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Title: accounting notes
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Accounting for managers
First sem MBA 2017-18
--------------------------------------------------------

Objectives of Management Accounting


The basic objective of management accounting is to assist the
management in performing its functions effectively
...


Management accounting helps in the performance of each of these
functions in the following ways:


Provides data: Management accounting serves as an important
source of data for management planning
...




Modifies data: The accounting data required for managerial
decisions is properly collected and classified
...




Analyses and interprets data: The accounting data is probed
meaningfully for effective planning and decision-making
...
Ratios are calculated and likely trends are
projected
...
Initially, it means identifying the feasibility
and consistency of the various segments of the plan
...




Facilitates
control:
Management accounting helps
in
translating given objectives and strategy into specified goals
for attainment by a specified time and secures
effective accomplishment of these goals in an efficient
manner
...




Uses qualitative information: Management accounting does
not restrict itself to financial data for helping the management
in decision making but also uses such information which may
not be capable of being measured in monetary terms
...


Management Accounting: Limitations

Limitations of Management Accounting:
The origin of management accounting can be traced to overcome the
limitations of financial accounting and cost accounting
...
It does not provide the
necessary information to the management for planning, control and
decision-making
...


(ii) Recording of Actual Cost:
In financial accounting assets and properties are recorded at their cost
...
Thus, it has nothing to do with their realizable or
replaceable value
...
Information regarding wastages and losses is also
not available from the financial accounts
...

(iv) No Provision for Cost Control:

Costs cannot be controlled through financial accounting as there is no
provision for corrective action because of expenses being recorded
after their incurrence
...

(v) No Evaluation of Business Policies and Plans:
There is no device in financial accounting by which the actual
progress can be measured against the targets in order to evaluate the
business policies and plans, to know the reasons for deviations and
how to correct them, if need be
...
There are many situations where management is required
to take decisions but information provided by financial accounting is
not adequate
...
Financial accounts
can be prepared and interpreted only by those persons who possess
adequate knowledge of accounting concepts and conventions and are
well conversant to the practice of accounting
...
In actual
practice, cost accountants are doing the jobs of management
accountants
...
That is why; management

accounting is treated as extension of cost accounting
...

Thus, the science of accounting is not in a finished state
...
The role of accounting has changed after the
Second World War
...

Rather accounting helps in forecasting, planning and controlling the
business events and taking managerial decisions
...

Characteristics of Management Accounting:
Following points may be noted in this respect:
(i) Technique of Selective Nature:
Management Accounting is a technique of selective nature
...

Only that information is communicated to the management which is
helpful for taking decisions on various aspects of the business
...
It can inform
but cannot prescribe
...
Much

depends on the efficiency and wisdom of the management for
utilizing the information provided by the management accountant
...
It helps in planning the future because
decisions are always taken for the future course of action
...

Moreover, it tries to analyse the effect of different variables on the
profits and profitability of the concern
...
It provides the information
to the management in the form which may be more useful to the
management in taking various decisions on the various aspects of the
business
...

It includes all information which is provided to the management for
financial analysis and interpretation of the business operations
...
Management
accounting does not usually follow any national accounting standards
...
Management accounting has several advantages
...
Business owners can also
create a competitive advantage by developing cost allocation processes in
their management accounting function
...
Although financial
management is of great importance to current and potential investors,
management accounting is necessary for managers to make current and
future financial decisions
...
Its purpose is to convey
an understanding of some financial aspects of a business firm
...

Thus, the term ‘financial statements’ generally refer to the two
statements:

(i) The position statement or the balance sheet; and
(ii) The income statement or the profit and loss account
...

Financial statements are the outcome of summarizing process of
accounting
...
Myer, “The financial statements
provide a summary of the accounts of a business enterprise, the
balance sheet reflecting the assets, liabilities and capital as on a certain
date and the income statement showing the results of operations
during a certain period
...


Smith and Asburne define financial statements as, “the end product of
financial accounting in a set of financial statements prepared by the
accountant of a business enterprise-that purport to reveal the financial
position of the enterprise, the result of its recent activities, and an
analysis of what has been done with earnings
...
In the words of
Anthony ” Financial statements, essentially, are interim reports,
presented annually and reflect a division of the life of an enterprise
into more or less arbitrary accounting period-more frequently a year
...


Nature of Financial Statements:
The financial statements are prepared on the basis of recorded facts
...
The statements are prepared for a particular period, generally
one year
...

The accounting records and financial statements prepared from these
records are based on historical costs
...

The American Institute of Certified Public Accountants states the
nature of financial statements as “Financial Statements are prepared
for the purpose of presenting a periodical review of report on
progress by the management and deal with the status of investment in
the business and the results achieved during the period under review
...


The American Accounting Association expresses in its statement,
“Every corporate statement should be based on accounting principles
which are sufficiently uniform, objective and well understood to
justify opinions as to the condition and progress of business
enterprise
...

According to John N
...

The following points explain the nature of financial statements:
1
...
The records are maintained on the basis of actual
cost data
...
The figures of various accounts such as cash in
hand, cash in bank, bills receivables, sundry debtors, fixed assets etc
...
The
assets purchased at different times and at different prices are put

together and shown at cost prices
...

2
...
The convention of valuing inventory at cost or
market price, whichever is lower, is followed
...

The convention of materiality is followed in dealing with small items
like pencils, pens, postage stamps, etc
...
The stationery is valued at cost and not on the
principle of cost or market price whichever is less
...

3
...
One of these assumptions is that the enterprise is treated as a
going concern
...
So the assets are shown on a going
concern basis
...


Though there is a drastic change in purchasing power of money the
assets purchased at different times will be shown at the amount paid
for them
...
The assumption is
known as realization postulate
...
Personal Judgments:
Even though certain standard accounting conventions are followed in
preparing financial statements but still personal judgment of the
accountant plays an important part
...
There are a number of methods for valuing stock, viz
...

The accountant will use one of these methods for valuing materials
...


Classification of Accounts
Personal, Real & Nominal Accounts
An accountant records a transaction in his book of accounts, first
he must understand which transaction should be debited and
which should be credited
...


Classification of Accounts:
Following are the types and classification of accounts
1
...
Real Accounts
3
...
Personal accounts can be further divided in to:
1
...
Artificial Persons Accounts

Natural Person’s Personal Accounts
These accounts are related to human beings, physically we can touch them
...
Such accounts are necessary to track to those amounts which are
payable or receivable
...
Such business can be operated by Board of Governors, Head of
Departments, and Principles etc
...


Real Accounts
Real accounts represent the assets both tangible and intangible
...


building,

plant&

machine,

cash,

goods,

Rule of Real Account: Debit what comes in
Credit What Goes Out
Nominal Accounts
These accounts have no existence in real life but just a name in the books of
account
...

For Example: Salary Accounts, Discount Accounts, and Rent Accounts etc
...
A journal entry is the recording of a business transaction in the
journal
...
A transaction is entered in a journal before it is entered in ledger
accounts
...

Format of Journal
Date
11-1-2010

Particular
Cash Ac Dr

LF

Debit Rs
1,00,000

To capital Ac Cr
Total

Credit Rs
-----1,00,000

1,00,000

1,00,000

A ledger (general ledger) is the complete collection of all the accounts and
transactions of a company
...
The chart of accounts is a listing of the titles and numbers of all
the accounts in the ledger
...

The groups of accounts usually appear in this order: assets, liabilities, equity, dividends,
revenues, and expenses
...
It provides direction as to what exactly will be found in the financial
statement preparation
...
It is called a trial balance because the
information on the form must balance
...
These documents are used by the investment community, lenders,
creditors, and management to evaluate an entity
...
This report reveals the financial performance of an organization for the
entire report period
...
An earnings per share figure may also
be added if the financial statements are being issued by a publicly-held company
...



Balance sheet
...
The information is aggregated into the general
classifications of assets, liabilities, and equity
...
This is a key document, and so is included in most issuances of the financial
statements
...
This report reveals the cash inflows and outflows experienced
by an organization during the reporting period
...
This document can be difficult to assemble, and so is more commonly issued
only to outside parties
...
This report documents all changes in equity during the
reporting period
...
This document is not usually included when the financial
statements are issued internally, as the information in it is not overly useful to the
management team
...




Ratio analysis is a powerful tool of financial analysis
...
ratio act as an index of efficiency of a company
...
Ratio analysis also useful for decision
making
...
The standard costing technique consists in- (a) element wise standard costs
are predetermined; (b) standard costs are compared with actual costs; & (c) with
reference to causes & points of incidence, variances are measured & analyzed
...

The standard costing technique was evolved for the purpose of eliminating the
short comings of historical costing
...
There is a pre-determination of data which are related to production
...


b
...
e
...

c
...

d
...

e
...


Variance Analysis
Variance Analysis deals with an analysis of deviations in the budgeted and actual
financial performance of a company
...
At times, it is also a sign of unrealistic budgets and
therefore in such cases budgets can be revised
...
It helps to
understand why fluctuations happen and what can / should be done to reduce the
variance
...

A variance in management accounting may be favourable (costs lower than
expected or revenues higher than expected) or adverse (costs higher than expected
or revenues lower than expected)
...


VARIANCE ANALYSIS FORMULA
Variance = Actual Income/Expense – Budgeted Income/Expense

NEED AND IMPORTANCE OF VARIANCE ANALYSIS:






Variance analysis aids efficient budgeting activity as management wishes to have
lower deviations from the planned budgets
...

Variance analysis acts as a control mechanism
...

Variance analysis facilitates assigning responsibility and engages control
mechanism on departments where it is required
...




LIMITATIONS OF VARIANCE ANALYSIS
The variance analysis is been of large use to corporations; however it comes with
its own set of limitations as follows:


Variance analysis as an activity is based on financial results which are released
much later after quarterly closing; there may be a time gap which may affect the
remedial action taking an ability to a certain extent
...




If the budgeting is not made taking into consideration the detailed analysis of each
factor, the budgeting exercise may be loosely done which is bound to deviate from
the actual numbers
...

Variances could occur due to change in one or many items of the budgeted list and
hence we can have various types of variance to be analysed
...
Apart from these, the management may also use the variance analysis on
other variables like direct cost yield variance, fixed overhead efficiency variance,
variable overhead efficiency variance, fixed overhead capacity variance, fixed
overhead total variance among many others
...


Meaning of Marginal Cost

Marginal cost means an amount at any given volume of output by which the
aggregate costs are changed if the volume of output is changed by one unit
...


Meaning of Marginal costing
According to CIMA Terminology,

“marginal costing is the ascertainment of marginal costs and of the effect on profit of changes
in volume or type of output by differentiating between fixed costs and variable costs
...

Cost-volume-profit analysis estimates how much changes in a company's costs,
both fixed and variable, sales volume, and price, affect a company's profit
...
This is a very powerful tool in managerial finance and accounting
...


Budget : Meaning, Features and Its Types |
Accounting
Meaning and Need for Budget:
A budget is a blueprint of plan of action to be followed during a
specified period of time for the purpose of attaining a given objectiv
According to CIMA Terminology, budget is “a plan quantified in
monetary terms prepared and approved prior to a defined
period of time, usually showing planned income to be
generated and/or expenditure to be incurred during that
period and the capital to be employed to attain a given
objective”
...
It is a means of communication by which the top management
uses the budget as a vehicle to communicate their ideas to the
subordinates who are to give them the practical shape
...
) of the organisation in such a way that the use of
resources is maximised
...


Types:
I
...
For each function there is usually a separate budget
which is controlled by the functional manager
...
Sales Budget
This budget is a forecast of quantities and values of sales to be
achieved in a budget period
...
This budget can be
prepared on the basis of products, sales areas or territories, salesmen
or agent wise, types of customers etc
...
However, in addition to past sales, the sales
manager must consider other factors affecting future sales e
...
,
seasonal fluctuations, growth of market, trade cycle etc
...


(ii) Market Analysis:
The purpose of market analysis is to ascertain the potential market
demand for a product, product design required by customers, fashion,
trends, purchasing power of people, activities of competitors and the
prices that consumers are likely to pay
...


(iv) General Trade Prospects:
The probability of the sales going up or down depends on the general
trade prospects
...
In this connection valuable
information may be known from financial papers and magazines,
national and international economic statistics, international relations,
political influences, government policies etc
...
For example, introduction of new product or new design,
additional spending on advertising, improved deliveries, after-sales
services etc
...



...
Production Budget:
After preparing the sales budget, the production budget is prepared
...
It shows the number of units
of each product that must be produced to satisfy the sales forecasts
and to achieve the desired level of inventory
...

While preparing a production budget, the factors like sales forecast,
budgeted stock requirements, plant capacity, policy of management
regarding purchase of components etc
...
It is
very necessary to coordinate production with sales budget to avoid
imbalance in production
...
Production Cost Budget:
Production cost budget shows in detail the estimated cost of carrying
out the production plan and programmes set out in the production
budget
...
Factory overheads are usually further
subdivided into fixed, variable and semi-variable
...


5
...
There are two stages of preparing
material budget
...

Afterwards the price of each kind of direct material and component is
used to obtain the cost of different types of materials and components

consumed
...
The unit material utilisation rate is
multiplied by the number of units to be produced in order to
determine the total units of material required for estimated
production
...
Purchase Budget:
Purchase Budget gives the details of the purchases which must be
made during the budget period
...

The purchase budget for raw materials is the most
important and the following factors are required to be
considered in preparing this budget:
(i) Production or delivery target,
(ii) Quantity and quality of each material needed,
(iii) Present stock position,
(iv) The dates on which different quantities of materials are required,
(v) Safety stock,
(vi) Orders already placed,
(vii) Sources of supply,
(viii) Storage space available,
(ix) Economic order quantity,

(x) Price to be paid,
(xi) Finance available,
(xii) Seasonal discounts,
(xiii) Transport and receiving arrangement,
(xiv) Management policy etc
...
Labour Budget:
This budget contains the estimates relating to number of employees
and types of employees required for the budgeted output
...

The standard labour hours required for each type of product are then
set with the help of time and motion study
...

8
...

10
...

Since most of the administration cost is fixed in nature, the

preparation of this budgets does not present much difficulty
...

11
...
This budget
is based on the requisitions for capital expenditure from various
departments

and

after

considering

their

profitability,

capital

expenditure is sanctioned and incorporated in the budget
...
Cash Budget:
A cash budget is a statement of estimated sources and uses of-cash
...
This budget is prepared
after all the functional budgets are prepared
...

(ii) It shows how much cash can be internally generated to finance
capital expenditure
...
g
...

(iv) It indicates the availability of cash for taking advantages of
discounts offered
...

A cash budget is prepared by any of the following methods:
1
...
Cash requirements of
all functional budgets are also taken into account
...

All anticipated cash receipts are added to the opening balance of cash
and the expected cash payments are deducted to arrive at the closing
balance of cash
...
Adjusted Profit and Loss Method:
This method represents cash budget in the form of cash flow
statement
...

The budgeted profit is adjusted by adding back depreciation,
provisions, capital receipts, decrease in current assets like debtors,
stock, increase in current liabilities like creditors, and by deducting

dividends, capital payments, increase in current assets like debtors,
stock and decrease in current liabilities like creditors
...

3
...
The two sides of the balance sheet are then
balanced and the balancing figure represents cash/bank balance or
overdraft—depending upon whether the liabilities side or assets side is
heavier
...
Master Budget:
Master budget is a summary of all the functional budgets and shows
the overall budget plan
...
” This budget commonly summarizes functional budgets to
produce a budgeted Profit and Loss Account and a budgeted Balance
Sheet at the end of the budget period
...
Fixed Budget (Static Budget):
A fixed budget is defined as a budget which is designed to remain
unchanged irrespective of the volume of output or turnover attained
...


Thus, it does not provide for any change in expenditure arising out of
changes in the level of activity or capacity
...
But if the level of output actually
achieved differs considerably from that budgeted, large variances will
arise and the budgetary control becomes ineffective and meaningless
...
Flexible Budget:
A flexible budget is a budget which is designed to change in
accordance with the level of activity actually attained
...

Thus, a flexible budget distinguishes between fixed and variable costs
and adopts itself to any level of activity
...

The budget allowance given under this system serves as a standard of
what costs should be at each level of activity
...
e
...
It helps both in profit
planning and controlling cost
...

(ii) Where the business is a new one or introduces new products and it
is difficult to foresee the demand
...
which is
short in supply
...

(v) Where there are general changes in sales
...

(ii) It helps management to control costs more effectively because the
total costs at different levels of operation are determined already
...

(iv) It enables management to keep an eye on the total performance of
the organisation ranging from production to sales and from cost to
profit
...
First of all, budgets are
prepared and then actual results are recorded
...
The budgetary control is a continuous process which
helps in planning and co-ordination
...
A budget is a means and budgetary control is the end-result
...
” Weldon characterizes
budgetary control as planning in advance of the various functions of a
business so that the business as a whole is controlled
...
Batty defines it as, “A system which uses budgets as a means of
planning and controlling all aspects of producing and/or selling
commodities and services
...
” According to him, “Budgetary control involves
the use of budget and budgetary reports, throughout the period to coordinate, evaluate and control day-to-day operations in accordance
with the goals specified by the budget
...

(c) The actual figures are recorded
...

(e) If actual performance is less than the budgeted norms, a remedial
action is taken immediately
...
The organizational activities
are

directed

towards

achieving

the

objective
...


Each department or unit is called a responsibility center
...

The main objectives of dividing an organization into such responsibility
centers are to control cost by assigning certain responsibilities to them and
evaluating whether the assigned responsibility are discharged within the
specific time and budget or not
...

Robert Anthony defines responsibility accounting as "that types of
management accounting that collects and reflects both planned and
actual accounting information in terms of responsibilities centers
...
Homgreen defines "responsibilities accounting is a systems of
accounting that recognizes various responsibilities centers throughout the
organization and that deflects the plan of each of these and centers by
allocating particular recanted and cost to the one having the pertinent
responsibility
...

Prerequisites for responsibility accounting
The following are the prerequisites for an organization to adopt the
responsibility accounting
...

•The objective of each responsibility center must be pre-determined
...

•There must be an environment that fosters the co-ordination and cooperation among the responsibility centers
...

•There must be proper system of the flow of the deviation exits between the
objective and responsibility
...
The
performance appraisal should be connected to the reward system
...
Generally, the responsibility centers are divided into four groups as
given below
...
A cost center can be relatively small, such as manufacturing cell,
the office of the chief executive, or legal department a cost center could also
be quite large such as a factory or the entire administrative areas for a large
firm
...
For
example, a factory might be segmented into many work situations, each of
which is a cost center
...
A purpose department
manager is responsible for evaluating and selecting vendors and it therefore
responsible for the quality of manorial and components the vendor's supply
...
Hospitals are the principle users of revenue center, largely
because of cost allocate issues and third party reimburse (such as Medicare,
novices)
...
But any center generates costs, if only the salary of it's'

manager, so revenue center exist because the organization choose not to
make the manager responsible for costs
...
Companies whose strategies include remaining only a market
where their products most criteria such as specified market-shares or rank
will hold marketing manager responsible for such goods
...

Profit center
A profit center is a segment whose manager is responsible for revenues as
well as costs
...
In some cases, the profit calculated includes only
direct costs
...


Investment center
An investment center is a segment whose manager is responsible not only
for revenues and costs but also for the investment required to generate
profits
...
Return
on investment relates profit to the resources (plant and equipment,
inventory, receivables) required to earn it
...


five prerequisites of responsibility accounting
...

•The organizational structure should be sub-divided into smaller units or
departments called the responsibility centers
...

•The right and responsibilities of each center must be defined
...

•Each responsibility center should be able to provide accounting information
as required
...
State any four importance of responsibility accounting
...

a
...
It helps to carry out the
organizational activities effectively and efficiently
...
Effective performance evaluation: responsibility accounting makes the
performance appraisal simple and effective
...


Effective

responsibility: since

the

head

or

manager

of

each

responsibility center tries his best to discharge the responsibilities assigned
to him effectively, there is a low change of deviation between the objective
and achievement
...


Motivation

to

employees: under

responsibility

accounting,

the

employees are more responsible toward their works
...


limitations of responsibility accounting
...

a
...

b
...


c
...

d
...


---------------------Good luck--------------------------

The following chart shows relationship between

organization structure and responsibility centers:


Title: accounting notes
Description: notes are useful for Bcom, Bba, & mba