Fundamentals of Management Accountancy

Management Accounting refers to accounting information that can help managers in
a) Control of operations
b) Planning
c) Decision Making
To appreciate the importance of Management Accountancy we need to understand its evolution which may be traced as follows:

management_accounting

Cost

Expenditure incurred to manufacture a product or provide a service.

Responsibility Centers

Responsibility Centers are organizational sub-units where each sub-unit is assigned a set of responsibilities.

Such organizational sub-units can be created on various bases such as locations, departments, functions, individuals etc.

responsibility_centers

Responsibility centers could be the following types:

a) Cost Centers
b) Profit Centers
c) Investment Centers

Cost Centers

Organizational sub-units which has a responsibility to control & report costs are called cost centers. Costs are generally accumulated to cost centers.

Profit Center & Investment Center

Profit center would be responsible for the profit it generates (they are responsible both for the revenue generated & costs incurred by them).

Similarly, the success of an investment center is measured based on the return generated over the investment made for the center.

Cost Classification

Costs classification can be made on various bases. Some of them are explained below:

Cost_classification_1

Cost_classification_2

 

Cost_classification_3

Cost_classification_4

Comments

  1. Venkata Kalyan says:

    Hey, Can we say that management accounting helps the managment in controlling the cost for a unit by analyzing the ways possible In a single sentence). Ignore if iam wrong.

    • @ Venkata Kalyan ….Though one of the key areas of Management Accouting is controlling costs, it is more related to assisting management in all kinds of decision making. When we say that, it need not only be cost related decisions, but also revenue related decisions . For example pricing decisions.

      I would encourage readers to share their thoughts here. I think thats the best way for all of us to learn more and more in less time.

  2. Kiran,

    i wanted to use one of your illustrations in my master thesis.
    Could you please provide me with your sources? I am particularly interested in the reference for the table of Responsibility centers.

    Thx in advance!

    Irena

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