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What is management accounting? Discuss the nature and scope of management
accounting?
What is balanced scorecard? Discuss the four perspectives of balanced scorecard
with the help of a strategy map created by a company.
Discuss the usefulness of life cycle costing in managerial decision-making.
What is target costing? What are the steps involved in target costing? Discuss
advantages and limitations of target costing.
2. Management accounting: The process of identification, measurement,
accumulation, interpretation and communication of information both financial
as well as non-financial used by managers in planning, controlling and
decision-making. It provides information required by managers for different
purposes as follows:
a) Formulation and setting up of plans for the organization;
b) Planning and controlling the operations of the firm;
c) Taking decisions and selection of best course of action;
d) Communication of information to employees and
e) Safeguarding assets and other resources of the firm.
Scope of Management accounting
a) Budgeting and budgetary control
b) Standard costing and variance analysis
c) Break-even analysis
d) Cost-volume-profit analysis
e) Funds flow statement
f) Cash flow statement
g) Incremental cost analysis
h) Responsibility accounting
i) Ratio analysis
j) Comparative financial analysis
Balanced Scorecard:
It translates an organization’s mission and strategy into a set of performance
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measures that provides the framework for implementing its strategy. Not only
does the balanced scorecard focus on achieving financial objectives, it also
highlights the non-financial objectives than an organization must achieve to
meet and sustain its financial objectives. The balanced scorecard measures
an organization’ performance from four perspectives:
1. Financial: the profits and value created for shareholders.
2. Customer: the success of the company in its target market.
3. Internal business processes: the internal operations that create value for
customers.
4. Learning and growth: the people and system capabilities that support
operations.
A company can develop strategy maps and the four perspectives of the balanced
scorecard. A strategy map is a diagram the describes how an organization creates value
by connecting strategic objectives in explicit cause-and-effect relationships with each
other in the financial, customer, internal business process and learning and growth
perspectives.
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Solution
Life cycle costing
It is based on the basic premise that for decision-making all costs whether
capital or revenue, whether upstream (e.g. research and development) or
downstream (e.g. customer service) incurred during all phases of the product
life cycle are relevant. The product’s life cycle starts from the time of inception
of the product by the producer to dispose of the product by the customer.
The costs incurred during the life cycle of a product can be classified in the
following six categories:
a) Research and development costs
b) Product design costs
c) Manufacturing costs
d) Marketing costs
e) Distribution costs
f) Customer service costs
Life cycle costing is helpful in managerial decision-making as follows:
1. Pricing decision
2. Focuses on both visible and invisible costs
3. Overall view
4. Facilitates capital budget decision
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The SVC Ltd. has production capacity of 15,000 units of a product per annum.
At present, the company manufactures 10,000 units of a product which are sold
in domestic market at ₹25 per unit. The production cost of it per unit is as under:
Particulars ₹
Material 8.00
Labour 6.00
Factory overheads:
Fixed 2.00
Variable 1.50
Office overheads (fixed) 1.00
Selling overheads
Fixed 0.50
Variable 1.00
Total 20.00
A foreign customer is interested in the product and he is willing to buy 5,000
units (One order) but at a price of ₹17.50 per unit.
Determine:
(a) The amount of total profit from domestic sales of product to the firm.
(b) The amount of total profit from foreign sales to the firm.
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(c) Should the order be accepted by the firm? If yes, what possibly be the
underlying assumption?
(d) Will your advice be different if the price offered is ₹15 per unit?