Management Accounting

Introduction
Suppose you want to buy a pair of shoes to attend
the job interviews. The interviews are expected
in the immediate future.
Assume that the shoe store, in which you are
shopping, has a big rack of shoes all of which are
of your size and are priced at Rs. 160 any pair.
There are several colour and style. What is
relevant?
Colour & style?
Price? Comfortable? Size?
You want to buy a pair of jogging shoes and not
more than Rs. 400 to spend on them. Let us
assume that you prefer to jog in an isolated area
and you do not care about your appearance
while jogging.
What is relevant?
Colour & style?
Price?
Comfortable?
Relevant costs for the decisions are expected
future costs that differ under alternatives.
The costs which remain fixed between
alternatives under consideration are irrelevant
costs.
 Management Accounting
Management accounting is that part of
accounting which provides necessary information
to the management for planning, decision making
and controlling.
It is associated with the internal management of
the organization.
 Techniques of management accounting

A. Based on financial accounting information:

 Analysis of financial statements through
comparative statement, common size
statement, trend analysis and ratio analysis.
 Cash flow analysis
 Analysis of shareholders’ fund
 B. Based on cost accounting information

 Marginal costing (including cost-volume-profit

analysis)
 Differential costing
 Standard costing
 C. Based on future information
 Budgetary control
 Business forecasting
 Project evaluation
D. Based on Mathematics
 Operations research
 Linear Programming
 Network Analysis
 E. Other techniques
 Economic value added (EVA)
 Management information system
 Integrated ABC and EVA system
 Marginal Costing
Marginal costing is a technique of costing/
management accounting for managerial decision
making in which total cost is segregated into faxed
and variable cost.
Here fixed cost is period cost and variable cost is
product cost.
 Assumptions
Fundamental Assumptions:
1. All costs are of two types: fixed cost and variable
cost. (All semi-variable costs can be divided into
fixed and variable components.)
2. Either the firm is producing one product or in
case of multi-product firm, the proportion of
product mix remains the same at all levels of
output.
Simplifying assumptions:
1. There is no opening stock and closing stock. This
implies that production = sales
2. Variable cost per unit is fixed
3. Fixed cost in total is fixed
4. Selling price per unit is fixed
5. Cost and revenue are linearly associated.
 Different Terms in Marginal Costing
1. Contribution : Contribution is the difference
between sales and variable costs and it contributes
towards fixed costs and profit.
It can be expressed
as follows :
i) Total Contribution = (Total Sales - Total Variable
Cost) or (Contribution per unit × Number of units
sold)
ii) Contribution per unit = Selling price per unit -
Variable cost per unit
2. Profit-volume Ratio : When the contribution from sales
is expressed as a percentage of sales value it is known as
Profit-volume Ratio (P/V Ratio). It expresses the
relationship between contribution and sales.
P/V Ratio = (Contribution / Sales) × 100
or
(Contribution per unit / Selling price per
unit) × 100
or
[Change in Profit/ Change in Sales] × 100
3. Break Even Point (B.E.P): It is the point of
activity at which total revenue is equal to total cost
so that there is no profit no loss or total
contribution is exactly equal to total fixed cost so
that there is no profit no loss.
It may be expressed as :
B. E.P (in units) = Fixed Cost / Contribution per unit
B.E.P (in Rs.) = Fixed Cost / P/V Ratio
B.E.P (in % of total capacity) = (B.E. Sales/Capacity
Sales) × 100
4. Margin of Safety : Margin of Safety is the
difference between total sales and sales at break-
even point.
Margin of Safety (in Rs) =Total Sales – B.E.P Sales
Margin of Safety (in % of sales value) =
[(Total Sales - B.E.P Sales) / Total Sales]× 100
Prob-2
From the following information, find out
(i) contribution per unit, (ii) total contribution,
(iii) P/V Ratio, and iv) B.E.P (in units and amount):
Selling price per unit Rs. 15
Variable cost per unit Rs. 10
Fixed cost Rs. 5,00,000
Output 1,50,000 units.
Prob-4
Vani Ltd. Gives you the following data :
Selling price per unit Rs. 100
Variable cost per unit Rs. 60
(i) Find out P/V Ratio.
(ii) Calculate the revised P/V Ratio if
(a) There is decrease in selling price by 10 %.
(b) There is increase in variable cost by 10 %.
Marginal Cost Equation : S-V =F+P
Where, S= Sales Value , V= Variable Costs ,
F= Fixed Costs , P= Profit.
Some other formulas derived from marginal cost
equation :
(i) Sales x P/V ratio = F + P
(ii) Total Sales = B.E.P Sales + Margin of Safety
(iii) B.E.P Sales × P/V Ratio = F (Fixed Cost)
(iv) Margin of Safety × P/V Ratio = P (Profit)
 Prob-5
A company has fixed expenses of Rs. 90,000 with
sales at Rs. 3,00,000 and a profit of Rs. 60,000.
(a) Calculate the P/V Ratio. (b) What is the
margin of safety? (c) If in the next period, the
company suffered a loss of Rs. 30,000,
calculate the sales value.
Prob-6
You are given the following data :
Year Sales Profit
2001 Rs. 1,20,000 Rs. 8,000
2002 Rs. 1,40,000 Rs. 13,000
Find out (i) P/V Ratio, (ii) B.E.P sales, (iii) Sales
required to earn a profit of Rs. 12,000, (iv) profit
when sales is Rs. 1,30,000 and iv) Margin of
safety in year 2002.
 Prob.

Selling price per unit Rs. 10; Variable cost per unit
Rs. 4; Fixed cost Rs. 35,000. Calculate B.E. Sales in
each of the following cases:
i) If selling price is reduced by 20%
ii) If variable cost is decreased by 25%
iii) If selling price and variable cost are decreased
by 20% and 25% respectively and fixed cost is
increased by 20%.

(Ans: i) 70000; ii) 50000 and iii) 67200

Prob-8
Given the following information :
Units of output 5,00,000
Fixed cost Rs. 7,50,000
Variable cost per unit Rs. 2
Selling price per unit Rs. 5
You are required to determine :
(i) the sales value needed for a profit of Rs.
6,00,000 and
(ii) the profit if 4,00,000 units are sold at Rs. 6 per
unit.
 Prob.
Given:
Profit Rs. 12,000; Fixed cost Rs. 24,000; Margin of
Safety Rs. 30,000
Calculate:
i) B. E. Sales and actual sales
ii) Sales to earn profit of Rs. 4,000
iii) Sales to earn profit @ 10% on sales
iv) Profit when sales are 10% above B.E.Sales
[Ans: 60,000 and 90,000; 70000; 80,000; 2400
Prob-9.
The following particulars are available in respect of
an article produced in a factory :
(i) Units produced 20,000
(ii) Variable cost incurred per unit Rs. 16
(iii) Total fixed costs incurred Rs. 1,60,000
(iv) Selling price is fixed to earn a profit of 33⅓ %
on the total cost incurred per unit.
You are required to compute (a) P/V Ratio
(b) B.E.P in terms of units and sales value (c) Units
to be produced and sold to earn a profit of Rs.
24,000 (if total fixed cost remains unchanged).
Calculate the amount of sales, when
Fixed cost Rs. 20000
Profit Rs. 10000 and
BEP Rs. 40000
 Prob.
A company is currently utilizing 80% capacity with a turnover of
Rs. 8,00,000 at Rs. 25 per unit. The cost data are:
Material cost Rs. 7.50 per unit; Labour cost Rs. 6.25 per unit
Semi-variable cost Rs. 180000 (V.C P.U Rs. 3.75)
Fixed cost Rs. 90,000 up to 80% capacity, beyond that it will be
increased by Rs. 20,000
Calculate:
i. Break Even Point (Units and Amount)
ii. Profit at 80% Capacity
iii. Number of units to be sold to earn profit of 8% on sales
iv. Activity Level needed to earn a profit of Rs. 95000
[20000 units and Rs. 500,000; Rs. 90,000; 27273 units; 88.33%]
 Prob.
A factory engaged in manufacturing buckets is working at
40% capacity and produces 10,000 units per year. The
cost for one bucket is:
Material Rs. 10; Labour Rs. 3 and Overhead Rs. 5 (60%
fixed)
The selling price is Rs. 20 per unit. In case it is decided to
work at 50% capacity, the selling price falls by 3%. At 90%
capacity, selling price falls by 5% and similar fall in price
of material.
Calculate profit and BES at 50% and 90% capacity.
[at 50% = 25,000; 132275; at 90% = 71,250; 126673
 Prob.
In a purely competitive market 10,000 units of a
product can be manufactured and sold, and certain
amount of profit is generated. It is estimated that
2,000 units of that product need to be sold in a
monopoly market to earn the same profit.
Profit under both the market conditions is targeted
at Rs. 2,00,000. The variable cost per unit is Rs. 100
and total fixed cost is Rs. 37,000.
Determine the selling prices under both monopoly
and competitive market conditions.
[Ans: Monopoly Rs. 218.50; Competitive Rs. 123.70
Let the S.P is X per unit under monopoly.
2000X – 2000 x 100 = 37000 +200000
X = 218.50
Let the S.P is Y per unit under competitive.
10,000 X – 10,000 x 100 = 37000 + 200000
Y = 123.70
 Prob.
When sales of a company declines from Rs.
9,00,000 to Rs. 7,00,000, its profit of Rs. 50,000 is
converted into loss of Rs. 50,000.
Determine the B.E.Sales.
 Prob.
A company sells its product at Rs. 15 per unit. If it
sells 8,000 units, it incurs a loss of Rs. 5 per unit. If
the volume is raised to 20,000 units, it earns a
profit of Rs. 4 per unit.
Calculate B.E. sales in terms of amount and units.
[Ans: B. E. Sales Rs. 1,80,000; B. E. units = 12,000
Prob.
Two firms A and B sell same product.
Particulars A B
Sales 500000 600000
Variable cost 400000 400000
Fixed cost 30000 70000
Profit 70000 130000

1. Calculate at which sales both the firms will earn

same profit
2. State which firm is likely to earn greater profit in the
condition of heavy demand of the product.
[Rs. 300000]
Prob.: A dealer is currently selling 24000 shirts per
year. Following details are for 2018:
Selling price p.u. Rs. 40; V.C. p.u Rs. 25; Staff salaries
Rs. 1,20,000; General office cost per year Rs. 80,000;
other office cost Rs. 40,000.
1. Calculate B.E.sales and Margin of Safety
2. Find out profit if 20,000 shirts are sold
3. If selling commission per shirt Rs. 3 is introduced,
find out the no. of shirts to be sold to earn profit
of Rs. 15,000
4. Assume in 2019, additional staff salary is
anticipated and price of a shirt is likely to be
increased by 15%, calculate the B.E.Sales.
[ 6,40,000 and 3,20,000; 60,000; 21250; 598000]
Angle of Incidence : This is angle between total
sales and total cost lines. This angle is an indicator
of profit earning capacity over the break- even point.
A large angle of incidence indicates earning of high
margin of profit. Small angle of incidence indicates
earning of low margin of profit.
Marginal Cost : It is the aggregate of variable costs.
Break Even Chart : Break Even Chart is a
graphical representation of Marginal Costing.
 Limitations of Marginal Costing

The concept of marginal costing is sound, but it

must be interpreted in the light of the limitation of
its underlying assumptions. These are :
1. In actual practice it may be difficult to split
perfectly all costs into their fixed and variable
components.
2. Variable cost per unit may fluctuate.
3. In real practice, fixed costs go up in steps as
activity increases.
4. A high level of sales may only be achieved by
offering substantial discounts.
5. Marginal costing technique may not be useful if
there are changes in the mix of products.
 Difference Between Absorption Costing
and Marginal Costing

1 In absorption costing, all costs (fixed and

variable costs) are product costs. But in marginal
costing , only variable costs are product costs and
fixed costs are period costs.
2 In absorption costing, fixed costs enter into the
value of inventory, where as in marginal costing,
fixed costs are not inventoriable.
3. In absorption costing, the focal point is profit.
Here, Profit = Sales – Total Cost. But in marginal
costing, the focal point is contribution.
Contribution = Sales –Variable Cost .
4. Absorption costing is not suitable for decision-
making. But marginal costing is suitable for
decision-making.
 Prob.
Maximum capacity of a firm is 10,000 units.
Currently producing 6,000 units.
S.P P.U. Rs. 10
Cost P.U. Rs. 7.5 (Fixed cost per unit Rs. 2.5)
There is demand for additional 2,000 units at a
concessional rate of Rs. 7 per unit.
State whether the firm accept the offer if the firm
follows i) absorption costing system and ii)
marginal costing system.
 Application of Marginal Costing
Marginal Costing is essentially a technique of
decision-making. The followings are the important
managerial uses of this technique :
(a) Profit planning (b) Presentation of cost data for
control purpose. (c) Make or buy decision (d)
Optimum product mix (e) Alternative use of
production facilities (f) Evaluation of
performance.
Problem of Product Mix
Given the following information you are required
to state which of the alternative product mixes you
would recommend to the management and why.
Selling price per unit X : Rs. 25
Y : Rs. 20
Direct material per unit X : Rs. 8
Y : Rs. 6
Direct wages X : 24 hours at Re. 0.25 per hr
Y : 16 hours at Re. 0.25 per hr
Fixed overhead Rs. 750
Variable overhead 150 % of direct wages.
Alternative product mixes:
(i) 250 units of X and 250 units of Y
(ii) 100 units of X and 400 units of Y
(iii) 400 units of X and 100 units of Y.
Prob.

A company has a contribution/sales ratio of 40%. It

maintains margin of safety of 20%. If its annual
fixed cost amount to Rs. 240000, calculate:
Break even sales
Margin of safety
Total sales
Total variable cost and
Profit
Prob.
The ratio of variable cost to sales is 70%, The
break even point occurs at 60% capacity sales.
Find the amount of sales when fixed costs are
90000. Also calculate profit at 75% of the
capacity sales.
X ltd. has earned contribution of Rs. 200000 and
net profit of Rs. 150000 on sales Rs. 800000.
What is the margin of safety?
Cost is the amount of expenditure relating to a
cost object ( specific thing or activity). Cost
object may be a product, job, service, process or
any other activity.
Cost is the amount of resources given up in
exchange for some goods or services. Resources
are measured in terms of money.
Cost may be deferred (unexpired) costs and
expired costs.
Unexpired costs provide benefits in the future
periods and known as assets and hence
appear on the balance sheet. Plant building
inventory, prepaid rent
Expired costs are known as expenses which
already used in generation of revenue.
 Applications

Product or Sales Mix

Limiting Factor
Make or Buy
Special Order including Foreign Offer
Add or Drop Products
Operate or Shutdown
Product pricing
 Sales Mix Decision

X Y
Direct Material p.u. 20 18
Direct wages p.u. 6 4
Variable Overhead is 100% of direct wages
Sales price p.u. 40 30

Fixed Overhead is expected to be Rs. 1600

Proposed Sales-Mix:
1)100 units of X and 200 Units of Y
2)150 Units of X and 150 Units of Y
3) 200 units of X and 100 units of Y
Find out optimum sales mix.
 Prob. 2
Particulars Product A Product B Product V
(P.U.) (P.U.) (P.U.)
Raw Materials Rs. 80 Rs. 40 Rs. 20
Direct Wages Rs. 5 Rs. 15 Rs. 10
Variable Overhead Rs. 10 Rs. 30 Rs. 20
Selling Price P.U. Rs. 140 Rs. 120 Rs.90

Total Fixed Costs is Rs. 10,000. Find out the Optimum sales mix:
i) 200 units of A, 300 Units of B and 0 units of C
ii) 400 Units of A, 0 units of B and 100 units of C
iii) 0 units of A, 300 Units of B and 200 units of C
 Limiting Factor
A key factor or limiting factor puts a limit on
production, sale and profit of the firm. In such
situation,  management has to take a decision
whose production is to be increased,
decreased or stopped. In such cases, selection
of the product is done on the basis of
contribution per unit of limiting factor.
Prob.1
The following particulars are extracted from the records of a
company:
Product A Product B
per unit Per unit
Sales Rs. 100 Rs. 120
Consumption of RM 2 kg. 3 kg.
Material cost Rs. 10 Rs. 15
Wages cost Rs. 15 Rs. 10
Direct Expenses Rs. 5 Rs. 6
Machine hours used 3hrs 2hrs
Fixed Overhead Rs. 5 Rs. 10
Variable overhead Rs. 15 Rs. 20
(a)Comment on the profitability of each product when:
i. Total sales potential in units is limited
ii. Total sales potential in value is limited
iii. Raw material is in short supply
iv. Production capacity in terms of machine hour is the
limiting factor
(b) Assuming raw material is the key factor, availability of
which is 10000 kg. and the maximum sales potential of
each product being 3500 units, find the product-mix
which will yield the maximum profit.
Ans. Prob.1
i. Contribution p.u. : A Rs. 55, B Rs. 69 (B prof.)
ii. P/V ratio : A .55, B 0.575 ( B profitable)
iii. Contribution per unit of RM: A Rs. 27.5, B 23
iv. Contribution p.u. of machine hour: A 18.33, B 34.50 (B
profitable)
b) Availability of RM 10,000 kg
Max. sale of A 3500 units, RM = 3500x2 =7000 kg
Production of B = (10000-70000)/3 = 1000 units
Total contribution (3500x55) +(1000x69) = 261500
Less fixed cost (3500x5)+(1000x10) = 27500
Profit Rs. 234000
 Prob. 2

Particulars Product X Product Y

Per unit per unit
Sales (Rs.) 100 150
Material Cost 20% of Selling Price
Consumption of RM 2kg. 5kg.
Direct wages 30 50
Labour hours used 5hrs. 6hrs.
Variable overhead 50% of material cost
Total fixed overhead Rs. 10,000
Comment on the profitability of each product
when:
i. Total sales potential in units is limited
ii. Total sales potential in value is limited
iii. Raw material is in short supply
iv. Production capacity is the limiting factor
 Prob. 3

The following particulars are obtained from the records

of a company engaged in manufacturing two
products A and B from a certain raw material:
Particulars Product A Product B
Per unit per unit
Sales (Rs.) 100 200
Material Cost (Rs. 10 per k.g.) 20 50
Direct wages (Rs. 6 per hour) 30 60
Variable overhead 10 20
Total fixed overhead Rs. 10,000
i. Comment on the profitability of each product
when:
a) Total Sales potential in value is limited
b) Raw material is in short supply
c) Production capacity is the limiting factor
ii. If total material available is 3000 kg and it is
decided to produce at least 200 units of each
product, calculate optimum product mix to yield
maximum profit
 Particulars Product A Product
B
Sales Rs. 100 Rs. 120
Material cost (Rs. 5 per kg) Rs. 10 Rs. 15
Fixed overhead Rs. 5 Rs. 10
Other Variable costs Rs. 35 Rs. 36

Assuming raw material is the key factor, availability of

which is 10,000 kg and minimum & maximum sales of
each product are 1000 units and 4000 units
respectively, find the product mix which will yield the
maximum profit.
 Prob.
Particulars X(Rs) Y(Rs)
Direct material per unit 20 18
Direct wages per unit 6 4
Sales per unit 40 30

Variable Overhead is allocated to products @100% of direct wages.

Expected fixed overhead for the period is Rs. 1600
a) Identify the optimum product mix from the following:
i) 100 units of X and 200 units of Y
ii) 150 units of X and 150 units of Y
iii) 200 units of X and 100 units of Y
b) The proposed sales mixes to earn a profit of Rs. 300 and Rs.590
with the total sales of X and Y being 300 units.
 Relevant and irrelevant cost
X ltd. is operating at 60% capacity level and producing
6000 units. Selling price per unit is Rs. 20. Its average
cost per unit Rs. 15 (40% fixed). Identify the relevant
and irrelevant cost for each cases.
i) The company want to produce 9,000 units of the
product.
ii) The company want to produce 12,000 units of the
product
iii) The company receives a foreign offer for the sales of
additional 2000 units at a price of Rs. 14 each.
Acceptance or rejection of Foreign Offer
X Ltd. is presently operating at 60% capacity for
the production of 6,000 units at a selling price of
Rs. 13 per unit. Its present average cost of
production is Rs. 10 (40% fixed).
The company receives an export order for 1000
units at Rs. 8 per unit. The buyer pays for the
shipping expenses.
It is estimated that variable costs would increase by
10%, while the present fixed costs would remain
unaffected. The offer will not affect the regular
sales of the company.
The management appears to be hesitant to accept
the order because the price of Rs. 8 is below the
present unit cost of Rs. 10.
Should the offer be accepted?
 Problem: acceptance/rejection of foreign order

The cost sheet of a product shows the following

figures (per unit) for a total production and sale
of 8000 units:
Direct material Rs. 12; direct labour Rs. 6, factory
overhead: fixed Rs. 2 and variable Rs. 3; selling &
distribution overheads: fixed Rs. 1 and variable
Rs. 1.5; administrative overhead (fixed) Rs. 2.5
Selling price per unit is Rs. 32 and the production
capacity utilised is 80% only.
 A foreign customer is willing to buy 2000 quantity
of the product so as to reach the full capacity
production at present at a price of Rs. 25 p.u.
The extra cost for exporting the product will be
Rs. 0.60 p.u.
Should the company accept the foreign order?
Support your answer with proper calculations
[Ans. Existing profit 32000, additional profit will be
Rs. 3800]
 Foreign offer:

A company at present producing 20000 units of a

product and the details are:
Sales Rs. 200000; cost of production Rs. 120000;
Selling and distribution expenses Rs. 30000.
Maximum production capacity 25000 units. Fixed
costs included in cost of production are Rs.
40000 and variable cost included in selling and
distribution expenses are commission @ 10%
on sales and packing expenses @Rs. 0.2 per
unit.
An offer for purchase of 4000 units is received
from outside India at Rs. 6 per unit. No sales
commission is payable on such foreign order
but packing costs will be Rs. 0.80 per unit.
Should the company accept the offer?