, (1999).
[12] Björnenak, T., & Olson, O., Unbundling management accounting innovations.
Management Accounting Research, 10 pp. 325-338, (1999)
[13] Government of Bangladesh, “President's Order No.27. The Bangladesh Industrial
Enterprises (Nationalization Order)”, The Bangladesh Gazette Extraordinary, Ministry of Law
and Parliamentary Affairs, (Govt. of Bangladesh, 26 March, 1972).
[14] Ghafur, A., “On the Nationalized Industrial Sector Controversy”, Political Economy,
Journal of Bangladesh Economic Association, Vol.2, No.1, pp.5- 10, 1976.
[15] Jones, C. S. & Sefiane, C. S., “The Use of Accounting Data in Operational Decision Making
in Algeria”, Accounting Auditing and Accountability Journal, Vol.5, No.4, pp.71-83, 1992.
[16.I] Uddin, S.N. and Hopper, T.M., “A Bangladeshi Soap Opera: Privatization,

Accounting, and Regimes of Control in a Less Developed Country”,Accounting, Organizations
and Society, Oxford; Vol. 26, Nos. 7/8, pp. 643-672, Oct/Nov 2001.

• www.accountingweb.co.uk
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• www.cimaglobal.com
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I am Md. Shafaet Jamil, student of Stamford University Bangladesh conducting a survey for
thesis report to completion of BBA program. You are inviting to join a part of the survey of “The
tools of management accounting - Practice, implements & Challenge in Bangladesh” whose
mission is to analyzing and finding the effectiveness of management accounting tools in various
industries of Bangladesh.

Before you do, I want you to know that:

“Your Company confidentiality will be maintain and participation is entirely voluntary”

Name of Institution:
Type of Institution:
Contact Person:
Telephone Number:
[If your organization doesn’t have practice of various management accounting tools, please do not
complete the following questions & avoid the survey] [Mark the Box]
1. In which of the following industries are the core activities of your company positioned?

 Cement & Ceramic

 Automobile
 Food & Allied
 Electronics and communication equipment
 Construction and engineering
 Pharmaceutical & Chemicals
 Tannery
 Textile

2. How long have you engaged with this business?

Less than 1 Year 2-3 Year 3– 5 Year 5-10 Year Over 10 Year
3. Does your company have any competitors?

• Yes No
4. If YES, - how do you rate the competition?
Very low .Low Moderate High Very High
5. (a). Does your institution have a variable costing system?
(b). If yes, (i).Who is heads the variable costing department? (Job Title)………………………

(ii).Who does s/he report to?.......……………………………………………………………

6. (a) List the variable cost faced by your institution:

 ……………………………………………………………………………………….……..
 ………………………………………………………………………………………..……
(b) Which new/additional variable costing, other than those covered in the Variable costing
department Guidelines, does your institution face?

7. (a). Has your institution developed variable costing Manuals and Programmers for all the
risks listed in 2(a) and (b) above?


(b). If yes, how often are the variable costing assessment procedures in the manuals and

Reviewed by your institution?


(c). who reviews the procedures?



8. (a) which challenges did your institution experience during the formulation and
Implementation stages of the variable costing function?

(b) Which strategies did your institution put in place to overcome the challenges stated in

(a) above?

9. (a). Is your institution’s variable costing function centralized or decentralized?

Centralized Centralized means it falls under a

department/section with staff involved full-time in
variable costing.

Decentralized Decentralized means respective business units

handle risk management

(b). If decentralized, describe how your institution is undertaking overall variable costing.

10. What mechanisms have been employed by the management of your institution to ensure
that the variable costing culture penetrates to all levels of staff?

11. Does your institution have a management information system that facilitates effective risk
identification, measurement, control, reporting and monitoring?


If yes,
a) What variable costing monitoring reports are available within your institution; what is
frequency of such reports and who are they issued to?

Monitoring Frequency of Who are the
Reports issue reports issued

b) How does your institution measure the variable costing?

Stress Testing
Back Testing
Contingency Planning
Value at Risk
12. Mention the Extent of Use of Management Accounting Techniques

13. How long has your company been using the technique?
Less than 1 Year 2-3 Years 3– 5 Years 5-10 Years
Over 10 Years

14. Which changes have been experienced by your institution arising from the introduction of
the variable costing framework?

15. What proportion of your institution’s budget is spent purely in the variable costing?

16. Does your institution have in place an independent function that reviews the effectiveness
of the Variable costing function?

If yes, indicate the department/function responsible...........................................................

17. Which plans and strategies has your institution put in place to change or enhance the
variable costing function?

18. What changes would you propose to the Variable costing Guidelines?
19. What are the Reasons for Low Use of Management Accounting Techniques?

 Historical Information is given more importance

 Lack of awareness, understanding the benefit of its use
 Consider involvement of extra cost
 Lack of trained and experienced personnel
 Reluctant to use it and base decision on personal experience
 Lack of skilled personnel

20.What are the main benefits of the current use of technique?

 Cost reduction
 Customer satisfaction
 Quality control
 High Margin
 Others