INTRODUCTION TO

MANAGEMENT ACCOUNTING
for BBA 2023

Course Instructor:
Prof. Surbhi Gupta
LEARNING OUTCOMES

By the end of the session, students are expected to understand:

1. Introduction to Cost and Management Accounting
2. Features of Cost and Management Accounting
3. Scope of Cost and Management Accounting
4. Importance of Cost and Management Accounting
5. Functions of Cost and Management Accounting
6. Differences between:
i. Financial Accounting, Cost Accounting, and Management Accounting
WHAT IS ACCOUNTING?
It describes the process of
tracing an individual or
company’s monetary
transactions.
WHAT IS ACCOUNTING?

• Accounting is the process of keeping track of all financial transactions

within a business, such as any money coming in and money going out.
• It’s not only important for businesses in terms of record keeping and
general business management, but also for legal reasons and tax
purposes.
• Accounting is the process of recording, classifying and summarizing
financial transactions.
• It provides a clear picture of the financial health of your organization and
its performance, which can serve as a catalyst for resource management
and strategic growth.
ACCOUNTING TYPES

Recording business transactions in the books of account for the purpose of

Financial Accouting presenting final accounts

Provide relevant information to management for decision-making, cost

Cost Accounting control, and performance evaluation.

To assist management in planning, controlling, and decision-making to

Management Accounting facilitate effective business operations and achieve organizational goals
WHY STUDY COST AND MANAGEMENT
ACCOUNTING?
• Decision-Making Skills (to evaluate alternative courses of action, assess
the financial implications, and make informed choices)
• Strategic Planning (learn how to set budgets, allocate resources, and
contribute to the development of long-term organizational strategies)
• Resource Allocation (learn how to allocate costs to products, services, or
departments, which is crucial for efficient resource management within
an organization)
• Performance Evaluation (to measure and evaluate the performance of
various aspects of a business, such as departments, projects, or products.
This skill is valuable for assessing efficiency and identifying areas for
improvement)
WHY STUDY COST AND MANAGEMENT
ACCOUNTING?
• Budgeting Skills (setting financial targets, forecasting future expenses
and revenues, and creating a financial plan)
• Cost Control (helps students understand how to control and manage
costs effectively; crucial for businesses to remain competitive and
profitable)
• Entrepreneurship (provides the financial foundation necessary for
starting and managing a business; helps entrepreneurs make informed
decisions about pricing, production, and resource allocation)
• Career Opportunities (Professionals in roles such as financial analysts,
management consultants, controllers, and business managers benefit
from these skills)
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WHY STUDY COST AND MANAGEMENT
ACCOUNTING? (for Students from Business class
family)
• Enhanced Business Acumen (equips them with the skills to analyze,
interpret, and use financial information effectively, contributing to overall
business acumen)
• Family Business Management (provides essential tools for managing the
financial aspects of the business-like budgeting, cost control, and
strategic decision-making)
• Sustainable Business Practices (helps students identify cost-effective and
sustainable business practices. Understanding how to control costs and
improve efficiency is critical for the long-term success and sustainability
of a business)
WHY STUDY COST AND MANAGEMENT
ACCOUNTING? (for Students from Business class
family)
• Financial Decision-Making (provides them with the skills needed to make
informed decisions related to pricing, investment, and resource allocation)
• Strategic Planning for Growth (helping students identify opportunities for
growth and expansion)
• Succession Planning
• Efficient Resource Allocation
• Risk Management (apply these skills to identify and mitigate financial risks that
may impact the family business)
• Value Creation (By identifying areas of improvement and implementing cost-
effective measures, they contribute to the overall value of the family
enterprise)
• Professional Growth
 Users of
accounting
information
 MANAGEMENT ACCOUNTING DEFINITION
• National Association of Accountants (USA) – Management accounting is
“the process of identification, measurement, accumulation, analysis,
preparation and communication of financial information used by
management to plan, evaluate and control within the organization and to
assure appropriate use and accountability for its resources”.

Identification

Communication Measurement

Management
accounting

Preparation Accumulation
Analysis
RELATIONSHIP
OF FINANCIAL,
COST &
MANAGEMENT
ACCOUNTING
MANAGEMENT ACCOUNTING AT NYKAA
• Costing and Pricing Strategies: MA helps in determining the costs associated
with various products and services. This information is crucial for Nykaa to set
competitive prices, considering factors such as acquisition costs, shipping,
storage, and promotional expenses.
• Budgeting and Forecasting: This involves setting financial targets, planning for
sales and expenses, and regularly assessing actual performance against
budgeted figures.
• Performance Measurement and KPIs: MA contributes to the identification and
monitoring of key performance indicators (KPIs) relevant to Nykaa's business
goals. These metrics could include sales growth, customer acquisition costs,
inventory turnover, and other factors critical to business success.
• Inventory Management: Efficient management of inventory is crucial in the
retail sector. MA helps Nykaa in optimizing inventory levels, controlling carrying
costs, and ensuring that the right products are available to meet customer
demand.
MANAGEMENT ACCOUNTING AT NYKAA
• Decision Support: Assist in providing financial insights for strategic decision-
making like assessing the financial feasibility of new product launches,
expansion strategies, or investments in technology and infrastructure.
• Customer Profitability Analysis: Understanding the profitability of different
customer segments is essential for e-commerce companies. MA can help
Nykaa analyze customer behavior, preferences, and the financial impact of
various marketing strategies.
• Cost of Customer Acquisition: MA assists in calculating the cost of acquiring
each customer which valuable for Nykaa to assess the effectiveness of
marketing campaigns and allocate resources efficiently.
• Online Analytics: In the e-commerce industry, online analytics play a significant
role. MA techniques can be applied to analyze web traffic, conversion rates,
and the overall performance of Nykaa's online platform.
SCOPE OF COST AND MANAGEMENT ACCOUNTING
• To determine product costs: The total product cost and cost per unit of product
are important in making inventory valuation, deciding price of the product, and
managerial decision-making.
• To determine selling price: The information from cost accounting helps the
management in deciding the selling price, and in preparing tenders and
quotations.
• To control costs: It aims to control costs by establishing a balance between actual
and budgeted performances (comparing and analyzing the variance to take
corrective action).
• To facilitate planning and policy formulation: The statements of units and stock
provide information for formulating operating policies. The different alternative
plans are evaluated in terms of respective cost and associated benefits.
 FUNCTIONS OF COST AND MANAGEMENT
ACCOUNTING
• It helps in determining and analyzing the cost of departments, processes, jobs, products,
sales territories, sales order etc.
• It helps management in controlling cost through accumulation and utilization of cost data
regarding different products, activities or functions.
• It helps to make revenue decisions-
 Pricing- Pricing new products, changing the price of existing products.
 Product mix- short-term (choosing to focus on a product), long-term (increasing or
decreasing capacity).
 Profit-volume mix- decisions regarding cost, volume, and selling price to maximize the
profits.
• It assists management in formulating policies and plans directed towards profitable
operations (pricing of new products or services, replacement of machinery, dropping a
product, expansion or contraction programmes).
• It assists in the formulation and execution of budgets and standards
FEATURES OF COST AND MANAGEMENT ACCOUNTING

• It is both science and art.

• It is a process of accounting for costs (cost ascertainment and cost control) and using the
information for managerial decision-making.
• It ascertains the total cost or cost per unit of good sold.
• It records income and expenditure relating to production of goods and services.
• It establishes budgets and standards to find out deviations and variances.
• It involves the preparation of right information to the right person at the right time so that it
may be helpful for the management for planning, control, and decision-making.
• It provides statistical data on the basis of which future estimates are prepared and
quotations are estimated.
• Cost of incomplete work is also ascertained.
• Adequate control is imposed on elements of cost (material, labour, and expenses).
 IMPORTANCE OF COST AND MANAGEMENT
ACCOUNTING
• Managers and manufacturers:
Helps in ascertainment of cost.
Identifying unprofitable activities.
Helps in cost reduction.
Elimination of wastage.
Helps in inventory control.
Helps to compare with standard cost within the firm or industry.
Aids in price fixation.
It helps in checking the accuracy of the financial accounts.
It helps management in analyzing the costs of different alternatives like
make or buy, continue or drop a product, buy or lease, sell or process
further, operate or shut down etc.
 IMPORTANCE OF COST AND MANAGEMENT
ACCOUNTING
Employees: An efficient costing system benefits employees through incentive
plans.
Investors: Control of cost, elimination of wastages, and improved efficiencies
increase the safety, liquidity, and profitability of the firm.
Consumers: Due to cost control, the price of goods can be reduced.
Creditors: They can base their judgement about the profitability and prospects
of the business using cost and management accounting information.
Economy: An efficient costing system steps up government revenue due to
efficiency of production.
 DIFFERENCE BETWEEN ACCOUNTING TYPES
Basis Financial Accounting Management Accounting
Scope Focuses on business as a whole. Focuses on divisions/departments of a
business.
Stakeholders It provides information to outside parties It provides information to internal
such as government, investors, creditors, management.
shareholders etc.
Nature of It primarily provides monetary information In addition to monetary information, it
information of past events. provides information about quantities of
materials produced and consumed,
number of workers etc. It uses this
information to anticipate events for future.
Periodicity Longer (usually year to year basis). Short-term.
Norms and Regulated by GAAP and other legal Based on internal rules, procedures, and
standards provisions. forms.
Precision More precision required. Less precision required.
Objectivity More objective. More subjective. Based on judgement
rather than measurement.
Necessity Compulsory due to legal provisions. Based on the requirements of the business.
 DIFFERENCE BETWEEN ACCOUNTING TYPES
Basis Cost Accounting Management Accounting
Objective Ascertainment of cost, cost control, and cost To provide accounting information to
analysis for decision making. management for decision making.
Coverage and Provides only cost information for Covers tax planning, tax accounting,
reporting managerial use. financial management, cost accounting and
financial accounting.
Scope Narrower. It is an input into management Broader.
accounting.
Evaluation of It is more specifically related to cost It incorporates all levels and functions of
performance determination, budget creation, variance management.
analysis. Management accounting is concerned with
It does not provide for evaluation of the assisting the management in its functions,
performance of management. as well as evaluating the performance of
the management.
Aspects of costs Concerned with ascertainment, allocation, Main emphasis is on decision-making. It is
distribution, and accounting aspects of concerned with impact of costs on various
costs. aspects of business activity.
 DIFFERENCE BETWEEN ACCOUNTING TYPES
Basis Cost Accounting Management Accounting
Planning Concerned with short-term planning. Concerned with short-term and long-term
Focuses on optimizing costs in a complex planning. Uses data to make planning and
business environment. strategy decisions for the company.
Approach Historical in approach. Futuristic in its approach. More predictive in
nature than cost accounting.
Process Involved in collection of cost data, analysis It uses a large amount of data and
of cost behaviour, preparing financial information from cost accounting.
statements, and attributing costs to It requires specified knowledge and skills.
units/objects/departments.
 DIFFERENCE BETWEEN ACCOUNTING TYPES
Basis Financial Accounting Cost Accounting
Objective To ascertain the financial position and To ascertain costs for decision-making.
performance of the business.
Nature Classifies, records, presents, and interprets Classifies, records, presents, and interprets
transactions in terms of money. material, labour, and overhead costs.
Recording of Historical data. Historical and pre-determined costs.
data
Users of It provides information to outside parties It provides information to internal
information such as government, investors, creditors, management.
shareholders etc.
Analysis of Provides profit/loss of the organization. Provides detailed cost and profit of each
costs and product, process, job, contracts etc.
profits
Time period Prepared for a definite period. As and when required by the management.
Presentation of Set format (double accounting system); No set format. Information is presented on
information horizontal or vertical basis. a comparative basis.
SUMMARY
• Financial Accounting involves preparation of financial statements which summarize the
results of operations for selected periods of time and show the financial position of the
business at particular dates.
• Cost accounting, as a tool of management, provides management with detailed records of
the costs relating to products, operations or functions.
• Management accounting may be defined as the application of accounting techniques for
providing information designed to help all levels of management in planning and
controlling the activities of a business enterprise and in decision making.
• Cost accounting and management accounting are closely linked as they use common basic
data and reports to a significant degree.
• Financial, cost, and management accounting differ on the basis of their scope, objective,
users of information, periodicity, and presentation of information.
• Cost and management accounting has the following scope: (a) determine product costs, (b)
determine selling price, (c) control costs, and (d) facilitate planning and policy formulation.
TRUE OR FALSE?
1. Management accounting is a branch of accounting that
produces information for managers within an organisation.
2. Management accounting is based on double entry system.
3. Management accountant is also called controller.
4. Cost accounting is a part of management accounting.
5. Management accountant must be a qualified Chartered
Accountant or Management Accountant from the Institute of
Chartered Accountants.
6. Small firms may find it difficult to afford a system of
management accounting which is quite costly.
TRUE OR FALSE?
7. Management accounting system cannot be installed without a
proper system of cost accounting.
8. Management accounting is a branch of financial accounting.
9. Ratio analysis and funds flow statements are part of
management accounting.
10. Main emphasis of management accounting is on cost
ascertainment and cost control for maximisation of profit.