📊 Management Accounting Notes
1. Introduction
Definition → Management Accounting is the process of providing financial
and non-financial information to managers for decision-making, planning,
and control.
Main Purpose:
Planning → Budgets, forecasts
Controlling → Performance measurement, variance analysis
Decision-making → Pricing, product mix, make-or-buy, etc.
⚖️Difference vs. Financial Accounting
Financial Accounting: External users, historical, GAAP/IFRS required.
Management Accounting: Internal users, future-oriented, flexible (no strict
rules).
2. Cost Concepts in Management Accounting
Relevant Cost → Future cost that differs between alternatives.
Irrelevant Cost → Past (sunk) or unavoidable.
Opportunity Cost → Benefit lost when choosing one alternative.
Controllable Cost → Can be influenced by a manager.
Uncontrollable Cost → Beyond the manager’s influence.
3. Decision-Making Tools
1. Cost-Volume-Profit (CVP) Analysis
Contribution Margin (CM) = Sales – Variable Costs
Break-even Point (Units) = Fixed Costs ÷ CM per unit
Margin of Safety = (Actual Sales – BE Sales) ÷ Actual Sales
Operating Leverage = CM ÷ Net Operating Income (measures profit
sensitivity to sales).
2. Relevant Costing Decisions
Make or Buy → Compare variable cost of making vs. purchase price.
Special Order → Accept if additional revenue > incremental cost.
Product Line Decisions → Drop if contribution margin < avoidable fixed cost.
Sell or Process Further → Process further if incremental revenue >
incremental cost.
3. Budgeting
Master Budget → Overall plan (sales, production, cash, etc.).
Operating Budget → Sales, production, expenses.
Financial Budget → Capital expenditures, cash, balance sheet.
Flexible Budget → Adjusts based on activity level.
✅ Example: Flexible Budget → If sales units increase, variable costs increase
proportionally, fixed costs remain constant.
4. Standard Costing & Variance Analysis
Direct Materials:
Price Variance = (AP – SP) × AQ
Quantity Variance = (AQ – SQ) × SP
Direct Labor:
Rate Variance = (AR – SR) × AH
Efficiency Variance = (AH – SH) × SR
Overhead Variances: Spending, efficiency, volume variances.
Managers use variance reports to identify problem areas.
5. Performance Measurement
Responsibility Accounting: Evaluates managers on what they control.
Cost Centers → Control over costs.
Profit Centers → Control over revenues & costs.
Investment Centers → Control over revenues, costs, and investments.
Key Metrics:
ROI (Return on Investment) = Net Income ÷ Average Invested Assets
Residual Income (RI) = Net Operating Income – (Minimum Rate × Assets)
Balanced Scorecard → Performance viewed from:
Financial perspective
Customer perspective
Internal process perspective
Learning & growth perspective
6. Capital Budgeting (Long-Term Decisions)
Tools used for investment appraisal:
1. Payback Period = Investment ÷ Annual Cash Inflows
2. Accounting Rate of Return (ARR) = Avg. Accounting Profit ÷ Investment
3. Net Present Value (NPV) = PV of Cash Inflows – Investment
If NPV > 0 → Accept project.
4. Internal Rate of Return (IRR) = Discount rate that makes NPV = 0.
7. Managerial Tools & Techniques
Activity-Based Costing (ABC) → Allocates overhead by activities.
Target Costing → Expected price – Desired profit = Target cost.
Kaizen Costing → Continuous cost reduction during production.
Life-Cycle Costing → Considers all costs from product design to disposal.
Just-In-Time (JIT) → Inventory management to minimize waste.
8. Ethical Considerations in Management Accounting
According to the IMA (Institute of Management Accountants):
Competence → Maintain expertise.
Confidentiality → Protect sensitive info.
Integrity → Avoid conflicts of interest.
Credibility → Provide accurate and fair reports.
