Management Accounting and Control Systems

8/8/2019 Management Accounting and Control Systems

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MANAGEMENTMANAGEMENT

ACCOUNTING ANDACCOUNTING ANDCONTROL SYSTEMSCONTROL SYSTEMS

Module 1Module 1SrikanthSrikanth

VibhaVibha

SwethaSwetha

Ramya.MRamya.M

SushmaSushma

RashmiRashmi

SrividyaSrividya

Satish.SSatish.S


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BASIC COST CONCEPT:BASIC COST CONCEPT:

MEANING OF COST:MEANING OF COST:

According to SHILLINGLAW costAccording to SHILLINGLAW cost

represent the resources that have beenrepresent the resources that have beensacrificed to attain a particular objectives.sacrificed to attain a particular objectives.

The amount of expenditure (actual or notional)The amount of expenditure (actual or notional)incurred on specified thing or activity.incurred on specified thing or activity.


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The Institute of Cost and ManagementThe Institute of Cost and Management

Accountants, LondonAccountants, London, defines, defines costcostaccountingaccounting as the process of accountingas the process of accountingfor cost from the point at whichfor cost from the point at whichexpenditure is incurred or committed toexpenditure is incurred or committed to

the establishment of its ultimatethe establishment of its ultimaterelationship with costrelationship with cost centrescentres and costand costunits. In its widest range it embraces theunits. In its widest range it embraces thepreparation of statistical data, thepreparation of statistical data, the

application of cost control methods andapplication of cost control methods andthe ascertainment of profitability ofthe ascertainment of profitability ofactivities carried out or plannedactivities carried out or planned..


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OBJECTIVES OF COSTOBJECTIVES OF COST

ACCOUNTINGACCOUNTING To determine theTo determine the product costproduct cost

To facilitate theTo facilitate the planning and control ofplanning and control ofregular business activities.regular business activities.

To supplyTo supply information for short run andinformation for short run andlong run decisions.long run decisions.


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FINANCIAL ACCOUNTING VsFINANCIAL ACCOUNTING Vs

COST ACCOUNTINGCOST ACCOUNTING Financial accountingFinancial accounting

classifies, records,classifies, records,presents and interprets,presents and interprets,in terms of money,in terms of money,transactions, and eventstransactions, and eventsthat are of financialthat are of financialcharacter, and providescharacter, and providesmanagement with themanagement with the

facts and figuresfacts and figuresnecessary for thenecessary for thepreparation of thepreparation of theperiodic financialperiodic financialstatements.statements.

Cost accounting classifies,Cost accounting classifies,records, presents andrecords, presents and

interprets in a significantinterprets in a significantmanner the material,manner the material,labour and overhead costlabour and overhead costinvolved in manufacturinginvolved in manufacturingand selling each productand selling each productor rendering service.or rendering service.


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FINANCIAL ACCOUNTING VsFINANCIAL ACCOUNTING Vs

COST ACCOUNTINGCOST ACCOUNTING Shareholders, creditors,Shareholders, creditors,

financial analysts,financial analysts, govtgovt

authorities, stockauthorities, stockexchange, labour unions,exchange, labour unions,etc.etc.

all info is in terms ofall info is in terms of

money.money. for a definite period,for a definite period,

yearly, half yearly,yearly, half yearly,quarterlyquarterly

Members of managementMembers of managementat different levels.at different levels.

any unit is used on theany unit is used on thebasis of the situation.basis of the situation.

Statements prepared asStatements prepared asper requirement.per requirement.


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ABSTRACTABSTRACT

GoalsGoals

StrategiesStrategies

Management Control SystemsManagement Control SystemsManagement by objectivesManagement by objectives

Responsibility centersResponsibility centers

Cost classificationCost classificationCost analysisCost analysis


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Goals:Goals:--

GoalsGoals are defined as broad statements of whatare defined as broad statements of whatorganization aims to achieve in the long run ororganization aims to achieve in the long run oron a permanent basis. Thus access to goals areon a permanent basis. Thus access to goals are

fairly timeless statements, affected by thefairly timeless statements, affected by thepassage of timepassage of time..

A definite direction is given to organizationalA definite direction is given to organizational

energies through setting goals and focusing onenergies through setting goals and focusing ongroup effort.group effort.


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GoalsGoals

Cost accounting is necessary for theCost accounting is necessary for theachievement of following objectives orachievement of following objectives orpurposes:purposes:--

1.1. COST ASCERTAINMENT.COST ASCERTAINMENT.

2.2. COST CONTROL.COST CONTROL.

3.3. DECISION MAKING.DECISION MAKING.

4.4. FIXATION OF SELLING PRICE.FIXATION OF SELLING PRICE.


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Strategy is the route with alternatives forStrategy is the route with alternatives forreaching objectives and goals.reaching objectives and goals.

Strategy is an outline of the proposedStrategy is an outline of the proposedpath of action of an organizationpath of action of an organization.. StrategyStrategyis futuristic and indicates the direction ofis futuristic and indicates the direction of

growth on the basis of which the growthgrowth on the basis of which the growthplan is formulated.plan is formulated.


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Strategies can be classified in two:Strategies can be classified in two:

a)a) ChartersCharters ::-- Although most companies legalAlthough most companies legalcharters are written in such broad terms that thecharters are written in such broad terms that the

company is permitted to engage in any type ofcompany is permitted to engage in any type oflawful economic activity, in practice a companyslawful economic activity, in practice a companysmanagement draws boundaries around themanagement draws boundaries around theterritory in which it will operate.territory in which it will operate.


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b)b) PolicesPolices: Policies are essentially constraints: Policies are essentially constraintswithin which subordinate managers arewithin which subordinate managers areexpected to operate.expected to operate.

Various policies in an organizationVarious policies in an organization

DividendDividend,, DebtDebt structure,structure, ShortShort termtermborrowing,borrowing, FFinancialinancial policies,policies, CapitalCapital

investment, Product design policies, Promotion,investment, Product design policies, Promotion,Compensation, Retirement.Compensation, Retirement.


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Key variables in MCSKey variables in MCS

Input variablesInput variables::--

1)1) Raw material availabilityRaw material availability

2)2) Raw material qualityRaw material quality

3)3) Raw material costsRaw material costs


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Production Variables:Production Variables:--

1)1) Capacity utilizationCapacity utilization

2)2) Losses(scraps)Losses(scraps)3)3) QualityQuality ControlControl4)4) MaintenanceMaintenance5)5) CostsCosts

6)6) DeliveryDelivery


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Marketing variables:Marketing variables:--

1)1) Order book positionOrder book position2)2) Market shareMarket share

3)3) Institutional salesInstitutional sales


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Key Variables in MCSKey Variables in MCS

Asset Management VariablesAsset Management Variables::--

1)1) Asset turnoverAsset turnover

2)2) Working capital turnoverWorking capital turnover


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MANAGEMENT BYMANAGEMENT BY

OBJECTIVESOBJECTIVESprocess of agreeing upon objectivesprocess of agreeing upon objectiveswithin an organizationwithin an organization

Essence isEssence is

participative goal settingparticipative goal setting

choosing course of actionschoosing course of actions

decision makingdecision making


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STEPSSTEPS

Set ObjectivesSet Objectives

Organize The GroupOrganize The Group

Motivate And CommunicateMotivate And Communicate Measure PerformanceMeasure Performance

Develop PeopleDevelop People


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Review of key result areas:

Marketing

Innovation

Human organization

Financial resources

Physical resourcesPhysical resources

ProductivityProductivity Social responsibilitySocial responsibility

Profit requirementsProfit requirements


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W.r.tW.r.t costcost

Identify costs within the projectIdentify costs within the project

Ensure that expenses are approved beforeEnsure that expenses are approved before

purchasingpurchasing Keep a central record of all costs incurredKeep a central record of all costs incurred

Control the overall cost of the projectControl the overall cost of the project


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Sources for Cost InformationSources for Cost Information

Cost information is nothing but theCost information is nothing but theprocessed cost data which is used by theprocessed cost data which is used by themanagement for the purpose of planningmanagement for the purpose of planningand control. The sources for collectingand control. The sources for collectingthese cost information are usually costthese cost information are usually costcentrescentres, Investment, Investment centrescentres and profitand profit

centrescentres in thein the organisationorganisation..


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COST CENTRECOST CENTRE

According to CIMA, London, Cost CentreAccording to CIMA, London, Cost Centreis:is:--

a location, person or item of equipment (ora location, person or item of equipment (or

group of these) for which costs may begroup of these) for which costs may beascertained and used for the purpose ofascertained and used for the purpose ofcontrol.control.

The main purpose of ascertaining the costThe main purpose of ascertaining the costis to control of cost.is to control of cost.

The number of cost centres vary fromThe number of cost centres vary fromorganization to organization.organization to organization.


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TYPES OF COST CENTRETYPES OF COST CENTRE

1. Personal and Impersonal Cost Centres1. Personal and Impersonal Cost Centres

2. Operation and Process Cost Centres2. Operation and Process Cost Centres

3. Product and Service Cost Centres3. Product and Service Cost Centres


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PERSONAL & IMPERSONAL COSTPERSONAL & IMPERSONAL COSTCENTRESCENTRES

Personal Cost Centre:Personal Cost Centre:--

It is one which consists of person or aIt is one which consists of person or a

group of persons.group of persons.

Impersonal Cost Centre:Impersonal Cost Centre:--

It consists of a location or an item ofIt consists of a location or an item ofequipment, or a group of these.equipment, or a group of these.


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OPERATION & PROCESS COST CENTREOPERATION & PROCESS COST CENTRE

Operation Cost Centre:Operation Cost Centre:--

It consists of those persons and/orIt consists of those persons and/or

machines carrying on the same kind ofmachines carrying on the same kind ofoperation.operation.

Process Cost Centre:Process Cost Centre:--

It is a centre which has a continuousIt is a centre which has a continuoussequence of operations.sequence of operations.


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PRODUCT & SERVICE COSTPRODUCT & SERVICE COST

CENTRECENTREProduct Cost Centre:Product Cost Centre:--It refers to a centre through which aIt refers to a centre through which a

product passes and generally corresponds to aproduct passes and generally corresponds to a

product department.product department.For Ex: Weaving department in a textile mill,For Ex: Weaving department in a textile mill,melting shop in a steel mill.melting shop in a steel mill.


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Contd..Contd..

Service Cost Centre:Service Cost Centre:--

It is a department or centre whichIt is a department or centre whichincurs direct or indirect costs but does not workincurs direct or indirect costs but does not work

directly on products.directly on products.For Ex: Maintenance department, Power house,For Ex: Maintenance department, Power house,

tool room, repair shop, etctool room, repair shop, etc


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Contd.Contd.

Example:Example: In an engineering industry, the costIn an engineering industry, the costcentrescentres may bemay be

i)i) Machine ShopMachine Shop

ii)ii) Welding ShopWelding Shop Production CostProduction Cost CentresCentres

iii)iii)Assembly ShopAssembly Shop

iv)iv)General Administrative DepartmentGeneral Administrative Department -- ServiceService

Cost CenterCost Center


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PROFIT CENTRESPROFIT CENTRES

Segment of activity of aSegment of activity of abusiness which isbusiness which isresponsible for bothresponsible for both

revenue and expenses andrevenue and expenses anddiscloses the profit of adiscloses the profit of aparticular segment ofparticular segment ofactivity.activity.

Created to delegateCreated to delegateresponsibility to individualsresponsibility to individualsand measure theirand measure theirperformance.performance.


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REQUISITES OF PROFITREQUISITES OF PROFIT

CENTRESCENTRES There must be at least two units for whichThere must be at least two units for which

separate measures of revenue andseparate measures of revenue andexpenses are available.expenses are available.

The manager should have control over theThe manager should have control over thecosts and revenues.costs and revenues.

Profits must be reported to topProfits must be reported to topmanagementmanagement


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DIFFERENCESDIFFERENCES

COST CENTRE PROFIT CENTRE

1. Created for accounting

conveniences of costs and theircontrol.

1. Created because of

decentralization of operations.

2. Cost centers are notautonomous.

2. Profit centers are autonomous.

3. A cost centre does not havetarget costs.

3. Each profit centre has a profittarget.

4. Unit of activity or area ofresponsibility for which costsare allocated.

4. Segment of activity which isresponsible for both revenueand expenses.


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INVESTMENT CENTRESINVESTMENT CENTRES

It is a profit centre in which inputs areIt is a profit centre in which inputs aremeasured in terms of expense andmeasured in terms of expense andoutputs in terms of revenues, and inoutputs in terms of revenues, and inwhich assets employed are also measuredwhich assets employed are also measured..


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INVESTMENT CENTRESINVESTMENT CENTRES

The manager is accountable for productionThe manager is accountable for productionand sales decisions along with the investmentand sales decisions along with the investmentdecision.decision.

The success of investment centre isThe success of investment centre ismeasured not only by its profits but also bymeasured not only by its profits but also byrelating that profit to the amount ofrelating that profit to the amount of

investment, i.e., ROI.investment, i.e., ROI. ROI= Income of theROI= Income of the IInvestment Centrenvestment Centre

Assets of the Investment CentreAssets of the Investment Centre


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COMPARISONCOMPARISON

TYPE OFCENTRE/

RESPONSIBLITY

COST CENTRE PROFIT CENTRE INVESTMENTCENTRE

Manager hascontrol over

Costs( onlycontrollable costitems).

Costs(controllable costs), Salesprices, outputvolumes.

Costs, Salesprices,Investment infixed andcurrent assets.

Principle

PerformanceMeasurement

Variance

analysis,efficiencymeasures.

Profit. Return on

Investment,Residualincome, otherfinancial ratios.


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MANAGEMENT CONTROLMANAGEMENT CONTROL

Management is the profession of controlManagement is the profession of control

Managers take decisions in order to achieve definedManagers take decisions in order to achieve defined

goals within an established time periodgoals within an established time period

IIt helps to check the errors and to take the correctivet helps to check the errors and to take the correctiveaction so that deviation from standards are minimizedaction so that deviation from standards are minimized

and stated goals of the organization are achieved inand stated goals of the organization are achieved indesired mannerdesired manner


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Management control system


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EElements in a control systemlements in a control system

1.1. The characteristic or condition to be controlledThe characteristic or condition to be controlled

2.2. The sensorThe sensor

3.3. The comparatorThe comparator

4.4. The activatorThe activator

They occur in the same sequence and maintain aThey occur in the same sequence and maintain aconsistent relationship to each other in every system.consistent relationship to each other in every system.


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Kinds of controlKinds of control

(1)(1) OpenOpen-- or closedor closed--loop control : the nature of theloop control : the nature of theinformation flow designed into the systeminformation flow designed into the system

(2)(2) Man or machine control : the kind of componentsMan or machine control : the kind of componentsincluded in the designincluded in the design

(3)(3) Organizational or operational control : the relationshipOrganizational or operational control : the relationship

of control to the decision processof control to the decision process


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OOperational controlperational control

It serves to regulate the dayIt serves to regulate the day--toto--day output relative today output relative toschedules, specifications, costs, plans and objectivesschedules, specifications, costs, plans and objectives

It focuses on events in a recent periodIt focuses on events in a recent period

Operational control systems are derived from theOperational control systems are derived from therequirements of the management control systemrequirements of the management control system

Corrective action may involve training, motivation,Corrective action may involve training, motivation,leadership, discipline, or termination.leadership, discipline, or termination.


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OOperational controlperational control

Some of the questions which can be evaluated throughSome of the questions which can be evaluated throughoperational control are:operational control are:

Is the output of product or service the proper qualityIs the output of product or service the proper quality

and is it available as scheduled?and is it available as scheduled? Is the energy resource being utilized efficiently?Is the energy resource being utilized efficiently?

Are the costs associated with the transformation processAre the costs associated with the transformation processin line with cost estimates?in line with cost estimates?

Is the information needed in the transformation processIs the information needed in the transformation processavailable in the right form and at the right time?available in the right form and at the right time?


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Evaluation Techniques for OperationalEvaluation Techniques for OperationalControl:Control:

Value chain analysisValue chain analysis

Quantitative performance measurementsQuantitative performance measurements

BenchmarkingBenchmarking

Key Factor RatingKey Factor Rating


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Task controlTask control

TTask control facility provides functions that synchronizeask control facility provides functions that synchronizetask activity, or that control the use of resourcestask activity, or that control the use of resources

It helps to provide flexible schedules and betterIt helps to provide flexible schedules and bettercustomer servicecustomer service

It helps in distribution and allocation of tasks for workersIt helps in distribution and allocation of tasks for workers

It provides the ability to control all tasks and operationsIt provides the ability to control all tasks and operationswithin the supply chainwithin the supply chain


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Benefits of Task controlBenefits of Task control

Cost effective management tool to manage theCost effective management tool to manage thedistribution of tasksdistribution of tasks

Visibility of work in progress, to improve accountabilityVisibility of work in progress, to improve accountabilityand productivityand productivity

Flexibility of the system to add new jobs, or reFlexibility of the system to add new jobs, or re--allocateallocate

them, or delete them thereby increasing staff utilizationthem, or delete them thereby increasing staff utilization

Management reports to measure performance andManagement reports to measure performance andtherefore improve efficiency of your operationstherefore improve efficiency of your operations


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COST UNITCOST UNIT Breaks up the cost of a cost centre intoBreaks up the cost of a cost centre into

smaller sub divisions and helps insmaller sub divisions and helps inascertaining the cost of saleable productsascertaining the cost of saleable products

or services.or services. Unit of measurement of costUnit of measurement of cost

EgEg: sugar mill: sugar mill-- cost percost per tonnetonne

:textile mill:textile mill--cost per metercost per meterunit of product, service or time in relationunit of product, service or time in relation

to which cost may be ascertained orto which cost may be ascertained or

expressedexpressed


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CLASSIFICATION OF COSTCLASSIFICATION OF COST

Process of grouping costs according toProcess of grouping costs according totheir common characteristicstheir common characteristics

Important so as to identify the cost withImportant so as to identify the cost withcost centre or cost unitscost centre or cost units


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1)1) By nature or elements:By nature or elements: MaterialMaterial LabourLabour

ExpensesExpenses2) By functions:2) By functions: ManufacturingManufacturing CommercialCommercial AdministrativeAdministrative Selling and distributionSelling and distribution


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3) Degree of traceability3) Degree of traceability

Direct costDirect cost

Indirect costIndirect cost4) Changes in activity or volume4) Changes in activity or volume

Fixed costFixed cost

Variable costVariable cost Semi variable costSemi variable cost


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5) Controllability5) Controllability

Controllable costControllable cost

Uncontrollable costUncontrollable cost6)Normality6)Normality

Normal costNormal cost

Abnormal costAbnormal cost


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Classification of CostClassification of Cost

By relationship with accounting periodBy relationship with accounting periodCapital costCapital cost

Revenue costRevenue cost

By timeBy timeHistorical costHistorical cost

Predetermined costPredetermined cost

According to planning and controlAccording to planning and controlBudgeted costBudgeted cost

Standard costStandard cost


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Difference b/w Budgeted cost &Difference b/w Budgeted cost &Standard costStandard cost

Standard cost Budgeted Cost

Standard costs are

projection of costaccounts

Budgeted costs are

projection of financialaccounts

It is a control function It is a planning function

Standard costs areintensiveBudgeted costs areextensive


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By association with theBy association with theproductproduct

Product costProduct cost

Period costPeriod cost


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For managerial decisionsFor managerial decisions

Marginal costMarginal cost

Sunk costSunk cost

Differential costDifferential cost Out of pocket costOut of pocket cost

Opportunity costOpportunity cost


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Cost AnalysisCost Analysis FFor Managementor ManagementDDecision Makingecision Making

Important FunctionsImportant Functions OOf Management:f Management:--

-- PlanningPlanning

-- Decision MakingDecision Making

-- ControllingControlling


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Cost Accounting HelpsCost Accounting HelpsManagement In Following Ways:Management In Following Ways:--

Classification and subClassification and sub--division of costsdivision of costs::--

Unprofitable activities are disclosed & stepsUnprofitable activities are disclosed & steps

Can be taken.Can be taken.

Control of Material, Labour and OverheadControl of Material, Labour and Overheadcostcost::--

Stores ledger and material abstract areStores ledger and material abstract aremaintained .maintained . -- Detailed information aboutDetailed information aboutavailability of labour and machine capacity.availability of labour and machine capacity.


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Contd.Contd.

Business policiesBusiness policies::--New ProductNew Product -- Selection of profitable product mixSelection of profitable product mix-- Utilization of spare capacityUtilization of spare capacity -- Make or BuyMake or Buy

decisiondecision

BudgetingBudgeting

Standard for measuring efficiencyStandard for measuring efficiency

Best use of limited resourcesBest use of limited resources


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Contd..Contd..

Instrument for management controlInstrument for management control

Cost AuditCost Audit -- Assist in prevention of errors andAssist in prevention of errors andfrauds.frauds.

Special FactorsSpecial Factors ::--It informs about optimum profitability, seasonableIt informs about optimum profitability, seasonablevariations in volumes and cost, idle time of labour,variations in volumes and cost, idle time of labour,

idle capacity of the machine.idle capacity of the machine.

Price determinationPrice determination


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Management Accounting and Control Systems

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