Tools and Techniques of Management Accounting PDF

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Tools and Techniques of Management Accounting Lecture note...

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Tools and Techniques of Management Accounting Management accounting provides accounting service to the management through its various functions, and has to employ a number of tools, techniques and methods. No one satisfy all managerial needs. With gradual development of this subject, a number of new tools and techniques have been developed either replacing the old ones or as an additions to them. The important tools and techniques used in management accounting are discussed below. 1.Financial planning Financial planning involves determination of both long – term and short term financial objectives of the firm and formulation of financial procedures to achieve the objectives. Determination of capital structure is an important aspect of financial planning. Once the finance manager has determined the firms financial requirements, his next task is to see that these funds are in hand. The funds can be raised in many forms such as long term and short term debts, secured and unsecured debts, preference shares, equity shares etc.the ratio of these securities should be decided so as to have an optimum capital structure. Management accounting provides capital budgeting techniques for financial planning. 2.Analysis of Financial Statements It is said that financial statements are mere silent heaps of figures. Management accounting provides tongue to the silent heaps of figures and analyzes the financial statements. This helps in classifying and presenting data in a manner useful to the management. The significance of information provided is explained in a non – technical language in the form of common - size statements, comparative financial statements, ratio analysis, funds flow and cash flow techniques. 3.Historical Cost Accounting The statement of actual cost s incurred forms historical cost accounting. The actual cost is compared to the standard cost which give an idea about the performance of the business concern. 4.Budgetary Control Budgetary control means control of costs with help of budgets. In it various budgets targets are predetermined. Then actual performance is compared with the budgeted one . This helps in establishing the responsibilities and co-ordinating the departments. Budgets thus are used as a tool for planning and control. 5.Standard Costing Standard costing is a very significant cost control device. Under this technique, cost are determined in advance by systematic analysis. The actual cost are compared with standards, the variances are analysed to ascertain the causes and action is taken to correct the same in order to increase efficiency. Usually standard costing is used along with budgetary control for effective control operations. 6.Marginal Costing Marginal costing means the ascertainment of marginal costs and its effect on profit due to changes in the volume and type of output. It is done by dividing total costs into fixed costs and variable costs. While the variable costs are considered for decision –making, fixed costs are treated as period costs to be charged t costing profit and loss account. Marginal costing techniques is highly useful to the management in taking various vital decision like price fixation, profit planning, sales mix, make or buy components etc. 7.Decision Accounting Decision making is an important task of management. Decisions on capital expenditure, whether to make or buy ,what price to be charged and other important matters may assisted by the employment of terms of costs, prices and profits furnished by the management accountant. Best choice is made after considering other non – financial factors. 8.Revaluation Accounting It is also known as replacement or price level accounting. It is suggested as a tool to combat the effects of inflation on accounting values. In this technique, the units are expressed in terms of current

cost basis instead of historical costs .This helps in keeping the capital of the company intact. 9.Control Accounting Control accounting is not a separate accounting system. It consists of techniques of standard costing ,budgetary control, control reports and statements, internal check, internal audit and statutory audit and organization and methods. It is in this fields that the management accountant has scope to display ingenuity in the analysis, interpretation and presentation of information at all levels of management.

RATIO ANALYSIS The relationship between two figures expressed mathematically is called a 'Ratio'. It is a numerical relationship between two numbers which are related in some manner. Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of determination and interpretation of various ratios for helping in decision making. Ratio analysis involves three steps. 1. Calculation of appropriate ratios from the financial statements. 2. Comparison of the ratios with standards or with ratios of the past period. Comparison can also be made with the ratios of other firms. 3. Interpretation of ratios.+ +

The funds flow statement is a report on the movement of funds or working capital. It explains how working capital is raised and used during an accounting period. Cash flow statement is a statement which highlights the inflows and outflows to cash during a specified period. It indicates the sources from which the cash has been generated, uses to which the cash has been put and the resultant changes in the cash balance over the period. It explain the reasons for the change in cash position of a company. Marginal costing is one of the most useful techniques available to the management. It guides the management in pricing , decision- making and assessment of profitability. It reveals the inter – relationship between cost, volume of sales and profit. It classifies costs into fixed and variable and only variable costing or incremental costing.

4.Margin of Safety – Margin of safety is the excess of sales over the break even sales. It can be expressed in absolute sales amount or in percentage. It indicates the extent to which the sales can be reduced without resulting in loss. A large margin of safety indicates the soundness of the business. The formula for the margin of safety is: Profit Present Sales – Break Even Sales (or) ---------------------P.V.Ratio

6.Profit Volume Ratio – The profit volume Ratio is usually called P.V. Ratio. It is one of the most useful ratios for studying the profitability of business. The ratio of contribution to sales is the P.V ratio. It may be expressed in percentage. Therefore every organisation tries to improve the P.V. ratio of each product by per unit. The concept of P.V. ratio helps in determining break even point, profit at any volume of sales, sales, volume required to earn a desired amount of profit etc. Contribution P.V. Ratio = ---------------------------- X 100 Sales

7.Break Even Point – Break even point refers to the point where total cost is equal to total revenue. It is a point of no profit, no loss. This is also minimum point of production where total costs are recovered. If sales go up beyond the break even point, the organisation makes a profit. If they come down ,loss is incurred. Fixed Expenses 1. Break Even Point ( in units ) = -----------------------------Contribution per unit Fixed Expenses 2.Break Even Point ( in Rupees ) = -------------------------- X Sales Contribution

Under piece system of payment, wages are based on output and not on time. There is no consideration for time taken in completing a task. A fixed rate is paid for each unit produced, job

completed or an operation performed. Workers are not guaranteed minimum wages under this system of wage payment Sales variance is the difference between actual sales and budget sales. It is used to measure the performance of a sales function, and/or analyze business results to better understand market conditions. H.L. Gantt, an associate of Taylor, devised this scheme on the basis of Taylor's plan. Under this scheme, fixed time rates are guaranteed. Output standards and time Standards are established for the performance of each job. Workers completing the standard job within the standard time or a shorter time receive wages for the standard time plus a bonus! The bonus is a percentage, varying from 20 to 50, of the wage for the standard time. When a worker fails to turn out the required quantity of products, he simply gets his time rate without any bonus A cash budget is a budget or plan of expected cash receipts and disbursements during the period. These cash inflows and outflows include revenues collected, expenses paid, and loans receipts and payments. In other words, a cash budget is an estimated projection of the company's cash position in the future....