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UNIT 1:

 

MBA MANAGERIAL ACCOUNTING

SYLLABUS

Unit-I Introduction: Accounting for Management, Role of Cost in decision making, Comparison of Management Accounting and Cost Accounting, types of cost, Elements of cost - Materials, Labour and overheads and their Allocation and Apportionment, preparation of Cost Sheet, Methods of Costing. 

Unit – I : Foundations of Managerial & Cost Accounting

Introduction: Accounting for Management

Meaning of Accounting for Management

Accounting for Management, also known as Managerial Accounting, is the branch of accounting that focuses on providing financial and non-financial information to managers for planning, controlling, decision-making, coordination, and performance evaluation.

It is not restricted to monetary data only, but also includes statistical, operational, production, and behavioral data that support managerial decisions. Managerial accounting transforms raw accounting data into meaningful information.

Unlike financial accounting, which focuses on external stakeholders, managerial accounting is internal-oriented, future-focused, and strategy-driven.

Objectives of Accounting for Management

  • Planning business operations

  • Decision making

  • Cost control

  • Profit maximization

  • Resource optimization

  • Performance measurement

  • Strategic management

  • Risk management

  • Business forecasting

Nature of Managerial Accounting

  • Future oriented

  • Decision focused

  • Flexible structure

  • Internal reporting

  • Analytical

  • Strategic support system

  • Management-oriented

  • Problem-solving in nature

Role of Cost in Decision Making

Meaning of Cost

Cost refers to the monetary value of resources sacrificed to produce goods or services. It represents economic sacrifice and opportunity loss.

Strategic Role of Cost

Cost is not just an expense — it is a managerial control tool and strategic weapon used for competitive advantage, sustainability, and profitability.

Importance of Cost in Managerial Decisions

  1. Pricing Decisions
    Example: If cost per unit = ₹120 and desired profit = 25%, then selling price = ₹150

  2. Make or Buy Decisions
    Example: Internal production cost = ₹80/unit, Outsourcing cost = ₹75/unit → Buy decision preferred

  3. Shutdown Decisions
    Fixed costs continue but variable costs saved → decision based on contribution

  4. Product Mix Decisions
    Selecting products with higher contribution margin

  5. Expansion Decisions
    Capacity utilization vs cost escalation

  6. Cost Control
    Waste reduction and efficiency improvement

  7. Budgeting Decisions
    Scientific resource allocation

Comparison: Management Accounting vs Cost Accounting

Basis                    Management Accounting       Cost Accounting
Scope                    Wider                    Narrower
Focus                    Decision making                    Cost determination
Nature                    Strategic                    Operational
Time orientation                    Future-oriented                    Present & past
Users                    Management only                    Management + production
Purpose                    Planning & control                    Cost control
Approach                    Analytical                    Recording oriented

Types of Cost (In-depth Classification)

On the Basis of Nature

  1. Fixed Cost – Rent, salary, insurance

  2. Variable Cost – Raw material, power

  3. Semi-variable Cost – Telephone bills

On the Basis of Function

  1. Production Cost

  2. Administration Cost

  3. Selling Cost

  4. Distribution Cost

On the Basis of Behavior

  1. Controllable Cost

  2. Uncontrollable Cost

On the Basis of Time

  1. Historical Cost

  2. Predetermined Cost

On the Basis of Decision Making

  1. Relevant Cost

  2. Irrelevant Cost

  3. Opportunity Cost

  4. Sunk Cost

  5. Differential Cost

  6. Marginal Cost

  7. Incremental Cost

  8. Avoidable Cost

  9. Replacement Cost

Elements of Cost

1. Material Cost

Meaning:

Cost of raw materials used in production.

Types of Material:

  • Direct Material (wood, steel, cotton)

  • Indirect Material (lubricants, cleaning material)

Material Control Techniques:

  • EOQ

  • ABC Analysis

  • Inventory control

  • Stock verification

  • Just-in-Time (JIT)

2. Labour Cost

Meaning:

Cost of human effort in production.

Types:

  • Direct Labour

  • Indirect Labour

Labour Control Methods:

  • Time recording

  • Time booking

  • Wage systems

  • Incentive plans

  • Productivity measurement

3. Overheads

Meaning:

All indirect costs excluding material and labour.

Types of Overheads:

  • Factory Overheads

  • Office Overheads

  • Selling Overheads

  • Distribution Overheads

Allocation and Apportionment of Overheads

Allocation:

Charging whole overhead to one department directly

Apportionment:

Distribution of overheads among departments on a rational basis

Basis of Apportionment:

  • Area

  • Machine hours

  • Labour hours

  • Power consumption

  • Asset value

  • Number of employees

Preparation of Cost Sheet (In-depth)

Meaning:

A statement showing the detailed breakup of cost, cost per unit, and profit.

Detailed Format:

Prime Cost: Direct Material

  • Direct Labour

  • Direct Expenses
    = Prime Cost

Works Cost: Prime Cost

  • Factory Overheads
    = Works Cost

Cost of Production: Works Cost

  • Office Overheads
    = Cost of Production

Cost of Sales: Cost of Production

  • Selling & Distribution Overheads
    = Cost of Sales

Profit = Sales – Cost of Sales

Numerical Examples (Solved)

Example 1: Cost Sheet Preparation

Material = ₹60,000
Labour = ₹40,000
Direct Expenses = ₹10,000
Factory OH = 20% of Labour
Office OH = 10% of Works Cost
Selling OH = 5% of Cost of Production

Solution: Prime Cost = 60,000 + 40,000 + 10,000 = ₹1,10,000
Factory OH = 20% of 40,000 = ₹8,000
Works Cost = ₹1,18,000
Office OH = 10% = ₹11,800
Cost of Production = ₹1,29,800
Selling OH = 5% = ₹6,490
Cost of Sales = ₹1,36,290

Example 2: Cost Classification

Rent = Fixed Cost
Raw Material = Variable Cost
Manager Salary = Fixed Cost
Electricity = Semi-variable Cost

Example 3: Cost Per Unit

Total Cost = ₹2,00,000
Units Produced = 2,500
Cost per unit = ₹80

Methods of Costing (With Use Cases)

  1. Job Costing – Printing press, furniture work

  2. Process Costing – Sugar industry, cement industry

  3. Batch Costing – Medicines, garments

  4. Contract Costing – Roads, bridges, buildings

  5. Operating Costing – Hospitals, transport services

  6. Unit Costing – Manufacturing units

Additional Numerical Examples (Solved)

Example 4: Profit Calculation

Cost of Sales = ₹3,50,000
Sales = ₹4,20,000
Profit = Sales – Cost of Sales = ₹70,000

Example 5: Overhead Apportionment

Two departments A & B. Overhead = ₹30,000
Area ratio = 2:1

Dept A = ₹20,000
Dept B = ₹10,000

Example 6: Contribution & Decision Making

Selling price/unit = ₹200
Variable cost/unit = ₹120

Contribution/unit = ₹80

If Fixed Cost = ₹40,000
Break-even units = 40,000 / 80 = 500 units

Example 7: Make or Buy Decision

Make cost/unit = ₹95
Buy cost/unit = ₹90

Decision: Buy is economical

Example 8: Shutdown Decision

Selling price/unit = ₹150
Variable cost/unit = ₹110
Fixed cost = ₹50,000

Contribution/unit = ₹40
If production continues → Fixed cost recovery possible → Do not shutdown

Example 9: Product Mix

Product A contribution = ₹50/unit
Product B contribution = ₹30/unit

Decision: Prioritize Product A

Example 10: Cost Control

Standard material cost = ₹10/unit
Actual cost = ₹12/unit

Variance = ₹2 adverse → Cost inefficiency detected

Exam-Oriented Short Questions

  1. Define managerial accounting

  2. Explain sunk cost

  3. What is apportionment?

  4. Define prime cost

  5. What is opportunity cost?

  6. What is relevant cost?

  7. Define works cost

Long Questions

  1. Explain the role of cost in managerial decision making

  2. Prepare a detailed cost sheet with illustration

  3. Compare management accounting and cost accounting

  4. Explain types of cost with examples

  5. Explain allocation and apportionment with basis

  6. Explain elements of cost in detail

Unit Summary

This unit builds the foundation of managerial accounting by explaining the concepts of cost, classification of cost, strategic role of cost, elements of cost, overhead treatment, cost sheet preparation, and costing methods which are essential for managerial decision-making, financial planning, and business strategy.

Learning Outcome

After studying this unit, students will be able to:

  • Understand cost behavior deeply

  • Classify cost scientifically

  • Prepare professional cost sheets

  • Apply costing methods in real business

  • Use cost data in managerial decisions

  • Control business expenditure

  • Support strategic planning

  • Improve business efficiency

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