1.ManagementAccountingSCDL ByProf. AUGUSTIN AMALADAS M.COM ., AICWA.,PGDFM.,B.Ed.

2. Structure of the syllubusChapter-1 Financial accounting 1. Introduction 2. Basic Accounting 3. Process of accounting 4. BRS 5. Rectification of Errors Final accounts 3. Cost Accounting 6. CONCEPTS 7. ELEMENTS OF COST 8. MATERIAL 9. LABOUR 9. OVER HEADS 10. MARGINAL COSTING techniques 11. BUDGETARY CONTROL12.STANDARD COSTING TECHNIQUES 13. UNIFORM COSTING CONTROL 4. Management accounting Costs and Budgeting 5. FLOW OF CASH/SHORT TERM AND LONG TERM information Accounts payable RAW mATERIAL ADR Long term loans Preference Shares Bad debts Accounts receivable Debtors Work in progress information Overheads Labour Equityshares CASH GDR information Information 6. FLOW OF CASH - LONG TERM ADR Long term loans Preference Shares Equityshares CASH Short term GDR land furniture investments goodwill building Patent rights Know how Copy right 7. FLOW OF CASH-SHORT TERM information Accounts payable RAW mATERIAL Bad debts Accounts receivable Debtors Work in progress information Overheads Labour information Information Discounting bills creditors Cash credit Bank overdraft Sale of investments Bad debts Bad debts Issue of long term funds Sale of fixed assets Bank overdraft cash cash 8. Accounting Labour laws marketing Costing technical technology political production statistical Share market MANAGEMENT ACCOUNTS INFORMATION INFORMATION INFORMATION INFORMATION INFORMATION 9. 10.

Anything incurred during the production of the goods or service to get the output into the hands of the customer

The customer could be the public (the final consumer) or another business

Controlling costs is essential to business success

Not always easy to pin downwhere costs are arising!

Costs 11. 12. Differences between cost accounting/Management Accounting/financial accounting 1.Collection Analysis and decision making 2.Management 3.Future 4.Non-statutory 5.Using various techniques 6.Supply the required information To correct persons on time 1.Estimation and control 2.Internal 3. Future 4. Not allorganisations 5.Costing records 6.Cost audit once in two years 1.Recording 2.Outsiders 3.Past 4.Statutory 5.Preparation of profit/lossA/c And balance sheet 6.Audit& reporting Management Accounts Cost Accounts Financial Accounts 13. Users of information organisation shareholders public Benefactors government banks Debenture holders Loan vendor Preference shareholders creditors debtors customers dividend liquidity Dividend/value in the share market Interest/return of capital Interest/return of capital Timely payment Timely supply Good product Less pollution Good name tax 14. Techniques in management accounting Management Accounting Cost accounting Mathematics operation research statistics Ratios Financial accounts Budgetary control Cash flow statement FFS Trend percentages Marginal costingVariance analysis Comparitive statementCommon size statements 15. Chapter-2: Basics of financial accounting

1.Concepts

2.system of accounting

3.Types of Expenditure

4.Terms used in financial accounts

5.Double entry / Single entry

6. Depreciation methods

7. Practical consideration relating to depreciation

16. 1.concepts& conventions

Meaning:Basic assumptions upon which the basic process of accounting based.

a] Business entity concept-

b] Dual aspect concept

c] Going concern concept

d] Accounting period concept

e] Cost concept

f]Money measurement concept

g] Matching Concept

• • • • Conventions

• • • • Coservativism

• • • • Materiality

• • • • Consistency

17. a] Business entity concept-

Business is different from the owner

We pass Journal entry when owner contributes towards capital.

When amount / goods withdrawn for personal use we make an entry in the business

When Income tax paid by the owner out of business money we make an entry In the books of accounts.

18. b] Dual aspect concept

Every debit has equal amount of credit

Asset =Liability

Liability creates asset

If asset>Liability= profit

If Liability> Assets= loss

19. c] Going concern concept

Business will go for at least for a reasonable period.

Depreciation is provided based on this assumption.

If this assumption is not made all Fixed assets will be valued at realised value like current assets.

20. d] Accounting period concept

Fixing time limit for accounts

Profit for the period

It can be one week or two weekor 6 months/one year or 5 years

But to find profit we normally consider 12 months period

Financial year for income tax point of view 1 stApril-31 stMarch of the following year

Calendar year January to December

Divali to Divali

21. e] Cost concept

The cost to the organisation (Actual) is recorded in the books

Assets are not recorded according to the market price every year.

Depreciation is calculated on cost not based on market price

Accounting records may not show the real worth of the business

Market price may be disclosed with in bracket in the balance sheet

22. f]Money measurement concept

Every thing which can be expressed in terms of Money is recorded in the books

Beautiful women are working /Handsome boys working in this company/Efficient engineers worth 5000 crores How do you record?.

Good working environment?

Highly motivated employees?

23. g] Matching Concept

Matching Cost with revenue

It is used to estimate correct profits

Accrual/ cash basis of accounting

• Even cash paid /received if it belongs to accounting period we consider them as expenditure /income

• Salary outstanding for the last month?

• Income from Investments yet to be received?

• Rent received in advance for next year?

24. Conventions

Customs and traditions that are followed by the accountants while preparing the financial statements.

Why do we respect elders?

Why do we shake hands?

Why do Young Indians hate receiving dowry?

25. Coservativism

To be on the safer side

Expect future losses as current year loss

not future income is treated as current year income.

Stock is valued cost price / market price which ever is lower

Making provision for bad debts is based on this assumptions.

26. Materiality

Material impact on profitability are considered

Insignificant transactions ignored from recording

Pen purchased, pencil purchased?

Wine purchased regularly?

27. Consistency

Accounting policies and proceedures should be followed consistently

Method of depreciation should be followed consistently.

Stock valuation- cost/market price whichever is lower is consistently followed

If not followed it amount to change in the policy of the company

28. 2.system of accounting(18)

1.Cash system:

unless cash received /paidin the accounting year can not be considered as income/expenses respectively

29. 2.Mercantile

Mercantile/Accrual/due concept:

Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered.

If last year expenditure paid this year?

If you receive/paid in advance ?

Last year I loved her? Next year I shall love him depends !!!!

30. Mercantile love!!!!???

Last year I loved her? Next year I shall love him depends on type of bike model!!!!

31. 3.Types of Expenditure(19)

A) Capital expenditure

B) Revenue expenditure

C) Deferred Revenue expenditure

32. A) Capital expenditure(19)

Expenditure incurred which will :

Increase Production capacity

Increase earning capacity

Reduction in the cost of operation.

Example: purchase of fixed assets

Purchase of Machinery

purchase of investment

If such expenditure is not to do with the basic functions of the business such expenditure is capital expenditure.

How do you consider if you buy goodwill, copy right or patent right?

33. Capital expenditure-continue(page-19)

Both tangible and intangible assets included

Intangible assets such as patent right, copy right, technical know-how, francises, goodwill etc.,

Depreciation is provided on fixed assets which will appear in the profit and loss account

They appear in the Balance sheet

The life is more than one year

They should not appear in the profit and loss account

34. Revenue Expenditure(page-19)

Expenditure incurred which will :

Not Increase Production capacity

Not Increase earning capacity

maintain the capacity

No Depreciation is provided on fixed assets which will appear in the profit and loss account

They appear in the profit and loss account

The life is not more than one year

They should not appear in the balance sheet

35. Deferred revenue expenditure(page-19)

Deferred means- postponed

Heavy revenue expenditure

Vodafone incurred 200 crores for advertisement after merger with Hutch

It can not be written off within a year

It appears in the balance sheet as last item

Every year some portion is written off in the profit and loss account.

Research and deveopment expenditure, initial advertisement expenditure, preliminary expenditure are example

36. Terms(page-20) Debentures Equity shares Preference shares Trade discount Cash discount Debit note Credit note Creditors Balance sheet Accounts receivable Accounts payable Assets Liabilities Capital Drawings Debtors depreciation Polio Brought forward(B/f) Trail balance Account Debit Credit Journal Ledger Narration casting 37. Terms used in costing Factory over heads Office and administration overheads Administration section Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation Indirect material Indirect labour Indirect expenses + Total cost Factory Consumable stores, cotton waste ,oil Wages to storekeeper, foremen, works managers salary, repairs to factory building, insurance to machinery factory lighting Indirect material Indirect labour Indirect expenses+ Works cost Factory Raw material; cost per unit can be identified, in the individual cost centre; Engaged in manufacturing process Hire charges of machinery-direct expenses Direct material Direct labour Direct expenses Prime cost 38. Selling and distribution Sales department Packing material, samples,salaries to sales personnel,commission to sales manager, warehouse charges,advertisement,repairs to distribution van, discount to customers Indirect material Indirect labour Indirect overheads Cost of sales+ Profit Sales 39. Life education

Lady in a seashore

40. 5.Double entry / Single entry(22)

Is Accounting based on business concept or religious concept?

Giving first and receiving later.

Giving cash receiving machinery

We consider both aspects such as debit and credit

41. Rules of acccounting(23)

Personal rule/Account-supplier debtors, owner, banker, outstanding wages

Real rule/Account- cash, bank, building, furniture, goodwill, patent rights

Nominal rule/account: income and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses.

42. Personal rule

Debit the receiver

credit the giver

Example: Computer chips purchased on credit from wipro

Here credit Wipro as Wipro is the giver of computer.

Sold goods to Meena

Meena is the receiver-debit

43. Excercise

Amount collected from debtors?

Amount deposited to bank?

44. Real rule

These are the accounts of assets and liabilities

Rule:debit what comes in

• • Credit what goes out

45. Excercise

Goods supplied for cash

Cash withdrawn from bank

Cash withdrawn from bank for personal use

Land purchased by giving a cheque

Building sold on credit

46. Nominal rule

Related to Expenses and income

Rule:Debit all expenses and losses

Credit all incomes and gains

47. Excercise

Rent paid Rs 50,000

Wages paid Rs.1,00,000

Wages outstanding-Rs.60,000

Commission received-25,000

Discount allowed to customer Rs.1,000

Telephone bills paid-Rs.2500

Shares issued at premium-Rs.2,00,000

48. Suitable questions to pass journal entry

If cash transaction, person is not important

Every birth of an account there is a death of the account

Ask what comes in?

Or what goes out?

49. Depreciation Accounting(24)

Reduction in the value of assets

Use factors, time factor,obsolescence are the factors

Statutory requirement

AS(6)

Fixed assets are depreciated

Current assets are not depreciated

Land and cattle are not depreciated.

50. Depreciation methods

Straight line method

Written down value method

Sinking fund method

Machine Hour rate method

Unit cost method

Depletion asset method

Depreciation Fund method

Sum of digits method

Accelerated depreciation method

51. Impact on books

Depreciation Expense

Net income

Asset

Equity

Return on assets

Return on Equity

Turnover Ratios

Cash flow

NPV

IRR

Pay back

52. Impact of Tax

Block asset method

Purchase of Asset

Sale of Asset

Short term/Long-term Capital asset

Asset used less than 180 days during the previous year

Asset purchased preceding previous year but put into use less than 180 days during the current previous year

53. Divisible profit and depreciation(Page:30-31)

Profit after adequate depreciation[Sec.205(2)]

Profit after interest-depreciation of the current year- Depreciation of the previous year- loss of the previous year

Depreciation as per Schedule XIV of the Companies Act

Section 350 calculated on WDV

54. Methods(25)

1. straight line method:

Cost (- )estimated scrap value

Estimated life in years

2. written down value or diminishing balance method.

cost of the asset=1,00,000; rate of depreciation =10%

#Depreciation for the 1 styear=1,00,000*10%=10,000

Value at the end of first year= 1,00,000-10,000= 90,000

##Second year depreciation=90,000*10%=9000

55. Methods(26)

3. production unit method:

Depreciation=(cost-scrap)(units produced during the year)

• • • • no of units the machine

• • • • can produce during its life

• • • • Suppose cost=1,00,000; scrap=5000; total life in units=10000 units. No. of units produced during the year=3000

• • • • Depreciation=(1,00,000-5000)(3000)/10,000

• • • • =Rs 28,500

56. Production hour method

It depends on number of hours produced insteadof units produced

We calculate production hour rate

Multiply the no.of hours used during the year with the rate gives depreciation

57. Joint factor rate method(27)

Both fixed element and variable elements are considered

Cost is divided into fixed and variable

Fixed part is divided based on time

Variable elements are divided by total units which gives rate per unit

58. Annuity method

C*r

Depreciation=

n

1-1/(1+r) -1

Depreciation is constant

It depends on future cash inflows

It assumes that the capital invested would have earnedinterest had been invested otherwise

59. Sinking fund method(29)

Amount available would be equivalent to the original cost

C*r

Depreciation=n

(1+r) 1

Calculation of 26380 is wrong. I should be 16380.

60. Endowment policy method

Insurance policy is taken to replace the asset.

The depreciation is equal to the insurance premium paid

61. Renewal method(29)

When asset is renewed full amount is written off.

62. By-by to chapter-2

Chineese tree

Life education 63. Chapter-3

Journalising

Ledger (subsidiary books)

Posting

Trial balance

Trading and profit and loss account

Balance sheet

64. Final Accounts Adjustments

Direct expenses

Indirect expenses

Opening stock given in adjustment

Closing stock given in the adjustment

Wages outstanding in trail balance

Income from investment due given in trail balance

Meaning of adjustment

Income tax

Life insurance premium

Goods drawn by the owner

65. Final Accounts Adjustments

Domestic house hold Expenses

Income tax refund

Income from house property

Accrual basis of Accounting

Un expired insurance

Income received in Advance

Interest on Capital

Provision on Doubtful debts

provision for Discount on debtor

Deffered revenue expenditure

66. Final Accounts Adjustments

Reserve Fund

Goods Distributed as free sample

Managers Commission

Goods on sale or approval basis

Hidden adjustments

67. Terms used in final accounts

Trading account

Profit and loss account

Profit and loss appropriation account

Balance sheet

Capital

Long term liabilities

Current liabilities

Fixed assets

68. Terms

Investments

Current assets

Adjustments

Closing stock

Depreciation

Outstanding expenses

Prepaid expenses

69. Terms

Accrued income

Income received In advance

Bad debts

Provision for doubtful debts

Interest on capital

Drawings

Deferred revenue expenses

70. Terms

Abnormal expenses

Goods distributed as free sample

Goods sent on approval

Commission payable to manager

71. Important adjustments In various problems

Illus:2 page-59 i) repairs tp plant ii)Income tax of X

Iii) Provision for bad debts

Iv) adjustment no.b,e and f

V) calculation of works managers commission and general managers commission

72. Important adjustments In various problems

Illustration 3: i) adju.e and I and trading account purchases and sales

Illustration 4: bank loan, adj. a,d and g.

Illustration 5: loan, adj.b and c.

Illustration 6: adj: b,f and h

Illustration 7: adj:b and d

Illustration 8: adj.f

Illustration 9: adj. d and e

Illustration 10: loan, adj.a

73. See you in the next chapter BRS

Life education

God and Poor man

74. Bank reconciliation statement

Cash book

Pass book

Cheques issued butnot debited

Cheques deposited but not cleared

Bank charges entered in the pass book

Income from investments entered in the pass book

Electricity, water, telephone , internet bills paid directly by bank entered in the pass book

Clerical errors in the pass book or cash book

75. Exercise:-23 page124

Q.2 page-115 and questions no6 page-117 and q.25 page-126

76. Life education

Child likes to hug in the evening

77. Chapter 5: Rectification of Errors(page-129)

Reasons for errors in accounting:

1.error of omission

2 .error of commission

3.Error of principle

4. Compensating error

78. Errors not affecting trial balance

1.error of omission

2.Error of principle

3.compensating error

4. complete omission

5.error of commission

79. Suspense Account

If trial Balance does not tally ie debit is not equal to credit then temporarily to close down we open a suspense Account on the deficit side known as suspense account.

80. Rectification: Steps

Rectify only the account in which error is committed.

Book means complete setof accounts

Accounts means mistake only in the account

If suspense account is given and if one side error suspense account has to be either debited or credited accordingly.

81. Problems in errors Problem:7 page-139 2500 1300 160 245 500

Drawings A/c debit

to General expenses a/c credit

2. Sales Account debit

to Machinery A/c credit

3. Rent a/c debit

To land lord a/c

4. Repairs a/c

To Building

5. Suspense a/c debit

To Harish a/c

To Cash A/c

2500 1300 160 245 250 250 82. Problem:6 page-139 700 400 2700 400 1100 2700 400 a.Machinery Dr. To Purchases a/c To Wages a/c b.Suspese a/c Dr. to Mohan a/c Cash a/cDr. To Mohan amount amount particulars 83. 700 900 600 17000 1200 700 900 600 18200 Mohan a/c Dr. To sales susp. c. Suspensea/c ToYogesh a/c d.Furniture a/cdr To P/L a/c e.Machi.a/cdr. To Purchases To trade exp. particulars 84. Life education Thomas Cooper Dictionary 85. Chapter-6 Cost Accountancy-terms

Cost centre

Impersonal and personal cost centre

production and service cost centre

Concept of cost

86. Terms in costing

Accounting Costs:

These are costs that impact an organizationsgeneral ledger.For example, buying a product results in a chain of events wherein a purchase order is processed,a product/service is received, then an invoice arrives from the vendor 87. The bottom line is that theorganizationis out "hard" or "real" money.[1Examples:Hardware and software purchasesProfessional servicesMaintenanceLaborMedical benefitsInsuranceInternet Service Provider fees Wide area network fees 88. Economic Costs

Economic costs are "opportunity costs." Instead of doing X, you had to do Y. These are not hard-currency costs and it is dangerous to lump them into the cost-savings category with accounting costs because their effects will not necessarily show up on the bottom line.

89. Example

:

Reducing firefighting on incidents related to problematic changes is robbing resources from planned work (projects) and applying them to unplanned, reactive work (incidents). If you say that better change management reduced unplanned work by 20 percent, that is not an accounting cost savings, but it did free up resources to work on projects. It would be wise to identify what project progress was enabled through the action.

90. Example-2

By training users, incidents handled by the service desk decreased 5 percent. Again, this is not an accounting cost savings unless a resource is dismissed, thus impacting labor, benefits and so on.

91. mixing accounting and economic cost

mixing accounting and economic cost savings together and instead wrap both types of costs with a business case explaining the benefits of the proposal.

92. Overhead

These are indirect costs that are absorbed by IT. For example, a portion of building rent is often allocated to IT based on some cost driver such as percent of floor space allocated.

93. illustration

If IT occupies 10 percent of a building, then accounting will likely allocate 10 percent of the rent to IT. This overhead cost must then be factored into the services that IT offers in order for proper charge backs, pricing and so on

94. Sunk Costs

These are costs that, once spent, cannot be changed. If something is purchased that cannot be returned or sold off, then that item should be considered a sunk cost. Sunk costs need to be factored into costing, but it also should recognized that altering them may not be possible by definition.

95. Cost Drivers

When determining costs, it is worthwhile to understand what drives the costs. In other words, if you do X, then you see a corresponding increase in cost Y. To illustrate, if you must buy a PC and software licenses for each new person hired, then the addition of new users is one of the cost drivers for the associated PC and software expense accounts.

96. Salvage Value/Salvage Costs

If you can sell an asset for more than its book value, then you are actually booking another form of income. On the other hand, if the salvage value is lower than the book value, then accounting will need to write the asset off.

If you have to pay someone to take things away due to hazardous materials laws, then you may even incur expenses relating to the disposal of the asset.

97. Differential cost

Increased or decreased cost due to the increased or decreased volume of operations.

Additional cost due to operation.

98. Normal cost and abnormal cost(150)

Normal costs incurred at a certain level of output

Abnormality in cost due to unforeseen situations

99. Relevant cost and relevant benefit

Required for decision making

Costs that are affected by by the decision

Costs and benefits that are independent of a decision are not relevant and need not be considered.

Future cash inflows and future outflows are relevant.

Sunk costs are irrelevant

Allocated common costs are irrelevant

Opportunity costs are relevant (shadow price)

Incremental costs are relevant incremental benefits are relevant.

Avoidable costs are relevant and unavoidable costs are irrelevant for decision making.

100. Relevant and irrelevant

Five engineers already employed on monthly salary but will not be sent out if not employed in an another project. The salary paid to those engineers are relevant or irrelevant to estimate the price for the project?

Two more engineers are selected exclusive to the new project-are the costs relevant to take decision for new project?

101. Direct and indirect costs

Direct Costs are costs that can be specifically and exclusively identified with the particular object (product)

Salary of processing associate

Indirect Costs are costs that can not be specifically and exclusively identified with the particular object (product)

Salary of team leader

Direct costs are allocated. Indirect costs are apportioned.

102. product costs Period costs

Product cost are those costs that are identified with goods purchased or produced for resale.

Period costs are those costs that are not included in the inventory valuation and as a result are treated as expense in the period in which they are incurred.

Product costs will generateincome.but period costs do not generate income.

103. Treatment of period and product costs Product code Period code Manufacturing cost Non manufacturing costs Recorded as an asset In thebalance sheet And becomes anExpense in the P/LA/CWhen the productIs sold Recorded as an Expense in the P/L A/c In the currentAccounting year sold unsold 104. Variable, fixed, semi variable and semi fixed

CostVariable cost

cost

Out put

fixed cost

Activity level 105. Step fixed cost

Total

Fixed cost

Activity level

106. Variable, fixed, semi variable and semi fixed. direct material, direct labour and direct expenses.Both fixed and variable elements in the costs. Variable costs Semi variable cost Supervisors salary, leasing charges for cars, depreciation on building In the long run all costs are variable. Fixed cost 107. Incremental costs and Marginal cost

Differential costs and revenues are the difference between costs and revenues for the corresponding item under each alternative being considered.

Marginal cost/revenue - one extra unit of output cost/revenue.

108. 109. Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Ended December 31, 20X0 Direct materials used Beginning raw materials inventory Add: Cost of raw materials purchased Total raw materials available Less: Ending raw materials inventory Total raw materials usedDirect laborManufacturing overhead Indirect materialsIndirect laborDepreciationfactory buildingDepreciationfactory equipmentInsurancefactoryProperty taxesfactoryTotal manufacturing overheadTotal manufacturing costsAdd: Beginning work-in-process inventoryLess: Ending work-in-process inventoryCost of goods manufactured