Management Accounting

BBA 207

UNIT- 2

Prepared By
Dr. Rashmi Chawla Dr. Varsha Goyal
Associate Professor Professor
DME Management School DME Management School

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Programme Outcomes

PO1: Apply knowledge of various functional areas of business

PO2: Develop communication and professional presentation skills
PO3: Demonstrate critical thinking and Analytical skills for business decision
making
PO4: Illustrate leadership abilities to make effective and productive teams
PO5: Explore the implications and understanding of the process of starting a
new venture
PO6: Imbibe responsible citizenship towards a sustainable society and
ecological environment
PO7: Appreciate inclusivity towards diverse cultures and imbibe universal
values
PO8: Foster Creative thinking to find innovative solutions for various business
situations

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Course Objective and Course Outcomes

Objective: The objective of the course is to familiarize the learner the basics of
Management Accounting concepts and their application in managerial
decision making.

CO1: Understand the nature and scope of Management Accounting

CO2: Analyze and Interpretate the Financial Statements of a company and its
limitations
CO3: Executing Skills to prepare various budget
CO4: Examine the impact of different Ratios on the financial performance of the
company.
CO5: Compute Cash flow analysis and its likely impact on the company

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GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, DELHI
BACHELOR OF BUSINESS ADMINISTRATION (BBA)
BBA 207: Management Accounting
L-4, T•0 Credits —4
Objective: The objective of the course is to familiarize the learners with the basic management
accounting concepts and their applications in managerial decision making.

Course Outcomes:
1. Understand the nature and scope of Management Accounting.
2. Analyse and interpret the accounting financial statements of a company and its limitations.
3. Executing skills to prepare various Budgets.
4. Examining the impact of different ratios on the financial performance of a company.
5. Compute cash flow analysis and its likely impact on the company

Course Contents
Unit 1: (14 Hours)
Introduction: Meaning, Objectives, and Scope of management accounting; Difference between financial
accounting, cost accounting and management accounting; Comparative financial statements, common size
financial statements, trend analysis, Ratio analysis, cash flow statement.

Unit 2: (14 Hours)

Budgetary Control and Variances: Concept and types of budgeting and budgetary control; meaning,
objectives, merits, and limitations of budgetary control; budget administration; Functional budgets including
cash budget; Fixed and flexible budgets: meaning and preparation; Zero-based budgeting; Performance
budgeting, difference between performance & traditional budgeting. Meaning of Variance and Variance
Analysis – Material, Labour, Overheads and Sales Variances, Disposition of Variances, Control Ratios.

Unit 3: (14 Hours)

Costing and Profit Planning: Meaning of Variable Costing, Absorption Costing and Marginal Costing;
uses of Marginal costing; Cost-Volume-Profit Analysis, Profit/Volume ratio, Break-Even Analysis -
Algebraic And Graphic Methods, Angle of Incidence and Margin of Safety.

Unit 4: (14 Hours)

Managerial Decision Making:Decision making based on Marginal Cost Analysis - profitable product mix,
Make or Buy, Addition or Elimination of a product line, sell or process further, operate or shut down
Managerial Decision-making using spreadsheets. 4
Unit 2 – Table of Contents
Sno. Topic Name
2.1 Concepts and types of Budgeting and Budgetary Control
2.2 Meaning, Objectives, Merits and Limitations of Budgetary Control and Budget
Administration
2.3 Functional Budgets including Cash Budget
2.4 Fixed vs Flexible Budgeting: Meaning and Preparation
2.5 Zero Base Budgeting and Performance Budgeting
2.6 Meaning of Variance and Variance Analysis
2.7 Material Cost Variance
2.8 Labour Cost Variance
2.9 Overhead Variance Analysis
2.10 Disposition of Variances, Control Ratios

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1.1
Concepts and types of Budgeting and Budgetary Control

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Suggested Readings

1. Author: MN Arora
Book: Management Accounting
Chapter: Introduction to Management Accounting

2. Author: SN Maheshwari
Book: Management Accounting
Chapter: Introduction to Management Accounting
https://commercemates.com/nature-and-scope-of-management-accounting/

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Introduction
• Budgeting projects anticipated revenue and
expenditures for a future period based on
prevailing internal and external factors. A
detailed statement of projected financial result
is prepared by considering inputs from various
levels.

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Key Points
• Budgeting is a systematic approach, that predicts revenues and expenditures of
an individual, family, group, business entity, or government. A realistic report
helps businesses trace their financial performance. This is crucial for decision-
making.

• They are classified into personal, corporate, government, static, flexible, master,
operating, cash, financial, and labor subtypes.

• Incremental, zero-based , activity-based , participative , negotiated , and value

proposition are different methods of budgeting.

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Budgeting Mrthods

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#1 – Incremental Budgeting
It is a traditional method; the manager takes the
previous period’s budget as a benchmark. Further, the
anticipated percentage change is either summed up or
deducted to formulate the current budget. It includes
adjustment for inflation, overall market growth, and
other relevant factors.
#2 – Zero-based Budgeting (ZBB)
In this method, all the figures are reset to zero, and the
manager begins with a fresh interpretation of all the
items. The manager has to justify every new number
with reasoning, in contrast to using figures from the
previous accounting period. ZBB eradicates
traditional expenditures that are no longer required. It
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is a strategic top-down approach re-evaluating every
#3 – Activity-based Budgeting
Operations or activities that generate cost to the business are
identified. Ways of reducing costs are strategized. It is mostly used
in mature organizations.

#4 – Participative Budgeting
Top-level executives often take the help of the managers and
workers of different departments in designing the financial plan. It
is a bottom-up approach.

#5 – Negotiated Budgeting
It has both top-down and bottom-up traits. Managers and
employees together frame the financial plan, keeping in mind
goals and targets—set by top-level management.

#6 – Value Proposition Budgeting

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As the name suggests, every cost is re-evaluated and justified
Budgeting Process

Given below are the seven steps of financial planning.

1. First, ascertain the goal of financial planning.
2. Next, interpret and compare historical data of revenues and
expenses.
3. Then, devise a rough budget to direct the actions towards the
objective.
4. Further, refine the findings to chalk down a final budget.
5. Prepare and submit a budget report.
6. Review the financial plan from time to time—detect loopholes.
7. Track the performance, taking the necessary corrective
measures if required. 14
Types of budget
• 1. Operating budget: It highlights the day-to-day expenses
and revenue of the organization and typically includes salaries,
utilities, marketing expenses, and salary projections.
• 2. Capital budget: It helps organizations assess their financial
feasibility for capital projects by recording their long-term
investments in equipment, machinery and infrastructure.
• 3. Cash budget: It helps track the organization’s incoming and
outgoing cash flows and predict cash surpluses to meet
financial obligations.
• 4. Master budget: It includes all the individual budgets of
different departments or divisions and is the organization’s
overall financial plan.
• 5. Flexible budget: It is a budget that incorporates minor
adjustments based on the changing environment, like variations
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in sales and production levels.
• 6. Zero-based budget: Every expenditure is justified by
analyzing it from scratch. This approach helps in optimizing
resource allocation by reducing unnecessary costs.
• 7. Sales budget: It predicts the expected sales volumes and
revenue for the period and is the basis for planning production
and setting sales revenue targets.
• 8. Expense budget: The planned expenses for various
departments, like marketing, sales, research and development,
and office.
• 9. Project budget: It is the budget of a specific project and
includes expenses, project profitability and strategies for cost-
cutting.
• 10. Departmental budget: The budget allocated to each
department helps the managers plan their expenses to achieve
the organizational and departmental objectives efficiently.

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Importance of having a budget
1. Financial control
It is one of the crucial financial planning tools as it helps
organizations set goals by analyzing the various sources
of income, expenses, and savings target. This makes it
easier for the organizations to understand their financial
viability and allocate resources.
2. Emergency preparedness
A well-planned budget can help navigate through
sudden financial roadblocks by allocating a part of
resources and money to the emergency budget. This
emergency budget acts as a safety net, reducing the
increased reliance on debt or external sources of funds
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during crisis times.
• 3. Improved cash flow management
• A budget also helps track the cash inflows and outflows, ensuring
enough liquidity. It also helps organizations in efficient payroll
processing, inventory management, and maintenance of vendor
payment records. Enhanced cash flow management helps reduce
stress and maintain financial stability.
• 4. Performance evaluation
• They serve as benchmarks for effective evaluation of financial
performance. Organizations compare the actual output with the
budgeted predictions to gain insights into their financial health. It
also helps assess their spending habits and sources of revenue and
take proactive measures to bridge the gaps in their financial
performance.
• 5. Communication and accountability
• The budget promotes a culture of transparency and accountability
within the organization. Effectively communicating the budget to
stakeholders like investors, partners, and employees helps create a18
Budgetary Control
• Budgetary control is a systematic process that helps
organizations monitor and manage their financial
performance by comparing actual results with planned
budgets. It allows businesses to track expenses, identify
variances, and take corrective actions to meet financial
goals.

• “The establishment of budgets, relating the

responsibilities of executive to the requirements of a
policy and the continuous comparison of actual with
budgeted results either to secure by individual action
the objectives of that policy or to provide a firm basis
for its revision”
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Conclusion
• Budgeting helps organizations in controlling and
monitoring expenses in the following way:
• It helps categorize the expenses under various
subheadings that assists management in identifying
areas of overspending.
• It also assigns specific spending limits to each category,
encouraging every department to behave financially
responsible.
• It helps organizations make informed expenditure
decisions as they are crucial to assessing the potential
impact of each proposed expense.
• Organizations can detect any early signs of financial
instability by closely reviewing the expenses and
addressing trivial issues that might escalate into
significant crises. 20