Management Accounting

Cost Accounting is the branch of accounting which is used to measure, record, allocate and summarise cost at various stages of production cycle whether it is fixed or variable cost. Cost Accounting is an invaluable tool for accountant in estimating thefuture cost and building various cost control te...
last updated on 18-Feb-2017
Cost accounting and financial accounting are two different branches of accounting. In order to understand the differences better, the following table will help greatly. Financial Accounting Cost Accounting It is used to record financial transactions and is used to know the financial position of the ...
last updated on 18-Feb-2017
The main objectives or purpose of cost accounting are as follows: 1. Cost accounting is used to prepare budgets and estimates. 2. It helps in ascertaining product's profitability and suggests various techniques and steps to reduce the cost. 3. Cost accounting helps management greatly in making the d...
last updated on 18-Feb-2017
Cost accounting scope is very wide. However, this has been described under three headings as follows: Budgeting In order to do anything, you need to be aware of the resources that you have and how it will turn out. This all can be done with the help of the budget. In cost accounting, actual costs ar...
last updated on 18-Feb-2017
In a manufacturing concern, various costs are incurred which have different characteristics. By classifying each cost according to its nature, helps the management in making appropriate decisions in order to improve efficiency and productivity. On a broad scale, costs are classified into five major ...
last updated on 18-Feb-2017
Cost accounting is a wide subject in which various methods are used according to the nature of the business and transactions. It is necessary to follow a proper accounting system to determine operations costs and actual cost of manufacturing the products. By employing the accounting system, decision...
last updated on 22-Feb-2017
It is one of the most popular cost accounting systems used by the entities to calculate the cost of the product correctly. Under this method, thecost of the product is calculated by adding direct costs and indirect costs. Direct costs mean cost of raw materials and direct labours. It is also called ...
last updated on 22-Feb-2017
Planning and control are the backbones of any cost accounting system. It provides the foundation through which managementcan devise strategies to better perform in the coming periods and increase performance and profitability. In order to better plan, a pre-determined overhead rate is calculated at ...
last updated on 22-Feb-2017
As we have discussed for planning purpose, we need to estimate the overhead absorption rate (OAR) at the start of the year. But the actual figure of the overheads may be more or less. In this circumstances, management/ cost accountant need to take appropriate steps to account for the adjustment. Jou...
last updated on 22-Feb-2017
It is utterly different cost accounting method. Under this method, we do not pay attention to the fixed overheads as they continue to happen even at zero production activity. So fixed cost is treated as period cost and is not included in the unit cost of the product. Formula Marginal cost = Direct m...
last updated on 22-Feb-2017
Absorption cost is a worldwide accepted cost accounting method. It has associated advantages which are as follows: Advantages It considers both variable and fixed overheads and a result, products are priced considering the total cost. This ensures products are sold at a profit, It is useful for fina...
last updated on 23-Feb-2017
The absorption costing is no doubt a good system of costing the product but it has few drawbacks as well which are as follows: Disadvantages It helps very little in making key decisions about the productivity and performance, it is not a good idea to consider fixed cost in every level of output beca...
last updated on 23-Feb-2017
Marginal costing is regarded as the key tool to make well-informed decisions in a manufacturing sector. It can benefit the management as follows: It calculates contribution margin at each level of activity, so there is no room for creating unreal profit by producing unnecessary extra units, It is go...
last updated on 23-Feb-2017
Mostly, marginal costing is used for decision-making process. But the decision maker should keep in mind following drawbacks/ disadvantages of marginal costing: It focuses on contribution margin to decide the profitability of the product. However, fixed cost may be quite high which may cause the pro...
last updated on 23-Feb-2017
Some times, it happens that during the same production activity, more than one products get created. Under this case, we have to cost each product separately in order to charge the right amount from customer to earn theprofit. This is quite common in oil refining company where during the same produc...
last updated on 23-Feb-2017
InActivity Based Costing (ABC), the entity identifies the activities which are responsible for manufacturing overheads. This is a different approach from the traditional one as the old one usually allocates overheads on the basis of machine hours or direct labour hours. ABC is mostly applied in a ma...
last updated on 24-Feb-2017
Activity based costing is a complex cost accounting system and it should be implemented only when its benefits are more than the cost incurred to implement this. In order to implement the ABC system, follow five steps are important: 1. Identification of cost activities The first step in ABC is to id...
last updated on 24-Feb-2017
Advantages of ABC (Activity Based Costing) is a modern manufacturing costing system. It unhides reasons which are difficult to identify using traditional absorption costing. This enables the organisation to improve its efficiency and maximise profits. 1. It identifies activities which are causing th...
last updated on 24-Feb-2017
Though, ABC is considered the best option to improve performance throughout the organisation. But this is not always possible. Following are the main Disadvantages/ drawbacks of Activity Based Costing (ABC): 1. The cost of conducting ABC may be greater than the benefits obtained, 2. The overheads mi...
last updated on 24-Feb-2017
Throughput Accounting is adifferent approach in management accounting as it treats onlythe direct material as the variable cost. All other cost is considered as the fixed cost. So, it means that profit can be improved only by reducing the fixed overheads. It revolves around the bottlenecks or scarce...
last updated on 25-Feb-2017
Throughput Accounting Ratio is a ratio of throughput and sum of labour and overheads. As the purpose ofThroughput Accounting is solelythe short term. All the attention is put on the removal of bottleneck resources. Formula Throughput Accounting Ratio = Throughput / (Labour + overheads) Where: Throug...
last updated on 25-Feb-2017
Relevant Cost is an important concept in management accounting. It is one over which decisions are made and that is why it affects the decision-making process significantly. Often people get confused whether the cost is relevant or irrelevant. The simple test is to look out whether the incurring of ...
last updated on 25-Feb-2017
Break Even Analysis is done to estimate how much company should sell to meet its total cost. It means that it is the point at which the entity is not earning theprofit and even not incurring anyloss. Example Question Alpha industry manufactures solar fans. The sales revenue is $10,000 fo 500 units. ...
last updated on 25-Feb-2017
Break Even Analysis is no doubt a great tool to analyse the performance of the products but there are several limitations attached with it. These are: It is applicable to companies which are selling either one product or selling more than one product in a consistent ratio like 1:2, 1:3 and so on. It...
last updated on 27-Feb-2017
Standard Costing is often described as estimated future cost because it is set before undertaking any project. The idea is to plan the total cost of materials, labours and overheads and estimating the sales as well. At the end of the period, when theproject gets completed, actual costs are analysed ...
last updated on 27-Feb-2017
The difference between standard material cost and actual material cost on the basis of actual production is termed as Total Material Variance. Formula Material variance = Standard cost - actual cost Example Question The standard cost and actual cost of Alpha industry are as follows: Standard Cost Ma...
last updated on 27-Feb-2017
It is also called raw material price variance. It is a part of thetotal material variance. It indicates the difference between the actual amount incurred on raw materials purchased and the standard amount estimated for the purchase of the materials. Formula This variance is calculated by multiplying...
last updated on 27-Feb-2017
Material Quantity Variance arises due to the differences in the actual quantity used and the standard quantity set for the planning purposes. It is obtained by multiplying the standard price of the material with the difference between the actual quantity and the standard quantity. Formula Material Q...
last updated on 27-Feb-2017
Direct labour cost may be the reason of gain or loss, so the use of Labour variance is very helpful in improving the performance of the operations. There may be circumstances where the production manager hired labour at an increased rate or the labour is working slowly causing adverse variance. Form...
last updated on 28-Feb-2017
Rate Variance is used to identify the difference in labour cost due to change in therate of pay to labours. Formula Rate variance = Difference in rates x Actual hours worked Example Following data is available for Alpha industry: Standard cost Labour 20,000 hours @ $2.66 per hour = $53,200/- Actual ...
last updated on 28-Feb-2017
In orde to understand the effect of variation in number of hours planned and number of hours actually used to produce the products, the efficiency or hour variance is used. Formula Efficiency variance = (Actual hours - Standard hours) x Standard rate Example Followingdata is available for Alpha indu...
last updated on 28-Feb-2017
It is the difference between actual overhead incurred and the standard overheads. Formula Overhead variance = Actual overheads incurred - Standard overheads Example Following data is available for Alpha industry: Standard cost Overhead $83,900/- Actual Cost Overhead $70,500/- Required: Calculate Ove...
last updated on 28-Feb-2017
Inventory is a vital part of trading and manufacturing companies. That is why, it is necessary to have accurate information about stock level. If the entity is not keeping up-to-date information about its inventories of raw materials, work in process and finished goods, then there are major chances ...
last updated on 06-Mar-2017
Ordering cost is the cost of ordering the raw materials required in the production. This is a broad term but in short we can define it by saying it involves all the cost from the creation of the requisition of the purchase order up to the payment to the supplier. During this, there will be cost of e...
last updated on 06-Mar-2017
These are the cost incurred to store the inventory into the warehouse or store rooms. This means that it covers all the depreciation expense of the machines and fixed assets used for keeping the inventory. It also involves the cost of freezing the inventories if the inventory is of perishable nature...
last updated on 06-Mar-2017
Payroll is a major element of cost in organizations especially the manufacturing one. So, it is not an easy task to reduce this cost. Payroll in cost & management accounting refers to the office staff and labor wages. In manufacturing concerns, labor wages account for most of the payroll expense...
last updated on 09-Nov-2017
Payroll calculations are done over the basis of employee’s attendance which can be obtained through the manual register maintained at the main gate of the company. However, due to misuse of the manual registers, most of the entities are using face scanning or thumb impression biometric machine...
last updated on 09-Nov-2017
Process Costing In industries where similar types of products are produced, the process costing is the best cost accounting system. The products consume the same amount of overheads and direct costs. It would not be wise to apportioned cost to individual units. So, in process costing we calculate av...
last updated on 20-Dec-2017
Practical Difficulties in Installing a Cost Accounting System There is no doubt that cost accounting is a valuable tool for providing in-depth information to the each level of management. This helps them in their strategic decision making process. But, in practical life, there are various obstacles ...
last updated on 20-Dec-2017
Financial accounting accumulates various types of costs into broad account. But this is not good for decision making process. In order to make it possible for the decision maker to create proper strategies for the growth of the organization, it is necessary to break down costs into elements. The det...
last updated on 20-Dec-2017
Re-Ordering Level It is the level at which new purchase requisition is initiated by the store keeper because the level of stock is going to touch the minimum level in the store. Re-ordering level is the level of stock between the maximum and minimum level of stock. The minimum stock should be enough...
last updated on 20-Dec-2017
When a new item of inventory is ordered for purchase, it involves three types of costs which are acquisition cost, carrying cost and ordering cost. The acquisition cost remains the same whether you order the same quantity of inventory in one order or more than one order unless and until, you are giv...
last updated on 21-Dec-2017
Danger level as the name suggest, is the point where normal issue of materials or inventories are stopped because the stocks/ materials has reached to a level where unnecessary release could cause disturbance in the production. When such case arises, materials are issued to the departments only when...
last updated on 21-Dec-2017
In order to avoid any halt in the production process, there is a strong need to maintain a minimum level of materials in the store. This lowest level is called minimum level stock. If the level falls below this level, there are strong chances that production will stop in near future and as a result,...
last updated on 21-Dec-2017
In order to keep the ordering cost and carrying cost under control, a maximum level of stock is determined. It ensures that the cost saved as a result of minimizing the ordering cost and carrying cost can be utilized in any other way to maximize the net income of the entity. Maximum level ensures th...
last updated on 21-Dec-2017
Bin card is the statement of all the receipts and issue of the stock from the store department. It is also called stock card or bin tag. It is the responsibility of the store keeper to write every in and out of stock from the store. The physical stock count and the stock quantity should be equal; ot...
last updated on 21-Dec-2017
Store ledger is a type of ledger which is maintained in costing department. It is like a reconciliation sheet which is used to find any differences between bin card and costing department records. Though, both bin card and stores ledger look like same but there is a slightly minor difference found b...
last updated on 21-Dec-2017
In orde to pay the labours, there are two major systems exist which are: time wage system - this is based on the time spent in the factory, no matter work has been done or not. piece rate system - this is based on the wor done in the factory, no matter whether the worker has worked few hours or whol...
last updated on 21-Dec-2017
This is the system of wage payment under which the worker is paid according to the hours worked. This may be then projected over the daily, weekly and monthly basis. Formula Rate per hour x total hours worked Example Mr John is working in a towel manufacturing company. He is paid @ $ 2 per hour. He ...
last updated on 21-Dec-2017
This is wage payment system in which the labour is paid for each unit produced or for the completion of a specified task. Here, the time does not matter whether the labour has completed his work in 2 hours or in o8 hours, he will be paid only per piece. Example Mr. A is paid $ 1 per unit for packagi...
last updated on 26-Dec-2017
Under this wage system, a labour is paid for time saving on the completion of thr work. For example, if the labour is given 08 hours to compelet the job. If the labour is given 30 % bonus for the time saved on the completion of the work. Then if the labour completes the job in 05 hours, then he will...
last updated on 26-Dec-2017
Though, there are numerous cost accounting methods & practices. But in order to compare various units in the same organization or different units in the industry, a new method of cost accounting is used which is called Uniform Costing. By using uniform costing, we are able to compare the overhea...
last updated on 25-Jan-2018
So far we have read about financial ratios but in a uniform costing we use numerous cost accounting related ratios. These ratios require the sharing of extensive data among member undertakings. Though, it is difficult to find data from your competitors but in some industry, member undertakings share...
last updated on 25-Jan-2018