MANAGEMENT

ACCOUNTING
CA Sangeeta Pandit
HOD Finance
SIMSREE
 ACCOUNTING

Definition
Objectives
Books of Accounts
Process of Accounting
Final Accounts
Limitations
 MANAGEMENT ACCOUNTING

Definition

Management Functions

Differences between Management &

Financial Accounting

Techniques
 MARGINAL COSTING

Definition

Difference between Absorption &

Marginal Costing

Advantages, Disadvantages and

Applications
MARGINAL COSTING PROBLEM, NO. 1
Fixing Selling Price
ABC Ltd. can sell 1000 units of a product at a variable cost of Rs.40
per unit and fixed costs of Rs.60,000. If the company desires to earn a
profit of Rs.1,00,000 what should be its selling price per unit?
Solution

Units 1000
Rs.
Fixed Cost 60,000
Profit Desired 1,00,000
Total Contribution 1,60,000
Contribution / Unit 160
Marginal Cost / Unit 40
Selling Price / Unit 200
MARGINAL COSTING PROBLEM, NO. 2
 SOLUTION - PROBLEM NO. 2

Products A B C
Per Unit Rs. Rs. Rs.
Selling Price 18 7 25
Direct Material 8 4 3
Direct Labour 2 5 7
Variable Overhead 5 2 4
Marginal Cost 15 11 14
Contribution 3 -4 11
Units 4000 6000 10,000

Only product B should be discontinued as its

selling price does not recover even its variable
cost. Product A should not be discontinued.
MARGINAL COSTING PROBLEM NO. 3
Make or Buy Decision
10,000 units of a component can be purchased from the market at Rs.100 per
unit with transport and ordering cost of Rs.20 per unit.
The components production cost per unit is .
Direct Material Rs.50, Direct Labour Rs.20, Variable Overhead Rs.10, Fixed
Overheads Rs.30. Should the company make the component or buy it.

Solution
The marginal cost of the component is Rs.80 per unit while the cost of buying it
from outside is Rs.120 per unit. Thus if the component is produced in house
there will be saving of Rs.40 per unit, total savings would be Rs.4,00,000.
 PROFIT INTERPRETATION

Economist
Trade Union
Investor
Tax Officer
Accountant
PROFIT PLANNING FACTORS TO BE
CONSIDERED
Selling Price
Wage Rate
Raw Materials
Efficiency of Production
Cost Reduction Options
Volume of Production
 BEHAVIOR OF PROFITS - IN
RELATION TO VOLUME
Fixed Expenses

Variable Expenses

Bifurcation helps in profit forecasting at

different levels of production
 BEHAVIOR OF PROFITS - IN
RELATION TO VOLUME
Fixed Expenses

Variable Expenses

Bifurcation helps in profit forecasting at

different levels of production
PROFIT FORECASTING PROBLEM

Units 40,000 50,000 60,000

Rs. Rs. Rs.
Sales (@ Rs. 10) 4,00,000 5,00,000 6,00,000
Variable cost (@ Rs.6) 2,40,000 3,00,000 3,60,000
Margin 1,60,000 2,00,000 2,40,000
Fixed Costs 1,50,000 1,50,000 1,50,000
Profit 10,000 50,000 90,000
% to Sales 2.5% 10% 15%
BREAK-EVEN POINT
 MARGIN OF SAFETY

Definition
Application in management decision
making
To continue the above example if output
is 50,000 units margin of safety would
be 12,500 units.
SENSITIVITY OF PROFIT TO CHANGE
IN SELLING PRICE

Sales = quantity sold* selling price

selling price influences sales figures

which affects profits
To continue the previous example table below
shows sensitivity of profit if selling price is
increased by 10%

10% increase Before increase

in Selling Price
Sales 5,50,000 5,00,000
Variable Cost 3,00,000 3,00,000
Contribution 2,50,000 2,00,000
Net Profit 1,00,000 50,000
Less Fixed Cost
% of Net Profit to Sales 18.2% 10%
% of Contribution to Sales 45.5% 40%
Break even Units 30,000 37,500
Break even Amount 3,30,000 3,75,000
If selling price is decreased by 20% the change would be
as follows:

10% increase Before increase

in Selling Price
Sales 4,00,000 5,00,000
Variable Cost 3,00,000 3,00,000
Contribution 1,00,000 2,00,000
Net Profit -50,000 50,000
Less Fixed Cost
% of Net Profit to Sales -12.5% 10%
% of Contribution to Sales 25% 40%
Break even Units 75,000 37,500
Break even Amount 6,00,000 3,75,000
ANALYSIS OF PRICE CHANGE ON
PROFIT FIGURE

Increase in selling price

Decrease in selling price

Leverage effect
 CHANGE IN VARIABLE COST
Table below shows position if there is increase in variable cost
of wages by 5%

5% increase in Wages Before increase

Sales 5,00,000 5,00,000
Variable Cost 3,15,000 3,00,000
Contribution 1,85,000 2,00,000
Net Profit 35,000 50,000
Less Fixed Cost
% of Net Profit to Sales 7% 10%
% of Contribution to Sales 37% 40%
Break even Units 40,540 37,500
Break even Amount 4,05,400 3,75,000
CHANGE IN VARIABLE COST OF RAW
MATERIAL
10% increase in Before increase
material cost
Sales 5,00,000 5,00,000
Variable Cost 2,70,000 3,00,000
Contribution 2,30,000 2,00,000
Net Profit 80,000 50,000
Less Fixed Cost
% of Net Profit to Sales 16% 10%
% of Contribution to Sales 46% 40%
Break even Units 32,610 37,500
Break even Amount 3,26,100 3,75,000
 CHANGE IN FIXED COST

Rs.10,000 increase Before increase

in fixed cost
Sales 5,00,000 5,00,000
Variable Cost 3,00,000 3,00,000
Contribution 2,00,000 2,00,000
Net Profit 40,000 50,000
Less Fixed Cost
% of Net Profit to Sales 8% 10%
% of Contribution to Sales 48% 40%
Break even Units 40,000 37,500
Break even Amount 4,00,000 3,75,000
 CHANGE IN FIXED COST

Rs.15,000 decrease Before

in fixed cost increase
Sales 5,00,000 5,00,000
Variable Cost 3,00,000 3,00,000
Contribution 2,00,000 2,00,000
Net Profit 65,000 50,000
Less Fixed Cost
% of Net Profit to Sales 13% 10%
% of Contribution to Sales 40% 40%
Break even Units 33,750 37,500
Break even Amount 3,37,500 3,75,000
 LEVERAGE EFFECT

Sluggish when contribution is unchanged

Sensitive when contribution is affected

 ELASTICITY OF DEMAND

Elasticity of demand is the responsiveness

of demand to change in price
Increase in selling price could result in
decrease of units sold
Decrease in selling price could result in
increase of units sold
 PROFIT VOLUME RATIO
PV ratio is ratio of contribution to sales
In short run as fixed cost is constant PV
ratio will measure effect on profit due to
change in sales
At break even point there is no profit or
loss thus sales are equal to total cost
Sales = Total FC + Total VC
Sales - Total VC = Total FC
Therefore, contribution = Fixed Cost
 APPLICATION OF PV RATIO

Uses

Limitations and assumptions

 BUDGETS

Use of budget in planning

System of planning:
a) Strategic
b) Management Control
c) Operational Control
 SUBSEQUENT OF PLANNING

Strategic Planning - A top management

function. Highly creative and relatively
unstructured.
Management Control - Participation at
all levels of management. Includes
detailed budgets.
Operational Control - A front line
supervisory staff function.
 MANAGEMENT CONTROL
Budgets
Budget of a manufacturing concern would
start with sales forecast and go on to cover
other estimates like production, materials,
labour, factory overheads, operating
expenses, inventories, cash flows,
borrowings and capital assets expenditure.
 SALES BUDGET

Sales estimates given by the filed staff

Modifications in the estimates by the
sales manager

Factors considered for modifications

 COMPREHENSIVE BUDGET
1. Sales Forecast 8. Finished Goods Inventory
2. Production 9. Operating Expenses
3. Material Usage 10. Cost of Goods Sold
4. Material Purchase 11. Cash Flow
5. Direct Labour 12. Income Statement
6. Factory Overheads 13. Balance Sheet
7. Raw Materials
 STANDARD COSTS

Definition of Standard Cost

Acceptable Standards

Material Standard Cost

Labour Standard Cost

Management by Exception Principle

 VARIANCES

Definition
Importance
Causes of unfavourable variances in
Causes of unfavourable variances
inusage
 PROBLEM ON MATERIAL PRICE &
USAGE VARIANCE

The standards in a paper manufacturing

concern were :Quantity - 2 Kgs per unit,
Price-Rs.0.45 per Kg., actual production 500
units, material purchased 1200 Kgs at Rs.
0.50 per Kg., 1100 Kgs used in production.

Calculate Material price variance and Material

usage variance.
 SOLUTION

Actual Quantity X Actual Price 600

(1200 X 50)
Less: Actual Quantity X 540
Std. Price (1200 X 45)
Variance due to Price 60
Actual Quantity X Std. 495
Cost (1100 X 45)
Less: Std. Quantity X 450
Std. Price [(500 X 2) X 45]
Usage Variance 45
 ALTERNATIVE SOLUTION
Actual Price per kg. .50
Standard Price per kg. .45
Variance per kg. .05
Actual quantity 1200
Material price variance 1200 * .05 60
Actual quantity used 1100
Less: Standard Quantity 1000
Variance in quantity 100
Standard price .45
Materials usage variance 100*.45 45
Budget variance 60 + 45 105
 USES OF STANDARD COSTS

Product costing

Income determination

Inventory valuation

Budgeting
INCORPORATION OF STDS IN A/CS
Raw material purchase A/c Dr 540
Raw material price var A/c Dr 60
To Suppliers A/c 600

Work-in-process A/c Dr 450

Material usage var A/c Dr 45
To Raw material A/c 500
LABOUR COST VARIANCE PROBLEM
Standard is 2 units to be produced in an hour at the
hourly wage rate of Rs. 8. If in a month 500 units are
produced at Rs.8.05 wage rate, calculate the variances.

Act hours * Act rate 260*8.05 2093

Act hours * Standard rate 260*8 2080
Usage rate var 13

Act hours * standard rate 260*8 2080

Standard quantity * standard rate 250*8 2000
Usage efficiency or quantity var 80
Total budget var 13 + 80 93
 LABOUR VARIANCE ANALYSIS
Union agreements
Efficiency of labour
Production schedule
Accounting entry

Work-in-process 2000
Labour rate var 13
Labour efficiency var 80
To Wage payable A/c 2093
 REVISION OF STANDARDS

Changing environment
Price increase by suppliers
Change in product design
Re-negotiated union agreements
Change in method of production