Masters Degree in Business Management Course No.02

Institute of Human Resource Advancement University of Colombo

MBM 03 - Management Accounting

RMRB Rajapakse, Senior Lecturer in Accounting

1

Introduction to Management Accounting

What is management?

Direct resources to achieve a common goal

2

Challenges to Managers

Today business environment is so complex and competitive. Need to achieve sustainable development through limited resources.

Managers role is challengeable. So they need to make rational decisions

that can facilitate to achieve organizational objectives.

3

Challenges to Managers

MA helps them providing information in on order make operational/ strategic decisions in competitive business environment

4

Different decisions What are the various decisions make by Marketing manager Production manager HR manager Project manager Financial manager

5

Management Accounting (MA)

That part of accounting system which facilitates to the management process is called as MA

MA is a decision making system- it presents accounting information to assists management

MA is futuristic –it helps to evaluate future as it present.

6

Management Accounting (MA)

It is process of identification, measurement, accumulation, analysis, presentation, interpretation and communication of information which use by the management in order to plan, evacuate, control and assure accountability.

7

Concepts of MA

Full cost concepts

Marginal cost concepts

Differential cost concept

Responsibility Accounting Concept

8

FA vs. MA

Financial accountingPrepared for the whole EntityApplied GAAPs, accounting standardsLegal requirementFramework is givenUse historical data External parties

Management accounting

Prepared for the sections, department, activity etc. No concepts is applied

Management requirementNo frameworkHistorical / estimated dataInternal parties

9

Behavioral aspect of MA

Through performance measurement Through budgeting

10

MA for managers

Planning device Controlling device Communicating device Coordinating device Evaluation device Performance measurement

11

Cost Concepts, classification and ascertainment of cost Cost information is important to, - analysis cost structure - estimate / plan cost - cost control - performance evaluation - profitability analysis - make pricing decision - special decisions like make or buy decisions, - product/ product line decisions etc

12

Cost sheet Direct Cost

Direct Material xxx

Direct Labour xxx

Other Direct Cost xxx

Prime Cost xxx

Over Head Costs

Production overhead cost xxx

Production cost xxx

Administrative overhead xxx

Selling & Distribution overhead xxx

Total Cost xxx

Profit xxx

Selling Price xxx

Cost Elements

Direct Cost?. cost that can be conveniently identified with a particular cost unit, cost center

- Direct material cost - Direct labour cost - Other direct cost ?????

Cost elements cont:

Overhead Cost ?. cost that can not be conveniently identified with a particular cost unit, cost center

- Production overhead - Administrative overhead - Selling and distribution overhead ??

Cost classifications Direct cost Vs. Indirect cost Variable cost Vs. Fixed cost Marginal cost Vs. Absorption cost Relevant cost Vs. Irrelevant cost Product cost Vs. Period cost Sunk cost Imputed cost Opportunity cost etc;………….

Over Head Cost

Traditional over head cost allocation

process. -It has based on volume -It ignores the involvement of different activities.

Classification of Over Head

Function (production, administration, distribution)

Elements (indirect material, indirect labour, indirect expenses)

Behaviour / Variability (Fixed, variable, semi variable)

Steps in Overhead Cost Accounting

Collections and Classification Allocation and apportionment to

production and service departments Re-apportionment of service

departments to production departments

Absorption of Overheads

Steps in Absorption process

Allocation

Apportionments

Re-apportionment

Absorption rate

Illustration 1 : Compute the prime cost, Factory cost, Cost of production & Total cost

Direct material 57,000 Director’s remuneration 1,500

Direct wages 28,000 Telephone & postage 200

Factory rent & rates 2,500 Printing & stationary 100

Office rent & rates 500 Legal charges 150

Plant repairs & maintenance

1,000 Advertising 1,500

Plant depreciation 1,250 Salesmen’s salary 2,500

Factory heating & lighting

400 Showroom rent 500

Factory mgr’s salary 2,000 Sales 1,16,000

Office salaries 1,60021