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Management accounting

concepts ,need and

By:- Group 1
Kalagi Joshi-70
Payal Parekh-74
Sarbjit Chhina-56
Arun Mahajan-39
Pawandeep Singh-60
Vikesh Bansal-40
Meenakshi Wasson-44
Definition :-

“Management accounting is concerned with the provision of
information to those responsible for managing businesses and
other economic organizations to help them in making better
decisions about the future of organization and in controlling the
implementation of decisions they make”.

 In simple terms

“The provision of information required by management for planning, organising and
control” .

 Characteristics:-

 No legal obligation -makes running a business simpler.

 Management accounting identifies, collects, measures,
and reports information that is useful to managers in
planning, controlling and decision-making.
 The needs to ‘improve overall profitability’ and ‘cost
reduction’ are the major priorities for management
accounting in Indian companies.
 Budgeting for planning and control is the most widely
used tool of management accounting. About 97%
respondents use it moderately or extensively.

Management accounting as 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.
 Risk Management—Contributing to frameworks
and practices for identifying, measuring,
managing and reporting risks to the
achievement of the objectives of the

Users of Management accounting
 Managerial accounting, also known as cost
accounting, provides economic and financial
information for the internal users of the
financial statements.
 The internal users of the financial statements
 department heads,
 shift managers and leaders and
 the human resources department.
 Usersof the managerial accountant’s financial
information are the following:

· All levels of management for planning and to

establish departmental objectives.

· Human Resources uses managerial accounting

reports to have the right mix of employees to
keep the business a smooth-running operation.

· Department heads use these reports to

measure the success or failure of staying within

 Formulating strategies
 Planning and constructing business activities
 Helps in making decision
 Optimal use of Resource (economics)
 Supporting financial reports preparation
 Safeguarding asset

Role of management accounting in
 Accounting plays important and useful role by developing the
information for providing answers to many questions faced by
the users of accounting information.

Ø How good or bad is the financial condition of the hospitals?

Ø Has the activities of hospital resulted in a profit or loss?
Ø How well the different departments of the hospital have performed
in the past?
Ø Which departments have been profitable?
Ø Out of the existing products and services which should be
discontinued / outsourced or which facilities should be
Ø Whether to buy a component from the market or
to manufacture the same?
Ø For e.g. :- HIS
Ø Whether the cost of services provided are
reasonable or excessive?
Ø What has been the impact of existing policies on
the profitability of the hospital business?
Ø What are the likely results of new policy
decisions on future earning capacity of the
Ø In the light of past performance of the hospitals
how it should plan for future to ensure desired
results ?
II. Objectives of Managerial

A. Providing information for decision
making and planning:
 Virtually all major decisions by internal users
(i.e., managers) rely largely on managerial
accounting information(includes financial and no
financial data like the cost of products, budgets, cash

B.Assessing the organization's
competitive position:
 A crucial role of managerial accounting is to
continually assess how an organization compares with
the competition, with an eye toward continuously

 C.Assisting in directing and
Ø Directing and controlling day-to-day
operations requires a variety of data
about the process of providing a good or
 1.Directing operational activities
 2.Controlling operations
 3.Attention-directing functions
 D. Motivating managers and
Ø A key purpose of managerial accounting is to
motivate managers and other employees to direct
their efforts toward achieving the organization’s

 11
Various concepts of management

 Transfer Pricing
 Variance Analysis
 Activity-based costing
 Responsibility accounting
 Target costing
 Differential Cost Accounting
 Absorption Costing

Transfer Prices
 Transfer
prices are the amounts charged by
one segment of an organization for a
product or service that it supplies to another
segment of the same organization.
Variance analysis:
 It is used to determined the total changes
between budgeted and actual amounts.

 In most of the organizations, it can be explained
by one or more five factors:

1) volume
 2)mix of units of activities
 3)revenue per unit of activity
 4)cost incurred per input
 5)usage and efficiency of the input

What is a budgetary(standard)
 It is a planned cost or a target cost. It is a realistic
estimate based on historical data or experiments like
time and motion studies.
 Standard cost gives an indication of probable cost of
performing an operation or producing a good or
service in normal conditions.


 Actual amount paid or incurred, as opposed to

estimated cost or standard cost.

Why compare Actual Costs with
Standard Costs
 It gives an idea of efficiency.
 It is used for accountability.
 Management by exception.
 It helps in cost control.
Activity-Based Costing (ABC)

It is a costing model that identifies activities in an
organization and assigns the cost of each activity
resource to all products and services according to
the actual consumption by each: it assigns more
indirect costs into direct costs.

 It helps to identify inefficient product,

department and activity
 It helps to allocate more resources on profitable
product, department and activity
 It helps to control the cost at individual level and
on departmental level
 It helps to find unnecessary costs

Responsibility Accounting

An accounting system that

provides information . . .

Relating to the To evaluate

responsibilities of managers on
individual managers. controllable items.
Significance of Responsibility
 Easy Identification
 Motivational Benefits
 Data Availability
 Ready-hand Information
 Planning and Decision Making
 Delegation and Control

often occurs as
T o p organizations
M a n a g e m e continue
n t to grow.

M id d le M id d le
M a n a g e m e n tM a n a g e m e n t

S u p e r vS i su o p r e r vS i su o p r e r vS i su o p r e r v i s o

Decision Making is Pushed Down

Target costing

Target Costing is a disciplined process for
determining and realizing a total cost at which
a proposed product with specified functionality
must be produced to generate the desired
profitability at its anticipated selling price in
the future.

Advantages of target costing
To reduce costs before they are locked in
Develops specific and real targets which ensure satisfactory financial

To control design specifications and production

Reduces the development cycle of product/service

As a driver for cost improvement

Involves staff from all areas in the cost analysis and encourages them
to take responsibility for managing the costs.
Advantages of target costing

ØTo encourage a focus on the customer

 Brings a focus on the final users of the service or product.

ØAs an analysis which highlights other problems

 Highlights other problems in areas such as purchasing which affect

the cost of the product or service.
looks at the impact which new services have on the existing ones.

ØProvides a framework focusing on the wider

supply chain, in effect a whole systems

Differential Cost

It distinguishes between full costs and
differential costs and when each should be
used, discusses cost behavior, explains how to
undertake cost-volume-profit analyses, and
explains the concept of contribution and its
role in alternative choice decision-making.

Absorption Costing

üAlso called Full Cost Method

üDiscusses the role of overhead volume and
overhead budget variances in managerial
decision making and cost control.

Total Cost = Direct material cost + Direct labor

cost + overheads (fixed & variable)