Defination of Management Accounting:

Management Accounting is the process of identification,

measurement, accumulation, analysis preparation, interpretation and
communication of information that assists/helps executives for
achieving organizational objectives. It is concerned with accounting
informations which is useful to Management.
he American Institute of !ertified "ublic Accountants #AI!"A$
%tatetes that management accounting as practice extends to the
following three areas &'
(. %trategic Management & )eep an important role as a %trategic
partner in the orgznization.
*. "erformance Management & +eveloping the practice of business
decision ma,ing and managing the performance of the
organization.
-..is, Management & !ontribute for identifying, measuring,
managing and reporting ris, to be achievement of organizational
objections.
Ques.Discuss the Compore & Contrast between Management
Accounting & Financial Accounting :-
here are some compare / contrast between Management Accounting and
0inancial Accounting.
hey are as follows &
%l Items Management Accounting 0inancial Accounting
( +efination A Management accounting
systems produces information
that is used within an
1rganization by managers /
employees
A 0inancial accounting systems
produces information that is used by
internal / external parties to the
organization li,e creditors, share
holder,ban, etc.
* Monitory
information
Management accounting
information may be monitory
or non monitory.
0inancial accounting information are
monitory nature.
- 2enrally
Accepted
Accounting
"rinciple#2
AA"$
3ere, need not follow 2AA" 3ere, must follow 2AA".
4 .eports .eports to those inside the
organization for planning,
motivating, controlling /
performance evaluation.
.eports to those outside the
organization li,e owners, lenders, tax
authorities, regulators etc.
5. 6mhasis on
activities
Management accounting
emphasises on future
activities.
0inancial accounting emphasises on
past activities.
7. +ata 3ere, relevancy of data is
emphasized.
3ere, objectivity and verifiability of
data are emphasized.
8. ime span. 9o time span for producing
financial statement.
0inancial statements are re:uired to
be produced for the period of (*
months.
;. Information. imeliness for information is
re:uired.
"recision of information is re:uired.
<. Accounting
6:uation.
In Management Accounting,
accounting e:uation is not
used.
=ut, 0inancial Accounting is
prepared on the basis of accounting
e:uation, assets e:uale to liabilities.
(>. 6xternal
reports.
In Managerial Accounting,
"reperation of external reports
are not mandatory.
In 0inancial Accounting, "reperation
of external reports are mandatory.
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Ques. @hat are the roles of management accounting in planning, control
and decision ma,ing in a ban,. 1r,
A Management Accounting is useful in =an,ing 1peration B. !omments.
1r,
A Management Accounting is helpful in managerial decision ma,ing B
+iscuss.
Ans &' Management accounting plays an important role in efficient and
effective management. It is helpful in ban,ing operation by
following ways &
($0orecasting&
0orecasting is the important step of management process. Managements
accounting helps to ban, management by forecasting deposits, Coans/
Advances and financing.
*$ "lanning&
"lanning is the future course of action. %o,=an,ing Management
cannot success without proper planning. here is no plan there is no
management. o ma,e a proper plan management account is used as a
tool of ban,ing management strategy. =y ta,ing proper plan
management accounting helps'
' recording business or ban,
transaction.
' measuring results of financial
changes.
' protecting financial effects of
future transaction.
' preparing internal reports in a user
frientdly format.
' pricing, capital expenditure
projects, product cost, budgeting.
-$ 1rganizing &
"roper organizing is the pre condition of proper ban, management.
"roper organizing ensure the environment of ban, management
and helps to staffs / wor,ers to maintain their duty /
responsibility.
4$ Motivating&
=y preparing budget management accountant serve to motivate managers
and subordinates to attempt to achieve the organization objectives.
0ormalized targets are more li,ely to motivate than vague or
ambiguous comments.
5$ !o'ordinating&
!o'ordinating is one of the important steps of manager procees.
@ithout
co'ordinating of activities between department of ban,ing
organization is not possible to earn or achieve orgnizational
objectives. Management accounting helps in co'ordinating by
creating proper communication among department to department
of ban,ing organization.
7$ !ontrolling &
!ontrolling is the pre condition of effective / efficient ban,ing
management.@ithout contrrolling any management cannot achieve its
target or objectives. A ban,ing organization depends on itDs performance
analysis. If the performance is not well, it is usually thrown in to dustbin.
0or example, !ity =an, was not performing well once, and hence it was
mar,ed as problem ban,. hey started to improve their performance and
performance report by using controlling process. 0inally they overcome.
Management accountant helps in following controlling activities.
' =udgetary control.
' %tandard costing.
' =rea, 6ven Analysis.
' !ollecting !ash.
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' !ontrolling stoc,s/+eposits.
' !ontrolling expenses.
' Monitoring of %trategy or
performance.
' Monitoring gross margin.
8$ +ecision Ma,ing &
he Management Accountant plays an important rote in the ban,ing
organization decision ma,ing proceess. "lanning is not implimented
without proper decision ma,ing. he management accounting helps to
management to ta,e timely and proper decision ma,ing. he management
accountant collects and analyse data and presents information to managers
to helps in decision ma,ing for ac:uiring ban, organizations objectives.
+ecision ma,ing helps In'
' Esing cost information for pricing
' !apital investment and mar,eting.
' 6valuating mar,et and product profitability.
' 6valuating the financial effect of strategies and plans.
Management Accounting helps in managerial decision by following ways F
1r, Steps of decision maing process&
#a$ +efine the problems & 0irst steps
#b$ 3elping the problem analysis & %econd %teps.
#c$ 3elping the searching or developing alternatives &
#d$ %electing the best alternative &
#e$ "utting +ecision in to action &
#f$ 3elping the following up decisions &
Gus. 6xplain the role of Management Accounting in a ban,. 1r,
+iscuss the necessity of Management Accounting to a ban,er.
Ans. 9ecessity of Managment Accounting to a ban,er or in a ban,.
($ !ollection, !lassification, Analysis and presentation of financial
data
*$ %ystematic and reliable planning.
-$ Ascertainment, .eduction and !ontrol of !ost.
4$ "roduct "ricing.
5$ Measurement of wor, performance.
7$ "repation of statement of cost and other necessary statement.
8$ "reparation of Master "lan or +evelopment of Industry.
;$ 0orward loo,ing or 0uture 0orecasting.
<$ 6fficiency Analysis.
(>$ 3elping the decision ma,ing.
=6" A9ACH%I% &
G& @hat is =rea, 6ven "oint I
Ans. =rea, 6ven "oint & =rea, 6ven "oint is the level of sales at which
profit is zero.
he =rea, 6ven "oint can be defined as the point where total sales
e:ual to total expenses. In this point there is no loss or no profit. %o,
it is called the e:uilibrium point of Income and 6xpenses.
It can be shown graphically F
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@e see in the graph when sales is 4 units then total sales is ,.4>>/J and total
expenses is ,.4>>/J. 3ere, the interesting point of total sales line and
total expenses line is =rea, 6ven "oint where total sales e:uals to total
expenses.
Q: Discuss the three Approaches of Methods of !"# Anal$sis.
hree Approaches of =6" Analysis&/Methods of =6" Analysis &'
(. he !ontribution Margin Approach/Method.
*. he 6:uation Approach/Method.
-. he 2raphic Approach/Method.
(. !ontribution Margin Approach &
An approach of computing the =6" in which the fixed expenses
are divided by the contribution margin per unit.
It is expressed by unit and a,a symbolicallyF
=6" in unit J 0ixed !ost /!ontribution Margin per unit.
=6" in a,a J 0ixed !ost /!ontribution Margin .atio.
*. 6:uation Approach &
A method of computing =6" that relies on the e:uation %ales e:uls
to the sum of veriable expenses, 0ixed expenses and profit.
It is expressed by following e:uation F
%ales J Kariable 6xpenses L 0ixed 6xpenses L "rofit.
-. 2raphic Approach &
A method of computing =6" that shown in graph by intersecting sales line
and expenses line where "rofit is zero, or @here total sales e:uals to
total expenses.
It can be shown by the following graph F
3ere, we see in the graph the =6" intersect between the total sales and total
cost line and indicates total sales e:uals to total cost.
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Q. Discuss the usefulness and assumptions of !"# Anal$sis.
Ans.
%sefulness&'mportance :
(. #rofit #lanning :
o prepare shortterm profit planning, =6" analysis plays an important
role. =6" analysis helps organization to earn maximum profit by
determining sales level in different price, marginal cost, marginal profit
total cost, total profit etc.
). #roduct #ricing :
+emand of product is changed by increasing or decreasing selling price
of product. @e can ,now how a product price increase of decrease for
maximizing profit from =6" analysis.
*. #roduce or purchase :
=6" analysis plays a vital role to ta,e decision for producing product
in organization or purchase from other institution or external suppliers.
+. Accepting or ,a-ecting Additional .rders :
Additional orders either profitable or loss. If profitable, it will accepted,
if loss, it will be rejected. =6" analysis helps to accept or reject
additional orders.
/. 'ncrease0 Decrease or Discontinuance of #roduction :
@hen production is increase then variable cost is increased but fixed
cost is unchanged. As a result if selling price remaining unchange then
profit is increased through =6" enalysis. @e can assure to increase or
decrease of production for profit maximization of the organization.
1. Selecting new selling territories :
=6" analysis plays a vital role to ta,e proper decision of selecting new
selling territories in home country or abroad for the purpose of
maximizing profit.
8. %ell or "rocess further &
o earn profit more, the product must sell or further process is
confirmed by =6" analysis.
;. .eduction of "rice in competitive mar,et &
In competitive mar,et when "roduct "rice is reduced then demand is
increased and sales volume are increased also. =6" analysis helps in
this situation.
<. .eplacement +ecision &
In case of replacement decision, =6" analysis helps to management
providing information.
Assumptions&conditions of !"# anal$sis :
Assumptions :
($ In a specific time fixed cost will be constant.
*$ .ate of variable cost will remain unchanged.
-$ %emi variable cost is possible to divide into variable and fixed
element.
4$ "roduction process and sales "olicies are constant.
5$ .atio of sales mix of different product will be unchanged.
7$ %elling price is constant.
8$ Inventory does not change.
;$ Inventory will be evaluated in selling price.
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Q: 2hat are the 3imitations of !"# Anal$sis.
3imitation of !"# Anal$sis :
(. =6" Analysis is established some assumptions. If the assumption
is incorrect then =6" analysis will be failed.
*. =6" analysis is only a supply side i.e. cost only.
-. It assumes that fixed cost are constant.
4. It assumes average variable costs are constant per unit of output, at
least in the range of li,ely :uantities of sales i.e. linearity.
5. It assumes that :uantity of goods produced in e:ual to the :uantity
of goods sold.
7. It assumes that the relative proportions of each product sold and
produced are constant i.e. the sales mix is constant.
8. Invested capital is neglected here.
;. It is sometimes difficult to divide semi variable cost into fixed and
variable.
Qus. Define Margin of safet$. Discuss its implication 4 cfve).
Ans.
+efination of Margin of %afely &
Margin of safety is the excess of budgettet or actual sales over the brea,
even volume of sales.
@hen actual sales are more than brea, even sales then additional sales is
called margin of safety.
@e can get margin of safety by deducting brea, even sales from
actual sales.
0ormula of determining Margin of safety is given below F
Margin of safety #in unit$ J otal sales #in unit$M =6" sales #in unit$
Margin of safety #In ,$ J otal sales #in a,a$M =6" sales #in a,a$
'mplication
If actual sales is more than brea,'even sales then management feels safety.
Epper degree of actual sales from brea,'even sales indicate more margin of
safety. If margin of safety is large then management feels secure / strong
safety. In this situation there is no possibility of loss.
1n the other hand, when the margin of safety is reduced then sales is also
reduced and in this situation, there is a possibility of loss. Coss is started
when sales goes below the brea,'even point or e:uilibrium point. In this
way by using margin of safety we can assume the profit or loss situation of
the management.
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Capital !udgeting
Q. 2hat is Capital !udgeting 5
Ans.
he investment decisions of a firm are generally ,nown as capital
budgeting or captial expenditure.
he process of evaluating and selecting longterm investment is commonly
referred to as captial budgeting.
!apital =udgeting is the process of generating, evaluating, selecting and
following up on captial expenditure alternatives.
Q. Discuss the techni6ues of Captial !udgeting. .r0
Discuss the techni6ues of e7aluating long-term in7estment
proposal&Capital "8penditure.
Ans.
here are some techni:ues of capital budgeting. hey are as follows F
(9 :raditional :echni6ues& Methods :
4i9 #a$ bac period 4#!#9:
#a$ If year of profit even &
#!# J 9!1/ 9!=
@here, 9!1 J 9et !ash 1utlay
9!= J 9et !ash =enefit.
#b$ If year of profit un'even&
#!# J A L #;C. < C9 &+
@here,
A J Hear in which !ummulative !ash 0low near to 9!1.
! J !ummulavive !ash 0low of the Hear A.
+ J !ash 0low of the year following the Hear A.
4ii9 #a$ bac ,eiprocal0
4iii9 ,eturn on 'n7estment:
#a$ 1n the basis of initial investment.
,.' J #Average 6A/ initial investment$ N (>>
#b$ 1n the basis of average investment.
A,, J Average 6A/Average Ivestment
)9 Discounted Cash Flow Methods&:echni6ues :
#i$ ;et present 7alue method 4;#=9:
9"K J "resent value of in flow M "resent value of 1ut flow.
#ii$ 'nternal ,ate of ,eturn 4',,9:
',, J C L #!/!'+$O # 3 M C$
@here,
C J Cowes +iscount .ate
3 J 3igher +iscount .ate
! J 9"K at lower discount rate
+ J 9"K at higher discount rate.
4iii9 #rofilabilit$ 'nde8 4#'9:
#'Jotal "K of !ash Inflow / "K of 9et !ash 1utlay.
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Q. Discuss the Strengths and 2eaness of diffenent Capital !udgeting
:echni6ues .r0
Ad7antages & Disad7antages of Different :echni6ues.
Ans.
here are some strengths / @ea,ness of different techni:ues of capital
budgeting. hey are as follows F
#a$ !ac #eriod 4#!#9 techni6ues :
Strengths :
(. It is simple to compute.
*. Invested capital returned within a short time.
-. .einvestment scope.
4. .educe the probability of loss.
5. It is suitable where insufficient cash money
exist.
2eaness :
(. It ignors the time value of money.
*. It fails to recognize cash flow after pay bac,
period.
-. !oncept of same rate of profit earning.
4. It ignors salvage value of assets.
5. 9ot consider earning capacity of additional pay
bac, period.
Accounting ,ate of ,eturns 4A,,9:
Strengths :
(. It is very simple to understand.
*. It helps to ,now percentage of profit.
-. 6mphasise on the whole life of project.
4. 6asy to comparative analysis.
5. .ate of return is the yard stic, of project
determination.
2eaness :
(. It ignores time value of money.
*. It does not consider the ris,.
-. .ate of return is e:ual in different stage of project.
his idea is wrong.
4. .e'invest does not allow.
5. It does not allow scrap value of assets.
;et present 7alue 4;#=9 :
Strengths :
(. It considers time value of money.
*. It consider the the cash flow for whole life of the
project.
-. It is reliable and resonable.
4. It is considers the scrap/salvage value.
5. It can be determind the profitable project easily.
2eaness :
(. It is complex to understand.
*. Management must be set an unrealistic discount
factor.
-. It is difficult to forcast future economic condition.
4. +itermination of future discount rate is difficult.
'nternal ,ate of ,eturns 4',,9 :
Strengths :
(. o ,now the masimum .1I.
*. !onsider the time value of money.
-. Measure the profitability of project.
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4. !onsider the cash flow of whole life of project.
2eaness:
(. !alculation of I.. is very difficult.
*. "K !alculation is difficult due to inflationary effect.
-. It is not suitable for different stage of project.
#rofitabiling 'nde8 4#'9 :
Strengths :
(. It is used the measurement of !apital .ationing
*. Measure the profitabilng of the project.
-. !onsider the cash flow of whole life of project.
4. !onsider the time value of money.
2eaness :
(. 9ot suitable for different stage of project.
*. here is no specific factor to calculate "I.
-. !ost of !apital is used as discount rate.
Q. Discuss the importance of Capital !udgeting 5
Ans.
!apital =udgeting plays an important role in long term financial decision of
organization.
he importance of !apital =udgeting are discussed below &'
(. >elps firm to plan its financing :
!apital budgeting helps firm to plan its longterm financing for achieving
financial objectives.
). A7oid forecast error :
he future success of a business largely depends on the investment
decision that is closely related to capital budgeting. %o, capital budgeting
helps to avoid forecast error of investment decision.
*. 3ongterm goal of a compan$:
he capital budgeting decision has its effect over a long period of time. As
a result through a capital budgeting decision firm can achieve its longterm
goal.
+. Ad7ance plan of collecting funds :
=y ta,ing advance plan of collecting fund, capital budgeting helps to firm
for obtaining its objectives.
/. Steps of ris reduction :
!apital budgeting analysis plays a vital role by ta,ing many steps for
reducing potential ris, in decision ma,ing.
1. Face competition :
As per decision, if firm use instruments in low :uality for producing
product, then firm may loss product mar,et. In this situation, capital
budgeting helps managemant to face competition.
8. 3arge Capital 'n7estment :
!apital bidgeting involves in large amount of fund. %o any wrong decision
can suffer to the company. 0or this reason capital budgeting is very
important for capital budgeting management.
;. ,is and uncertaint$ :
!apital budgeting decision is surrounded by great number of uncertainties.
he future is uncertain and full of ris,. he estimates about cost, revenue a
profit may not come true. In this situation different capital budgeting
techi:ues play an important role.
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