MANAGEMENT ACCOUNTING

2/6/2023 SRMIST-FSH-COMMERCE-KTR 1
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Information for
management
Scatter diagrams Cost accounting methods Purpose of budgeting Variable overhead
expenditure & efficiency
variance
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Sources of data Lines of best fit Absorption costing Budget preparation Fixed overhead total
variance
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Internal source Analysis of cost data Marginal Costing Flexible budget Fixed overhead
expenditure Variance
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External source Regression analysis Advantages &
disadvantages of
absorption costing
Capital budgeting Fixed overhead volume
variance
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Concept of cost Time series analysis Advantages &
disadvantages of
marginalcosting
Discounted cash flow Fixed overhead capacity
variance
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Cost classification
based on nature of
expenses
Spreadsheet Job Costing Budgetary control Fixed overhead
efficiency variance
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Costclassification
based onfunction
Accounting for material
cost
Batch Costing Reporting Interpret the variance
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Cost
classification
based on
variability
Ordering material Process Costing Behavioral aspect of
budgeting
Reconciliation of
budgeted & actual profit
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Cost behavior Receiving & issuing
material
Service Costing Standard Costing Performance
measurement
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Use of graphs Methods of valuing
purchases
Activity based costing Purpose of standard
costing
Overview of
performance
measurement
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Cost objective Methods of valuing
issues
Target costing Principles of standard
costing
Application of
performance
measurement
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Cost units FIFO, Weighted average
method
Life cycle costing Difference between
standard, marginal &
absorption costing
Measures of financial
performance –
Profitability, Liquidity,
Activity
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cost centers EOQ, Inventory levels Total quality management standard cost per unit
under absorption
costing
Gearing

MARGINAL COSTING
Marginal costing is the accounting system in which variable costs are charged
to cost units and fixed costs of the period are written off in full against the aggregate
contribution. Note that variable costs are those which change as output changes - these are
treated under marginal costing as costs of the product.
IMPORTANT FORMULE
1. Marginal cost equation
Contribution = Sales – Variable cost
Contribution = Fixed cost + Profit
2. P/v Ratio
Contribution/Sales * 100
Sales – Variable cost / Sales * 100
Change in profit / Change in sales * 100 (when profit / loss and sales of two periods are given )

3. Break- even point (B.E.P)
1. break even volume (units) Fixed cost/Contribution per unit (or) Break even sales / Selling price per unit
2. break even sales (in rupees) Fixed cost / p/v ratio (or) Break even volume * Selling price per unit
4. Margin of safety (MOS)
MOS = Actual sales – Break even sales
MOS in rupees = Profit / P/v ratio
MOS in units = Profit / Contribution per unit
5. Required sales for given profit
Required sales in units = Required profit + Fixed cost / Contribution per unit
Required sales value in rupees = required profit + Fixed cost/ P/v ratio
6. Profit from given sales
Profit = Contribution – Fixed cost
Contribution = Given sales* P/v ratio

A Ltd has furnished the following
details
Fixed cost – Rs.80000
Variable cost per unit – Rs.4
Estimated sales – Rs.2,00,000
Selling price per unit – Rs.20
Compute the following
1. Contribution
2. P/V ratio
3. Break even point
4. Break even Sales
1.Contribution = sales-variable cost
20-4 = Rs.16 per unit
2. P/V ratio = Contribution / Sales * 100
16/20*100 = 80%
3. BEP = Fixed cost / Contribution per unit
80000/16 = 5000 units
4. Break even sales = Fixed cost / P/V ratio
80000 / 80% = Rs.1,00,000

Computation of BEP
The fixed expenses of an industrial concern
amount to Rs.1,80,000.Its variable cost per
unit is Rs.29 and selling price is Rs.44 per
unit. Calculate break even point

From the following information relating to Palani Bros
Ltd, you are required to findout
a. P/V ratio , b. Break even point, c. Margin of safety,
d. Volume of sales to earn a profit of Rs.6,000
Total fixed costs 4500
Total variable costs 7500
Total sales 15000

Marginal cost and contribution statement
Particulars Amount
Sales 15000
Less: Variable
cost
7500
Contribution 7500
Less : fixed
cost
4500
Profit 3000
a. P/V ratio
contribution / sales * 100 = 7500/15000*100 = 50%
b.Break even point
Fixed expenses / P/v ratio = 4500/50% = Rs.9000
c.Profit = Rs.3000
d. Margin of safety
Sales- break even sales = 15000-9000 = Rs.6000
e. Sales to earn a profit of Rs.6000
Required sales = Fixed cost + Required profit/P/v ratio
4500+6000/50% = Rs.21,000

Marginal costing- When two consecutive
periods figures are given
Year Sales (Rs) Profit(Rs)
2007 1,40,000 15,000
2008 1,60,000 20,000
Calculate
1. P/V ratio
2. BEP
3. Sales required to earn a profit of
Rs.40,000
4. Fixed Expenses
5. Profit when sales are Rs.1,20,000

1. P/V ratio
Change in profit / Change in sales * 100
Change in profit = 20000-15000 = 5000
Change in sales = 1,60,000-1,40,000 = 20,000
5000/20000*100 = 25%
2.BEP
Fixed Expenses / P/v Ratio
P/v ratio = 25%
Fixed expenses = Contribution - Profit
Contribution = sales*P/v ratio
Using 2007 sales, contribution =
140000*25/100= 35000
Profit = 15000 (using 2007 profit)
F.C = 35000-15000 = Rs.20,000
BEP = 20000/25*100 = Rs.80,000
3.Sales
Required profit+Fixed cost/P/v
ratio
40000+20000/25*100 =
Rs.2,40,000
4. Fixed Expenses = Rs. 20,000
5. Profit
Contribution – Fixed cost
Contribution = sales*P/v ratio
1,20,000*25/100 = Rs.30,000
Fixed cost = Rs.20000
Profit = 30000 – 20000 = Rs.10000

Find out:
1. P/V ratio
2. BEP
3. Sales for a profit of Rs.40,000
4. Profit for sales of Rs.2,50,000
5. Margin of safety at a profit of profit of Rs.50,000
Year Sales (Rs) Profit(Rs)
1996 1,50,000 20,000
1997 1,70,000 25,000

Absorption Costing
The figures are extracted from the
books of Vijay irons ltd for the year
1989 and 1990 whose capacity is
10,000 irons p.a.
Direct material – Rs.3.50
Direct labor – 0.50
Fixed Overhead - Rs.2.00
Selling price – Rs.8.00
Production in 1989 was 10,000 units
and in 1990 also it was 10,000 units.
Sales was 8,000 units in 1989 and
12,000 units in 1990.
Prepare cost statement assuming
that the company uses Absorption
costing
Particulars 1989 1990
Units Per unit Rs) Total (Rs) Units Per unit Rs) Total (Rs)
Direct material 10000 3.5 35000 10000 3.5 35000
Direct Labour 10000 0.5 5000 10000 0.5 5000
Prime Cost 10000 4 40000 10000 4 40000
Add: Fixed overhead 10000 2 20000 10000 2 20000
Cost of Production 10000 6 60000 10000 6 60000
Add : Opening stock nil nil nil 2000 6 12000
10000 6 60000 12000 6 72000
Less : Closing Stock 2000 6 12000 nil nil nil
Cost of sales 8000 6 48000 12000 6 72000
Add : Profit 8000 2 16000 12000 2 24000
Sales 8000 8 64000 12000 8 96000

JOB COSTING
CIMA – It is a form of specific order costing in which costs are
attributed to individuals jobs
Job Costing Procedure
1. Customers Enquiry
2.Quotation for the job
3.Customer’s Order
4.Cost Accumulation
5.Completion of job
6.Profit Recognition
Objectives of Job Costing
1. Ascertaining the cost of each job order,
element, as accurately as feasible
2. Enabling preparation of overhead quotations
and tenders through reliable estimates
3. Determination of suitable overhead recovery
rates to absorb the overheads fully
4. Providing proper valuation of work-in0
progress at any given time
5. Establishing procedures for controlling and
reducing costs over a period of time

Job Cost Sheet
Particulars Rs Rs
Direct material xxx xxx
Direct wages xxx xxx
Production overhead xxx xxx
Prime cost / Work/ Manufacturing
Cost xxx xxx
Office & distribution overheads xxx xxx
Total cost xxx xxx
Profit/Loss xxx xxx
Selling price xxx xxx

JOB COSTING
The following data is available
in respect of Job no 876
•Direct material- Rs.17000,
Wages – 160 hours at Rs.50
per hour
•Variable overhead incurred
for all jobs – Rs.80000 for
2000 labour hours
•Fixed overhead are observed
at R.20 per hour
Find the profit or loss from
the job is billed for
Rs.40000
Job cost sheet for job no 876
Particulars Rs Rs
Direct materials 17000
Wages (160*50) 8000
Prime Cost 25000
Overheads
Variable 80000/2000*160 6400
Fixed 160*20 3200 9600
Total Cost 34600
Profit (Balancing figure) 5400
Job Bill 40000

BATCH COSTING
Batch costing is another form of job costing. Under this method, homogeneous
products are taken as cost unit. A batch consists of a specific number of products or
units or articles. The number varies from one batch to another. Hence, batch cost is
used to determine the cost per unit or article per unit.
The Economic Batch Quantity is very similar to Economic order Quantity. But, there
is only one difference ie Economic Batch Quantity is calculated to fix the level of
production at minimum cost but Economic Order Quantity is calculated to fix the
level for ordering the purchase of raw materials, stores and spares.

SERVICE COST / OPERATING COST
It is a method of costing designed to ascertain and control the costs of
services.. It is unit costing as applied to the cost of services.
The following are the some of the costs units normally used in different services
Passenger transport Passenger-kilometer/mile
Goods transport Ton-mile/ kilometer
Hospitals (in-patients) Patient-bed-day
Lodging Houses Room-day
Cinema theaters Man-show
Power generation Kilowatt-hour
Road-lighting Per lamp post

Goods Transportation Costs
A truck starts from city ‘A’ with load of 8 tons. It unloads 2 tons in town ‘B’ and the
balance 6 tons in Town ‘C’.
In the return journey it carries 4 tons from town ‘C’ to the city directly.
(a)Calulate – Absolute ton kms , Commercial ton kms
Distance were as follows – city to town B 50 kms
Town B to town C 40 kms
Town C to city direct 70 kms
(b) Ascertain the cost per commercial ton km, if total cost per trip is Rs.2,880 (round
trip)
© If arranged profit is 25% on the freightage, compute the charge per commercial ton
km

(a) 1. Absolute ton kms =
Distance travelled*Load
carried
(50*8)+(40*6)+(70*4)
400+240+280 = 920 ton kms
2. Commercial ton kms = Total
distance travelled * Average load
carried
(50+40+70)* 8+6+4/3
160*6=960 commercial ton kms
Cost per commercial ton km
Total cost per round trip/Total
commercial ton kms
2880/960 = Rs.3 per ton km
c. charge per commercial ton km`
Targeted profit is 25% on
freightage or 1/3 on cost
cost per commercial ton km = 3
Add : Targeted profit )3*1/3 = 1
Charge per commercial ton km = 4

Operating Costing
Meaning and Definition
Operating costing is a method of costing designed to ascertain and
control the costs and services. Those industries or organizations which do not
produce any product but render some service to customers can use this
method.
According to Wheldon, “Operating costing actually is unit costing as applied
to the cost of services”.

Operating Costing
Whatever is the nature of services, it is essential to find out the cost of performing a
service and relate the costs to appropriate cost units.
The following are some of the cost units normally used in different services:
(a) Passenger transport – Passenger – KM / mile
(b) Goods transport – Ton – mile / KM
(c) Hospitals (in – patient) – Patient – bed – day
(d) Lodging Houses – Room day
(e) Cinema theatres – Man – Show
(f) Power generation – Kilowatt – hour
(g) Road lighting – Per lamp post

Objectives of Transport costing:
(a) Cost ascertainment
(b) Price fixation
(c) Quotations
(d) Decisions data
(e) Control over maintenance
(f) Operational efficiency

Benefits of Operating costing
 Reliable prices
 Cost recovery
 Cost Control
 Policy decisions
 Logistics

Classification of Costs
I.Fixed or Standing charges:
These expenses are incurred whether the vehicles actually operate or not. They have to paid even
when the vehicles are standing. They have no relationship with the miles or kilometres run by vehicles,
but are mostly related to time. Eg., Garage rent, office exp, managers salary and road license etc.,
II. Semi-variable or Maintenance Charges:
These are the expenses incurred to keep the vehicles in running condition. Eg., Repairs,
replacement of tyres and tubes, overhauling charges etc.,
III. Operating Charges / Running Charges :
These are expenses relating to the actual running of the vehicles. Diesel, Petrol.
Note: (i) Drivers and conductors remuneration is a standing charges. If paid on monthly or weekly
basis. It becomes a running charges if the payment is on the basis of trips made or distance covered.
(ii) Depreciation of vehicles is a standing charges. If the life of the vehicles is estimated in
number of years. It becomes a running charges if life of vehicles is estimated in terms of miles or
kilometres.
3RD APRIL 2020 SRMIST-FSH-COMMERCE-KTR

Specimen

Exercise – 1- Running Distance Cost (or) Cost per Running km/mile

SRMIST-FSH-COMMERCE-KTR
Solution - 1

Exercise - 6

Solution - 6

ACTIVITY BASED COSTING
Activity-based costing (ABC) is a method of assigning overhead and indirect costs—
such as salaries and utilities—to products and services. The ABC system
of cost accounting is based on activities, which are considered any event, unit of work,
or task with a specific goal.
The activity-based costing (ABC) system is a method of accounting you can use to
find the total cost of activities necessary to make a product. ... And, the activity-based
costing process shows you which overhead costs you might be able to cut back on.
For example, you make soap.
PURPOSE OF ABC
Activity-based costing provides a more accurate method of product/service costing,
leading to more accurate pricing decisions. It increases understanding of overheads
and cost drivers; and makes costly and non-value adding activities more visible,
allowing managers to reduce or eliminate them

•Identify costly activities required to complete
products. ...
•Assign overhead costs to the activities
identified in step 1. ...
•Identify the cost driver for each activity. ...
•Calculate a predetermined overhead rate for
each activity. ...
•Allocate overhead costs to products.
STEPS INVOLVED IN ABC

PROCESS COSTING
Process costing is a method of costing used mainly
in manufacturing where units are continuously
mass-produced through one or more processes. ...
The method used is to take the total cost of
the process and average it over the units of
production.

PROCESS COSTING PROBLEM- 1
Problem 1
Particulars Proces J
Proces
K
Material 45000 15000
Labour 60000 25000
Chargeable
expenses 5000 10000
Overhead
17000 on
the basis of
labour
12000 5000
Overhead
Solution
Process J a/c
Particulars Amount Particulars Amount
To Material 45000By process K a/c 122000
To Labour 60000
To Chargeable expenses 5000
To Overhead 12000
122000 122000
Process K a/c
To Process J a/c(Transfer) 122000By Finished Stock 177000
To Material 15000
To Labour 25000
To Overhead 5000
177000 177000
Labou
r 60000
60+2
5 85
25000
17000*6
0/85
1200
0
17000*2
5/85 5000

PROCESS COSTING - PROBLEM 2
Problem 1
Particulars PROCESS A PROCESS B PROCESS C
Material 10000 12000 20000
Labour 8000 10000 20000
Chargeable
expenses 3000 5000 15000
Overhead 12000 on the basis of labour
10000 8000 9000
Overhead
Labour 80008+10+20 38
10000
20000
12000*8/38 2526
12000*10/38 3158
12000*20/38 6316

PROCESS COSTING – PROBLEM 2
Solution
Process A a/c
To Material 10000By process B a/c 23526
To Labour 8000
To Overhead 2526
23526 23526
Process B a/c
To Process B a/c(Transfer) 23526By Process C a/c 53684
To Material 12000
To Labour 10000
To Overhead 3158
53684 53684
Process B a/c
To Process C a/c(Transfer) 53684By Finished Stock 115000
To Material 20000
To Labour 20000
To Overhead 6316
115000 115000

TARGET COSTING
Target costing is not just a method of costing, but rather a
management technique wherein prices are determined by
market conditions, taking into account several factors, such as
homogeneous products, level of competition, no/low switching
costs for the end customer, etc. When these factors come into
the picture, management wants to control the costs, as they
have little or no control over the selling price.
CIMA defines target cost as “a product cost estimate derived
from a competitive market price.”
Target Costing = Selling Price – Profit Margin

Key Features of Target Costing:
The price of the product is determined by market conditions. The company is a price
taker rather than a price maker.
1. The minimum required profit margin is already included in
the target selling price.
2. It is part of management’s strategy to focus on cost reduction
and effective cost management.
3. Product design, specifications, and customer expectations are
already built-in while formulating the total selling price.
4. The difference between the current cost and the target cost is
the “cost reduction,” which management wants to achieve.
5. A team is formed to integrate activities such as designing,
purchasing, manufacturing, marketing, etc., to find and
achieve the target cost.

LIFE CYCLE COSTING
The process of estimating how much money you will spend on an asset over the course
of its useful life. Whole-life costing covers an asset's costs from the time you purchase
it to the time you get rid of it. ... The cost to buy, use, and maintain a business asset adds
up.
2. Characteristics of Life Cycle Costing:
a. Product life cycle costing involves tracing of costs and revenues of a product over
several calendar periods throughout its life cycle.
b. Product life cycle costing traces research and design and development costs and total
magnitude of these costs for each individual product and compared with product
revenue.
c. Each phase of the product life-cycle poses different threats and opportunities that may
require different strategic actions.

BENEFITS OF LIFE CYCLE COSTING
(i) It results in earlier action to generate revenue or lower
costs than otherwise might be considered. There are a
number of factors that need to be managed in order to
maximise return in a product.
(ii) Better decision should follow from a more accurate
and realistic assessment of revenues and costs within a
particular life cycle stage.
(iii) It can promote long term rewarding in contrast to
short term rewarding.
(iv) It provides an overall framework for considering
total incremental costs over the entire span of a product.

PROCESS OF LIFE CYCLE COSTING

TOTAL QUALITY MANAGEMENT
Total quality management (TQM) has been defined as an integrated organizational effort designed to improve
quality at every level
DEFINITION
The process to produce a perfect product by a series of measures require an organized effort by the entire company
to prevent or eliminate errors at every stage in production is called total quality management. According to
international organization for standards defined tqm as, “TQM is a management approach for an organization,
centered on quality, based on the participation of all its members and aiming at long-term success through
customer satisfaction and benefits to all members of the organization and to the society
Characteristics of TQM
Committed management.
Adopting and communicating about total quality management.
Closer customer relations.
Closer provider relations.
Benchmarking.
Increased training.
Open organization
Employee empowerment.
Flexible production.
Process improvements.
Process measuring

Traditional approach and TQM Quality element Previous state TQM Definition
Product-oriented Customer-oriented Priorities Second to service and cost First among
equals of service and cost Decisions Short-term Long-term Emphasis Detection
Prevention Errors Operations System Responsibility Quality Control Everyone Problem
solving Managers Teams Manager’s role Plan, assign, control, and enforce Delegate,
coach, facilitate, and mentor
The three aspects of TQM Counting Customers Culture Tools, techniques, and
training in their use for analyzing, understanding, and solving quality problems Quality
for the customer as a driving force and central concern. Shared values and beliefs,
expressed by leaders, that define and support quality
Principles of tqm 1. Produce quality work the first time and every time. 2. Focus on the
customer. 3. Have a strategic approach to improvement. 4. Improve continuously. 5.
Encourage mutual respect and teamwork
The key elements of the TQM
Focus on the customer.
Employee involvement
Continuous improvement

BENEFITS OF TQM: • Improved quality. • Employee participation. • Team work. •
Working relationships. • Customer satisfaction. • Employee satisfaction. • Productivity. •
Communication. • Profitability. • Market share.
Advantages of tqm
• Improves reputation- faults and problems are spotted
and sorted quicker. • Higher employee morale- workers
motivated by extra responsibility ,team work and
involvement indecisions of tqm. • Lower cost. •
Decrease waste as fewer defective products and no
need for separate.
Disadvantages of tqm • Initial introduction cost. •
Benefits may not be seen for several years. • Workers
may be resistant to change.

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