Management Accounting

Prepared By
Dr. Rashmi Chawla Dr Varsha Goyal
Associate Professor Professor
DME Management School DME Management School
 Suggested Readings

1. Author: MN Arora
Book: Management Accounting
Chapter: Decision Making and Marginal Costing

2. Author: SN Maheshwari
Book: Management Accounting
Chapter: Decisions Involving Alternative Choice
 GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, DELHI
BACHELOR OF BUSINESS ADMINISTRATION (BBA)
BBA 207: Management Accounting
L-4, T•0 Credits —4
Objective: The objective of the course is to familiarize the learners with the basic management
accounting concepts and their applications in managerial decision making.

Course Outcomes:
1. Understand the nature and scope of Management Accounting.
2. Analyse and interpret the accounting financial statements of a company and its limitations.
3. Executing skills to prepare various Budgets.
4. Examining the impact of different ratios on the financial performance of a company.
5. Compute cash flow analysis and its likely impact on the company

Course Contents
Unit 1: (14 Hours)
Introduction: Meaning, Objectives, and Scope of management accounting; Difference between financial
accounting, cost accounting and management accounting; Comparative financial statements, common size
financial statements, trend analysis, Ratio analysis, cash flow statement.

Unit 2: (14 Hours)

Budgetary Control and Variances: Concept and types of budgeting and budgetary control; meaning,
objectives, merits, and limitations of budgetary control; budget administration; Functional budgets including
cash budget; Fixed and flexible budgets: meaning and preparation; Zero-based budgeting; Performance
budgeting, difference between performance & traditional budgeting. Meaning of Variance and Variance
Analysis – Material, Labour, Overheads and Sales Variances, Disposition of Variances, Control Ratios.

Unit 3: (14 Hours)

Costing and Profit Planning: Meaning of Variable Costing, Absorption Costing and Marginal Costing;
uses of Marginal costing; Cost-Volume-Profit Analysis, Profit/Volume ratio, Break-Even Analysis -
Algebraic And Graphic Methods, Angle of Incidence and Margin of Safety.

Unit 4: (14 Hours)

Managerial Decision Making:Decision making based on Marginal Cost Analysis - profitable product mix,
Make or Buy, Addition or Elimination of a product line, sell or process further, operate or shut down
Managerial Decision-making using spreadsheets.
 Course Objectives
• The objective of the course is to familiarize the students/learners with the basic
concepts of the management accounting and their applications in managerial
decision making.

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 Course Outcomes
CO 1: Understand the nature and scope of management accounting
CO 2: Analyse and interpret the accounting financial statements of the company
C0 3: Executing skills to prepare various budgets
CO 4: Examining the impact of various financial ratios on the financial performance of
the company
CO 5: Compute cash flow analysis and its likely impact on the business/company.

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 Table of Contents…….
Sno. Topic
4.1 Managerial Decision Making- Meaning
4.2 Decision Making based on Marginal Cost Analysis
4.3 Profitable Product Mix
4.4 Make or Buy
4.5 Addition of Product Line
4.6 Elimination of Product Line
4.7 Sell the product outright or Process further
4.8 Operate or shutdown the operations
4.9 Managerial Decision Making using spreadsheets
4.10 Some numericals

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4.4 Make or Buy Decision

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 Suggested Readings

1. Author: MN Arora
Book: Management Accounting
Chapter: Decision Making and Marginal Costing

2. Author: SN Maheshwari
Book: Management Accounting
Chapter: Decisions Involving Alternative Choice
 Introduction
• A firm may be manufacturing a product by itself.
• It may receive an offer from outside supplier to supply that product.
• This situation is called choosing between Make the product yourself or buy it from
the outside supplier.

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 Make or Buy decision
• The decision in such a situation will be made by comparing the price that has to be
paid and the savings that can be effected on cost.

• The savings will be only in terms of marginal cost of the product since no savings can
be effected in fixed cost.

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• Vice a versa can also happen in Make or buy situation.
• Say, a firm is already buying a product from an outside supplier and wants to make
its own product. Then it has to compare the price being paid to outsiders and the
additional costs incurred to make the product on own.

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 Considerations while taking Make or Buy
decision
a) If in place of buying the product we start making it then we loose the surplus
capacity for other usages. Opportunity cost of surplus supplies.
b) Quality of the product gets affected. We need to ensure that it remains same or
gets improved if we switch between alternatives.
c) Regularity of supplies.
d) Reliability of the supplier.

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Question

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 Solution
• Shall be discussed in the class.

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 Conclusion
• Students learnt about the meaning of Make or Buy decision
and how we can take decision in such a situation.

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