Tuesday, September 15, 2009

TOOLS & TECHNIQUES

TOPIC - 1

MANAGEMENT ACCOUNTING

MANAGEMENT REPORTS AND CONTROLS

01. Concept of Management Accounting:
v The techniques termed as 'Management Accounting' first in 1950 by British Team of Accountants (Anglo American Productivity Council).
v Internal administrative aid to business management. A Management tool.
v Two Terms - (1) Management (2) Accounting.
v Management is the substitute of ‘Guess Work' or 'Hit or Miss' method. Objectives - to study the operating problems on the basis of facts and to work out the best use and application of human and material resources.
v 'Accounting' - analysing, interpreting the transactions in terms of time, quantity and money. Financial - cost - Management Accounting.
v Definition of 'Management Accounting' - "The presentation of accounting information in such a way as to assist the management in the creation of the policy and day-to-day operation of an undertaking" - by: Anglo American Productivity Council.

v Objectives:
v Devices employed to achieve the objectives.
Forward looking principle.
Target setting principle.
The principle of exception.
02. Evolution:
v I Stage - Financial recording - Double entry system of Book-Keeping.
v II Stage - Scientific cost ascertainment - Cost Accounting.
v III Stage - Integration of cost and financial Accounts.
v IV Stage - Business forecasting, Budgeting and standard costing.
v V Stage - Budgetary control - not merely knowing the cost of production
but also controlling the costs.
03. Scope of Management Accounting:
v Financial Accounting.
v Cost Accounting.
v Budgetary and forecasting.
v Cost control procedure.
v Statistical methods.
v Legal provisions.
v Organisation and Methods.
04. Functions of Management Accounting:
v Modification of data.
v Analysis and interpretation of data.
v Facilitating Management Control.
v Formulation of Business budgets.
v Use of Qualitative information.
v Satisfaction of information needs of Management.
05. Emphasis of Management Accounting:
v Emphasis on future/use of budget.
v Involve a process selecting and discrimination of data - use of 'costs' in decision making process.
v Emphasis on the behaviour of cost elements - division of costs into - fixed, semi-fixed, variable and semi-variable.
v Establishes relationship between cause and effect of any significant business activity.
06. Advantages:
v Elimination of intuitive management.
v Enables to get maximum return.
v Continuous method of comparing results with standards, etc.

07. Stages:

Re-arrangement
®
Adoption
®
Analysis
®





¯
Mental Revolution
¬
Explanation
¬
Diagnosis
¬


v
Re-arrangement
:
Classifying the financial data etc.
v
Adoption
:
Processing of financial data
v
Analysis
:
Interpreting the financial statement.
v
Diagnosis
:
The causes and the effects i.e., result of the financial statement.
v
Explanation
:
Suggestion i.e., the result of analysis and diagnosis.
v
Mental Revolution
:
The concept of human psychology regarding the introduction of Management Accounting.

08. Tools and Techniques of Management Accounting.

v Management of today is not satisfied with only post-mortem examination of accounts and records; it seeks guidance from accounts in its management functions. It is not an easy job to arrive at any concrete management decision unless it is accentuated on some aids or medias. So certain medias or tools are necessary to reach the target.

v Therefore, Management Accounting employs tools and techniques in order to discharge its duty of helping the management in planning, co-ordination control and appraisal of activities. They are as follows:

v Analysis of financial Statements.

v Ratio Analysis.

v Cash Flow & Fund Flow Analysis.

v Statistical & Graphical Techniques.

v Costing Techniques.

v Standard Costing & Variance Analysis.

v Budgetary Control.

v Total Cost & Marginal Cost Analysis, Break-even and Profit Volume Analysis.

v Inventory Management.

v Financial Planning & Control.

v Evaluation of Capital Project & Returns on Investment.

v Communication & Reporting.

The above analysis may lead to two things viz.

i) Show areas where immediate management action is necessary.

(ii) Serve as the basis for formulation of regular plans for the future.

Ratio Analysis may throw up data for action in spheres or profitability, solvency of the business etc.

Flow of funds Analysis may disclose important features on the basis of which working capital requirements, stock holding, cash requirements cash position, etc, may be modified and revised.

Marginal Cost Analysis assists in policy decisions regarding utilisation of spare capacity, sales mix, cost control etc.

Data from the above analysis are used for establishing budgets and standard cost for future periods.

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