CHSE Odisha Fundamentals of Management Accounting cheat sheet

Management accounting supplies information to internal managers for planning, control and decision making; it is not governed by statutory formats or GAAP presentation rules.

Distinguish it from financial accounting: financial accounting is historical, external and uniform; management accounting is forward-looking, internal and flexible in form.

Cost accounting is a subset that measures and records costs; management accounting interprets cost and other data for managerial action.

Core functions: planning, organising, controlling, communicating, motivating and decision making through relevant reports.

Tools include ratio analysis, CVP analysis, budgetary control, standard costing, funds and cash flow analysis, and marginal costing.

Reports should satisfy relevance, timeliness, comparability, reliability and cost-benefit tests; excessive precision is not the goal.

Management accounting is not statutory; its installation is optional, and its scope extends to non-financial and qualitative information.

Limitations: based on accounting records that may embed estimates, cannot replace managerial judgement, and installation and maintenance are costly.

Comparative statements show absolute amounts for two or more periods plus absolute change and percentage change; percentage change = (current year − base year) / base year × 100.

Common-size income statements express each item as a percentage of net sales; common-size balance sheets express each item as a percentage of total assets.

Common-size analysis removes the effect of scale, allowing comparison of firms of different sizes and of a firm across years.

Trend percentages use a base year set at 100 and express later years as (later year / base year) × 100 to reveal long-run direction.

Comparative balance sheet analysis reveals changes in working capital, capital structure and asset mix; watch for increases financed by short-term debt.

Percentage change is misleading when the base-year figure is zero or negative; state the reason and use absolute figures instead.

Limitations: both techniques use historical data, ignore price-level changes and qualitative factors, and are distorted by accounting policy changes.

Liquidity: current ratio = current assets / current liabilities; quick ratio = (current assets − inventory − prepaid expenses) / current liabilities.

Solvency: debt-equity ratio = long-term debt / shareholders' funds; proprietary ratio = shareholders' funds / total assets; interest coverage = EBIT / interest.

Activity: inventory turnover = cost of goods sold / average inventory; debtors turnover = credit sales / average debtors; fixed asset turnover = sales / net fixed assets.

Profitability: gross profit ratio = gross profit / net sales; net profit ratio = net profit / net sales; return on capital employed = EBIT / capital employed.

Working capital turnover = net sales / net working capital; a very high turnover can signal over-trading and insufficient working capital.

Ratios are meaningful only against a standard: prior years, industry averages or budgeted figures; a single ratio has no verdict.

Window dressing, seasonal peaks, accounting policy choices and the use of year-end rather than average balances distort ratio comparability.

Du Pont decomposition: return on equity = net profit margin × asset turnover × equity multiplier, separating profitability, efficiency and leverage.

Funds flow uses working capital as the fund: sources increase net working capital, applications decrease it; the statement explains changes between two balance sheet dates.

Sources of funds: funds from operations, issue of shares or debentures, long-term loans, sale of fixed assets, non-operating income.

Applications of funds: purchase of fixed assets, redemption of shares or debentures, repayment of loans, payment of dividends, tax, increase in working capital.

Funds from operations = net profit + non-fund and non-operating charges already debited − non-operating income credited; add back depreciation, goodwill written off and transfers to reserves.

Cash flow classifies flows as operating, investing and financing; cash from operations is derived by adjusting net profit for non-cash items and changes in working capital.

Investing activities cover acquisition and disposal of long-term assets and investments; financing activities cover equity, borrowings and dividend payments.

Cash equivalents are short-term, highly liquid investments with original maturity of three months or less, subject to insignificant risk of value change.

Non-cash transactions such as asset purchase by issue of shares are excluded from the cash flow statement and disclosed separately.

Contribution = sales − variable cost; P/V ratio = contribution / sales; break-even sales = fixed cost / P/V ratio.

Break-even quantity = fixed cost / contribution per unit; margin of safety = actual sales − break-even sales, or profit / P/V ratio.

Profit = (sales × P/V ratio) − fixed cost; required sales for target profit = (fixed cost + target profit) / P/V ratio.

At break-even point contribution equals fixed cost and profit is zero; beyond it each rupee of contribution becomes profit.

Margin of safety percentage = margin of safety / actual sales × 100; a high margin indicates a comfortable cushion before losses begin.

CVP assumes selling price, variable cost per unit and fixed cost remain constant, and that costs split cleanly into fixed and variable elements.

Composite break-even for a multi-product firm uses the weighted average P/V ratio or overall contribution per unit of the sales mix.

Sales mix change alters the overall P/V ratio; a shift toward a higher P/V product lowers break-even sales.

A budget is a quantified plan for a defined future period; budgetary control compares actual with budget, analyses variances and takes corrective action.

Functional budgets include sales, production, purchase, direct material, direct labour, overhead, cash and capital expenditure budgets.

Production budget in units = sales units + desired closing finished goods − opening finished goods.

Purchase budget in units = consumption + desired closing raw material − opening raw material; consumption = production units × material per unit.

The master budget consolidates functional budgets into a budgeted income statement, balance sheet and cash budget.

Fixed budgets stay unchanged regardless of activity; flexible budgets are recast at the actual activity level and are the correct base for variable overhead control.

Zero-base budgeting requires each activity to be justified from nil each period; incremental budgeting starts from the prior period's figures.

Budgetary control requires participation, clear responsibility centres and prompt variance reporting; rigid or imposed budgets invite slack and resistance.

Standard cost is a predetermined cost under specified efficient conditions; a variance is the difference between standard and actual, favourable or adverse.

Material price variance = (standard price − actual price) × actual quantity purchased; material usage variance = (standard quantity − actual quantity) × standard price.

Labour rate variance = (standard rate − actual rate) × actual hours paid; labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate.

Variable overhead efficiency variance uses hours; variable overhead expenditure variance = (standard rate − actual rate) × actual hours.

Fixed overhead expenditure variance = budgeted fixed overhead − actual fixed overhead; volume variance = (budgeted − standard hours for actual output) × standard rate.

Sales price variance = (actual price − standard price) × actual quantity sold; sales volume variance is valued at standard margin or standard profit.

Favourable means profit is higher than standard; adverse means lower. Check signs before interpreting any variance.

Assign responsibility: price variances to purchasing, usage and efficiency variances to production, volume variances to sales and capacity planning.

Marginal cost is the variable cost of one additional unit; marginal costing values inventory at variable cost only and treats fixed cost as a period charge.

Absorption costing values inventory at full cost including absorbed fixed overhead, so profit differs only through changes in inventory levels.

Relevant costs are future, incremental and cash-related; sunk costs, committed fixed costs and allocated common costs are irrelevant.

Accept a special order below normal price only if idle capacity exists and the price exceeds variable cost plus any incremental fixed cost.

Make or buy: compare avoidable cost of making with the buy price plus any opportunity cost of freed facilities.

Shut down a segment only if its contribution fails to cover avoidable fixed costs; unrecoverable fixed costs continue either way.

Key factor or limiting resource: rank products by contribution per unit of the scarce factor, not by contribution per unit.

Opportunity cost is the contribution forgone from the next best alternative and must be added to the cost of the chosen course.

A cost centre is accountable for costs, a revenue centre for revenue, a profit centre for both profit and costs, and an investment centre for profit relative to assets employed.

Controllable cost is one that a manager can influence materially within the period; only controllable items should be charged to a responsibility centre.

Return on investment = divisional profit / divisional investment; residual income = divisional profit − (required rate × investment).

ROI may cause managers to reject profitable projects that lower the divisional average; residual income avoids this but is an absolute measure.

Transfer pricing bases include market price, cost plus mark-up and negotiated price; the chosen basis affects divisional profit measurement.

Activity-based costing assigns overhead to products through activities and cost drivers, reducing cross-subsidisation under a single recovery rate.

Target costing sets cost from a competitive selling price less desired profit; kaizen costing seeks continuous cost reduction during production.

The balanced scorecard measures financial, customer, internal process, and learning and growth perspectives; JIT and total quality management are contemporary control philosophies.