Management Accounting 9781642876017, 9788183189729

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AGEMENT ACCOUNTING

J. MADEGOWDA,

Ph.D.,

Professor and Chairman, Department of Post-Graduate Studies and Research in Business Administration, Commerce and Tourism Administration, Kuvempu University, Jnana Sahyadri, Shankaraghatta - 577 451. Shimoga District, (Karnataka, India)

~ Gflimalaya GJlublishingGflouse MUMBAI • DELHI • NAGPUR • BANGALORE • HVDERABAD

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I'

©

Himalaya Publishing House, 2007 No part of this book shall be reproduced, reprinted or translated for any purpose wnatsoever without prior permission of the Publisher in writing.

ISBN

: 978-81-83189-72-9

First Edition: 2007

Published by

Branch Offices Delhi

Nagpur

Mrs. Meena Pandey for HIMALAYA PUBLISHING HOUSE, "Ramdoot", Dr. Bhalerao Marg, Girgaon, Mumbai-400 004. Phones: 2386 01 70 / 2386 38 63 Fax: 022 - 2387 71 78 E-Mail: [email protected] Website: www.himpub.com "Pooja Apartments", 4-8, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi-110 002. Phone: 2327 03 92, Fax: 2324 30 30 Fax: 011 - 2325 62 86 Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur-440 018. Phone: 272 12 16, Telefax: 0712-272 12 15

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CONTENTS CHAFfER

PAGE

No.

I

CHAPTER

FUNDAMENTALS OF MANAGEMENT ACCOUNTING

No.

1- 19

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

20 -

III

ACCOUNTING RATIOS

75 - 232

IV

FUNDS FLOW STATEMENT

233 - 363

CASH FLOW STATEMENT

364 - 414

BUDGETARY CONTROL

415 - 553

VII

STANDARD COSTING

554 - 655

VIII

MARGINAL COSTING

656 - 751

MANAGERIAL REPORTING

752 - 768

BIBLIOGRAPHY

769 - 772

INDEX

773 - 775

II

V VI

IX

74

"This page is Intentionally Left Blank"

Chapter - I FUNDAMENTALS OF MANAGEMENT ACCOUNTING

Objectives: The objectives of this chapter are: •

To

Introduce you emergence,

to

the

•

To explain the Need for, and Meaning and Definitions of, Management Accounting,

•

To

•

To bring out clearly the differences that exist between Management Accounting on the one hand, and Financial and Cost Accounting on the other.

describe the Nature, Accounting, and

subject 'Management Accounting'

Scope,

ObJectives,

Utility

and

with

Functions

Structure Emergence of Management Accounting •

Meaning and Definitions of Management Accounting

•

Need for Management Accounting

•

Nature or Characteristics of Management Accounting

•

Scope of Management Accounting

•

Objectives of Management Accounting

•

Functions of Management Accounting

•

Advantages or Importance or Utility of Management Accounting

•

Differences between Management Accounting and Financial Accounting

•

Differences between Management Accounting and Cost Accounting

•

Summary of the Chapter.

•

Key Terms to Remember

•

Notes and References

•

Questions for Self-study

Limitations of Management Accounting

an

emphasIs on

of

ItS

Management

Management Accounting: 2

Emergence of Management Accounting The persons at the helm. of affairs of all entItles including Trading Concerns, Manufacturing Companies, Service Providing Organizations, etc., have to take a number of decisions. For the purpose of taking decisions. they (managerial personnel. owners. directors of the boards. executives. etc .. ) need a lot of relevant information. Because. these pieces of information in the forms of facts, figures. etc., are essential for objective evaluation, as far as possible, of each of the alternatives available so that right decisions can be taken. Hence, the decision-makers (managerial personneL etc .. ) need an information system which is capable of furnishing the precise and relevant information at the right time. Management Accounting serves the managerial personnel by providing the required information and reports. Of course, one can also find other two important kinds of Accounting viz., Financial Accounting and Cost Accounting which are also functioning as information systems. However, they are suffering from a few limitations and also the fact that their beneficiaries are different and/or they are providing information to the same beneficiaries (viz., managerial personnel) but for different purpose. The limitations, like this, of Financial Accounting and Cost Accounting and their inability to serve the managerial personnel have led to the emergence of another branch of Accounting viz., Management Accounting. Though a few concepts and aspects of Management Accounting were known to the managerial personnel in the first quarter of twentieth century, it developed substantially only during last five decades. Even the term 'Management Accounting' was coined in 1950's as a separate course of study by the British Team of Accountants which visited the United States of America in 1950. The visit was sponsored by the Anglo-American Productivity Council for the purpose of highlighting the utility of Accounting as an effective management technique. Since then. it has d~veloped substantially. Management Accounting - Meaning and Definitions Management Accounting has been defined by many a number of experts and institutions in different ways. But all the definitions highlight the fact that it (i.e .. Management Accounting) aims at furnishing the relevant information to the managerIal personnel. And the managerial personnel use these facts and figures for the purpose of taking a number of decisions. These aspects become obvious from the f