SJ |1

INDEX
Unit-1
Introduction-Meaning, Functions, Scope and Limitations of Management Accounting, Financial
Accounting vs. Management Accounting……………………………………………………………………………………..2

Unit-2
An orientation to Cost Accounting-Purpose of Cost Accounting, Elements of cost, Kinds of costing,
Classification of Costs, Methods of Cost variability……………………………………………………….……………..3

Unit-3
Break-Even Analysis-Meaning, Graphic presentation, Preparation of break-even charts and their
interpretation, Managerial uses of Break-even analysis………………………………………………..……………..6

Unit-4
Marginal Costing-Meaning of Marginal Cost, Analysis of Incremental costs and revenues,
Management Application of Marginal Income Accounting……………………………………………………………9

Unit-5
Activity Based Costing-Concept, main activities & their cost drivers, developing ABC System……...11

Unit-6
Budgeting-Definition of a budget, Kinds of budgets, Preparation of a Budget, Budgetary Control,
Flexible Budgeting, Zero Base Budgeting, Performance Budgeting…………………………………………..…..14

Unit-7
Standard Costing-Meaning, Types of Standard and their revision, Difference between budgeting
and standard costing. Kinds of Variances, Their use in making appraisal and fixing responsibility,
Procedure of setting standard cost – Material, Labour and Overhead………………………………………….17

Unit-8
Responsibility Centres-Cost Centres, Profit Centres and Investment Centres, Inter divisional
transfer pricing – concept and methods………………………………………………………………………………………20

Unit-9
Current issues-Social Accounting, Human Resource Accounting, Balance Score Card……………..……22
 SJ |2

Unit-1
Introduction-Meaning, Functions, Scope and Limitations of Management Accounting, Financial
Accounting vs. Management Accounting

1. Introduction to Management Accounting

Meaning:
Management Accounting, also known as managerial accounting, is the process of identifying,
measuring, analyzing, interpreting, and communicating financial information to managers for the
pursuit of an organization's goals. Unlike financial accounting, which focuses on providing
information to external stakeholders, management accounting is primarily concerned with providing
information to internal stakeholders, such as managers and decision-makers.

Functions:

 Planning: Assisting in the formulation of future plans and strategies.

 Controlling: Monitoring and controlling operations to ensure they align with plans.

 Decision Making: Providing data and analysis to support decision-making processes.

 Performance Evaluation: Assessing the performance of various departments, projects, or

products.

Scope:

 Cost Accounting: Tracking and managing costs.

 Budgeting: Preparing and managing budgets.

 Financial Analysis: Analyzing financial statements and performance metrics.

 Forecasting: Predicting future financial performance.

 Internal Auditing: Ensuring compliance and efficiency in operations.

Limitations:

 Reliance on Historical Data: Often relies on past data, which may not always be indicative of
future performance.

 Subjectivity: Involves estimates and judgments, which can introduce bias.

 Costly: Implementing and maintaining a management accounting system can be expensive.

 Not Mandatory: Unlike financial accounting, it is not required by law, so the extent of its use
can vary widely between organizations.

2. Financial Accounting vs. Management Accounting

Financial Accounting:

 Purpose: To provide financial information to external stakeholders like investors, creditors,

and regulatory authorities.

 Focus: Historical data and financial statements (Income Statement, Balance Sheet, Cash Flow
Statement).
 SJ |3

 Regulation: Governed by accounting standards and regulations (e.g., GAAP, IFRS).

 Time Frame: Typically focuses on past performance (quarterly or annually).

 Precision: Requires precision and adherence to strict guidelines.

Management Accounting:

 Purpose: To provide financial and non-financial information to internal stakeholders for

decision-making.

 Focus: Future-oriented, including budgets, forecasts, and performance metrics.

 Regulation: Not governed by external standards; more flexible and tailored to the
organization's needs.

 Time Frame: Can be both short-term and long-term, depending on the decision-making
needs.

 Precision: Can include estimates and projections, which may not be as precise as financial
accounting data.

Examples:

 Financial Accounting Example: A company prepares its annual financial statements to report
its financial performance to shareholders and regulatory bodies.

 Management Accounting Example: A company uses cost-volume-profit analysis to

determine the break-even point for a new product line, helping managers decide whether to
proceed with the launch.

Summary

 Management Accounting is internal, future-oriented, and flexible, focusing on aiding

managerial decision-making.

 Financial Accounting is external, historical, and regulated, focusing on providing a true and
fair view of the company's financial performance to external stakeholders.

Unit-2
An orientation to Cost Accounting-Purpose of Cost Accounting, Elements of cost, Kinds of costing,
Classification of Costs, Methods of Cost variability

1. An Orientation to Cost Accounting

Purpose of Cost Accounting:

Cost Accounting is a branch of accounting that focuses on capturing a company's total cost of
production by assessing the variable costs of each step of production as well as fixed costs, such as a
lease expense. The primary purposes of cost accounting include:

 Cost Control: Helps in controlling costs by setting standards and comparing actual costs with
standard costs.
 SJ |4

 Cost Reduction: Identifies areas where costs can be reduced without affecting the quality of
the product.

 Decision Making: Provides essential data for managerial decision-making, such as pricing,
budgeting, and investment decisions.

 Profitability Analysis: Helps in determining the profitability of products, services, or

departments.

 Budgeting and Forecasting: Assists in the preparation of budgets and forecasts for future
periods.

2. Elements of Cost

The total cost of a product or service is generally classified into three main elements:

 Material Costs: The cost of raw materials used in the production process.

o Direct Materials: Materials that can be directly traced to the product (e.g., wood in
furniture manufacturing).

o Indirect Materials: Materials that cannot be directly traced to the product (e.g., glue,
nails).

 Labor Costs: The cost of human effort used in the production process.

o Direct Labor: Labor that can be directly traced to the product (e.g., wages of
assembly line workers).

o Indirect Labor: Labor that cannot be directly traced to the product (e.g., salaries of
supervisors).

 Overhead Costs: All other costs associated with the production process that are not directly
traceable to the product.

o Factory Overhead: Includes indirect materials, indirect labor, and other indirect costs
like utilities, depreciation, and maintenance.

3. Kinds of Costing

Costing can be classified into various types based on the nature and purpose:

 Job Costing: Used when products are manufactured based on specific customer orders (e.g.,
custom furniture).

 Process Costing: Used when products are manufactured in continuous processes (e.g., oil
refining, chemical manufacturing).

 Batch Costing: Used when products are manufactured in batches (e.g., pharmaceuticals,
bakeries).

 Contract Costing: Used for long-term contracts (e.g., construction projects).

 Operating Costing: Used in service industries (e.g., transportation, hospitality).

4. Classification of Costs
 SJ |5

Costs can be classified in various ways depending on the purpose:

 By Nature:

o Fixed Costs: Costs that do not change with the level of production (e.g., rent,
salaries).

o Variable Costs: Costs that vary directly with the level of production (e.g., raw
materials, direct labor).

o Semi-variable Costs: Costs that have both fixed and variable components (e.g.,
utilities).

 By Function:

o Production Costs: Costs incurred in the manufacturing process.

o Administrative Costs: Costs related to the general administration of the business.

o Selling and Distribution Costs: Costs related to selling and distributing the product.

 By Behavior:

o Direct Costs: Costs that can be directly traced to a product (e.g., direct materials,
direct labor).

o Indirect Costs: Costs that cannot be directly traced to a product (e.g., overheads).

5. Methods of Cost Variability

Understanding how costs behave is crucial for effective cost management. The main methods of cost
variability include:

 Fixed Costs: These costs remain constant regardless of the level of production or sales.
Examples include rent, salaries, and insurance.

 Variable Costs: These costs vary directly with the level of production. Examples include raw
materials and direct labor.

 Semi-variable Costs: These costs have both fixed and variable components. For example, a
utility bill may have a fixed base charge plus a variable charge based on usage.

 Step Costs: These costs remain fixed over a range of production levels but jump to a higher
level once a certain threshold is crossed. For example, additional supervisors may be needed
once production exceeds a certain level.

Examples:

 Fixed Cost Example: A company pays $10,000 per month in rent for its factory, regardless of
how many units it produces.

 Variable Cost Example: A company

spends 5onrawmaterialsforeachunitproduced.Ifitproduces1,000units,thetotalvariablecostis5
onrawmaterialsforeachunitproduced.Ifitproduces1,000units,thetotalvariablecostis5,000.
 SJ |6

 Semi-variable Cost Example: A company's electricity bill

is 1,000permonthplus1,000permonthplus0.10 per unit produced. If it produces 2,000 units,
the total electricity cost is 1,000+(1,000+(0.10 * 2,000) = $1,200.

Unit-3
Break-Even Analysis-Meaning, Graphic presentation, Preparation of break-even charts and their
interpretation, Managerial uses of Break-even analysis,

1. Meaning of Break-Even Analysis

Break-Even Analysis is a financial tool used to determine the point at which a business's total
revenue equals its total costs, resulting in neither profit nor loss. This point is called the break-even
point (BEP). It helps businesses understand the minimum level of sales or production required to
cover all costs.

 Key Components:

o Fixed Costs: Costs that do not change with the level of production or sales (e.g., rent,
salaries).

o Variable Costs: Costs that vary directly with production or sales (e.g., raw materials,
direct labor).

o Total Revenue: The total income from selling goods or services.

o Break-Even Point (BEP): The level of sales or production where total revenue equals
total costs.

 Formula:

Break-Even Point (Units)=Fixed CostsSelling Price per Unit−Variable Cost per UnitBreak-Even Point (U
nits)=Selling Price per Unit−Variable Cost per UnitFixed CostsBreak-Even Point (Sales)=Break-Even Poi
nt (Units)×Selling Price per UnitBreak-Even Point (Sales)=Break-Even Point (Units)×Selling Price per U
nit

2. Graphic Presentation of Break-Even Analysis

A break-even chart is a graphical representation of the relationship between costs, revenue, and the
level of production or sales. It helps visualize the break-even point and the profit or loss at different
levels of activity.

 Components of a Break-Even Chart:

1. X-Axis (Horizontal Axis): Represents the quantity of units produced or sold.

2. Y-Axis (Vertical Axis): Represents costs and revenue in monetary terms.

3. Fixed Cost Line: A horizontal line showing fixed costs, which remain constant
regardless of production levels.

4. Total Cost Line: Starts at the fixed cost level and slopes upward, reflecting the
addition of variable costs as production increases.
 SJ |7

5. Total Revenue Line: Starts at the origin (0,0) and slopes upward, representing the
revenue generated from sales.

6. Break-Even Point: The intersection of the total cost line and the total revenue line.

3. Preparation of Break-Even Charts

Here’s how to prepare a break-even chart:

1. Plot Fixed Costs: Draw a horizontal line on the Y-axis representing fixed costs.

2. Plot Total Costs: Starting from the fixed cost line, plot the total cost line, which increases as
variable costs are added with higher production.

3. Plot Total Revenue: Starting from the origin, plot the total revenue line, which increases with
higher sales.

4. Identify Break-Even Point: The point where the total cost line and total revenue line
intersect is the break-even point.

5. Label the Chart: Clearly label the axes, lines, and break-even point.

4. Interpretation of Break-Even Charts

 Below Break-Even Point: The business is operating at a loss because total costs exceed total
revenue.

 At Break-Even Point: The business is covering all its costs but making no profit.

 Above Break-Even Point: The business is making a profit because total revenue exceeds total
costs.

5. Managerial Uses of Break-Even Analysis

Break-Even Analysis is a powerful tool for managerial decision-making. Its uses include:

1. Determining Profitability:

o Helps managers understand the level of sales or production required to achieve

profitability.

o Example: A company wants to know how many units it needs to sell to cover its fixed
costs of 50,000,withasellingpriceof50,000,withasellingpriceof20 per unit and variable
costs of $10 per unit. Using the formula:

BEP (Units)=50,00020−10=5,000 unitsBEP (Units)=20−1050,000=5,000 units

The company must sell 5,000 units to break even.

2. Pricing Decisions:
 SJ |8

o Helps in setting prices by understanding the impact of price changes on the break-
even point.

o Example: If the selling price is reduced to $15, the break-even point increases,
requiring more units to be sold to cover costs.

3. Cost Control:

o Identifies the impact of fixed and variable costs on profitability.

o Example: Reducing fixed costs (e.g., renegotiating rent) lowers the break-even point,
making it easier to achieve profitability.

4. Target Profit Analysis:

o Helps determine the sales volume required to achieve a specific profit target.

o Example: If the company wants a profit of $20,000, the required sales volume can be
calculated as:

Required Sales=Fixed Costs+Target ProfitSelling Price per Unit−Variable Cost per UnitRequired Sales=
Selling Price per Unit−Variable Cost per UnitFixed Costs+Target Profit

5. Evaluating Business Scenarios:

o Assesses the impact of changes in costs, prices, or production levels on profitability.

o Example: If variable costs increase due to rising raw material prices, the break-even
point will rise, requiring higher sales to maintain profitability.

6. Investment Decisions:

o Helps evaluate the feasibility of new projects or expansions by estimating the break-
even point.

o Example: A company considering a new product line can use break-even analysis to
determine if the expected sales volume justifies the investment.

Example of Break-Even Analysis

Let’s consider a company with the following data:

 Fixed Costs: $30,000

 Variable Cost per Unit: $5

 Selling Price per Unit: $10

1. Calculate Break-Even Point (Units):

BEP (Units)=30,00010−5=6,000 unitsBEP (Units)=10−530,000=6,000 units

2. Calculate Break-Even Point (Sales):

BEP (Sales)=6,000×10=$60,000BEP (Sales)=6,000×10=$60,000

3. Interpretation:
 SJ |9

o The company must sell 6,000 units or generate $60,000 in revenue to break even.

o Selling more than 6,000 units will result in a profit, while selling fewer will result in a
loss.

Summary

Break-Even Analysis is a vital tool for managers to understand the relationship between costs,
revenue, and profitability. It helps in:

 Determining the minimum sales or production level required to cover costs.

 Making informed pricing, cost control, and investment decisions.

 Evaluating business scenarios and setting profit targets.

Unit-4
Marginal Costing-Meaning of Marginal Cost, Analysis of Incremental costs and revenues,
Management Application of Marginal Income Accounting
1. Marginal Costing - The Core Idea

Marginal costing (also known as variable costing) is an accounting technique that focuses on
classifying costs as either variable or fixed. It's a way of looking at how costs change with changes in
production volume. The key principle is that only variable costs are included in the cost of a product.
Fixed costs are treated as period expenses and are written off in the period they are incurred.

 Variable Costs: These costs change directly and proportionally with the level of production.
Examples include:

o Direct materials (raw materials used in production)

o Direct labor (wages paid to workers directly involved in production)

o Variable overhead (electricity used to run machines, consumable supplies)

 Fixed Costs: These costs remain constant regardless of changes in production volume within
a relevant range. Examples include:

o Rent

o Salaries of administrative staff

o Depreciation of machinery (if calculated on a time basis)

o Insurance premiums

Example:

Imagine a company that makes chairs.

 Variable Cost per chair: ₹100 (wood, fabric, labor)

 Fixed Costs per month: ₹10,000 (rent, salaries)

 S J | 10

If they produce 100 chairs:

 Total Variable Cost: 100 chairs * ₹100/chair = ₹10,000

 Total Fixed Cost: ₹10,000

 Total Cost (using absorption costing, which includes both): ₹20,000

 Cost per Chair (using absorption costing): ₹200

If they produce 200 chairs:

 Total Variable Cost: 200 chairs * ₹100/chair = ₹20,000

 Total Fixed Cost: ₹10,000 (remains the same)

 Total Cost (using absorption costing): ₹30,000

 Cost per Chair (using absorption costing): ₹150

Notice how the cost per chair changes with production volume under absorption costing. Under
marginal costing, the cost per chair remains constant at ₹100, and the fixed costs are treated
separately.

2. Analysis of Incremental Costs and Revenues

This is where marginal costing really shines. It helps in decision-making by focusing on the
incremental (or marginal) impact of a decision. "Incremental" means the change in costs or revenues
resulting from a specific action.

Example:

The chair company is considering taking a special order for 50 chairs at ₹150 each. Should they
accept the order?

 Marginal Revenue: 50 chairs * ₹150/chair = ₹7,500

 Marginal Cost: 50 chairs * ₹100/chair = ₹5,000 (we only consider the variable cost)

 Incremental Profit: ₹7,500 - ₹5,000 = ₹2,500

Since the incremental profit is positive, the company should accept the order, even if the ₹150 price
is lower than their usual selling price. Why? Because the fixed costs are already covered by their
existing production. The special order only needs to cover its variable costs and contribute
something towards profit.

Key Point: Marginal costing helps to isolate the relevant costs and revenues for a particular decision,
making the analysis clearer.

3. Management Applications of Marginal Income Accounting

Marginal costing is a powerful tool for management decision-making in several areas:

 Pricing Decisions: As seen in the example above, marginal costing helps in setting prices for
special orders, especially when there is spare capacity. It can also be used to determine the
optimal sales mix when a company sells multiple products with different contribution
margins (selling price per unit minus variable cost per unit).
 S J | 11

 Make-or-Buy Decisions: When a company decides whether to manufacture a component

internally or outsource it, marginal costing helps compare the variable costs of making the
component with the purchase price from an external supplier.

 Product Mix Decisions: When a company sells multiple products, marginal costing helps
determine the most profitable product mix by focusing on the contribution margin per unit
of each product. The product with the highest contribution margin per unit should be
prioritized.

 Break-Even Analysis: Marginal costing is the foundation for break-even analysis, which
calculates the sales volume required to cover all costs (both fixed and variable) and start
making a profit. The break-even point in units can be calculated as:

Break-Even Point (Units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

 Inventory Valuation: Unlike absorption costing, marginal costing does not allocate fixed
manufacturing overhead to inventory. This can lead to more accurate profit reporting,
especially in situations where production and sales volumes fluctuate. Under absorption
costing, profits can be artificially inflated or deflated depending on inventory levels.

Limitations of Marginal Costing:

 External Reporting: Generally Accepted Accounting Principles (GAAP) often require

absorption costing for external reporting (financial statements).

 Long-Term Decisions: While marginal costing is excellent for short-term decisions, fixed costs
become more relevant in the long run. Ignoring fixed costs in long-term decisions can be
misleading.

 Difficulty in Cost Segregation: Sometimes, it can be challenging to accurately separate costs

into purely variable and fixed components. Some costs might be semi-variable (having both
fixed and variable elements).

In summary, marginal costing is a valuable management accounting technique that focuses on the
behavior of costs and their impact on profitability at different levels of activity. It's especially useful
for short-term decision-making, pricing, product mix decisions, and break-even analysis. While it has
limitations, its focus on incremental costs and revenues provides a clear view of the impact of
management decisions.

Unit-5
Activity Based Costing-Concept, main activities and their cost drivers, developing ABC System.
1. Activity-Based Costing (ABC) - The Core Concept

Traditional costing systems often allocate overhead costs based on volume-based drivers like direct
labor hours or machine hours. ABC, on the other hand, recognizes that activities drive costs. It
assigns costs to products or services based on the activities they consume. This provides a more
accurate picture of the true cost of a product or service, especially in complex manufacturing
environments with diverse products and overhead costs.
 S J | 12

The Basic Idea: Instead of simply allocating overhead based on volume, ABC identifies the key
activities performed in an organization, determines the cost of each activity, and then assigns those
activity costs to products or services based on how much of each activity they require.

2. Main Activities and Their Cost Drivers

Activities are the actions taken within an organization to produce goods or services. Cost drivers are
the factors that cause the cost of an activity to change.

Here's a breakdown with examples:

Activity Description Cost Driver Examples

Receiving, entering, and processing Number of orders, number of order

Order Processing
customer orders. lines

Material Moving raw materials and work-in- Number of material moves, weight of
Handling progress within the factory. materials handled

Machine Setup Preparing machines for production runs. Number of setups, setup time

Machine hours, number of production

Production Run Operating machines to produce goods.
runs

Inspecting products to ensure they meet Number of inspections, number of units

Quality Control
quality standards. inspected

Number of units packaged, type of

Packaging Preparing finished goods for shipment.
packaging

Number of shipments, weight of

Shipping Sending finished goods to customers.
shipments

Providing support to customers after the Number of customer calls, number of

Customer Service
sale. customer complaints

Engineering
Modifying product designs. Number of engineering change orders
Changes

Export to Sheets

Example:

Imagine a company that produces two types of products: Standard Widgets and Deluxe Widgets.
Deluxe Widgets require more complex setups and more quality inspections than Standard Widgets.

 Traditional Costing: Overhead is allocated based on machine hours. Deluxe Widgets use
more machine hours, so they are allocated a larger share of overhead.

 ABC: The company identifies the following activities and cost drivers:

o Setup: Number of setups

o Inspection: Number of inspections

o Machine Operation: Machine hours

 S J | 13

They then determine the cost per setup and the cost per inspection. Deluxe Widgets will be assigned
more setup and inspection costs than Standard Widgets, reflecting the actual resources they
consume.

3. Developing an ABC System

Developing an ABC system involves several steps:

1. Identify the Activities: Determine the major activities performed in the organization. This
often involves interviewing employees and observing processes.

2. Identify Cost Drivers: For each activity, identify the cost driver(s) that have a strong
correlation with the activity's cost.

3. Calculate Activity Cost Rates: Determine the cost per unit of each cost driver. This is done by
dividing the total cost of the activity by the total quantity of the cost driver.

Example: If the total cost of the "Setup" activity is ₹100,000 and there were 1,000 setups, the activity
cost rate for setups is ₹100 per setup.

4. Assign Costs to Products or Services: Multiply the activity cost rate by the quantity of the
cost driver consumed by each product or service.

Example: If Deluxe Widgets require 5 setups and the setup cost rate is ₹100 per setup, the setup cost
assigned to Deluxe Widgets is 5 setups * ₹100/setup = ₹500.

5. Calculate Total Product/Service Cost: Sum the costs of all activities assigned to a product or
service to arrive at the total cost. Add direct materials and direct labor costs to this total to
get the full product/service cost.

Example (Numerical):

Let's say the company produces 100 Standard Widgets and 50 Deluxe Widgets.

Cost Driver Cost Driver Cost

Activity Cost Cost Assigned
Activity Cost Driver Quantity Quantity Assigned
Rate (Standard)
(Standard) (Deluxe) (Deluxe)

Number of
Setup 10 20 ₹100/setup ₹1,000 ₹2,000
Setups

Number of
Inspection 50 100 ₹50/inspection ₹2,500 ₹5,000
Inspections

Machine Machine ₹20/machine

200 300 ₹4,000 ₹6,000
Operation Hours hour

Total
₹7,500 ₹13,000
Overhead

Export to Sheets

If direct materials and labor cost ₹50 per Standard Widget and ₹75 per Deluxe Widget:

 Total Cost (Standard Widget): ₹50 + (₹7,500/100) = ₹125

 S J | 14

 Total Cost (Deluxe Widget): ₹75 + (₹13,000/50) = ₹335

Benefits of ABC:

 More Accurate Costing: Provides a more realistic picture of product costs, leading to better
pricing and product mix decisions.

 Improved Decision Making: Helps managers understand the drivers of costs and identify
areas for improvement.

 Better Cost Control: By understanding activity costs, managers can focus on managing the
activities that drive those costs.

Challenges of ABC:

 Complexity: Implementing ABC can be complex and time-consuming.

 Data Requirements: ABC requires detailed data on activities and cost drivers.

 Costly Implementation: The initial implementation of an ABC system can be expensive.

Despite these challenges, ABC provides a powerful framework for understanding and managing costs
in complex organizations. It moves beyond simple volume-based cost allocation to provide a more
accurate and insightful view of how resources are consumed.

Unit-6
Budgeting-Definition of a budget, Kinds of budgets, Preparation of a Budget, Budgetary Control,
Flexible Budgeting, Zero Base Budgeting, Performance Budgeting
Budgeting is a fundamental aspect of financial management, whether for individuals, businesses, or
governments. It's a process of planning how to spend money over a specific period. Let's break down
the key concepts:

1. Definition of a Budget

A budget is a financial plan that estimates revenues (income) and expenses (spending) for a future
period. It's a roadmap for how to allocate resources to achieve specific goals. A well-crafted budget
serves as a control mechanism, allowing you to track actual spending against the plan and make
adjustments as needed.

2. Kinds of Budgets

Budgets can be classified in various ways, depending on the criteria used:

 Based on Time Period:

o Short-term budgets: Cover a short period, typically less than a year (e.g., monthly,
quarterly).

o Long-term budgets: Span a longer period, often several years (e.g., capital
expenditure budgets for major projects).

 Based on Flexibility:

o Fixed budgets: Remain unchanged throughout the budget period, regardless of

changes in activity levels.
 S J | 15

o Flexible budgets: Adjusted to reflect changes in activity levels or other relevant

factors.

 Based on Scope:

o Master budget: A comprehensive budget that encompasses all aspects of an

organization's operations.

o Functional budgets: Focus on specific areas or departments within an organization

(e.g., sales budget, production budget).

 Based on Approach:

o Zero-based budgeting: Requires justifying every expenditure from scratch, regardless

of past budgets.

o Incremental budgeting: Bases the budget on the previous period's budget, with
adjustments for expected changes.

o Performance budgeting: Focuses on the outcomes or results achieved with the

budgeted funds.

3. Preparation of a Budget

The process of preparing a budget typically involves the following steps:

1. Forecasting: Estimating future revenues and expenses based on historical data, market
trends, and other relevant factors.

2. Setting Objectives: Defining the goals that the budget is intended to achieve (e.g., increase
sales, reduce costs).

3. Developing Assumptions: Identifying the key assumptions that underlie the budget (e.g.,
inflation rate, economic growth).

4. Creating the Budget: Detailing the planned revenues and expenses for each period, often
using spreadsheets or specialized budgeting software.

5. Review and Approval: Reviewing the budget with relevant stakeholders and obtaining
necessary approvals.

4. Budgetary Control

Budgetary control is the process of monitoring actual performance against the budget and taking
corrective action when necessary. It involves:

1. Comparing Actual Results with the Budget: Regularly comparing actual revenues and
expenses with the budgeted figures.

2. Analyzing Variances: Identifying and analyzing any significant differences between actual
and budgeted amounts (variances).

3. Taking Corrective Action: Implementing measures to address unfavorable variances and

bring performance back in line with the budget.

5. Flexible Budgeting
 S J | 16

Flexible budgeting recognizes that actual results may differ from the initial budget assumptions. It
involves creating a budget that can be adjusted to reflect changes in activity levels or other relevant
factors. This allows for a more accurate comparison of actual performance with the budget, as it
takes into account any changes in the operating environment.

Example:

Imagine a company that manufactures toys. They have a fixed budget for producing 10,000 toys per
month. However, due to increased demand, they actually produce 12,000 toys in a particular month.
A flexible budget would be created to reflect this higher production level, adjusting variable costs
accordingly. This would provide a more meaningful comparison of actual costs with the budget.

6. Zero-Based Budgeting (ZBB)

ZBB is a budgeting approach that requires justifying every expenditure from scratch, regardless of
past budgets. It starts with a "zero base" and requires each department or program to justify its
funding requests for the upcoming period. ZBB can be more time-consuming than other budgeting
methods, but it can also lead to significant cost savings by forcing organizations to critically evaluate
their spending.

7. Performance Budgeting

Performance budgeting focuses on the outcomes or results achieved with the budgeted funds. It
links budget allocations to specific performance goals and measures. This approach emphasizes
accountability and efficiency by measuring the effectiveness of spending in achieving desired results.

Example:

A government agency might use performance budgeting to allocate funds to education programs
based on specific outcomes, such as student test scores or graduation rates. This approach
encourages the agency to focus on achieving results rather than simply spending money.

Key Benefits of Budgeting:

 Planning and Control: Budgets provide a framework for planning and controlling financial
resources.

 Resource Allocation: Budgets help allocate resources effectively to achieve strategic goals.

 Performance Evaluation: Budgets serve as a benchmark for evaluating actual performance.

 Communication and Coordination: Budgets facilitate communication and coordination

among different departments or individuals.

 Accountability: Budgets promote accountability by assigning responsibility for achieving

specific financial targets.

Budgeting is an essential tool for managing finances effectively, whether for individuals, businesses,
or governments. It provides a structured approach to planning, controlling, and evaluating financial
activities, ultimately leading to better financial outcomes.

Unit-7
Standard Costing-Meaning, Types of Standard and their revision, Difference between budgeting
 S J | 17

and standard costing. Kinds of Variances, Their use in making appraisal and fixing responsibility,
Procedure of setting standard cost – Material, Labour and Overhead.
1. Standard Costing - The Core Idea

Standard costing is a cost accounting technique that involves setting predetermined target costs,
called "standards," for various aspects of production. These standards represent the expected cost of
producing a unit or performing a task under efficient operating conditions. Standard costs serve as
benchmarks against which actual costs are compared, allowing businesses to identify variances and
take corrective actions.

2. Types of Standards and Their Revision

Standards can be classified into different types based on their level of rigor and the time frame they
cover:

 Ideal Standards: Represent perfect efficiency and are achievable only under the most
favorable conditions. These standards are rarely used as they can be demotivating.

 Attainable Standards: Reflect efficient but achievable performance. They are challenging yet
realistic and encourage employees to strive for improvement.

 Basic Standards: Remain unchanged over a long period and are used to track trends in costs.

 Current Standards: Are based on current operating conditions and are revised periodically to
reflect changes in factors like material prices, labor rates, and technology.

Standard Revision:

Standards should be reviewed and revised periodically to ensure they remain relevant and useful.
Factors that may necessitate standard revision include:

 Changes in material prices or labor rates

 Technological advancements

 Changes in product design or specifications

 Improvements in efficiency or productivity

 Changes in market conditions

3. Difference Between Budgeting and Standard Costing

While both budgeting and standard costing involve planning and control, they differ in their focus:

Feature Budgeting Standard Costing

Focus Overall financial plan for the organization Cost per unit or activity

Broader, encompassing all revenues &

Scope Narrower, focusing on specific costs
expenses

Time Frame Can be short-term or long-term Usually short-term

Level of Detail Less detailed More detailed

Purpose Planning, coordination, and control Cost control, performance evaluation

 S J | 18

Export to Sheets

4. Kinds of Variances

Variances are the differences between actual costs and standard costs. They can be favorable (actual
cost is lower than standard cost) or unfavorable (actual cost is higher than standard cost).

 Material Variances:

o Material Price Variance: Measures the difference between the actual price paid for
materials and the standard price.

o Material Usage Variance: Measures the difference between the actual quantity of
materials used and the standard quantity allowed for actual output.

 Labor Variances:

o Labor Rate Variance: Measures the difference between the actual labor rate paid
and the standard labor rate.

o Labor Efficiency Variance: Measures the difference between the actual labor hours
worked and the standard labor hours allowed for actual output.

 Overhead Variances:

o Variable Overhead Spending Variance: Measures the difference between actual

variable overhead costs and the standard variable overhead costs for actual hours.

o Variable Overhead Efficiency Variance: Measures the difference between the actual
hours worked and the standard hours allowed for actual output, multiplied by the
standard variable overhead rate.

o Fixed Overhead Budget Variance: Measures the difference between actual fixed
overhead costs and budgeted fixed overhead costs.

o Fixed Overhead Volume Variance: Measures the difference between budgeted fixed
overhead costs and absorbed fixed overhead costs.

5. Use of Variances in Appraisal and Responsibility Fixing

Variance analysis helps in:

 Performance Appraisal: Identifying areas of strength and weakness in cost control.

 Responsibility Fixing: Determining who is accountable for variances. For example, a material
price variance might be the responsibility of the purchasing department, while a labor
efficiency variance might be the responsibility of the production supervisor.

 Corrective Action: Taking steps to address unfavorable variances and improve cost
performance.

6. Procedure of Setting Standard Cost

Setting standard costs involves a systematic process for each cost element:
 S J | 19

a) Material Standards:

1. Determine Standard Price: Consider factors like current market prices, supplier relationships,
and expected price trends.

2. Determine Standard Quantity: Consider factors like product design, material yield, and
expected waste.

Example:

 Standard price of raw material X: ₹10 per kg

 Standard quantity of raw material X required per unit of product Y: 2 kg

 Standard material cost per unit of product Y: ₹10/kg * 2 kg = ₹20

b) Labor Standards:

1. Determine Standard Rate: Consider factors like prevailing wage rates, labor agreements, and
skill levels.

2. Determine Standard Hours: Consider factors like production methods, equipment efficiency,
and worker skill.

Example:

 Standard labor rate: ₹20 per hour

 Standard labor hours required per unit of product Y: 3 hours

 Standard labor cost per unit of product Y: ₹20/hour * 3 hours = ₹60

c) Overhead Standards:

1. Determine Standard Variable Overhead Rate: Divide budgeted variable overhead costs by
budgeted activity level (e.g., direct labor hours).

2. Determine Standard Fixed Overhead Rate: Divide budgeted fixed overhead costs by
budgeted activity level.

Example:

 Budgeted variable overhead costs: ₹100,000

 Budgeted direct labor hours: 10,000 hours

 Standard variable overhead rate: ₹100,000 / 10,000 hours = ₹10 per direct labor hour

 Budgeted fixed overhead costs: ₹50,000

 Budgeted direct labor hours: 10,000 hours

 Standard fixed overhead rate: ₹50,000 / 10,000 hours = ₹5 per direct labor hour

Unit-8
Responsibility Centres-Cost Centres, Profit Centres and Investment Centres, Inter divisional
 S J | 20

transfer pricing – concept and methods.

1. Responsibility Centers

A responsibility center is a segment or unit within an organization for which a manager is held
accountable. It's a way to decentralize decision-making and improve accountability by assigning
specific responsibilities to different managers. There are three main types of responsibility centers:

 Cost Centers: A cost center is a segment of an organization that is responsible for controlling
costs. The manager of a cost center is held accountable for minimizing costs while achieving
a certain level of output or service. Examples of cost centers include:

o Production departments in a manufacturing company

o Maintenance departments

o Administrative departments (e.g., HR, accounting)

Example: The production department of a car manufacturer is a cost center. The manager of this
department is responsible for controlling the costs of production, such as raw materials, labor, and
overhead, while meeting the production targets set by the company.

 Profit Centers: A profit center is a segment of an organization that is responsible for both
generating revenue and controlling costs. The manager of a profit center is held accountable
for maximizing the profit of the segment. Examples of profit centers include:

o Individual product lines

o Geographic divisions

o Retail stores

Example: A clothing company might have separate profit centers for its men's wear, women's wear,
and children's wear lines. Each profit center manager is responsible for maximizing the profit
generated by their respective product line.

 Investment Centers: An investment center is a segment of an organization that is responsible

for generating revenue, controlling costs, and managing the assets invested in the segment.
The manager of an investment center is held accountable for maximizing the return on
investment (ROI) of the segment. Examples of investment centers include:

o Subsidiaries of a company

o Divisions of a company

Example: A large conglomerate might have different divisions, such as a consumer goods division, an
industrial products division, and a financial services division. Each division is an investment center,
and its manager is responsible for maximizing the ROI of the division.

2. Interdivisional Transfer Pricing

Interdivisional transfer pricing refers to the pricing of goods or services transferred between different
divisions within the same organization. It's a critical issue in decentralized organizations where
divisions operate as semi-autonomous units. The transfer price affects the profitability of both the
selling and buying divisions, and it can have a significant impact on the overall profitability of the
organization.
 S J | 21

Methods of Interdivisional Transfer Pricing:

There are several methods used for setting interdivisional transfer prices, each with its own
advantages and disadvantages:

 Market Price Method: This method uses the prevailing market price for the goods or
services being transferred as the transfer price. It's generally considered the most objective
and fair method, as it reflects the opportunity cost of the goods or services. However, it can
only be used if there is an active external market for the goods or services.

Example: If Division A manufactures a component that can be sold in the open market for ₹100, and
Division B needs this component for its production, the market price method would set the transfer
price at ₹100.

 Cost-Based Methods: These methods use some measure of cost as the basis for the transfer
price. Common cost-based methods include:

o Full Cost Method: This method includes all costs of production (both fixed and
variable) in the transfer price.

o Variable Cost Method: This method includes only the variable costs of production in
the transfer price.

o Cost Plus Method: This method adds a markup to the cost of production to arrive at
the transfer price.

Example: If Division A's full cost of producing a component is ₹80, the full cost method would set the
transfer price at ₹80. If the variable cost is ₹60, the variable cost method would set the transfer price
at ₹60. If Division A adds a 20% markup to the full cost, the cost plus method would set the transfer
price at ₹96 (₹80 + ₹80 * 20%).

 Negotiated Price Method: This method involves negotiations between the buying and selling
divisions to arrive at a mutually agreeable transfer price. It allows for flexibility and can
consider the specific circumstances of each division. However, it can also lead to conflicts
and may not always result in the most optimal price for the organization as a whole.

Example: Division A and Division B might negotiate a transfer price for a component based on their
respective costs, market conditions, and the potential impact on their profitability.

Considerations in Setting Transfer Prices:

When setting interdivisional transfer prices, organizations need to consider several factors, including:

 Goal Congruence: The transfer price should align with the overall goals of the organization
and encourage divisions to act in the best interests of the company as a whole.

 Performance Evaluation: The transfer price should not distort the performance evaluation of
the divisions involved.

 Tax Implications: Transfer pricing can have tax implications, especially for multinational
companies.

 Administrative Costs: The method used for transfer pricing should be cost-effective to
administer.
 S J | 22

Interdivisional transfer pricing is a complex issue with no one-size-fits-all solution. Organizations

need to carefully consider the various methods available and choose the one that best suits their
specific circumstances and objectives.

Unit-9
Current issues-Social Accounting, Human Resource Accounting, Balance Score Card
1. Social Accounting

Social accounting, also known as socio-economic accounting or corporate social responsibility (CSR)
accounting, is a framework for measuring and reporting on an organization's social and
environmental performance, in addition to its financial performance. It goes beyond traditional
accounting, which primarily focuses on financial aspects, and considers the impact of an
organization's activities on various stakeholders, including:

 Employees: Employee well-being, safety, training, and diversity.

 Customers: Product safety, customer satisfaction, and ethical marketing practices.

 Community: Environmental impact, community involvement, and job creation.

 Environment: Resource consumption, pollution, and waste management.

Why is Social Accounting Important?

 Increased Stakeholder Expectations: Stakeholders, including investors, customers, and the

public, are increasingly interested in an organization's social and environmental
performance.

 Improved Decision-Making: Social accounting provides information that can help

organizations make more informed decisions about their social and environmental impact.

 Enhanced Reputation: Organizations with strong social and environmental performance are
often seen as more responsible and trustworthy, which can enhance their reputation.

 Long-Term Sustainability: Social accounting can help organizations identify and manage their
social and environmental risks, contributing to their long-term sustainability.

Challenges in Social Accounting:

 Measurement Difficulties: Measuring social and environmental impacts can be challenging,

as many of these impacts are not easily quantifiable.

 Lack of Standardized Frameworks: There is no universally agreed-upon framework for social

accounting, which can make it difficult to compare the social performance of different
organizations.

 Subjectivity: Social accounting often involves subjective assessments, which can lead to bias
and inconsistency.

Example:

A company might report on its social performance by including information on:

 The number of employees trained in a particular year.

 The amount of waste recycled.

 S J | 23

 The number of community projects supported.

 The level of customer satisfaction.

2. Human Resource Accounting (HRA)

Human resource accounting (HRA) is an accounting framework that attempts to measure the value of
an organization's human resources. It recognizes that employees are valuable assets and seeks to
quantify their contributions to the organization. HRA can help organizations:

 Make better human resource decisions: By understanding the value of their human
resources, organizations can make more informed decisions about recruitment, training, and
development.

 Improve employee retention: HRA can help organizations identify and address factors that
contribute to employee turnover.

 Enhance organizational performance: By investing in their human resources, organizations

can improve employee productivity and overall organizational performance.

Methods of HRA:

There are various methods used to measure the value of human resources, including:

 Historical Cost Method: This method calculates the cost of acquiring and developing human
resources.

 Replacement Cost Method: This method estimates the cost of replacing existing employees
with new ones.

 Present Value Method: This method calculates the present value of future benefits expected
to be generated by human resources.

Challenges in HRA:

 Measurement Difficulties: Measuring the value of human resources can be challenging, as it

involves both quantitative and qualitative factors.

 Lack of Standardized Frameworks: There is no universally agreed-upon framework for HRA,

which can make it difficult to compare the human resource value of different organizations.

 Subjectivity: HRA often involves subjective assessments, which can lead to bias and
inconsistency.

Example:

A company might use HRA to calculate the value of its employees by considering factors such as:

 Employee skills and knowledge.

 Employee experience.

 Employee performance.

 Employee potential.

3. Balanced Scorecard (BSC)

 S J | 24

The balanced scorecard (BSC) is a strategic management tool that helps organizations translate their
strategy into a set of measurable objectives. It goes beyond traditional financial measures and
considers other perspectives, such as:

 Customer Perspective: How do customers see us?

 Internal Business Process Perspective: What must we excel at?

 Learning and Growth Perspective: 1 How can we improve and create value?

Why is BSC Important?

 Strategic Focus: BSC helps organizations focus on their strategic goals and align their
activities accordingly.

 Balanced Perspective: BSC provides a balanced view of organizational performance by

considering both financial and non-financial measures.

 Improved Communication: BSC facilitates communication and understanding of the

organization's strategy.

 Performance Measurement and Improvement: BSC provides a framework for measuring

performance and identifying areas for improvement.

Example:

A company might use a balanced scorecard to track its performance by setting objectives and
measures in each of the four perspectives:

 Financial: Increase revenue by 10%.

 Customer: Improve customer satisfaction by 15%.

 Internal Business Process: Reduce production costs by 5%.

 Learning and Growth: Increase employee training hours by 20%.

By monitoring its performance across these perspectives, the company can gain a more
comprehensive view of its overall performance and identify areas where it needs to focus its efforts.

These current issues in accounting highlight the evolving nature of the field and the increasing
importance of considering non-financial factors in organizational decision-making. They reflect a shift
towards greater transparency, accountability, and sustainability in business practices.