Management Accounting

I can imagine the very first business activity which occurred on earth would be a barter trade, maybe it was an exchange of a bucket of rice with a bucket of wheat or a piece of meat? To analyse the fairness of the deal, both parties must have asked themselves” is the bucket of rice is worth the same as the bucket of wheat?” At the times when there...

Classification by elements of a product/service Classification of costs by its elements involves examining the products and services to identify different components of costs which were incurred to produce those products or providing those services. If we examine any product or service, we can easily identify different elements which require spe...

Direct or indirect link to a product/service This classification looks at each item of costs to ascertain if that specific cost is being incurred directly due to the production of a unit of product or service or there is an indirect relationship of the cost with products and services. Direct costs are usually incremental costs which means the m...

Functional/Departmental costs Production and non-production costs are the major categories in this area. However, if an organisation does not produce but only buy and sell then it will not incur production costs. Production costs Production costs are those costs which are incurred when raw material is converted into finished and part-fin...

Costs correlated to activity levels Fixed costs All those costs are fixed costs which do not change with the change in the level of activity (within a certain range) i.e. if a business produces/ sells more or less products. Examples for fixed costs are •Rent & business rates •Fixed salaried staff •Building Insurance •Telephone...

Absorption costing is the original technique to deal with indirect costs, therefore, it is also called “Traditional Costing”. This method is an easy way to allocate overheads to products and services in practice although it can give inaccurate figures allocated to different products and services in complex manufacturing scenarios. In my experience,...

Activity-Based costing (ABC) is a relatively new method of calculating total cost for products and services. Although in the classroom exercises and exam questions, this method may seem similar to Absorption Costing, in practice it is very different and much more precise technique than absorption costing. ABC records all activities in an organis...

We have discussed earlier in this book that one of the main reasons for calculating total cost of a product/ service is to establish a price for it. Many organisations produce a product, establish the total cost and then add a mark-up to set a price for their products. Well – that’s what used to happen but not anymore in many sectors. After glob...

Good businesses and managers plan ahead which mean they try to predict the future e.g., how much they will/can sell in future and how would they achieve the production required to meet those sales targets. Planning also involves looking at outside the organisation and foresee the future of the organisation in the changing political, economic, socia...

I have discussed this in my previous article “Introduction to Management Accounting” that there are three primary functions of management 1.Planning 2.Control and 3.Decision making. Budgeting is one of the most important tools used for planning and control purposes. However, these are not the only reasons budgeting is used in an organisation. T...

Working capital is the amount of money which is invested in the current assets or short-term assets of the business to run the business on daily basis. This money is used to pay expenses like staff wages and utility bills etc. However, most of this money is used to buy goods for resale (except those businesses where only services are sold). Ideally...