Module-1 … Managerial Accounting … Strictly for Private Circulation …. Dr.

RSM

INTRODUCTION TO MANEGERIAL
ACCOUNTING
Q-1 Successful business depend upon four factors – explain

Define Managerial Accounting.

Explain the Importance of Managerial Accounting.

Managerial Accounting quantifies the information and make the decision

more scientific and accurate. There are mainly 6 important benefits of
Managerial Accounting.

To understand whether the company is moving in correct direction and make

profit – then a manager need –

1. DETERMINE THE COST OF THE PRODUCT

Accurate information about the cost of the product. So, calculating the
precise of the product helps us to determine the selling price of the
product.

2. HOW MANY UNITS TO BE PRODUCED.

The manager also has to decide how many units of product should be
produced, because the business environment is highly volatile with
respect to economic conditions and consumer taste, or preference may
change.

3. TO ACCPET THE BIG ORDER OR REJECT THE BIG ORDER

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Module-1 … Managerial Accounting … Strictly for Private Circulation …. Dr. RSM

When a company gets a big order with a lower selling price, then the
company has to decide to accept the order or to reject the order.

4. MAKE OR BUY DECISION

Should the company make the product or get it produced from other
vendors. (Make or Buy decisions).

5. PRODUCT-LINE DECISION

Should they continue with the current range of products or trim the
product line or modify the product line.

6. DECIDE THE PRICE OF THE PRODUCT

Finally, the most important decision is at what price the company

should sell the product in the market.

Explain the SIMILARIITIES and DIFFERENCES between MANAGERILA

ACCOUNTING AND FINANCIAL ACCOUNTING.

Both the accounting focus on quantification of information – Managerial

Accounting focus on Cost per Unit, while F.A  focus on Aggregate cost of
good manufactured / sold.

DIFFERENCE BETWEEN MANAGERIAL ACCOUNTING AND FINANCIAL

ACCOUNTING

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What are different categories of cost?

Direct Material Cost  Material used in manufacturing is classified TWO

broad categories.

 Direct Material Cost– Direct material const include  raw materials

that can be directly and physically associated with finished goods. For
example, like wood in making the furniture, steel in making cars.

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Module-1 … Managerial Accounting … Strictly for Private Circulation …. Dr. RSM

 Indirect Material Cost – it is difficult to associate indirect cost with the

finished product. Indirect must have one of these two characteristics.
First  they do not physically become part of the finished product like
polishing oil use in furniture or

Secondly  their physical association with the finished product is too

small to trace (find-out) in the finished product. For example,

Indirect material cost is a part of MANUFACTURING OVERHEAD.

Let’s now discuss the second type of MANUFACTURING COST  IS A 

DIRECT LABOR COST.

Labor used in the manufacturing process can also be classified into the TWO
broad categories, namely

1. Direct Labor cost, and

2. Indirect Labor Cost

Direct Labor Cost  factory labor whose works can be directly associated
with converting raw materials into finished goods are classified as direct
labor costs. Like painter or engineers in an AUTOMOBILE factory.

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Module-1 … Managerial Accounting … Strictly for Private Circulation …. Dr. RSM

In the case of Indirect labor costs include the work of such employees cannot
be directly associated with the finished goods like wages of factory
supervisors or factory maintenance engineers. Indirect labor costs accounted
as part of the MANUFACTURING OVERHEAD.

Let’s talk about the last manufacturing cost i.e. THE MANUFACTURING
OVERHEAD COST

List-out the MANUFACTURING OVERHEAD COST

1. Indirect Material Cost

2. Indirect Labor Cost
3. Depreciation of factory building
4. Depreciation on factory machinery
5. Maintenance cost factory.

According to one study it indicates that the breakup of the cost in general is
as under-

Direct Material Cost = 55%

Direct Labor Cost = 15%, and

Manufacturing Overhead Cost = 30%

Out of these 3 costs, direct labor is the lowest and with the automation
comes in the direct labor cost will further go down.

Allocating Direct Materials and Direct Labor Cost are easy, but allocating the
Materials Overhead to a specific product type is a challenging task.

Explain the concept of PRODUCT AND PERIOD COST.

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** Refer list of Indirect cost.

Direct material cost  is considered as an inventory when incurred.

They are recorded in Account  as an ASSETS  and it will record as an

expense called Cost of Goods Sold (COGS), when the company sells the
Finished goods.

As the suggested PERIOD COST are matched with the REVENUE (SELLS) of a
specific time and are NOT included in Cost of Goods Sold (COGS).

Period cost is the non-manufacturing cost like Selling and Administrative

expenses.

To determine the NET INCOME then Period cost will be deducted from
revenues in the period they are incurred.

Having discussed the concept on the basic of Material cost , now let’s take
some examples and apply the concept.

EXAMPLES

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Module-1 … Managerial Accounting … Strictly for Private Circulation …. Dr. RSM

SOLUTION

1. DM
2. DL
3. MO
4. MO
5. DM
6. MO
7. DM
8. MO

Explain the trends in Managerial Accounting.

Business operates in a very dynamic environment; government regulations

keep changes and there is a constant change in technology. MA incorporates
these changes and provides accurate information to the managers. So that
they can make effective decisions by innovative new business concepts. One
such concept is of value chain. VC refers to all business processes that are
associated with providing all you product or service. It describes a full range
of activities need to make a product or service. This help to increase
efficiency that is maximizes production with the minimum possible cost. For
a manufacturing firm value chain may include

Research and product design

Acquisition of Raw Materials

Production

Sales

Marketing

Delivery

Customer relationship

For example,  lean manufacturing concept  increase productivity and

eliminate waste while improving the quality continuously.

Just in time (JIT) is another business innovation of managerial accounting.

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Technology helps in creating a lean management system and JIT etc.

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Module-1 … Managerial Accounting … Strictly for Private Circulation …. Dr. RSM

ERP  help us in centralizing all activities e.g. Purchase, sales, HR, finance
etc.

Automation has increased the overhead cost so allocating this cost to a

specific product has become more challenging.

Managerial Accounting has come up with new approach called “ACTIVITY

BASED COSTING” .

Activity Based Costing identifies the allocation of indirect material / labor and
other overhead to a specific cost. This helps in assigning more indirect cost.

BALANCE SCORE CARD

CSR

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