Cma 1st Unit

8/8/2019 Cma 1st Unit

1/84

Unit-1

Introduction to management accounting

Financial accounting:

Every business organization wants to know whether it has made profit or lossat the end of the given period; for this purpose it has to prepare a statementcontaining profit or loss. It also wants to know what it owns (assets) and howmuch it owes (liabilities) to its suppliers and others. In order to prepare thesestatements the business organization has to maintain a set of accounts.Accounting as an information system is the process of identifying, measuringand communicating the economic information of an organization to its userswho need the information for decision making. The following are the variousactivities for accounting.

1. Identifying the transactions and events:

Accounting identifies the transactions and events of a specific entity. Atransaction is an exchange in which each participant receives or sacrifices value(purchase of raw materials). An event (whether external or internal) is ahappening of consequence to an entity (use of raw materials for production). Anentity means an economic unit that performs economic activities.

2. Measuring the identified transactions and events:

Accounting measures the transactions and events in terms of a commonmeasuring unit that is the currency of the country.

3. Recording:

It is concerned with recording of identified and measured financial transactionsin an orderly manner soon after their occurrence in the proper books of accounts.

4. Classifying:

It is concerned with classification of recorded transactions so as to group the

transactions of similar type at one place. This function is performed bymaintaining the ledger in which different accounts are opened to which relatedtransactions are brought to one place by posting. For example all purchases of goods made for cash or on credit on different dates are brought to purchases ac.

5. Summarizing:


2/84

It is concerned with the summarization of the classified transactions in a manner useful to the users. This function involves preparation of financial statementssuch as income statement, balance sheet, statement of changes in financial

position, statement of cash flows etc.,

6. Analyzing:

It is concerned with the establishment of relationship between the various itemsor groups of items taken from income statement or balance sheet or both. Its

purpose is to identify the financial strengths and weaknesses of an enterprise. It provides the basis for interpretation.

7. Interpreting:

It is concerned with explaining the meaning and significance of relationship between the transactions by analyzing. Now-a-days the above six functions are

performed by electronic data processing devices and accountant has toconcentrate mainly on the interpretation aspects of accounting. The accountantsshould interpret the statements in a manner useful to users, so as to enable theusers to make reasonable decisions out of alternative courses of action.

8. Communicating:

It is concerned with the transactions of summarized and analyzed and interpretedinformation communicated to the users, to enable them to make reasoneddecisions.

Branches of accounting:

Broadly speaking, there are three main branches of accounting:

1. Financial Accounting2. Cost Accounting3. Management Accounting4. Social responsibility Accounting


It is a process of identifying, measuring, recording, classifying, summarizing,analyzing, interpreting and communicating the financial transaction and events;the purpose of this branch of accounting is to keep systematic records toascertain financial performance and financial position and communicate theAccounting information to the interested parties.

Cost accounting:


3/84

It is the process of Accounting and controlling the cost of a product, operation or function. The purpose of this branch of Accounting is to ascertain the cost, tocontrol the cost and to communicate information for decision making.

Management Accounting:

It is the application of Accounting techniques for providing informationdesigned to help all levels of management in planning and controlling activitiesof business enterprise and in decision making. The purpose of this branch of Accounting is to provide information that management may need in takingdecisions and to evaluate the impact of its decisions and actions. ManagementAccounting is not only confined to the area of cost Accounting but also coversother areas such as capital structure decisions, capital expenditure decisions,dividend decisions etc.

Social responsibility Accounting:

It is the process of identifying, measuring and communicating the social effectsof business decisions to permit informed judgement and decisions by the users of information. It is Accounting for social responsibility aspects of a business.Management is held responsibility for what it contributes to social well beingand progress. Accounting for environment is the part of social responsibilityAccounting.

Advantages of Financial Accounting:

Facilitates to replace memory:

Accounting facilitates to replace human memory by maintaining completerecord of financial transactions. Human memory is limited and Accounting helpsto overcome this limitation.

Facilitates to comply with legal requirements:

Accounting facilitates to comply with legal requirements which require anenterprise to maintain books of Accounts.

Example: Section 209 of the companys act 1956, requires a company to

maintain proper books of accounts, section 44AA of the income tax act, 1961requires certain persons to maintain specified books of Accounts.

Facilitates to ascertain net results of operations:

Accounting facilitates to ascertain net result of operations by preparingincome statements.


4/84

Facilitates to ascertain financial position:

Accounting facilitates to ascertain financial position by preparing balancesheet.

Facilitates the users to take decisions:

Accounting facilitates the users (i.e., short-term creditors, long-termcreditors. Present investors, potential investors, employee groups, management,general public, tax authorities), to take decisions, by communicating accountinginformation to them.

Facilitates a comparative study:

Accounting facilitates a comparative study in the following four ways:

o

Comparison of actual figures with standard or budgeted figures for the same period and the same firm.o Comparison of actual figures of one period with those of another

period for the same firm (intra firm comparison).o Comparison of actual figures of one firm with those of another standard firm belonging to the same industry (inter firm comparison).o Comparison of actual figures of one firm with those of industry towhich the firm belongs (pattern comparison).

Facilitates and assists management:

Accounting assists the management in planning and controlling businessactivities and in taking decisions.

e.g., projected cash flow statement facilitates the management to know thefuture receipts and payments and to take decisions regarding anticipated surplusor shortage of funds.

Facilitates control over assets:

Accounting facilitates control over assets by providing information regardingcash balance, bank balance, debtors, fixed assets, stock etc.,

Facilitates the settlement of tax liability:

Accounting facilitates the settlement of tax liability with the authorities bymaintaining proper books of accounts in the systematic manner.

Facilitates the ascertainment of the value of business:


5/84

Accounting facilitates the ascertainment of the value of the business in caseof transfer of business to another entity.

Facilitates raising loans:

Accounting facilitates raising loans from lenders by providing themhistorical and projected financial statements.

Acts as legal evidence:

Proper books of accounts maintained in a systematic manner act as legalevidences in case of disputes.

Disadvantages of financial accounting:

Ignores the quantitative elements:

Since the Accounting is confined to the monetary matters only. Thequantitative elements like quality of management, quality of labour force, publicrelations are ignored.

Not free from bias:

In many situations the accountant has to make a choice out of variousalternatives available. The examples are:

i. choice in method of depreciation (straight line vs. written

down)ii. choice in method of inventory valuation ( FIFO vs. LIFO)

As a result the analysis of financial statements cannot be said to be free from bias.

Estimated position and not real position:

Since the financial statements are prepared on a going concern basis asagainst liquidation basis, they report only the estimated periodic results and notthe true results can be ascertained only on the liquidation of an enterprise.

Ignores the price level changes in case of financial statements prepared onhistorical costs:

In case of financial statements prepared on historical cost, the fixed assetsare shown in balance sheet as historical cost less depreciation and not at thereplacement value which is often higher than the value stated in balance sheet


6/84

the analysis of such financial statements will not yield strictly comparable resultsunless the price level changes are taken into account.

Danger of window dressing:

When the management decides to enter wrong figures to artificially inflate or deflate the figure of profits, assets and liabilities, income statements, fails to provide true and fair view of the result of operations and balance sheet fails to provide true and fair view of financial position of the enterprise.

Primary objectives of accounting:

To maintain Accounting records:

Written records are always better than oral records since written records can be used by different persons for decision making purposes and serve as evidence

of transactions. Now-a-days, the volume of transactions is so large; a humanmemory cannot absorb each and every transaction. Accounting is done to keep asystematic record of:

a. financial transactions b. assetsc. liabilities

To calculate the results of operations:

To measure the financial performance of an enterprise, the results of

operations are ascertained by preparing an income statement (also known as profit and loss account) which shows the matching of current costs with currentrevenues during a particular accounting period.

A systematic record of incomes and expenses facilitates the preparation of income statement.

To ascertain the financial position:

To evaluate the financial strengths and weaknesses of an enterprise, thefinancial position is ascertained by preparing balance sheet which shows

resources (assets owned by an enterprise on right hand side) and the sources of financing those resources.

A businessman wants to know whether the business is attaining profits andlosses during a financial period. A systematic record of various assets andliabilities facilitates the preparation of balance sheet.

To communicate the information to the users:


7/84

Accounting communicates information to internal users and external users.The internal users include all the organizational participants at all levels of management (top, middle and lower levels). The top level of managementrequires information for planning, middle level management requiresinformation for controlling the operations and lower level for implementation.

For internal use, the information is usually provided as reports.

e.g., cash budget reports, production reports, idle time reports, feedback reportswhether to retain or replace an equipment decision reports, project appraisalreports etc.,

External users include government, new investors, creditors etc.,

Role of financial managers:

Raising finance:

This is a very important function performed by the finance manager. He hasto calculate the financial requirements of the firm, a firms capital structure, thevarious sources from which funds are to be acquired, keeping in view the cost,

benefits, risks characteristics of the firm and the time when the finance is to beraised.

Allocation of financial resources:

The financial manager is concerned with the efficient allocation of the firmsscarce resources to alternate uses. He has to invest money in long-term assets,inventory, marketable securities, and debtors, paying off dividends, maintainingsufficient cash to make payments and keep the firm running.

The process of allocating funds is a complex process. It involves an analysisof opportunities available keeping in mind the opportunity cost of capital, thefirms risk bearing capacity and the expectations of the shareholders.

Financial planning:

It involves analysis of financial flows of the firm, forecasting the outcome of various financing, investment and dividend decisions and evaluation of effects of various alternatives. This is to determine where the firm has been if positioned inthe market. This leads to a financial plan or strategy which includes acontingency plan for dealing with unfavorable situations.

Analysis of capital market trends:


8/84

A firm is a product of its environment. It is dependent upon the capitalmarket for raising finance, for meeting its long term needs. The financialmanager must understand the operations of the capital market and analyze thetrends from time to time in order to ascertain how securities are valued, manner in which risk is assessed etc., and this would enable him to deal with the

problems arising from investment, financing and dividend decisions.

Foreign exchange risk management:

In recent years, the value of foreign exchange transactions has increasedconsiderably. They have also been rapid change in international finance. Newmarkets, currency and institutions have emerged. This has considerablyincreased the risk of firms.

Analysis of capital market trends:

A firm is a product of its environment. It is dependent upon the capitalmarket for raising finance, for meeting its long term needs. The finance manager must understand the operations of the capital market and analyze the trends fromtime to time in order to ascertain how securities are valued, manner in which risk is assessed etc., this would enable him to deal with the problems arising frominvestment, financing and dividend decisions.

Treasury operations:

This is another function which the financial manager has to perform; treasuryoperations have the potential to generate considerable profit for the organization.

Foreign exchange risk management:

In recent years, the value of foreign exchange transactions has increasedconsiderably. They have also been rapid change in international finance. Newmarkets, currency and institutions have emerged. This has considerablyincreased the risk of firms.

Analysis of business, industry and competitor trends:

The financial manager has to analyze and understand the trends in business,

industry and competition in order to ascertain the direction in which businessand industry are moving competitors objectives and strategies and their financial and market positions and capital structure.

Analysis of macroeconomic trends:

The performance of business is affected by the macroeconomic conditions prevailing in the economy. These are like changes in intrest rates, inflation,


9/84

money supply, incentives etc., and the financial manager must understand andanalyze these trends. This would enable him to make sound investment,financing and dividend decisions.

Management accounting:

Scope of management accounting:

The main aim of management accounting is to help the management in its function of planning, directing and controlling. It provides techniques for the interpretation of theaccounting data. The following facts of management accounting speak for the scope of this subject.


It deals with historical data. The recorded facts are useful for planning thefuture course of action. The performance appraisal is based on recorded factsand figures. Thus management accounting is closely related to financialaccounting.

Cost accounting:

It provides various techniques for determining cost of manufacturing products. The systems of standard costing, marginal costing, differential costingand opportunity costing are all helpful to management for planning various

business activities. By using cost accounting techniques efficiency of variousdepartments is judged.

Budgeting and forecasting:

Budgeting explains the plans, policies and goals of an enterprise for adefinite period in future. Targets are set for the different departments &responsibility is fixed for achieving those targets. Comparison of actual

performance with budgeted figures gives an idea about the performance of different departments to the management. On the other hand, forecasting is a

prediction of a given set of circumstances. Both budgeting and forecasting are

useful for management accountant in planning various activities.

Inventory control:

Inventory has a special significance in accountingfor determining correctincome for a given period. Since it involves large sums, the management shoulddetermine different levels of stocks i.e., minimum level, maximum level,reordering level for inventory control. The control of inventory will ultimately


10/84

help in controlling stocks. Management will need effective inventory control tocontrol stocks.

Management reporting:

Keeping the management informed of various activities of the concern is oneof the important functions of management accountant. The reports are presentedin the form of graphs, diagrams, index numbers or other statistical techniques soas to make them easily understandable. The management accountant sendsmonthly, quarterly, and half-yearly reports to the management. The reports maycover profit and loss statements, cash flow statements, funds flow statements,and stock reports etc., the reports are helpful in giving a constant review of theworking of the business.

Interpretation of data:

The management accountant interprets various financial statementsinformation to the management. These statements give an idea about thefinancial and earning position of the concern. If the statements are not properlyinterpreted then wrong conclusions may be drawn. So interpretation is also animportant scope of management accounting.

Internal audit:

To judge the performance of every department internal audit system isnecessary. Internal audit helps management in fixing responsibility of differentindividuals.

The management compares actual performance with the predetermined standards.

Tax accounting:

Tax planning is an important part of management accounting. Incomestatements are prepared and tax liabilities are calculated. The management isinformed about the tax burden from the central government, state governmentand local authorities. Various tax returns are to be filed with differentdepartments and tax payments are to be made in time.

Tools and techniques of management accounting:

A number of tools and techniques are available and are used to supply the informationrequired by the management. Some of them are discussed below:

Analysis of financial statements:


11/84

In the financial statement analysis the data are classified and presented to themanagement in a useful way. The techniques used for financial analysis includecomparative financial statements, ratios, funds flow statements, trend analysisetc.,

Budgetary control:

Budgetary control technique is used as a tool for planning and control. The budgets of different departments are prepared in advance based on historical dataand future possibilities. The actual performance is recorded and compared withthe predetermined targets. The management is able to assess the performance of each and every person in the organization.

Standard costing:

This is one of the important techniques of cost control. It is determined in

advance based on a systematic analysis of prevalent conditions. The actual costsare recorded and compared with standard costs and the variances if any areanalyzed with their reasons. This standard costing technique helps to enhance theefficiency of the concern and also management by exception.

Marginal costing:

This is a technique of costing which is concerned with changes in costresulting from changes in the volume of production. It is helpful in measurementof profitability of different lines of production, departments and divisions of anenterprise. The short-term utilization of capacity decisions are also assessed with

the help of marginal costing.

Decision accounting:

Decision taking involves a choice from various alternatives. Managementaccounting helps to calculate the financial implications of each alternative andenables the management in taking important decisions regarding capitalexpenditure, make or buy decisions or expansion or diversification etc.,

Revaluation accounting:

This is also known as replacement accounting. The preservation of capital inthe business is the objective of management. Revaluation accountingis used todenote the methods employed for overcoming the problems connected with fixedasset replacement in a period of rising prices.

Management Information Systems:


12/84

With the development of electronic devices for recording and classifyingdata reporting to management has considerably improved. The data pertaining to

planning, coordination and control is supplied to the management.

Limitations of management accounting:

Although management accounting is helpful in providing guidelines for planning,directing and controlling functions still its effectiveness is limited a number of reasons.Some of the limitations of it are as follows:

It is based on accounting information:

Management is based on the data supplied by financial accounting and costaccounting. The data used for making the future decisions is historical. Thecorrectness of managerial decisions will depend upon the quality of data. If financial data collected is incorrect then the management accounting will not

provide correct analysis.

Comprehensive analysis:

Management accounting requires the knowledge of a number of relatedsubjects. The management should have a thorough knowledge of the accounting

principles, statistics, principles of management, economics etc., to have aneffective management accounting.

It is not an alternative to administration:

Management accounting does not provide an alternative to administration.Its tools and techniques only provide information and not decisions. Thesedecisions are to be made by management. Therefore management accountingdoes the supplementary service function either in taking decisions or in their implementation.

Evolutionary process:

Management is only in the evolutionary stage, the techniques and tools used by this system give varying results. The conclusions taken from analysis andinterpretations are not the same.

Personal judgment:

The interpretation of financial information depends upon the capability of interpreter and his personal judgment. Thus personal bias may creep in theanalysis and interpretations and affect the objectivity of decisions.

Resistance:


13/84

Installation of management accounting involves basic change in theorganizational setup. New rules and regulations are also required to be framedwhich effect a number of personnel; and hence there is a possibility of resistancefor some quarter or other.

Functions of management accountant:

Management accountant is known by different titles such as chief accountant, generalmanager of accounting; some of the duties that the management accountant has to

perform are:

ForecastingPlanning the financial requirements of businessRegulating the cash flowsManaging creditRaising funds

Maintaining proper relationship with financialinstitutions andProtecting the funds.

The functions of management accountant relate to the management and control of thefirms resources. His job involves providing information to design accounting and costing

policies, preparation of financial reports, budgeting and inventory control.

Planning and controlling function:

The management accountant establishes coordinates and maintains an

integrated plan for control of operations. These plans would provide coststandards, expense budgets, sales forecasts, capital investment programmes, profit planning etc.,

Reporting and interpreting function:

The management accountant compares the actual performance withoperating plans and standards and to report deviations if any to the owners of the

business.

Tax administration:

The management accountant in order to establish and administer tax policiesand procedures undergoes tax administration.

Preparation of reports to government agencies:

The management accountant prepares the reports to the government agenciesas required under different laws.


14/84

Protect the assets of business:

The management accountant performs the function of protecting the assets of the business through internal controls, auditing and ensuring proper insurancecoverage.

Appraisal of external influences on the business:

The management accountant makes an appraisal of the influence of economic, social and governmental influences and their effect on the business.

Differences between management and financial accounting:

Management and financial accounting are two sides or branches of accounting. Financialaccounting collects the financial data which is suitably altered for managementaccounting purposes. In a broader perspective, the scope of management accounting

includes financial accounting. The major point of distinction is that they differ in their emphasis and approach. Some of the major areas of distinction between managementaccounting and financial accounting are discussed below:

Focus:

The objective of the preparation of financial accounting is to meet theinformational needs of the external users; Businesses preparation of the profitand loss account to inform the external users like shareholders, creditors etc.,about the performance of the firm. The objective of management accounting isto prepare reports about the use of firms resources to meet the use/needs of

internal users.

Information:

Financial accounting reports are prepared on the basis of historicalinformation. The profit and loss account and balance sheet reveals to theshareholders how the resources entrusted to them have been utilized.Management accounting is meant for decision making process and focuses onthe future.

Need:

Financial accounting needs the statutory requirements as per the companiesact, 1956 and submission of the same to the shareholders. Financial accounts arerequired to be prepared in formats prescribed by law. No such statutoryrequirements are need to management accounting information.

Timing:


15/84

Financial accounting is based on the concept of accounting year in whichannual reports are prepared to be presented to the shareholders and interestedgroups. Management accounting reports are prepared for shorter durations,information is collected for the preparation of long term loans up to five years or more in case of capital expenditure plans.

Basis of preparation:

The preparation of financial accounts is subjected to GAAP. This makes thefinancial accounts consistent and meaningful from the investors andusers point of view. With the help of financial accounting information one canmake inter firm comparisons and analyze the performance trends over the years.This is possible because all the firms follow some GAAP.

Management accounting on the other hand is not based on any set of accepted principles. Every business follows its own procedure and principles for

preparing reports for the internal users. Such information generated should berelevant and aid management to make decisions.

Scope:

Financial accounting covers the entire organization and shows revenues andexpenses and equity of the firm as a whole. For the purpose of managementaccounting, an organization is divided into centers or units headed byresponsible persons. These centers collect cost and other related data.

Reporting:

Financial accounting emphasizes precision and accuracy because it is subjectto statutory audit. Management accounting requires information promptly for decision making where there is a need for continuous and speedy flow of information rather than precise information which may delay the process.

Cost accounting:

Cost is the amount of resources given in exchange for some goods or services. Theresources given up are money or moneys equivalent expressed in monetary units.ICWAI defines cost as, The amount of expenditure (actual or notional) incurred on or

attributable to a specified thing or activity.A cost must always be studied in relation to its purpose and conditions. Different

costs may be ascertained for different purposes and under different conditions. Work in progress is valued at factory cost while stock of finished goods may be valued at officecost. Even if the purpose of the study of the cost is the same, different conditions maylead to variation in cost. The cost per unit of product is sure to vary with an increase in


16/84

the volume of output since the amount of fixed expenses to be borne by each unit of output decreases.

Classification of costs:

The different bases of cost classification are: By time- historical and predetermined costs By nature or elements material, labour and overheads costs By degree of traceability of the product-direct and indirect costs Association with the product-product and period costs Changes in activity or volume- fixed, variable and semi-variable costs By function- manufacturing, administration, selling, R&D, and

preproduction costs Relationships with accounting period-capital, revenue costs Controllability-controllable, uncontrollable costs

Cost for analytical & decision making purposes- opportunity, sunk,differentials, joint, common, imputed, marginal, uniform replacement out-of pocket costs

Others conversion, traceable, normal, avoidable, unavoidable, total costs

I. Classification on the basis of time:

i. Historical costs: these are ascertained after they areincurred. Such costs are available only when the production of a particular thing has already been done. They are objective innature and can be verified with reference to actual operations.

ii. Predetermined costs: these costs are calculated beforethey are incurred on the basis of a specification of all factorsaffecting cost such costs may be:

Estimated costs costs are estimated before goodsare produced; these are naturally less accurate thanstandards.

Standard costs this method involves setting up of predetermined standards for each element of cost and each product. These are essential for comparing actual withstandards. These costs are essential for finding out thereasons of such variances and taking remedial actions.

II. By nature or elements:


17/84

i. Material costs: the substance from which the product ismade is known as material. It can be direct as well as indirect.

Direct material it refers to those materials whichcan become a major part of finished product and can be

easily traceable to the units.Indirect materials all material which is used for purposes ancillary to the production and which cannot beconveniently assigned to specific physical units is termedas indirect materials. E.g., consumable stores, printing andstationery etc.,

ii. Labor costs: labor can be classified into direct or indirect,

Direct labor it can be defined as the wages paid toworkers who are engaged in the production process whose

time can be conveniently and economically traceable tounits of products.Indirect labor labor employed for the purpose of

carrying the tasks incidental to goods or services providedis indirect labor.

iii. Overhead / expenses costs: expenses may be direct andindirect

Direct expenses these expenses are incurred on aspecific cost unit and identifiable with the cost unit

Indirect expenses these are the expenses whichcannot be directly, conveniently and wholly allocated tocost centers/units.

III. By degree of traceability to the products:

Costs can be distinguished as direct and indirect. Costs which can be easilytraceable to a product or some specific activity are called direct costs. Indirectcosts are difficult to trace to a single product or it is uneconomic to do so.

IV. Association with the product:

Costs can be classified as product costs and period costs.

i. Product costs: The costs which are traceability to the products and include in inventory values. In a manufacturingconcern, it comprises the cost of direct materials, direct labor andmanufacturing overheads. Product cost is a full a factory cost.


18/84

These costs are useful for valuing inventories which are shown inthe balance sheets as assets till they are sold.

ii. Period costs: these costs are incurred on the basis of timesuch as rent, salaries etc., include many selling and administrativecosts are essential to keep the business running.

V. By changes in activity or volume:

These costs can be classified into fixed, variable, semi variable / mixedcosts.

i. Fixed costs: CIMA (The Chartered Institute of Management Accountants) defines fixed cost as, A cost whichtends to be unaffected by variations in volume of output is fixedcost. Fixed cost depends mainly on time and do not vary directlywith volume or rate of output. Fixed cost can be classified as

Committed costs these costs incurred tomaintain certain facilities and cannot be quicklyeliminated.- rent, insurance.

Policy and managed costs policy costs areincurred for implementing particular management

policies such as executive development, housingetc., Managed costs are incurred to ensure theoperating existence of the company-staff services.

Discretionary costs these are not related tooperations and can be controlled by management.

These costs result from special policy decisions,new researches and can be eliminated or reducedto a desired level at the direction of management.

Step costs these costs are constant for agiven level of output and then increases by a fixedamount at a higher level of output.

ii. Variable costs: these are the costs that vary directly and proportionately with the output- Direct materials and Direct labor.

It should be kept in mind that the variable cost/unit is constant but

the cost changes corresponding to the levels of output.

iii. Semi fixed /semi variable / mixed costs : Such costscontain fixed and variable element because of the variableelement, they fluctuate with volume and because of fixedelements they do not change in direct proportion to the output.Semi variable also known as semi fixed costs change in the same


19/84

direction as that of the output but in the same proportion.-depreciation.

VI. By function:

A company performs a no. of functions; functional costs are classified asfollows:

i. Manufacturing or production costs: cost of operatingmanufacturing division of an undertaking. It includes the cost of direct materials, direct labor, direct expenses, packing and alloverhead expenses relating to production.

ii. Administrative costs: they are indirect and cover allexpenditure incurred in formulating the policy, directing theorganization and controlling operations of the concern, which isnot related to R&D, production, distribution and selling functions.

iii. Selling and distribution costs: selling cost is the cost of seeking to create and stimulate demand. E.g., advertisements,market research etc., distribution cost is expenditure incurredwhich begins with making of package produced available for dispatch and ends with making the reconditioned packagesavailable for reuse-warehousing, cartage etc.,

iv. R&D Cost: they include the cost of discovering new ideas, processes, and products by experiment and implementing suchresults on a commercial basis.

v. Pre-production costs: when a new factory is started or when a new product is introduced certain expenses are incurredsuch costs are termed as pre-production costs and termed asdeferred revenue expenditure.

VII. Relationship with accounting period:

Costs can be capital and revenue cost capital expenditure provides benefit to future period and is classified as an asset. Revenue expenditure benefits only the current period and is treated as an expense.

VIII. Controllability:

The CIMA defines controllable costs as, A cost which can be influenced bythe action of a specified member of an undertaking and uncontrollable cost as, a cost which cannot be influenced by the action of a specified member of anundertaking.

A controllable cost can be controlled by a person at a given organizationlevel. Controllable costs are not totally controllable some costs are partlyuncontrollable.


20/84

IX. Costs for analytical and decision making purpose:

i. Opportunity costs: these costs are the costs of selecting one course of action and the losing of other opportunities to carry out that course of action. It is the

benefits loosed by rejecting the best competing alternativeto the one chosen.

ii. Sunk costs: it is one that has already been incurredand cant be avoided by decisions taken in the future. It isalso called as unavoidable cost. It is an expenditure for equipment or productive resources which has noeconomic relevance to the present decision making

process. This cost is not useful for decision making as all past costs are irrelevant. It is defined as the difference between the purchase prices of an asset.

iii. Differential costs : these are defined as theincrease / decrease in total cost resulting out of theselection of an additional sales channel a change in themethod of production and distribution and addition or deletion of product.

iv. Joint costs: the processing of a single raw materialresults in 2 or more different products simultaneously.The joint products are not identifiable as different types of

products until a certain stage of production known as splitoff point is reached. Joint costs are the costs incurred up tothe point of separation. One product may be of major

importance and others have minor importances which arecalled byproducts.

v. Common costs: common costs are those costswhich are incurred for more than one product. They arenot easily related with individual products and hence theyare generally apportioned.

vi. Imputed costs: some costs are not incurred and areuseful while taking decisions pertaining to a particular situation. These costs are known as imputed / notionalcosts and they do not enter into traditional accountingsystem.

vii. Out of pocket costs: these signify the cash outlayrequired for an activity. The management would like toknow that the income from a particular project will at leastcover the expenditure for the project.

viii. Uniform costs: these are not distinct. Uniformcosting signifies the common costing principles and

procedures adopted by a no. of firms. They are useful ininter firm comparison.


21/84

ix. Marginal cost: it is the aggregate of variable costi.e., prime costs +variable over heads. These are classifiedas fixed and variable.

x. Replacement costs: these are the costs of replacing an asset at current market values e.g., when the

cost of replacing an asset is considered it means the costof purchasing the asset at the current market price isimportant and not the cost at which it was purchased.

X. Others:

i. Conversion costs: it is the cost of a finished product/work in progress comprising direct labour andmanufacturing overheads. It is the production cost less thecost of raw materials but including gains and losses inweight or volume of direct labor arising due to production.

ii. Normal costs: this is the cost which is normallyincurred at a given level of output in the conditions inwhich that the level of output is achieved.

iii. Traceable costs: these are those costs which can beeasily associated with the product process and

iv. Avoidable costs: these are those costs which under the present conditions need not be incurred.

v. Unavoidable costs: unavoidable costs are thosewhich under the present conditions must be incurred.

vi. Total cost: this is the sum of all costs associated toa particular unit, or process or department or the entireconcern. It may also mean the sum of the total material,labor and overheads. The term total cost however is not

precise by using terms that indicate the elements of costincluded.

vii. Value added costs: it means the selling price of the product/ service less the cost of materials used in the product/service. Often depreciation is deducted for ascertaining value added.

Managerial Use of classification of costs


22/84

1. Helps in Ascertainment of Cost: Cost Accounting helps in the ascertainment of cost of

each product, process, job, contract, activity etc. by using different methods of costing suchas Job Costing and Process Costing.

2. Helps in Control of Cost: It helps in the control of material costs, labor costs and

overheads by using different techniques of control such as Standard Costing and Budgetary

Control.

3. Helps in Decision making: It helps the management in making various decisions such as

(a) Whether to make or buy a component

(b) Whether to retain or replace an existing machine

(c) Whether to process further or not

(d) Whether to shut down or continue operations

(e) Whether to accept orders below cost or not

(f) Whether to expand or not

(g) How much reduction in the selling price should be made in case of depression?

4. Helps in fixing Selling Prices: It helps the management in fixing selling prices of

products or services by providing detailed cost information.

5. Helps in Inventory Control: It helps in inventory by using various techniques such as ABC analysis, Economic Order Quantity, Stock levels, Perpetual Inventory system and

Continuous Stock Taking, Inventory Turnover Ratio etc.

6. Helps in Cost reduction: It helps in the introduction of cost reduction programme and

finding out new and improved method to reduce costs.

7. Helps in measurements of Efficiency: It helps in measurements of efficiency of operations through establishment of standards and variance analysis.

8. Helps in preparation of Budgets: It helps in the preparation of various budgets such as

Sales Budget, Production Budget, Purchase Budget, Man-Power Budget, Overheads

budget.


23/84


24/84

The Cost Accountant Duties Are Critical To Any Organization And Its Growth

A cost accountant plays a very vital and an informative role in any organization. Theanalysis, compare as well as interpretation of facts and figures included in the cost

accountant duties play an important role in the overall operations of the organization. Hissound judgments based on the data collected; his ability to communicate the results of hiswork verbally as well as in writing; his interpersonal skills and his ability to work onvarious business systems as well as computers along with the most important qualitieslike integrity and honesty are some of the qualifications that can separate an excellentcost accountant from the others. Along with all these the qualification of CPA can really

be the jewel in the crown of a cost accountant.

The cost accountant duties need specialization as it concerns with some of the mostcrucial aspects of the entire financial operations that the organization is involved with.

Some of the primary cost accountant duties can be summarized as: Keep a close eye on the companys various financial operations

Maintain a strict vigil on all the employees during the audits

Access as well as evaluate the managements response to the audits

He might also be required to conduct internal audits of the company in order tocheck the efficiency as well as effectiveness of the various controls, operations aswell as the accuracy of the financial records of the company

The cost accountant duties might also include the uncovering of the weaknessesthat might be inherent in the companys bidding process

He has to report any discrepancy that he might have interpreted, to themanagement

He also has to provide the management with the information regarding the factorsthat might have a bearing on the prices as well as profitability of the products andexplain if there are any variances in the same to the senior management

Concerning the seriousness and importance of the cost accountant duties, it is reallyimperative that the selection of the cost accountant is done carefully.

Cost Accountant Responsibilities

Wanting to have a career in something, and enjoying what you do every day in this role; can often be two differentthings. If you are considering a career as an Cost Accountant, you may know the basic role or function of this
http://www.accountant-search.com/cost-accountant.htmlhttp://www.accountant-search.com/cost-accountant.html


25/84

position; but do you know what responsibilities you will have? Here is a list of the most standard responsibilitiesin the daily position of Cost Accountant.

Collect operational data and make analyses reports to forecast expenses and budgets.

Collect production data, maintenance and inventory control data.

Manage and coordinate annual physical counts and cycle counts in a plant.

Evaluate production costs, gains & losses and month-end closing data.

Forecast, prepare and implement a plant's budget.

Collect and analyze past years data to forecast budget for the ensuing year.

Study, review and reconcile variances in reports and data.

Identify solutions and create resources to control gaps.

Design, create and implement strategies, best practices and process improvements.

Identify operational opportunities and implement best processes and practices.

Design and implement advanced solutions based on collected data.

Accounting information systemAn accounting information system (AIS) is the system of records a business keepsmaintaining its accounting system . This includes the purchase, sales, and other financial

processes of the business. The purpose of AIS is to accumulate data and provide decisionmakers (investors, creditors, and managers) with information.

While this was previously a paper-based process, most businesses now use accounting software . In an electronic financial accounting system, the steps in the accounting cycleare dependent upon the system itself. For example, some systems allow direct journal

posting to the various ledgers and others do not. Not All AISs are computerized.
http://en.wikipedia.org/wiki/Accounting_systemhttp://en.wikipedia.org/wiki/Accounting_systemhttp://en.wikipedia.org/wiki/Accounting_systemhttp://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/w/index.php?title=Electronic_financial_accounting&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Electronic_financial_accounting&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Electronic_financial_accounting&action=edit&redlink=1http://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/wiki/Accounting_systemhttp://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/w/index.php?title=Electronic_financial_accounting&action=edit&redlink=1http://en.wikipedia.org/wiki/Ledger


26/84

K e y c h a r a c t e r i s t i c s o f a c c o u n t i n g i n f o r m a t i o n

There is general agreement that, before it can be regarded as useful in satisfying the needsof various user groups, accounting information should satisfy the following criteria:

Understandability

This implies the expression, with clarity, of accounting information in such a way that itwill be understandable to users - who are generally assumed to have a reasonableknowledge of business and economic activities

Relevance

This implies that, to be useful, accounting information must assist a user to form, confirmor maybe revise a view - usually in the context of making a decision (e.g. should I invest,should I lend money to this business? Should I work for this business?)

Consistency

This implies consistent treatment of similar items and application of accounting policies

Comparability

This implies the ability for users to be able to compare similar companies in the sameindustry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.

Reliability

This implies that the accounting information that is presented is truthful, accurate,complete (nothing significant missed out) and capable of being verified (e.g. by a

potential investor).

Objectivity

This implies that accounting information is prepared and reported in a "neutral" way. Inother words, it is not biased towards a particular user group or vested interest

Budgeting and Internal Controls - Accounting Information forPlanning


27/84

In most operations, the manager is responsible for preparing and maintaining a budget.

The budget, or financial plan, simply details the expectations of an operations owners

and managers for a specific period of time. In this article you will learn about the variety

of ways hospitality managers utilize budgets and the budgeting process to better operatetheir businesses. In fact, as you will discover, managers most often prepare not one, but

several types of budgets. You will learn about the various types of budgets most

hospitality operators prepare and why they develop them. Of all the many budgets that

can be produced, the operations budget is the one that is often foremost in the minds of

those who actually manage hospitality businesses. This is so because these budgets

contain important information about the controllable costs that are frequently used to

determine a managers actual skill and effectiveness. When managers meet budgetexpectations, they are often rewarded. When their operational budgets are not met,

financial and other incentives may be reduced or even eliminated. As experienced

managers know, one important result of creating a budget is the potential to later make

comparisons between budgeted and actual financial performance. A second type of

budget that is of critical importance to many hospitality managers is the cash budget. It is

this budget that allows managers to ensure that the operations cash on hand, which is

used to pay the normal operating costs of the business, is sufficient to cover thoseexpenses. Finally, you will learn about some of the pitfalls and solutions to controlling

the actual outcomes of careful budgeting. An effective control system will have five

fundamental characteristics, which are managements concern for assets, accurate data

collection and comparison to written standards, separation of responsibilities, cost

effectiveness, and regular external review.

- The Importance of Budgets

- Types of Budgets- Operations Budget Essentials

- Developing an Operations Budget

- Monitoring an Operations Budget

- Cash Budgeting

- Managing Budgets through Internal Controls


28/84

The Importance of Budgets

Just as the income statement tells a managerial accountant about past performance, the

budget, or financial plan, is developed to help you achieve your future goals. In effect,

the budget tells you what must be done if predetermined profit and cost objectives are to

be met. To prepare the budget and stay within it assures your predetermined profit levels.

Without such a plan, you must guess about how much to spend and how much sales you

should anticipate. Effective managers build their budgets, monitor them closely, modify

them when necessary, and achieve their desired results. Budgeting can also cause conflicts.

This is true, for example, when a hotels food and beverage department and housekeeping

department both seek dollars budgeted for new equipment. The top needs are for either

a new kitchen range or a new commercial washing machine. Obviously, the food and

beverage manager and the housekeeping manager may hold different points of view on

where these funds can best be spent!

Accounting Information for Planning - Forecasting in the HospitalityIndustry

Hospitality managers working in restaurants and hotels simply must be able to accurately

predict the number of guests they will serve as well as when those guests will arrive. If they

cannot, guest service levels or profits will surely suffer. In this article you will learn how

hospitality managers forecast business revenues so they can carefully plan to maximize

guest satisfaction.

It has been said that average managers know what has happened in their operations

in the past and good managers know what is currently happening in their operations.

However, the very best managers also know what will happen in the future. While it may

not be possible for managerial accountants to predict their future business volume with

100% accuracy, it is possible to create and utilize management tools that will become very

accurate in estimating future revenues, expense requirements, and staffing needs.

The advantages of maintaining accurate sales forecasts are many but include greater


29/84

efficiency in scheduling the employees needed to service anticipated guests, greater accuracy

in estimating food production requirements, improved levels of inventory maintained

(because demand for products will be better known), and greater effectiveness in developing

and maintaining purchasing systems.

In the restaurant business, an understanding of anticipated sales, in terms of either

revenue dollars, guest counts, or both, will help you have the right number of workers,

with the right amounts of product available, at the right time. For hoteliers, knowing the

anticipated demand for guest rooms and other hotel services also allows for the proper

scheduling of employees; however, it does even more. Because hotel room rates (unlike

a restaurants menu prices) are often adjusted monthly, weekly, or daily to reflect the

immediate demand for rooms, a good understanding of how to forecast room occupancy

rates allows hoteliers the ability tomaximize RevPAR through the effective pricing of rooms

and the elimination of room discounts during periods of high room demand.

In this article, you will learn how managerial accountants can accurately forecast

revenues as well as how they utilize this information to maximize profit and increase

operational efficiency.

- The Importance of Accurate Forecasts

- Forecast Methodology- Utilizing Trend Lines in Forecasting

The Importance of Accurate Forecasts

One of the first questions restaurateurs and hoteliers must ask themselves is very simple:

How many guests will we serve today? This week? This year? The correct answers to

questions such as these are critical, since these guests will provide the revenue from which

basic operating expenses will be paid. Clearly, if too fewguests are served, total revenuemay be insufficient to cover expenses, even if costs are well managed. In addition, purchasing

decisions regarding the kind and quantity of food or beverage to buy, the number of rooms

to clean, or the supplies to have on hand are dependent on knowing the number of guests

who will be coming to consume those products.

Labor required to serve the guests is also determined based on the managers best


30/84

guess of the projected number of customers to be served and what these guests will buy.

Forecasts of future revenues are normally based on a careful recording of previous sales,

since what has happened in the past in an operation is usually the best predictor of what will

happen in that same operation in the future. Finally, operating, cash, and capital budgets

cannot be prepared unless an operator knows the amount of revenue

upon which these bugets should be based.

In the hospitality industry, there are a variety of ways of counting or defining sales. In its

simplest case, sales are the dollar amount of revenue collected during some predetermined

time period. The time period may be an hour, shift, day, week, month, or year. When used

in this manner, sales and revenue are interchangeable terms. It is important, however, to

remember that a distinction ismade in the hospitality industry between sales (revenue) and

sales volume, which is the number of units sold. In many areas of the hospitality industry,

for example, in college and university dormitory food service, it is customary that no cash

actually changes hands during a particular meal period. Of course, the manager of such a

facility still created sales and would be interested in sales volume, that is, how much food

was actually consumed by the students on that day. This is critical information because, as

we have seen, a managermust be prepared to answer the question, Howmany individuals

did I serve today, and how many should I expect tomorrow?

Need for Managerial Accounting Information:

Every organization-large and small-has managers. Someone must be responsible for making plans,organizing resources, directing personnel, and controlling operations. Every where mangers carry out threemajor activities-planning, directing and motivating, and controlling.

Planning:

Planning involves selecting a course of action and specifying how the action will be implemented. The firststep in planning is to identify the alternatives and then to select from among the alternatives the one thatdoes the best job of furthering the organization's objectives. While making choices management must

balance the opportunity against the demands made on the companies resources.


31/84

The plans of management are often expressed formally in budgets, and the term budgeting is applied togenerally describe the planning process. Budgets are usually prepared under the direction of controller, whois the manager in charge of the accounting department. Typically, budgets are prepared annually andrepresent management's plans in specific, quantitative terms.

Directing and Motivating:

In addition to planning for the future, managers must oversee day-to-day activities and keep theorganization functioning smoothly. This requires the ability to motivate and affectively direct people.Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, andmake many small decisions that affect customers and employees. In effect, directing is that part of themanager's work that deals with the routine and the here and now. Managerial accounting data, such as dailysales reports are often used in this type of day-to-day decision making.

Controlling:

In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback,which signals operations are on track, is the key to effective control. In sophisticated organizations, thisfeedback is provided by detailed reports of various types. One of these reports, which compares budgetedto actual results, is called a performance report. Performance report suggest where operations are not

proceeding as planned and where some parts of the organization may require additional attention.

The Planning and Control Cycle:

The work of management can be summarized in a model. The model, which depicts the planning andcontrol cycle, illustrates the smooth flow of management activities from planning through directing andmotivating, controlling, and then back to planning again. all of these activities involve decision making. Soit is depicted as the hub around which the activities revolve.

Business Planning and Control: Integrating Accounting, Strategy and People startswith an introduction to core areas of management accounting and business planning. Itthen explores relationships between strategy, management accounting information, andthe design of control systems, taking into account the needs of both people andorganizations.

Business Planning and Control is an indispensable text for both undergraduate and postgraduate students taking modules related to management accounting and business planning and control.


32/84

Management process

Management process is a process of planning and controlling the performance or execution of any type of activity, such as:

a project ( project management process ) or a process ( process management process, sometimes referred to as the process

performance measurement and management system ).

The organization 's senior management is responsible for carrying out its management process. However, this is not always the case for all management processes, for example,it is the responsibility of the project manager to carry out a project management

process [1].

[edit ] See also

The Role of Accounting Information

Contributor By HeidiBW , eHow Contributing Writer Article Rating: (1 Ratings)

Add to Favorites

Accounting is "an information and measurement system that identifies, records,and communicates relevant, reliable, and comparable information aboutorganizations business activities," as defined in "Fundamental AccountingPrinciples" by Wild, Larson, and Chiappetta. Generally accepted accounting

principles (GAAP) are place that help us interpret and apply this informationeffectively.

What is Accounting Used For?

1. Accounting informs users of two main points about a company--whatit owes and what it owns. The basic accounting equation is as follows:Assets equal liabilities plus equity. Assets are resources that will
http://en.wikipedia.org/wiki/Planhttp://en.wikipedia.org/wiki/Planhttp://en.wikipedia.org/wiki/Control_(management)http://en.wikipedia.org/wiki/Performancehttp://en.wikipedia.org/wiki/Projecthttp://en.wikipedia.org/wiki/Projecthttp://en.wikipedia.org/wiki/Project_management_processhttp://en.wikipedia.org/wiki/Process_managementhttp://en.wikipedia.org/w/index.php?title=Performance_measurement_and_management_system&action=edit&redlink=1http://en.wikipedia.org/wiki/Organizationhttp://en.wikipedia.org/wiki/Organizationhttp://en.wikipedia.org/wiki/Senior_managementhttp://en.wikipedia.org/wiki/Senior_managementhttp://en.wikipedia.org/wiki/Management_process#cite_note-0%23cite_note-0http://en.wikipedia.org/w/index.php?title=Management_process&action=edit&section=1http://www.ehow.com/members/ds_16e07f07-5d9f-4d5b-9e73-edd03af1a053.htmlhttp://www.ehow.com/account/simple_login.aspxhttp://www.ehow.com/print/about_6367410_role-accounting-information.htmlhttp://www.ehow.com/members/ds_16e07f07-5d9f-4d5b-9e73-edd03af1a053.htmlhttp://en.wikipedia.org/wiki/Planhttp://en.wikipedia.org/wiki/Control_(management)http://en.wikipedia.org/wiki/Performancehttp://en.wikipedia.org/wiki/Projecthttp://en.wikipedia.org/wiki/Project_management_processhttp://en.wikipedia.org/wiki/Process_managementhttp://en.wikipedia.org/w/index.php?title=Performance_measurement_and_management_system&action=edit&redlink=1http://en.wikipedia.org/wiki/Organizationhttp://en.wikipedia.org/wiki/Senior_managementhttp://en.wikipedia.org/wiki/Management_process#cite_note-0%23cite_note-0http://en.wikipedia.org/w/index.php?title=Management_process&action=edit&section=1http://www.ehow.com/members/ds_16e07f07-5d9f-4d5b-9e73-edd03af1a053.htmlhttp://www.ehow.com/account/simple_login.aspxhttp://www.ehow.com/print/about_6367410_role-accounting-information.html


33/84

provide benefit in the future to the company. Liabilities are what thecompany owes to creditors or non-owners in future services goods or payments. Equity is explained as owner capital. By using theaccounting process and GAAP principles to identify, document andbalance these items, we can determine a net income for a businessand prepare financial statements for internal and external users whowill rely on this information.

Who Uses Accounting information?

2. Accounting keeps track of not only current financial information butalso a history, which will aid not only employees but outside interestedparties as well. Two types of users rely upon financial accounting--external and internal. External users are not directly involved withrunning the organization. These types of users will typically have limited

access to the information but will base their business decisions onthese reports. Examples of external users are customers, shareholders,lawyers and brokers. Internal users are directly involved in managingand operating an organization. They use accounting information tohelp improve the effectiveness of the business. Managers, payrolldirectors, and sales staff are examples of internal users of accounting.

Applying Accounting

3. In every business as well as in personal finance, there is a need for

a knowledgeable and ethical accounting; it is a key to success and asolid financial future. Proper documenting, balancing, and reporting of financial information is used by consumers, investors, employees, andmanagement.

Employment Opportunities

4. Opportunities for employment in this field are in demand and usuallypaid well. Certification is usually required and helps maintain a standardof knowledge in this field. There are four categories--financial,managerial, taxation, and accounting-related work. Examples of thesevarious jobs are external and internal auditors, certified professionalaccountants, chief financial auditors, payroll specialists, and appraisers.

Personal Accounting

5. Keeping track of income, expenses and assets is also a key elementof personal accounting. Individuals invest their money into various
http://www.ehow.com/about_6367410_role-accounting-information.htmlhttp://www.ehow.com/about_6367410_role-accounting-information.htmlhttp://www.ehow.com/about_6367410_role-accounting-information.htmlhttp://www.ehow.com/about_6367410_role-accounting-information.html


34/84

stocks and bonds or savings accounts based on the financial reportingof those companies. Maintaining accurate accounting of income versusmonthly expenses and planning for the future are important. Somepeople hire CPAs to help them understand where and how to invest aswell as to assist them in understanding tax filing and responsibilities.

Read more: The Role of Accounting Information | eHow.com http://www.ehow.com/about_6367410_role-accounting-information.html#ixzz0uCT6JrKJ

Accounting Information Systems (Accounting information systems s) combine the study and practice of

accounting with the design, implementation, and monitoring of information systems. Such systems use modern

information technology resources together with traditional accounting controls and methods to provide users

the financial information necessary to manage their organizations.

Accounting information systems TECHNOLOGY

Input The input devices commonly associated with Accounting information systems include: standard personal

computers or workstations running applications; scanning devices for standardized data entry; electronic

communication devices for electronic data interchange (EDI) and e-commerce. In addition, many financialsystems come Web-enabled to allow devices to connect to the World Wide Web.

Process Basic processing is achieved through computer systems ranging from individual personal computers to

large-scale enterprise servers. However, conceptually, the underlying processing model is still the double-

entry accounting system initially introduced in the fifteenth century.

Output Output devices used include computer displays, impact and nonimpact printers, and electronic

communication devices for EDI and e-commerce. The output content may encompass almost any type of

financial reports from budgets and tax reports to multinational financial statements.

MANAGEMENT INFORMATION SYSTEMS (MIS)

MISs are interactive human/machine systems that support decision making for users both in and out of

traditional organizational boundaries. These systems are used to support an organizations daily operational
http://www.ehow.com/about_6367410_role-accounting-information.html#ixzz0uCT6JrKJhttp://www.ehow.com/about_6367410_role-accounting-information.html#ixzz0uCT6JrKJhttp://www.ehow.com/about_6367410_role-accounting-information.html#ixzz0uCT6JrKJhttp://www.ehow.com/about_6367410_role-accounting-information.html#ixzz0uCT6JrKJhttp://www.ehow.com/about_6367410_role-accounting-information.html#ixzz0uCT6JrKJhttp://www.ehow.com/about_6367410_role-accounting-information.html#ixzz0uCT6JrKJ


35/84

activities; current and future tactical decisions; and overall strategic direction. MISs are made up of several

major applications including, but not limited to, the financial and human resources systems.

Financial applications make up the heart of an Accounting information systems in practice. Modules commonly

implemented include: general ledger, payables, procurement/ purchasing, receivables, billing, inventory,

assets, projects, and budgeting. Human resource applications make up another major part of modern

information systems. Modules commonly integrated with the Accounting information systems include: human

resources, benefits administration, pension administration, payroll, and time and labor reporting.

Accounting information systems INFORMATION SYSTEMS IN CONTEXT

Accounting information systems s cover all business functions from backbone accounting transaction processing

systems to sophisticated financial management planning and processing systems. Financial reporting starts at

the operational levels of the organization, where the transaction processing systems capture important business

events such as normal production, purchasing, and selling activities. These events (transactions) are classified

and summarized for internal decision making and for external financial reporting. Cost accounting systems are

used in manufacturing and service environments. These allow organizations to track the costs associated with

the production of goods and/or performance of services. In addition, the Accounting information systems can

provide advanced analyses for improved resource allocation and performance tracking. Management accounting

systems are used to allow organizational planning, monitoring, and control for a variety of activities. This allows

managerial-level employees to have access to advanced reporting and statistical analysis. The systems can be

used to gather information, to develop various scenarios, and to choose an optimal answer among alternative

scenarios.

DEVELOPMENT

The development of an Accounting information systems includes five basic phases: planning, analysis, design,

implementation, and support. The time period associated with each of these phases can be as short as a few

weeks or as long as several years.

Planningproject management objectives and techniques The first phase of systems development is the

planning of the project. This entails determination of the scope and objectives of the project, the definition of

project responsibilities, control requirements, project phases, project budgets, and project deliverables.

Analysis The analysis phase is used to both determine and document the accounting and business processes used

by the organization. Such processes are redesigned to take advantage of best practices or of the operating

characteristics of modern system solutions.


36/84

Data analysis is a thorough review of the accounting information that is currently being collected by an

organization. Current data are then compared to the data that the organization should be using for managerial

purposes. This method is used primarily when designing accounting transaction processing systems.

Decision analysis is a thorough review of the decisions a manager is responsible for making. The primary

decisions that managers are responsible for are identified on an individual basis. Then models are created to

support the manager in gathering financial and related information to develop and design alternatives, and to

make actionable choices. This method is valuable when decision support is the systems primary objective.

Process analysis is a thorough review of the organizations business processes. Organizational processes are

identified and segmented into a series of events that either add or change data. These processes can then be

modified or reengineered to improve the organizations operations in terms of lowering cost, improving service,

improving quality, or improving management information. This method is appropriate when automation or

reengineering is the systems primary objective.

Design The design phase takes the conceptual results of the analysis phase and develops detailed, specific

designs that can be implemented in subsequent phases. It involves the detailed design of all inputs, processing,

storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools and

application generators. Processing can be shown through the use of flowcharts or business process maps that

define the system logic, operations, and work flow. Logical data storage designs are identified by modeling the

relationships among the organizations resources, events, and agents through diagrams. Also, entity relationship

diagram (ERD) modeling is used to document largescale database relationships. Output designs are documented

through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and on-

line analytical processing tools. In addition, all aspects of the design phase can be performed with software tool

sets provided by specific software manufacturers.

Reporting is the driving force behind an Accounting information systems development. If the system analysis and

design are successful, the reporting process provides the information that helps drive management decision

making. Accounting systems make use of a variety of scheduled and on-demand reports. The reports can be

tabular, showing data in a table or tables; graphic, using images to convey information in a picture format; or

matrices, to show complex relationships in multiple dimensions. There are numerous characteristics to consider

when defining reporting requirements. The reports must be accessible through the systems interface. They

should convey information in a proactive manner. They must be relevant. Accuracy must be maintained. Lastly,

reports must meet the information processing (cognitive) style of the audience they are to inform.

Reports are of three basic types: A filter report that separates select data from a database, such as a monthly

check register; a responsibility report to meet the needs of a specific user, such as a weekly sales report for a

regional sales manager; a comparative report to show period differences, percentage breakdowns and variances


37/84

between actual and budgeted expenditures. An example would be the financial statement analytics showing the

expenses from the current year and prior year as a percentage of sales.

Screen designs and system interfaces are the primary data capture devices of Accounting information systems s

and are developed through a variety of tools. Storage is achieved through the use of normalized databases that

assure functionality and flexibility.

Business process maps and flowcharts are used to document the operations of the systems. Modern Accounting

information systems s use specialized databases and processing designed specifically for accounting operations.

This means that much of the base processing capabilities come delivered with the accounting or enterprise

software.

Implementation The implementation phase consists of two primary parts: construction and delivery.

Construction includes the selection of hardware, software and vendors for the implementation; building and

testing the network communication systems; building and testing the databases; writing and testing the new

program modifications; and installing and testing the total system from a technical standpoint. Delivery is the

process of conducting final system and user acceptance testing; preparing the conversion plan; installing the

production database; training the users; and converting all operations to the new system.

Tool sets are a variety of application development aids that are vendor-specific and used for customization of

delivered systems. They allow the addition of fields and tables to the database, along with ability to create

screen and other interfaces for data capture. In addition, they help set accessibility and security levels for

adequate internal control within the accounting applications.

Security exists in several forms. Physical security of the system must be addressed. In typical Accounting

information systems s the equipment is located in a locked room with access granted only to technicians.

Software access controls are set at several levels, depending on the size of the Accounting information systems .

The first level of security occurs at the network level, which protects the organizations communication

systems. Next is the operating system level security, which protects the computing environment. Then,

database security is enabled to protect organizational data from theft, corruption, or other forms of damage.

Lastly, application security is used to keep unauthorized persons from performing operations within the

Accounting information systems .

Testing is performed at four levels. Stub or unit testing is used to insure the proper operation of individual

modifications. Program testing involves the interaction between the individual modification and the program it

enhances. System testing is used to determine that the program modifications work within the Accounting

information systems as a whole. Acceptance testing ensures that the modifications meet user expectations and

that the entire Accounting information systems performs as designed.


38/84

Conversion entails the method used to change from an old Accounting information systems to a new Accounting

information systems . There are several methods for achieving this goal. One is to run the new and old systems

in parallel for a specified period. A second method is to directly cut over to the new system at a specified point.

A third is to phase in the system, either by location or system function. A fourth is to pilot the new system at a

specific site before converting the rest of the organization.

Support The support phase has two objectives. The first is to update and maintain the Accounting information

systems . This includes fixing problems and updating the system for business and environmental changes. For

example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to

conversion or reference tables used for financial reporting. The second objective of support is to continue

development by continuously improving the business through adjustments to the Accounting information systems

caused by business and environmental changes. These changes might result in future problems, new

opportunities, or management or governmental directives requiring additional system modifications.

ATTESTATION

Accounting information systems s change the way internal controls are implemented and the type of audit trails

that exist within a modern organization. The lack of traditional forensic evidence, such as paper, necessitates

the involvement of accounting professionals in the design of such systems. Periodic involvement of public

auditing firms can be used to make sure the Accounting information systems is in compliance with current

internal control and financial reporting standards. After implementation, the focus of attestation is the review

and verification of system operation. This requires adherence to standards such as ISO 9000-3 for software

design and development as well as standards for control of information technology.

Periodic functional business reviews should be conducted to be sure the Accounting information systems remains

in compliance with the intended business functions. Quality standards dictate that this review should be done

according to a periodic schedule.

ENTERPRISE RESOURCE PLANNING (ERP)

ERP systems are large-scale information systems that impact an organizations Accounting information systems .

These systems permeate all aspects of the organization and require technologies such as client/server and

relational databases. Other system types that currently impact Accounting information systems s are supply

chain management (SCM) and customer relationship management (CRM).

Traditional Accounting information systems s recorded financial information and produced financial statements

on a periodic basis according to GAAP pronouncements. Modern ERP systems provide a broader view of

organizational information, enabling the use of advanced accounting techniques, such as activity- based costing

(ABC) and improved managerial reporting using a variety of analytical techniques.


39/84

General principles of cost AccountingThe followings may be considered as the general principles of cost

accounting:

1. A cost should be related to its causes: Costs should be related as closely as possible to their causes so that cost can be shared only among the cost units passing through that department of which expenses are being considered.

2. A cost should be charged only after it has been incurred:While determining the cost of individual units those costs which have actually been incurredshould be considered. For example, a cost unit should not be charged to the selling costs, while it isstill in the factory. Selling costs can be charged with the products which are sold.

3. The convention of prudence should be ignored: Usually accountants believe in historicosts and while determining cost, they always attach importance to the historical cost. In costaccounting this convention must be ignored, otherwise, the management appraisal of the

profitability of projects may be VI tilted. According to W.M.harper,"a cost statement should, as far as possible, give the facts with no known bias. If a contingency needs to taken into consideration itshould be shown separately and distinctly".

4. Abnormal costs should be excluded from cost accounts:Costs which are of abnormal nature (e.g. accident, negligence etc.)Should be ignored whilecomputing the cost, otherwise, it will distort cost figures and mislead management as to the

working results of their undertaking under normal conditions.

5. Past costs not to be charged to future period:Costs which could not be recovered or charged in full during the concerned period should not betaken to a future period ,they are likely to influence the future period and future results are likelyto be distorted.

6. Principles of double entry should be applied wherever necessary:Costing requires a greater use of cost sheets and cost statements for the purpose of costascertainment and cost control, but cost ledger and cost control accounts should be kept on double

principle as far as possible.

Objectives of Cost Accounting

Cost accounting aims at systematic recording of expenses and analysis of the same so as toascertain the cost of each product manufactured or service rendered by an organisation.informationregarding cost of each product or service would enable the management to know where to


40/84

economize on costs, how to fix prices, how to maximize profits and so on. Thus, the main objectsof cost accounting are the following:

1. To analyze and classify all expenditure with reference to the cost of products and operations.

2. To arrive at the cost of production of every unit, job, operation, process, department or serviceand to develop cost standard.3. To indicate to the management any inefficiencies and the extent of various forms of waste,whether of materials, time, expenses or in the use of machinery, equipment and tools. Analysis of the causes of unsatisfactory results may indicate remedial measures.4. To provide data for periodical profit &loss accounts and balance sheets at such intervals, e.g.,weekly, monthly or quarterly, as may be desired by the management during the financial year, notonly for the whole business but also by departments or individual products. Also, to explain indetail the exact reasons for profit or loss revealed in total, in the profit &loss Account.5. To

Documents

Cma 1st Unit