Name Of Student: Rajput Priya Harendrasingh

PRN NO: 8021077076

Course :Post Graduation Diploma In Financial
Management(Evening)
Semester: 2nd Semester
Year: 2021-2022
Subject: Management Accounting
 (1) Difference between Financial Accounting,
Management Accounting & Cost Accounting

What is Cost Accounting?

Cost Accounting is a practice of Business in which we record, examine, summarize and study the
Cost of a company which is spent on any of the company's processes, it's services, products or
any thing of the company. In other words we can say that Cost Accounting is a process through
which we can determine the Costs of goods and services of any organisation. It is used in
financial Accounting and includes the recording, classification and allocation of various
expenditures. Cost Accounting helps in calculating the Costs of various goods of any
organisation. It eventually helps any organisation in controlling its Cost and plan their strategies
along with preparing them for making efficient decisions regarding Cost improvement. It also
helps the organization to understand the proper utilisation of Cost spent and to correct their
wrong decisions. 

What is Management Accounting?

Management Accounting or managerial Accounting can be defined as the process of preparing
reports on Financial and Non-financial transactions with the help of available data. Such reports
are made by accumulating, assessing and interpreting both Statistical and Qualitative and
Quantitative data and are also heavily based on the firm’s financial statements. 

What is Financial Accounting?

Financial accounting is a specific branch of accounting involving a process of recording,
summarizing, and reporting the myriad of transactions resulting from business operations over a
period of time. These transactions are summarized in the preparation of financial statements,
including the balance sheet, income statement and cash flow statement, that record the
company's operating performance over a specified period.
Difference between Financial Accounting, Cost Accounting and Management Accounting

 Cost Accounting is all about the Cost and it includes things like Cost control, Cost
computation and Cost reduction. Whereas Management Accounting is about managing
the organization and making effective decisions. 
 Cost Accounting has a narrow scope whereas Management Accounting has much broader
scope. 
 Cost Accounting helps the Business in preventing irrelevant spending which sometimes
goes beyond the budget. Whereas Management Accounting gives an idea about how
Management should strategize. 
 Cost Accounting is quantitative in nature whereas Management Accounting is both
quantitative and qualitative in nature. 
 Cost Accounting is used for shareholders, Management and vendors whereas
Management Accounting is only used for Management of the Business. 
 (2) BEP Chart, Assumptions of BEP Analysis

Introduction to Break-Even Analysis:

Break-even analysis is of vital importance in determining the practical application of cost func-
tions. It is a function of three factors, i.e., sales volume, cost and profit. It aims at classifying the
dynamic relationship existing between total cost and sale volume of a company.

Hence it is also known as “cost-volume-profit analysis”. It helps to know the operating condition
that exists when a company ‘breaks-even’, that is when sales reach a point equal to all expenses
incurred in attaining that level of sales.

The break-even analysis is based on the following set of assumptions:

(i) The total costs may be classified into fixed and variable costs. It ignores semi-variable cost.

(ii) The cost and revenue functions remain linear.

(iii) The price of the product is assumed to be constant.

(iv) The volume of sales and volume of production are equal.

(v) The fixed costs remain constant over the volume under consideration.

(vi) It assumes constant rate of increase in variable cost.

(vii) It assumes constant technology and no improvement in labour efficiency.

(viii) The price of the product is assumed to be constant.

(ix) The factor price remains unaltered.

(x) Changes in input prices are ruled out.

 (3) Application of Marginal Costing in business decision
making
Application # 1. Fixation of Selling Price:

Marginal cost of a product represents the minimum price for that product and any sale below the
marginal cost would entail a cash loss. The price for the product should be fixed at a level which
not only covers the marginal cost but also makes a reasonable contribution towards the common
fund to cover fixed overheads. The fixation of such a price for a product would be easier if its
marginal cost and overall profitability of the concern is known.

Application # 2. Maintaining a Desired Level of Profit:

The industry has to cut prices of its products from time to time on account of competition,
government regulations and other compelling reasons. The contribution per unit on account of
such cutting is reduced while the industry is interested in maintaining a minimum level of its
profits. In case the demand for the company’s products is elastic, the minimum level of profits
can be maintained by pushing up the sales. The volume of such sales can be found out by the
marginal costing technique.

Application # 3. Accepting of Price Less than the Total Cost:

Sometimes prices have to be fixed below the total cost of the product. This becomes necessary to
meet the situation arising during trade depression. It will be enough in such periods if the
marginal cost is recovered. The selling price may be fixed at a level above this cost though it
may not be enough to cover the total cost. This is because in such periods any marginal
contribution towards recovery of fixed cost is good enough rather than not to have any
contribution at all.
A price less than the total cost but above marginal cost may be acceptable when a specific order
has been received and it shall not affect the home market. The additional sales revenue should be
compared with the additional costs (which are only marginal costs generally) and if the net
revenue is greater, the order should be accepted. In case the market is competitive and there is a
fear of adverse impact on existing sales in the long run, the decision should be taken after careful
study.
 (4) Explain: Fixed Budget & Flexible Budget & Master
Budget

Fixed Budget

Definition: A fixed budget, also called a static budget, is financial plan based on the assumption
of selling specific amounts of goods during a period. In other words, fixed budgets are based on
a set volume of sales or revenues. This is an easy way for management to plan out expenses and
operations when they assume that sales volume and total revenues will be a set amount during a
period.

What Does Fixed Budget Mean?

There are, however, many shortfalls to using a fixed budget. For example, management’s
estimates of revenues are rarely accurate. It’s extremely difficult to predict future demand and
growth of an industry; so predicted values rarely match the actual numbers for a period.

Unfortunately, if the predicted numbers are not accurate enough, evaluations of performance,
capacity, and profits can’t be used to compare the actual results with the budgeted expectations.

Example

Finding the favorable or unfavorable variances between the actual and budgeted performance is

one way that management can gauge the performance of a segment. This is why flexible or
variable budgets are usually preferred to static budgets. They are able to corresponding with the
actual level of output and revenues better than a static budget.
A fixed budget does have a few advantages for some companies. Given their simplicity, static
budgets are easy to prepare and allow management to focus on operations instead of being
consumed with analysis. Fixed budgets are also useful for companies with reliable, annual
trends.

For example, some industries rarely change and customer demand has been the same for the past
10 years. Companies in this type of industry can reliability use a set volume amount based on
prior periods and still maintain accuracy.
 Flexible Budget

What is a Flexible Budget?

A flexible budget adjusts to changes in actual revenue levels. Actual revenues or other
activity measures are entered into the flexible budget once an accounting period has been
completed, and it generates a budget that is specific to the inputs. The budget is then
compared to actual expenses for control purposes. The steps needed to construct a flexible
budget are:

1. Identify all fixed costs and segregate them in the budget model.

2. Determine the extent to which all variable costs change as activity measures change.

3. Create the budget model, where fixed costs are “hard coded” into the model, and variable
costs are stated as a percentage of the relevant activity measures or as a cost per unit of
activity measure.

4. Enter actual activity measures into the model after an accounting period has been
completed. This updates the variable costs in the flexible budget.

5. Enter the resulting flexible budget for the completed period into the accounting system for
comparison to actual expenses.

This approach varies from the more common static budget, which contains nothing but fixed
amounts that do not vary with actual revenue levels. Budget versus actual reports under a
flexible budget tend to yield variances that are much more relevant than those generated
under a static budget, since both the budgeted and actual expenses are based on the same
activity measure. This means that the variances will likely be smaller than under a static
budget, and will also be highly actionable.

A flexible budget can be created that ranges in level of sophistication. Several variations on
the concept are noted below. In short, a flexible budget gives a company a tool for
comparing actual to budgeted performance at many levels of activity.
Basic Flexible Budget

At its simplest, the flexible budget alters those expenses that vary directly with revenues.
There is typically a percentage built into the model that is multiplied by actual revenues to
arrive at what expenses should be at a stated revenue level. In the case of the cost of goods
sold, a cost per unit may be used, rather than a percentage of sales.

Intermediate Flexible Budget

Some expenditures vary with other activity measures than revenue. For example, telephone
expenses may vary with changes in headcount. If so, one can integrate these other activity
measures into the flexible budget model.

Advanced Flexible Budget

Expenditures may only vary within certain ranges of revenue or other activities; outside of
those ranges, a different proportion of expenditures may apply. A sophisticated flexible
budget will change the proportions for these expenditures if the measurements they are
based on exceed their target ranges.

Advantages of Flexible Budgeting

The flexible budget is an appealing concept. Several advantages are noted below.

 Usage in Variable Cost Environment

 The flexible budget is especially useful in businesses where costs are closely aligned
with the level of business activity, such as a retail environment where overhead can
be segregated and treated as a fixed cost, while the cost of merchandise is directly
linked to revenues.

 Performance Measurement
 Master Budget

What is a Master Budget?

The master budget is the aggregation of all lower-level budgets produced by a company's
various functional areas, and also includes budgeted financial statements, a cash forecast,
and a financing plan. The master budget is typically presented in either a monthly or
quarterly format, and usually covers a company's entire fiscal year. An explanatory text may
be included with the master budget, which explains the company's strategic direction, how
the master budget will assist in accomplishing specific goals, and the management actions
needed to achieve the budget. There may also be a discussion of the headcount changes that
are required to achieve the budget.

A master budget is the central planning tool that a management team uses to direct the
activities of a corporation, as well as to judge the performance of its various responsibility
centers. It is customary for the senior management team to review a number of iterations of
the master budget and incorporate modifications until it arrives at a budget that allocates
funds to achieve the desired results. Hopefully, a company uses participative budgeting to
arrive at this final budget, but it may also be imposed on the organization by senior
management, with little input from other employees.

The budgets that roll up into the master budget include:

 Direct labor budget

 Direct materials budget

 Ending finished goods budget

 Manufacturing overhead budget

 Production budget

 Sales budget

 Selling and administrative expense budget

 The selling and administrative expense budget may be further subdivided into budgets for
individual departments, such as the accounting, engineering, facilities, and marketing
departments.

Once the master budget has been finalized, the accounting staff may enter it into the
company's accounting software, so that the software can issue financial reports comparing
budgeted and actual results.

Smaller organizations usually construct their master budgets using electronic spreadsheets.
However, spreadsheets may contain formula errors, and also have a difficult time
constructing a budgeted balance sheet. Larger organizations use budget-specific software,
which does not have these two problems.

Problems with the Master Budget

When a company implements a master budget, there is a strong tendency for senior
management to force the organization to closely adhere to it by including budget goals in
employee compensation plans. Doing so has the following effects:

 When compiling the budget, employees tend to estimate low sales and high expenses, so
that they can easily meet the budget and achieve their compensation plans.

 Forcing the organization to follow the budget requires a group of financial analysts who
track down and report on variances from the plan. This adds unnecessary overhead expense
to the business.

 Managers tend to ignore new business opportunities, because all resources are already
allocated toward attaining the budget, and their personal incentives are tied to the budget.

Thus, enforcing a master budget can skew the operational performance of a business.
Because of this problem, it may be better to employ the master budget as just a rough
guideline for management's near-term expectations for the business.
 (5) Explain: Net Present Value & I.R.R.

What is Net Present Value (NPV)?

Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the
entire life of an investment discounted to the present. NPV analysis is a form of intrinsic
valuation and is used extensively across finance and accounting for determining the value of a
business, investment security, capital project, new venture, cost reduction program, and anything
that involves cash flow.

NPV Formula

The formula for Net Present Value is:

Where:

 Z1 = Cash flow in time 1

 Z2 = Cash flow in time 2
 r = Discount rate
 X0 = Cash outflow in time 0 (i.e. the purchase price / initial investment)

Why is Net Present Value (NPV) Analysis Used?

NPV analysis is used to help determine how much an investment, project, or any series of cash
flows is worth. It is an all-encompassing metric, as it takes into account all revenues, expenses,
and capital costs associated with an investment in its Free Cash Flow (FCF).

In addition to factoring all revenues and costs, it also takes into account the timing of each cash
flow that can result in a large impact on the present value of an investment. For example, it’s
better to see cash inflows sooner and cash outflows later, compared to the opposite.
Why Are Cash Flows Discounted?

The cash flows in net present value analysis are discounted for two main reasons, (1) to adjust
for the risk of an investment opportunity, and (2) to account for the time value of money (TVM).

Negative vs. Positive Net Present Value

If the net present value of a project or investment, is negative it means the expected rate of return
that will be earned on it is less than the discount rate (required rate of return or hurdle rate). This
doesn’t necessarily mean the project will “lose money.” It may very well generate accounting
profit (net income), but since the rate of return generated is less than the discount rate, it is
considered to destroy value.  If the NPV is positive, it creates value.

Drawbacks of Net Present Value

While net present value (NPV) is the most commonly used method for evaluating investment
opportunities, it does have some drawbacks that should be carefully considered.

Key challenges to NPV analysis include:

 A long list of assumptions has to be made

 Sensitive to small changes in assumptions and drivers
 Easily manipulated to produce the desired output
 May not capture second- and third-order benefits/impacts (i.e., on other parts of a
business)
 Internal Rate Of Return

Capital budgeting is a function of management, which uses various techniques to assist in

decision making. Internal Rate of Return (IRR) is one such technique of capital budgeting. It is
the rate of return at which the net present value of a project becomes zero. They call it ‘internal’
because it does not take any external factor (like inflation) into consideration.

Introduction
The internal rate of return (IRR) is a discounting cash flow technique which gives a rate of return
earned by a project. The internal rate of return is the discounting rate where the total of initial
cash outlay and discounted cash inflows are equal to zero. In other words, it is the discounting
rate at which the net present value (NPV) is equal to zero.

How is the Internal Rate of Return computed?

For the computation of the internal rate of return, we use the same formula as NPV. To derive
the IRR, an analyst has to rely on trial and error method and cannot use analytical methods. With
automation, various software (like Microsoft Excel) is also available to calculate IRR. In Excel,
there is a financial function that uses cash flows at regular intervals for calculation.

The rate at which the cost of investment and the present value of future cash flows match will be
considered as the ideal rate of return. A project that can achieve this is a profitable project. In
other words, at this rate the cash outflows and the present value of inflows are equal, making the
project attractive.
How is IRR used for capital budgeting?
If the same costs apply for different projects, then the project with the highest IRR will be
selected. If an organization needs to choose between multiple investment options wherein the
cost of investment remains constant, then IRR will be used to rank the projects and select the
most profitable one. Ideally, the IRR higher than the cost of capital is selected.

In real life scenarios, since the investment in any project will be huge and will have a long-term
effect, an organization uses a combination of various techniques of capital budgeting like NPV,
IRR and payback period to select the best project.
What are the shortcomings of the method?

As mentioned earlier, IRR is widely used and adopted by many companies in combination with
other techniques for capital budgeting. However, this method has some shortcomings.
 IRR does not take into consideration the duration of the project. 
Example, if the company has to choose between two projects – Project A with IRR 15%
and duration is one year and Project B with IRR 20% and project duration is 5 years and
the cost of capital of the company is 10% – both the projects are profitable. If the
company selects Project B because it has a higher IRR it would be incorrect as the
duration of Project B is longer.
 IRR assumes that the cash flows are reinvested at the same rate as the project, instead of
the cost of capital. Hence, IRR may not give a true picture of the profitability.
 (6) Responsibility Acoounting

What is Responsibility Accounting?

Responsibility Accounting is a system of accounting where specific individuals are made
responsible for accounting in particular areas of cost control. In this accounting system,
responsibility is assigned based on knowledge and skills. If the costs increase, the person
assigned is held accountable and answerable.

Steps of Responsibility Accounting

Below are the steps involved in responsibility accounting.

1. Defining responsibility or cost center.

2. Tracking the actual performance of each responsibility center.
3. Comparing actual performance with the target performance.
4. Analyzing the variance between actual performance and target performance
5. Fixing responsibilities for each center after variance analysis
6. Communicating corrective actions to the individuals of each center

Types of Responsibility Center

Below are the types of responsibility centers.

#1 – Cost Center

This center consists of individuals responsible only for cost control. A person responsible for a
particular cost center is held accountable only for controllable expenses. Therefore, it is essential
to differentiate this center’s controllable and uncontrollable costs. The performance of each
center is evaluated by comparing the actual vs targeted price.

#2 – Revenue Center

The revenue center takes care of revenue, with the company’s sales teams being mainly
responsible.

#3 – Profit Center

A profit center refers to a center whose performance is measured in cost and revenue. Generally,
the company’s factory is treated as a profit center where raw material consumption is a cost and
finished product sold to other departments is revenue.
 #4 – Investment Center

A manager responsible for this center is responsible for utilizing the company’s assets in the best
manner to earn a good return on capital employed.
Advantages of Responsibility Accounting

Following are some benefits of responsibility accounting.

1. It establishes a system of control.

2. It is designed according to the organizational structure.
3. It is anchored to the budget to compare actual achievements with the budgeted data
4. It promotes the interest and awareness of in-office staff as they have to explain the deviation of
their assigned responsibility center.
5. It simplifies the performance report because it excludes items beyond the control of individuals.
6. It is helpful for top management to make an effective decision.

Disadvantages/Limitations of Responsibility Accounting

1. Generally, a prerequisite for establishing a successful responsibility accounting system like

proper identification of the responsibility center, an adequate delegation of work, and good
reporting are missing, making it difficult to establish this accounting system.
2. It requires a skilled workforce in each department, which increases its cost.
3. The responsibility accounting system applies only to controllable costs.
4. If the responsibility and objective are not adequately explained, the accounting system will fail to
give good results.

Conclusion

The responsibility accounting system is a mechanism by which costs and revenue are
accumulated and reported to the top management to make an effective decision. In addition, it
gives freedom to individuals to amplify their skills to reduce the cost and increase the
organization’s revenue.

In a responsibility accounting system, organizations divide their departments into different

responsibility centers, which help them focus on only those whose performance is not as per
target.