1.

Management Accounting is the presentation of accounting information in such a way as to assist

management in the creation of policy and the day-to-day operation of an undertaking. Thus, it relates to
the use of accounting data collected with the help of financial accounting and cost accounting for the
purpose of policy formulation, planning, control and decision-making by the management.

Management accounting links management with accounting as any accounting information required for
taking managerial decisions is the subject matter of management accounting.

Some leading definitions of Management Accounting are given below:

“Management Accounting is concerned with accounting information that is useful to management.” —

R.N. Anthony

Nature of Management Accounting:

(i) Technique of Selective Nature:

Management Accounting is a technique of selective nature. It takes into consideration only that data
from the income statement and position state merit which is relevant and useful to the management.
Only that information is communicated to the management which is helpful for taking decisions on
various aspects of the business.

(ii) Provides Data and not the Decisions:

The management accountant is not taking any decision by provides data which is helpful to the
management in decision-making. It can inform but cannot prescribe. It is just like a map which guides
the traveller where he will be if he travels in one direction or another. Much depends on the efficiency
and wisdom of the management for utilizing the information provided by the management accountant.
 (iii) Concerned with Future:

Management accounting unlike the financial accounting deals with the forecast with the future. It helps
in planning the future because decisions are always taken for the future course of action.

(iv) Analysis of Different Variables:

Management accounting helps in analysing the reasons as to why the profit or loss is more or less as
compared to the past period. Moreover, it tries to analyse the effect of different variables on the profits
and profitability of the concern.

Cost control is the practice of identifying and reducing business expenses to increase profits, and it
starts with the budgeting process. A business owner compares the company’s actual financial results
with the budgeted expectations, and if actual costs are higher than planned, management has the
information it needs to take action.

Cost Control aims at achieving the pre-determined cost targets and ends when the targets are achieved.
It entails target setting, ascertaining the actual performance and comparing it with the targets,
investigating the variances and taking preventive measures.

It aims at achieving the standard.

It is a preventive function. In cost control, costs are optimized before they are incurred.

It is generally applicable to items which have standards.

It contains guidelines and directive management such as, how to do a thing.

Advantages of Cost Control

The advantages of cost control are mainly as follows:

Achieving the expected return on capital employed by maximizing or optimizing profit.

Increase in productivity of the available resources.

Reasonable price for the customers.

Continued employment and job opportunities for the workers.

Economic use of limited resources of production.

Increased credit-worthiness.

Prosperity and economic stability of the industry.

Disadvantages of cost control

These are disadvantages of cost control:

Reduces flexibility and process improvement in a company.

Restriction on innovation.

Requirement of skillful personnel to set standards.

Trend analysis tries to predict a trend, such as a bull market run, and ride that trend until data suggests a
trend reversal, such as a bull-to-bear market. Trend analysis is helpful because moving with trends, and
not against them, will lead to profit for an investor. It is based on the idea that what has happened in
the past gives traders an idea of what will happen in the future. There are three main types of trends:
short-, intermediate- and long-term.

Trend analysis is the process of looking at current trends in order to predict future ones and is
considered a form of comparative analysis. This can include attempting to determine whether a current
market trend, such as gains in a particular market sector, is likely to continue, as well as whether a trend
in one market area could result in a trend in another. Though a trend analysis may involve a large
amount of data, there is no guarantee that the results will be correct.

In order to begin analyzing applicable data, it is necessary to first determine which market segment will
be analyzed. For instance, you could focus on a particular industry, such as the automotive or
pharmaceuticals sector, as well as a particular type of investment, such as the bond market.

Once the sector has been selected, it is possible to examine its general performance. This can include
how the sector was affected by internal and external forces. For example, changes in a similar industry
or the creation of a new governmental regulation would qualify as forces impacting the market. Analysts
then take this data and attempt to predict the direction the market will take moving forward.

Critics of trend analysis, and technical trading in general, argue that markets are efficient, and already
price in all available information. That means that history does not necessarily need to repeat itself and
that the past does not predict the future. Adherents of fundamental analysis, for example, analyze the
financial condition of companies using financial statements and economic models to predict future
prices. For these types of investors, day-to-day stock movements follow a random walk that cannot be
interpreted as patterns or trends.

Trend Trading Strategies

Trend traders attempt to isolate and extract profit from trends. There are many different trend trading
strategies using a variety of technical indicators:

Moving Averages: These strategies involve entering into long positions when a short-term moving
average crosses above a long-term moving average, and entering short positions when a short-term
moving average crosses below a long-term moving average.

Momentum Indicators: These strategies involve entering into long positions when a security is trending
with strong momentum and exiting long positions when a security loses momentum. Often, the relative
strength index (RSI) is used in these strategies.
Trendlines & Chart Patterns: These strategies involve entering long positions when a security is trending
higher and placing a stop-loss below key trendline support levels. If the stock starts to reverse, the
position is exited for a profit.

Advantages of Budgeting:

Budgeting plays an important role in the effective use of resources and achieving overall organisational
goals.

It has the following advantages:

1. Budgeting compels and motivates management to make an early and timely study of its
problems. It generates a sense of caution and care, and adequate study among managers before
decisions are made by them.

2. Budgeting provides a valuable means of controlling income and expenditure of a business as it is

a “plan for spending.”

3. Budgeting provides a tool through which managerial policies and goals are periodically
evaluated, tested and established as guidelines for the entire organisation.

4. Budgeting helps in directing capital and other resources into the most profitable channels.,

Profitable channels.
 5. Budgeting enables management to decentralise responsibility without losing control of the
business. It reveals weaknesses, inefficiencies, deviations in the organisation very promptly
which can be checked immediately to achieve a desired goal.

6. The use of budgeting in an organisation develops an attitude of “cost consciousness”, stimulates

the effective use of resources, and creates an environment of profit-mindedness throughout the
organisation. It emphasises how much should be spent to achieve a goal.

7. It provides a norm, basis or yardstick for measuring performance of departments and individuals
working in organisations. Individual managers can evaluate their own decisions and
achievements and take suitable steps to improve their performances.

8. Budgeting encourages productive competition, provides incentive to perform efficiently and

gives a sense of purpose to each individual in the organisation. All these positive factors lead to
higher output and increase employee productivity.

9. Budgeting provides a systematic and disciplined approach to the solution of problems in the
organisation.

10. Budgeting, if executed in nearly every enterprise, helps the total national economy by providing
stability of employment, economic use of resources and effective prevention of waste.

Limitations of Budgeting:

While budgeting performs many functions and has many advantages that are vital to an organi-sation, it
has certain limitations which require careful consideration:
 1. Planning, budgeting or forecasting is not an exact science; it uses approximations and
judgement which may not be cent per cent accurate. At best, a budget is an estimate; no one
knows precisely what will happen in the future. ADVERTISEMENTS: 2. The success and utility
of budgeting depends on the cooperation and participation of all members of management. All
persons should direct their efforts according to the plan. The top management also should
adhere to the budget and provide cooperation. Many a time budgeting has failed because
executive management has paid only lip service to its execution. 3. A budget is only a tool and
neither eliminates no

. The success and utility of budgeting depends on the cooperation and participation of all members of
management. All persons should direct their efforts according to the plan. The top management also
should adhere to the budget and provide cooperation. Many a time budgeting has failed because
executive management has paid only lip service to its execution.

2. A budget is only a tool and neither eliminates nor takes over the place of management. A
budget cannot be substituted for management but should only be used by management for
accomplishing managerial functions. Executives generally feel “circled in” by a budget and its
related figures. They fail to understand that budget is meant to provide detailed information,
goals and targets which may help them in achieving the company objectives.

3. The establishment of a budgeting process taken time. Also, sometimes too much is expected
from a budget and in case expectations are not fulfilled, the blame is put on the budget. An
efficient budgeting programme requires that responsible persons should understand the
philosophy, objectives and essentials of budgeting.

4. Excessive emphasis on budgeting may result in attempts by lower level management and
employees to buck the system by providing inaccurate estimates of future costs and revenues,
and by failing to take advantage of changes in the environment because to do so would result in
a deviation from plan, they would be considered as operating contrary to the budget. Under an
unbalanced budget programme, employees will tend to overestimate costs and underestimate
revenues, thus creating budget slack.

5. As the end of budget period approaches and employees realise that actual expenses have not
been as great as allowed by the budget, there may be a temptation to spend excessive amounts
in order to “use up” the budget allowance. Such activities result in sub-optimal profits for the
company.
5

Standard cost accounting can be a highly beneficial tool for managers who are attempting to plan a
more accurate budget. Accurate budgets could lead to a more profitable and efficient business at the
end of the day. This is because a standard costing system provides managers with a projected idea of
spending costs. Once these managers can compare standard costs to actual costs, they will be able to
determine if new business practices need to be utilized.

In this article, we will define standard costing, outline its benefits and disadvantages and provide you
with the steps to calculate a standard cost.

What is standard costing?

Standard costing is the practice of estimating the expense of a production process. It’s a branch of cost
accounting that’s used by a manufacturer, for example, to plan their costs for the coming year on
various expenses such as direct material, direct labor or overhead. These manufacturers will also be able
to compare the standard cost to the actual costs.

Advantages of standard costing

Standard costing provides managers with several advantages that can help their business operate more
efficiently. Here are a few examples:

Efficiency

Allows for cost control

Helps management make decisions

Accurate budgets

Lower production costs

Efficiency

A standard costing system provides a quick estimate of projected costs. Though accurate reports are
nice to have, they are not timely. A good estimate of costs provided promptly is highly preferable.

Allows for cost control

In the event of variances, managers are allowed to rectify any discrepancies. This will then allow them to
improve cost control. This means they can be more aware of spending habits in the future and strive for
little to no variances.
Helps management make decisions

Standard costing can also affect the way a business operates as a whole. Once managers have
determined any variances, this allows them to act and improve on current business practices and
spending.

For example, if the actual cost of materials is $50,000 and exceeds the standard cost of $10,000, this
would cause a variance of $40,000.

Managers can then begin to investigate why the variable occurred and how to prevent it from
happening in the future. The large variance in this circumstance could be caused by several reasons such
as inflation or the inefficient use of products purchased.

Accurate budgets

When managers have controlled costs through the use of the standard costing system, the actual costs
in the future should be close to the standard costs. This outcome is highly favorable because this means
that the profit plan went as projected. This can lead to more accurate budgets in the future.

Lower production costs

A lower amount of production costs could be a possible advantage when implementing a standard cost
system.

Materials mix variance

In any process, much time and money will have been spent ascertaining the exact optimum mix of
materials. The optimum mix of materials will be the one that balances the cost of each of the materials
with the yield that they generate. The yield must also reach certain quality standards. Let us take the
example of a chemical, C, that uses both chemicals A and B to make it. Chemical A has a standard cost of
$20 per litre and chemical B has a standard cost of $25 per litre. Research has shown that various
combinations of chemicals A and B can be used to make C, which has a standard selling price of $30 per
litre. The best two of these combinations have been established as:

Mix 1: 10 litres of A and 10 litres of B will yield 18 litres of C; and

Mix 2: 8 litres of A and 12 litres of B will yield 19 litres of C.

Assuming that the quality of C produced is exactly the same in both instances, the optimum mix of
materials A and B can be decided by looking at the cost of materials A and B relative to the yield of C.

Mix 1: (18 x $30) – (10 x $20) – (10 x $25) = $90 contribution

Mix 2: (19 x $30) – (8 x $20) – (12 x $25) = $110 contribution

Therefore, the optimum mix that minimises the cost of the inputs compared to the value of the outputs
is mix 2: 8/20 material A and 12/20 material B. The standard cost per unit of C is (8 x $20)/19 + (12 x
$25)/19 = $24.21. However, if the cost of materials A and B changes or the selling price for C changes,
production managers may deviate from the standard mix. This would, in these circumstances, be a
deliberate act and would result in a materials mix variance arising. It may be, on the other hand, that the
materials mix changes simply because managers fail to adhere to the standard mix, for whatever reason.

Marginal cost refers to the additional cost to produce each additional unit. For example, it may cost $10
to make 10 cups of Coffee. To make another would cost $0.80. Therefore, that is the marginal cost – the
additional cost to produce one extra unit of output.
Marginal Costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units of
cost, while the fixed cost for the period is completely written off against the contribution. Marginal cost
is the change in the total cost when the quantity produced is incremented by one.

Marginal costs are the costs associated with producing an additional unit of output. It is calculated as
the change in total production costs divided by the change in the number of units produced. Marginal
costs exist when the total cost of production includes variable costsMarginal cost refers to the additional
cost to produce each additional unit. For example, it may cost $10 to make 10 cups of Coffee. To make
another would cost $0.80.

Marginal cost is the cost of one additional unit of output. The concept is used to determine the optimum
production quantity for a company, where it costs the least amount to produce additional units. It is
calculated by dividing the change in manufacturing costs by the change in the quantity produced

To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷
(Sales price per unit – Variable costs per unit)

Selling price = Rs. 3 per unit

Variable cost = Rs. 2 per unit

Fixed cost = Rs. 90,000

Estimated sales for the period = 100,000 units or Rs. 300,000

90000/3-2

90000

The influencing factors for a price decision can be divided into two groups:

(A) Internal Factors and

(B) External Factors.

1. Organisational Factors:

Pricing decisions occur on two levels in the organisation. Over-all price strategy is dealt with by top
executives. They determine the basic ranges that the product falls into in terms of market segments. The
actual mechanics of pricing are dealt with at lower levels in the firm and focus on individual product
strategies. Usually, some combination of production and marketing specialists are involved in choosing
the price.

2. Marketing Mix:

Marketing experts view price as only one of the many important elements of the marketing mix. A shift
in any one of the elements has an immediate effect on the other three—Production, Promotion and
Distribution. In some industries, a firm may use price reduction as a marketing technique.

Other firms may raise prices as a deliberate strategy to build a high-prestige product line. In either case,
the effort will not succeed unless the price change is combined with a total marketing strategy that
supports it. A firm that raises its prices may add a more impressive looking package and may begin a
new advertising campaign.

Product Differentiation

The price of the product also depends upon the characteristics of the product. In order
to attract the customers, different characteristics are added to the product, such as
quality, size, colour, attractive package, alternative uses etc. Generally, customers pay
more prices for the product which is of the new style, fashion, better package etc.

4. Cost of the Product:

Cost and price of a product are closely related. The most important factor is the cost of
production. In deciding to market a product, a firm may try to decide what prices are
realistic, considering current demand and competition in the market. The product
ultimately goes to the public and their capacity to pay will fix the cost, otherwise product
would be flapped in the market.

5. Objectives of the Firm:

A firm may have various objectives and pricing contributes its share in achieving such
goals. Firms may pursue a variety of value-oriented objectives, such as maximizing sales
revenue, maximizing market share, maximizing customer volume, minimizing customer
volume, maintaining an image, maintaining stable price etc. Pricing policy should be
established only after proper considerations of the objectives of the firm.

(B) External Factors:

1. Demand:
The market demand for a product or service obviously has a big impact on pricing. Since
demand is affected by factors like, number and size of competitors, the prospective
buyers, their capacity and willingness to pay, their preference etc. are taken into account
while fixing the price.

. Competition:

Competitive conditions affect the pricing decisions. Competition is a crucial factor in price
determination. A firm can fix the price equal to or lower than that of the competitors, provided the
quality of product, in no case, be lower than that of the competitors.
 3. Suppliers:

Suppliers of raw materials and other goods can have a significant effect on the price of a product. If the
price of cotton goes up, the increase is passed on by suppliers to manufacturers. Manufacturers, in turn,
pass it on to consumers.

Sometimes, however, when a manufacturer appears to be making large profits on a particular product,
suppliers will attempt to make profits by charging more for their supplies. In other words, the price of a
finished product is intimately linked up with the price of the raw materials. Scarcity or abundance of the
raw materials also determines pricing.

4. Economic Conditions:

The inflationary or deflationary tendency affects pricing. In recession period, the prices are reduced to a
sizeable extent to maintain the level of turnover. On the other hand, the prices are increased in boom
period to cover the increasing cost of production and distribution. To meet the changes in demand,
price etc.

Several pricing decisions are available:

(a) Prices can be boosted to protect profits against rising cost,

(b) Price protection systems can be developed to link the price on delivery to current costs,

(c) Emphasis can be shifted from sales volume to profit margin and cost reduction etc.

5. Buyers:
The various consumers and businesses that buy a company’s products or services may have an influence
in the pricing decision. Their nature and behaviour for the purchase of a particular product, brand or
service etc. Affect pricing when their number is large.

6. Government:

Price discretion is also affected by the price-control by the government through enactment of
legislation, when it is thought proper to arrest the inflationary trend in prices of certain products. The
prices cannot be fixed higher, as government keeps a close watch on pricing in the private sector. The
marketers obviously can exercise substantial control over the internal factors, while they have little, if
any, control over the external ones.

10

Responsibility accounting is a kind of management accounting that is accountable for all the
management, budgeting, and internal accounting of a company. The primary objective of this
accounting is to support all the Planning, costing, and responsibility centres of a company.21

The following points highlight the top five advantages of responsibility accounting, i.e, (1) Assigning of
Responsibility, (2) Improves Performance, (3) Helpful in Cost Planning, (4) Delegation and Control, and
(5) Helpful in Decision-Making

Features of Responsibility Accounting

The monetary term of inputs is costs, and outputs are correspondingly called revenues. Hence, cost and
revenue information is crucial for responsibility accounting. Apart from the data of cost and revenue,
planned and actual financial data is also required.
11

The key difference between Cost Accounting vs Management accounting is that Cost accounting is
gathering and analyzing the information related to cost which provides only the quantitative
information to the users of the reports whereas Management Accounting is the preparation of the
financial as well as non-financial ...

6. Basis of decision making: Historic information is the basis of decision making

1. Inherent meaning: Cost accounting revolves around cost computation, cost control...

5. Sub-set: Cost accounting is one of the many sub-sets of management accounting

A reserve is an appropriation of profit or accumulated profit to strengthen the financial position of a

business whereas provision is an amount that is kept aside to meet the expected loss/expense.

Method of Creation: The reserves in the business are created by debiting profit and l...

Nature: Reserves are an appropriation of profit.

The volume variance is the difference in the actual versus expected unit volume of whatever is being
measured, multiplied by the standard price per unit.
D

Labour Cost Variance:

It is the difference between the standard cost of labour allowed (as per standard laid down) for the
actual output achieved and the actual cost of labour employed. It is also known as wages variance.

12

Fixed overhead volume variance is the difference between the amount budgeted for fixed overhead
costs based on production volume and the amount that is eventually absorbed. This variance is
reviewed as part of the cost accounting reporting package at the end of a given period.

Profit is a financial benefit that is realized when the amount of revenue gained from a business activity
exceeds the expenses, costs, and taxes needed

The formula to calculate profit is: Total Revenue – Total Expenses = Profit. Profit is determined by
subtracting direct and indirect costs from all sales earned. Direct costs can include purchases like
materials and staff

C
The sales mix is a calculation that determines the proportion of each product a business sells relative to
total sales. The sales mix is significant because some products or services may be more profitable than
others, and if a company’s sales mix changes, its profits also change.

D
Environmental accounting is a field that identifies resource use, measures and communicates costs of a
company’s or national economic impact on the environment.