accounting assighment 2

Chapter – 1

Management Accounting (ACCT-202)

Introduction:

Any accounting, which renders valuable information to help management, may be called Management Accounting. It is that form of accounting, which enables a business to be conducted more efficiently. A team of British Industrial Accountants and Managers submitted their report and defined Management Accounting, " as the presentation of accounting information in such a way as to assist Management in the creation of policy and day to day operation of an undertaking."

It is observed from the above definition that Management Accounting is concerned with the presentation of accounting information and not with its preparations. Thus, emphasis is laid down on the two aspects in Management Accounting:

a. To present the accounting information in proper way before the management.

b. Such accounting information being placed in a way as to assist management in its operations and functions.

Distinction between Management Accounting and Financial Accounting:

Management accounting and Financial accounting are complementary to each other. They are, however, distinguished in terms of relative importance of the problems and techniques involved. Such distinctions between two sets of accounting are discussed below:

1. Process: The functions of financial accounting are recording of financial transactions, collection of data and bringing them in concise form. Management Accounting picks up significant data out of collected data and presents for the use of management.

2. Flexibility: Under financial accounting attempts are being made to prepare accounts in accordance with the generally accepted principles, rules and conventions of accounting. However, the accounting principles are not binding on Management accounting. Management may fix its own rules and standards according to its convenience and needs.

3. Data Used: Financial accounting records only those transactions which have taken place in the past while Management accounting does also take into account the past events but only to the extent they affect the future positions.

4. Users of Report: In financial accounting, reports are used by external parties such as creditors, investors regulators, etc. On the other hand, reports are used by internal-officers and managers in managerial accounting.

5. Audit: Financial accounts are prepared on the basis of certain generally accepted principles and rules and therefore, it becomes compulsory to get them audited. But statements prepared under Management accounting are not required to be audited at all.

6. Publication: The publication and circulation of accounts and statements prepared under Financial accounting are compulsory because these are meant for external parties. Statements prepared under Management accounting convey information only to various levels of management.

Concept of Cost:

Cost represents the amount of expenditure incurred on a given thing. This implies some sort of sacrifices in consideration of receiving something. In other words, cost indicates a foregoing or release of somethings of value in consideration of obtaining some sort of benefit. Although, the term cost cannot be exactly defined. Its interpretation depends upon:

a. the purpose for which cost has to be determined.

b. the nature of the business in which the enterprise is engaged.

c. the element of business risks which may be insured or measured.

d. the measures which are used to ascertained the value of releases.

Concept of cost Centre:

A cost Centre is a location, person, or item of equipment or group of these for which cost may be ascertained and used for the purpose of cost control. The cost may be a department or a machine or a plant or a salesman, or a particular work etc. In certain cases, the cost unit and cost Centre may be the same. Each cost Centre is given charge to personnel for controlling the cost, accumulation of cost and its allocation. The sub divisions of cost Centre are:

a. The Personal Cost Centre

b. Impersonal cost Centre

c. Operation Cost Centre

d. Process Cost Centre

Profit Centre:

Profit Centre is a segment of a business that is responsible for all activities involved in the production and sales of products, systems, and services. It is thus a segment of the organization which has been assigned control over both revenues and costs. It encompasses both costs that it incurs and revenue that it generates. A profit Centre is created by the top management for evaluating performance of a division. It enjoys autonomy in decision making.

Productivity Centre: In productivity Centre, cost may be a department or a machine or a plant, or a particular work. One person in the department is given charge for controlling the cost, accumulation of cost and its allocation.

Investment Centre: It is a Centre in which head of the Centre is held responsible for the use of the assets as well as for revenues and expenses. On the other hand, he is expected to earn a satisfactory return on the assets employed in his responsibility Centre. Investment centers are generally used only for relatively large units which have independent divisions, both manufacturing and marketing, for their individual products.

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