Management accountIng

Management Accounting As A

Decision Making Tool

Management Accounting As A

Decision Making Tool

What is Managerial Accounting?

Management accounting is concerned specifically with how

cost information and other financial and nonfinancial

information should be used for planning, controlling, and

decision making.

Differences between Financial Accounting & Management Accounting

Financial Management

Primary uses External- investors,

creditors, Gvt.authorities

Internal managers of the business

Reports describe what has happened in the past

in an organization.

Reports concerned on future information as well as past information in an

organization.

Help investors, creditors and others to make

investment credit and other decisions.

Help managers to plane and control

business operations

Time dimension

Purpose of information

Financial Management

Cost Accounting

What is cost accounting?

Cost accounting consists of the identification, measurement, collection, analysis, preparation, and communication of financial information. Cost accounting, sometimes also referred to as managerial accounting, helps provide financial information used to,Equip managers for decision-makingImprove a manager’s ability to make decisionsControl and manage resources

The Need for Cost Accounting Measuring performance Reducing or managing costs Determining the fees or prices for goods and services Deciding to authorize, modify or discontinue a program or

activity

Objectives of Cost Accounting Ascertainment of cost Determination of selling price Cost control and cost reduction Ascertaining the profit of each activity Assisting management in decision-making

Overhead Cost Allocation

Total cost of product constitutes Direct Material,

Direct Labor & Overheads. Direct Material and

Direct Labor are directly traceable to the

products manufactured. Accuracy of product

cost computation depends on accurate

distribution of overheads to products.

Inaccuracies would lead to incorrect decisions –

especially the pricing decisions.

Traditional Method Vs. Activity Based Method

1. Traditional cost accounting is obsolete whereas Activity Based

Accounting is used more by various target-oriented companies.

2. ABC methods help the company to identify the needs of keeping

or eliminating certain activities to add value to the products.

3. TCA methods focus on the structure rather than on processes

whereas ABC methods focus on the activities or processes rather

than on the structure.

4. ABC provides accurate costs whereas TCA accumulates values

arbitrarily.

5. TCA is almost obsolete whereas   ABC methods are largely in use

since 1981.

Decision Making

Short Term Long Term

CVP BEP

Payback Period NVP IRR

Cost-Volume-Profit (C-V-P) Relationship

Cost-Volume-Profit (CVP) analysis is a managerial

accounting technique that is concerned with the effect

of sales volume and product costs on operating profit

of a business. It deals with how operating profit is

affected by changes in variable costs, fixed costs,

selling price per unit and the sales mix of two or more

different products.

CVP Analysis Formula

PX = Vx + FC + Profit

The basic formula used in CVP Analysis is derived from profit equation:In the above formula,

•P -is price per unit

•V -is variable cost per unit

•X -are total number of units produced and sold

•FC -is total fixed cost

Break Even Point (BEP)Break-Even Point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even."

Break Even Sales = Fixed Cost + Variable Cost

Break Even Point (BEP)

Net Present Value (NPV)In finance, the net present value (NPV) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows.

If the net present value is Then the project is

Positive Acceptable since it promises a return greater than

the required rate of return

Zero Acceptable, since it promises a return equal to the

required rate of return.

Negative Not acceptable, since it promises a return less than

the required rate of return

NPV=present value of financial inflow- present value of financial outflow

Net Present Value (NPV)Advantages Of Net Present Value (NPV)•NPV gives important to the time value of money.•In the calculation of NPV, both after cash flow and before cash flow over the life span of the project are considered.•Profitability and risk of the projects are given high priority.•NPV helps in maximizing the firm's value.

Disadvantages Of Net Present Value (NPV)•NPV is difficult to use.•NPV can not give accurate decision if the amount of investment of mutually exclusive projects are not equal.•It is difficult to calculate the appropriate discount rate.•NPV may not give correct decision when the projects are of unequal life.

The payback period (PP)

Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

Budgeting

Budgeting is the process of preparing a detailed statement

of financial results that are likely to happen in a period in a

time to come. There are five basic concepts,

Flexible Budgeting

Material Budgeting

Productivity Budgeting

Cash Budgeting

Budgeted Financial Statements

Flexible Budgeting

A flexible budget is an operating budget that features alternative estimates for various line items.

Advantages

A flexible budget enables the management to analyse the deviation of

actual output from expected output.

The management can compare actual costs at the actual volume with

the budgeted costs at the actual volume.

The flexible budget provides a correct basis for comparison between

actual and expected costs for an actual activity.

Material Budgeting

The direct materials budget calculates the materials that must be purchased, by time period, in order to fulfill the requirements of the production budget, and is typically presented in either a monthly or quarterly format in the annual budget.

Production BudgetingThe production budget is prepared after the sales budget. The production budget lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory.

Cash Budgeting

The cash budget contains an itemization of the projected sources and uses of cash in a future period. This budget is used to ascertain whether company operations and other activities will provide a sufficient amount of cash to meet projected cash requirements.

Advantages of budgeting  •Maximization of Profits•Proper Planning, Co-ordination & Control•To Use the Forecasting Techniques•Effective Utilization of Company's resources•Incentive Schemes to the Employees

Our Crew Mr: De Silva W.B.S.

Mr: Ishan B.A.C.

Ms: Panditha D.J.T.

Ms: Ruwangi H.A. Tharushika

Ms: Shashikala A.D.S.

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