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Management Accounting,9780195683608

Management Accounting

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Oxford University Press, USA
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Management Accounting is a comprehensive textbook that is specially designed to meet the needs of management students. It explores core concepts of management accounting through managerial applications and supplements them through numerous solved problems and detailed case studies.

The exposition provides in-depth coverage of the four key components of management accounting from an Indian perspective: management accounting fundamentals, tools for management accounting, management accounting in decision making, and management control systems. Among the important topics discussed are financial accounting and financial statement analysis, cost-profit-volume analysis, activity-based costing, costing in inventory valuation, costing for pricing, management control systems, responsibility accounting and budgeting, job and process costing, balanced score card and strategic costing, and ethics in managerial accounting.

Users will find this book highly useful for its coverage of the key concepts of management accounting explained through solved problems, small cases, tables, flow charts, and diagrams.

Author Biography

R C Sekhar was Professor Emeritus, T A Pai Institute of Management, Manipal, with over fifteen years of teaching experience in management and cost accounting at the postgraduate level. He was also a visiting faculty at the Indian Institute of Management, Ahmedabad; XLRI, Jamshedpur, and MDI, Gurgaon. Besides contributing important articles to numerous research papers in leading journals, he also held extensive experience in training and consultancy programmes.

A.V. Rajagopalan is currently Adjunct Professor (Research) with T.A. Pai Management Institute, Manipal. A doctorate and double M.Phil holder, he has over twelve years of academic experience, both in India and abroad, and has several years of industry experience prior to that. He has also conducted several executive training programmes and has been a consultant for various government projects.

Table of Contents

1. Introduction to Managerial Accounting
The users of accounting systems and accounting information
Roles of an Accountant
Accountants as Attention Directors, Problem solvers, and Scorekeepers
Ijiri's Accountee-Accounter-Accountant Model
Pacioli's double-entry bookkeeping and accounting systems
The Essence of Financial Accounting
Cost Accounting
Cost Audit Regulations in India
Public Regulations to Control Cost Accountants
Management Accounting
The Accountant in the Organizational Structure
A Day in the Life of a Management Accountant
Attitudes Towards Accounting Systems
Managers and Accounting Systems
A Comparative Survey of National Attitudes towards Accounting
Management Accounting in Developing Countries
Statutory Controls on Accounting
Moral and Ethical Imperative of Accountants
Cost of Accounting
Case Study 1: Cost Benefit of the Kaup Power Plant
Case Study 2: Excellent Engineering: Submersible Pump Division
2. Financial Accounting and Financial Statement Analysis
Basic Concepts in Financial Accounting
The Entity Concept
The Duality Concept
Accounting Equation
The Meaning of Debit and Credit
Money Measurement Concept
The Cost Concept
The Going Concern Concept
Periodicity Concept
Accrual Concept
The Matching Concept
The Concept of Prudence or Conservatism
The Realization Concept
Materiality Concept
Systematic Documentation of Transactions
Columnar Sales Day Books, Purchase Day Books, Cash Books, and Bank Books
T Accounts, General Ledgers, Subsidiary Ledgers, and Group Ledgers
Trial Balance
Periodic Adjustments in Accounts
The Practical Application of Concepts
Financial Statement Analysis
Cash Flow and Fund Flow Statements-Accounting Standard of the Institute of Chartered Accountants of India
Financial Ratio Analysis Through Standard Ratios
Liquidity Analysis Ratios
Profitability Analysis Ratios Activity Analysis Ratios
Capital Structure Analysis
Capital Market Ratios
Discernment Analysis
Accounting Standards
The Accounting Origins of the Enron, WorldCom, Parmalat, and Tata Finance Frauds
Case Study 1: Kamath's Student Mess
Case Study 2: Jyoti Prakash Highway Restaurant
3. Terminology of Costing
Natural Descriptive Classification and Functional Classification Cost Objects
Responsibility Centres
Classification of Costs According to Behaviour Towards Drivers and Over a Range
Controllable Costs and Uncontrollable Costs
Direct and Indirect Costs
Prime Costs, out of Pocket, and Conversion Costs
Unit Cost and Average Cost
Cost of Goods Sold
Cost of Goods Manufactured
Period Costs and Product Costs
Different Costs for Different Purposes
A Framework for Cost Management with Emphasis on Strategy
Case Study 1: Bansiram Bhujias
Case Study 2: Matsyaraja Moulded Boats
4. Cost-Volume-Profit Analysis
Changes in Costs and Profits with Changes in Volume
Why do Cost Per Unit and Revenue Per Unit Change with Volume?
Changes in Total Profits with Change in Volume
Break-even Analysis
Methods of Break-even Analysis
Limitations of Break-even Analysis
Break-even Analysis and CVP Analysis For Multiple Products
Planning for Target Income
Adjusting Plan for Taxation
'What If' and Sensitivity Analysis Using Computers
Measures of Risk
Margin of Safety
Operating Leverage
Risk Sharing and CVP Analysis
Changing Time Horizon for Analysis
Decision Options
Cost-volume Analysis for Non-profit Organizations
Using Multiple Cost Drivers
Decisions on Advertising Plans
Decisions in Raising or Reducing Sale Prices
Presentation of Profit in the Contribution Format
Case Study 1: Gummidipundi Sintered Products
Case Study 2: Franchising Money Order Business
5. Job and Process Costing
Job Costing vs Process Costing
Cost Flows in a Manufacturing Job Costing System
Costing of Products and Processes
Steps in Cost Ascertainment
Source Documents
Normal Costing
Accounting Mechanics of Normal Costing
Non-manufacturing Costs And Job Costing
Multiple Overhead Cost Pools
Negotiated or Administered Prices and Costplus Contracts
Batch Costing
Contract and Project Costing
Process Costing
Cost Flow
Equivalent Units of Production
Cost Sheet 187
Process Loss
Abnormal Loss
Inter Process Profit
Simple Overhead Allocation
Case Study 1: Poornima Biotech
Case Study 2: Bonda Earthmover Repairs
Case Study 3: Prakash Computer Hardware
Case Study 4: Siva Enterprises
Case Study 5: The Ethical Dilemma
6. Activity-based Costing
ABC-An Extension of Indirect Costs
ABC and the Seven Steps in Cost Ascertainment
Normal Costing and ABC
Problems of Measurement of Activities in ABC
Use of Work Sampling in ABC
GPK-The German Costing and Flexible Manufacturing Systems
Accounting Mechanics and ABC
ABC and Cost-volume-profit Analysis
ABC Hierarchy of Costs
Abc In Service And Merchandising Sectors
Activity-Based Costing with Two Activities
Impact of These Different Allocation Techniques and Overhead Rates on the Per Unit Cost
Other Uses of ABC
ABC and Controls
ABC and Product Mix Decisions
When to and When not to use ABC
7. Responsibility Accounting and Budgeting
Responsibility Accounting
Accountability in Organizations
Responsibility Centres
Types of Responsibility Centres
Hierarchy of Responsibility Centres
Responsibility Centre Report
Effective Responsibility Accounting
The Four Levers of Control
Participative Budgets
Strategy and its Relation to Budgets
The Budgeting Process
The Budgeting Cycle
Key Factors in Budget Making
Administrative Machinery for Budgets
Structure and Content of Budgets
Budgeting For Discretionary Costs and Engineered Costs
ABC and Budgeting
Responsibility and Controllability
Incremental, Kaizen, and Zero-based Budgets
Loose Budget and Slack Budget
Behavioural Problems in Budgets
8. Flexible Budgets and Variance Analysis
Relationship Between Actual Cost and Standard Cost
Variances Relating to Direct Labour
Definition of Standard Costing
Comparative Analysis of Variations of Actual Profits from Budgets
Factors that Deviate from the Budgets and Isolate the Variances for Responsibility Centres
Cause for Deviation from Budget-Sales and Second Level Analysis of Variances
The Third Level Analysis of Variances
Sales Mix
The General Problem of Sharing of Common Variance
The Varied Meaning of Overheads
Efficiency Variance due to Change in Batch Size in Actual and Budget
Production Volume Variance, Fixed Spending Variance, and Capacity Utilization
Formulae for Calculating Variance Analysis-A Memory Aid
Investigating a Variance
Comparison of Normal Costing and Standard Costing
Difference between Budgetary Control and Control through Standard Costing
Variance Analysis and Inventory Valuation
The Tediousness and Paperwork Involved in Variance Analysis
Keeping All Accounts at Standards and Reducing Work of Accounting
ABC Analysis, Standard Costing, and Variance Analysis
Limitations of Standard Costing and Its Negative Impact on Behaviour
9. Developing Standard Costs and Their Use in Pricing and Estimations for Contract Bids
Standard Costing For Pricing
Standard Cost in Public Services and Bidding
Processes of Standard Setting
Using Past Internal Data and Internal Benchmarking
Focus Groups and Participative Processes
Industrial Engineering
Working Back to Target Costs from Target Prices and Using Value Engineering
External Benchmarking
Using Secondary Data for Benchmarking
Competitive Benchmarking and Externalities
Learning Curve
Element of Strategic Innovations
10. Cost Information for Inventory Valuation and Inventory Management
Valuation of Inventories
Actual Cost Options
Standard Cost
Normal Costing
Items to be Included in the Inventory Costs
Periodicity of Inventory Valuation
Income Tax Provisions
Implications of Categories of Costs Included in Inventory Valuation
Impact of Inventory Accounting on Pricing
How Much Stocks should One have and When?
Functional Classification of Inventories
Cycle Inventories
Safety Stock
Anticipation Inventory
Pipeline Inventory
Economic Order and Batch Quantity
Cost of Errors in Estimation
Radical Transformation of the Cost Structure
Counting on Discounts for Bulk Purchases
When to Buy and Manufacture
When to Order with Uncertain Demand and Supply Pattern
Economic Batch Quantity
Practical Difficulties in Ordering only at the Reorder Point with an EOQ Model
Converting Imputed Costs of Interest to Real Cost
The Budgetary Process and its Divergence from Economic Ordering for Inventories
ABC, XYZ, VED, and FSN analysis of inventory
Illustration of ABC Analysis
Just In Time Concept
Accounting Modification to Match JIT
Throughput Costing
Back Flush Costing
Supply Chain Management
Material Resource Planning as a Tool
Economic Resource Planning as a Tool
Project Work
11. Decision-making and Relevant Costing
Special Cost Terminology of Relevant Costs
Determining Relevant Revenues and Relevant Costs for Electric Equipments
Variety of Algorithms Used in Relevant Cost Analysis
Special One-Time Orders
Replacement of Machines and Dealing with Historical Costs
Timing of Introduction of a New Product and Dropping off of an Existing Product
Make or Buy, and the Economics of Outsourcing
Product Mix and Allotment of Product to Scarce Resources
Closing Down and Opening Segments of an Organization
Dropping off and Adding a Class of Customers
Theory of Constraints
Ambushing the Constraints
12. Capturing the Complex Behaviour of Costs
Basic Objective of Developing Cost Functions
Cost Classification
Choice of Cost Objects and Related Cost/Revenue Drivers
International Variations in Classificatory Practices
Time Horizon 441; Relevant Range
Cost Estimation Methods
Six Steps to Building a Cost Function Using Quantitative Methods
Evaluating Cost Drivers
The Relative Strength of Alternative Cost Drivers
Cost Drivers, ABC, and Estimates of Overheads
Handling Non-linearity
Use of Actual Cost Data to Decide Parameters of Learning Curve
Data Collection
Understanding Macro-level and Public Policy Implications of Cost Behaviour
Coping Up With Imperfect Data
Case of Decision Dilemma at Hearty Foods Ltd
13. Costing for Pricing Decisions
Moderating Adam Smith's Invisible Hand
Three C's of Pricing
Pricing objectives
Who Decides the Prices?
Role of the Three C's in Varied Pricing Strategies
Life Cycle Costing
Target Costing, Locked-in Costs, and Pricing Revisited
Yield Management-A New Concept in Pricing Non-inventoriable Products
Application of Yield Algorithm in hotel industry
Application to Airlines
Application to Mother Dairy Vegetable and Fruit Shop
Laws and Government Regulations which hem Pricing Options
CHAPTER II of Competition Act 2002* Prohibition of Certain Agreements, Abuse of Dominant Position and Regulation of Combinations
The Essence Emerging from These Extracts of Law
14. Professional Ethics and Behavioural Issues
Integrity in a competitive world
Technical Standards
Professional Standards
Behavioural/Ethical Standards
The Indian code of ethics for cost accountants
Ethics and Social Responsibility
Institute of Management Accountants (IMA) of the US
Managing Conflict
Behavioural issues and the management accountant
Behavioural issues and employee morale
Not a 'sweet' Dilemma
15. Management Control Systems
Single focus and dual focus
The human impact on control
The Rationality Issue
The Ethical Issue Organizational Tensions
Self-defeating Controls
Formal and informal controls
Levers of Control
Diagnostic Systems
Interactive Control Systems
Interactive Controls in a Dairy Company
Interactive Controls in Snacks Outlets
Boundary Control Systems
Belief Control Systems
Traditional Controls
Cultural and Ethical Controls
Effective and Efficient Controls
Shifts in Control Systems
External Factors
Internal Factors
Degree of Controls
Control Optimization
Control Failure
Performance Measures
Costs of Control
Myths of accountability and controls
16. Balanced Scorecard
Strategy Maps
Relevance of the Scorecards
Characteristics of the Scorecard
Internal Business Processes Perspective
Customer Perspective
The Learning and Growth Perspective
Financial Perspective
Model Scorecard
Number of Scorecards
Weightage of the Scorecards
Balancing the Balanced Scorecard
The Cause-and-effect Relationships
Barriers to Success
The Cost of Implementing Balanced Scorecard
Government and non-profit Organizations
The ten commandments for successful implementation of BSC
Budgets and the Balanced Scorecard
Appendix 1: E-budgeting
How E-budgeting Works
Benefits of E-budgeting
Shortcomings of E-budgeting
Appendix 2: Cost Audit
Landmarks in the Development of Cost Audit
The Legal Provisions
Definition Expanding the Scope
Rationale for Cost Audit
The Healthy Cost
Scope of Cost Audit
Costing in Essential Services
The Cost Auditor
Appendix 3: Cost Accounting Standards
Preparation of CAS
Appendix 4: Costing in Government and Not-for-profit Organizations
Costing in Government
Cost Accounting in Not-for-profit Organizations
The Need for Cost Accounting in Not-for-profit Organizations

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