📌 1. Management Accounting – Basics
Management Accounting means using accounting information for planning, controlling, decision-making inside the organization.
Financial accounting is for outsiders → investors, govt., public.
But management accounting is for internal use only → managers use it to take decisions.
Functions of Management Accounting
| Function | Meaning (Simple) | Example |
|---|---|---|
| Planning | Setting goals & preparing future plans | Sales target planning for next year |
| Controlling | Comparing actual vs budget & taking action | If material cost > budget → find reason |
| Decision making | Choosing best alternative | Buy machine or outsource work |
| Performance evaluation | Checking efficiency of departments | Variance analysis |
| Communication | Sharing reports & budgets within company | MIS reports |
PART – 1 BUDGETING
📌 Meaning of Budget
A Budget is a financial plan for future income and expenses.
It tells – How much to produce? How much to spend? How much to earn?
Example:
If a company plans to sell 5,000 units @ ₹100 each,
Estimated Sales Budget = 5,000 × 100 = ₹5,00,000
📌 Budgeting
Budgeting means preparing different types of budgets for different activities.
It helps organization to plan and control its financial performance.
📌 Importance of Budgeting (Short & Easy)
- Helps in planning future activities
- Controls cost and avoids wastage
- Helps to forecast profit
- Coordinates all departments
- Helps in decision making
- Motivates employees to achieve target
- Useful for performance evaluation
- Helps in price-fixing & resource allocation
Example:
If sales is low in budget vs actual → company makes advertisement plan.
📌 Advantages of Budgeting
- Helps in cost control
- Reduces uncertainty
- Increases efficiency
- Encourages discipline
- Helps in optimum resource use
📌 Disadvantages of Budgeting
- Preparation is time-consuming
- Based on estimates (may be wrong)
- Requires skilled staff
- May create pressure on employees
📌 Functional Budgets
Budgets prepared for each department separately.
1) Raw Material Budget
Shows material required + purchases for production.
Format:
Material required for production
Add: Closing stock
Less: Opening stock
= Material to be purchased
Example:
Production = 2,000 units
Material required = 2 kg/unit → 4,000 kg
Closing stock = 500 kg
Opening stock = 200 kg
Material purchase = 4000 + 500 − 200 = 4,300 kg
2) Purchase & Procurement Budget
Shows quantity & cost of materials to be purchased for the period.
Example:
Material purchase 4,300 kg @ ₹30 → ₹1,29,000 purchase budget
3) Labour Budget
Shows labour hours & labour cost required.
Example:
Labour hour = 1 hour per unit
Production = 2,000 units → 2,000 hrs
Labour rate = ₹50/hr → Cost = ₹1,00,000
4) Production Budget
Shows units to produce based on sales.
Formula:
Production = Budgeted Sales + Closing Stock − Opening Stock
Example:
Sales = 5,000 units
Opening stock = 300
Closing stock = 500
Production = 5000 + 500 − 300 = 5,200 units
5) Cash Budget
Shows expected cash inflow & outflow month-wise.
Format:
Opening cash
+ Cash receipts (sales, interest)
- Cash payments (purchase, wages)
= Closing cash balance
Example:
Opening cash = ₹50,000
Receipts = ₹1,00,000
Payments = ₹70,000
Closing cash = 80,000
6) Flexible Budget
Budget prepared for different levels of output (50%, 80%, 100%)
Useful when production varies.
Example:
At 100% → Cost = ₹1,00,000
At 50% → Variable cost becomes half, but fixed cost remains same.
7) Zero-Based Budget (ZBB)
Budget prepared from zero, no previous budget considered.
Every expense must be justified.
Example:
Instead of saying “advertising 1 Lakh like last year”,
Company will ask – Do we really need ads? How much? Why?
Short Summary of Budgeting
| Budget | Purpose |
|---|---|
| Sales budget | Forecast sales |
| Production budget | Units to produce |
| Material budget | Raw material requirement |
| Purchase budget | Quantity & cost to buy |
| Labour budget | Labour hours & wages |
| Cash budget | Cash inflow & outflow |
| Flexible budget | For variable output levels |
| ZBB | Starts from zero, no past reference |
🌟 STANDARD COSTING – FULL NOTES
1. Meaning of Standard Cost & Standard Costing
🔹 Standard Cost
A standard cost is a pre-decided (planned) cost of producing one unit of product or service under normal conditions.
“Standard cost = What the cost should be.”
Example:
For 1 unit of product, management fixes:
- Material: 2 kg @ ₹30 = ₹60
- Labour: 1 hour @ ₹80 = ₹80
- Variable OH: ₹20 per unit
- Fixed OH: ₹40 per unit (based on normal capacity)
So standard cost per unit = 60 + 80 + 20 + 40 = ₹200.
🔹 Standard Costing
Standard costing is a system where:
- Standards are set for each element of cost (materials, labour, overhead, sales).
- Actual costs are recorded.
- Variances = difference between standard and actual are found and analysed.
It is mainly a tool for cost control and performance measurement.
2. Difference: Standard Costing vs Historical Costing
| Basis | Historical Costing | Standard Costing |
|---|---|---|
| Focus | Records what has happened | Plans what should happen and compares |
| Time | Looks at past | Future-oriented + comparison |
| Use | For financial reporting | For control, decision making |
| Cost control | Weak, because cost known after incurring | Strong, because deviations are spotted early |
3. Types of Standards (Short)
- Ideal standard – assumes perfect conditions (no wastage, no idle time). Not realistic.
- Currently attainable standard – achievable under normal efficient conditions (small normal loss allowed). This is most useful.
- Basic standard – very long-term standard used as a base (not changed for years, like index).
- Normal standard – based on average past performance over several years.
In exams, usually they ask meaning & which type is best → “Currently attainable standards are considered best because they are challenging but realistic.”
4. Steps in Standard Costing System
- Setting standards
- Material: standard quantity per unit & standard price per unit
- Labour: standard hours per unit & standard rate per hour
- Overheads: standard rate per hour or per unit
- Sales: standard selling price and sales quantity
- Measuring actual performance
Collect actual quantities, actual rates, actual hours, etc. - Calculating variances
Variance = Actual − Standard (or Standard − Actual, but always mention whether favourable/adverse). - Analysing variances
Find causes → price change, wastage, inefficiency, idle time, etc. - Taking corrective action
E.g. change supplier, train workers, revise standards, change process. - Reporting to management
Variance reports regularly for decision making.
5. Advantages of Standard Costing (Simple Points)
- Budgeting & planning – helps in preparing budgets and expected profits.
- Cost control – variances show where things went wrong.
- Performance measurement – good for evaluating departments and managers.
- Motivation – employees know clear targets.
- Decision making – contribution and variance info helps in pricing & make/ buy decisions.
- Management by exception – managers focus only on abnormal variances (big issues), not every small item.
6. Limitations / Disadvantages
- Difficult and time-consuming to set correct standards.
- Frequent changes in prices and technology make standards quickly outdated.
- Not suitable for very custom / job-order work where every job is different.
- Staff may feel pressure and manipulate figures to meet standards.
- Requires good costing system – small firms may find it costly.
🔍 VARIANCE ANALYSIS – OVERVIEW
Variance = Difference between Standard and Actual.
- If actual cost < standard cost → Favourable (F)
- If actual cost > standard cost → Adverse (A)
Main Types (as per your syllabus)
- Material Variances – price and usage
- Labour Variances – rate and efficiency
- Overhead Variances – variable & fixed
- Profit / Sales Variances – price, volume, usage, etc.
We’ll go one by one with easy formulas and small numeric examples.
7. Material Cost Variances
Assume:
Standard: 2 kg per unit @ ₹30/kg.
Actual output: 1,000 units.
So Standard quantity (SQ) = 2 × 1000 = 2,000 kg
Standard price (SP) = ₹30/kg.
Suppose actual:
- Actual quantity (AQ) used = 2,100 kg
- Actual price (AP) = ₹32/kg
(a) Total Material Cost Variance (MCV)
Formula (easy):
MCV = Standard Cost – Actual Cost
Standard cost (SC) = SQ × SP = 2,000 × 30 = ₹60,000
Actual cost (AC) = AQ × AP = 2,100 × 32 = ₹67,200
So, MCV = 60,000 − 67,200 = ₹7,200 (Adverse)
→ material cost is higher than expected.
(b) Material Price Variance (MPV)
MPV = (SP − AP) × AQ
= (30 − 32) × 2,100
= (−2) × 2,100 = ₹4,200 (Adverse)
Reason: price increased from 30 to 32.
(c) Material Usage (Quantity) Variance (MUV)
MUV = (SQ − AQ) × SP
= (2,000 − 2,100) × 30
= (−100) × 30 = ₹3,000 (Adverse)
Reason: used 100 kg more than standard → wastage / inefficiency.
Check:
MPV + MUV = 4,200 (A) + 3,000 (A) = 7,200 (A) = Total MCV ✔
Exam note: For your syllabus you must clearly write formulas for
MCV, MPV, MUV and show that MCV = MPV + MUV.
8. Labour Cost Variances
Assume:
Standard: 1.5 hours per unit @ ₹80/hour.
Actual output: 1,000 units.
So Standard hours (SH) = 1.5 × 1,000 = 1,500 hours.
Standard rate (SR) = ₹80 per hour.
Suppose actual:
- Actual hours (AH) = 1,600 hours
- Actual wages = ₹1,28,000 → Actual rate (AR) = 1,28,000 / 1,600 = ₹80/hr (same as standard).
(a) Total Labour Cost Variance (LCV)
LCV = Standard Labour Cost − Actual Labour Cost
SLC = SH × SR = 1,500 × 80 = ₹1,20,000
ALC = AH × AR = 1,600 × 80 = ₹1,28,000
LCV = 1,20,000 − 1,28,000 = ₹8,000 (Adverse)
(b) Labour Rate Variance (LRV)
LRV = (SR − AR) × AH
Here SR = AR = 80
→ LRV = 0 (no rate variance).
(c) Labour Efficiency Variance (LEV)
LEV = (SH − AH) × SR
= (1,500 − 1,600) × 80
= (−100) × 80 = ₹8,000 (Adverse)
Reason: more hours than standard → low efficiency.
Check: LRV + LEV = 0 + 8,000 (A) = 8,000 (A) = LCV ✔
Extra (if syllabus asks Idle Time Variance):
If some hours are lost due to power cut etc., cost of those hours × standard rate is idle time variance (Adverse).
9. Overhead Variances (Simple Level)
Overheads can be Variable OH and Fixed OH. At your level you usually need:
- Variable Overhead Expenditure Variance
- Variable Overhead Efficiency Variance
- Fixed Overhead Expenditure Variance
- Fixed Overhead Volume Variance
Example (Variable Overhead)
Standard: Variable OH rate = ₹20 per labour hour.
Standard hours for actual output (SH) = 2,000 hours.
So Standard VOH = 2,000 × 20 = ₹40,000.
Actual:
- Actual hours (AH) = 2,200 hours
- Actual VOH = ₹46,000
Total Variable OH Variance = Standard VOH − Actual VOH
= 40,000 − 46,000 = ₹6,000 (Adverse)
Split into:
- Expenditure Variance (SR − AR) × AH AR = 46,000 / 2,200 = ₹20.91
= (20 − 20.91) × 2,200 ≈ (−0.91) × 2,200 ≈ ₹2,002 (A) - Efficiency Variance (SH − AH) × SR
= (2,000 − 2,200) × 20 = (−200) × 20 = ₹4,000 (A)
Total ≈ 2,002 + 4,000 ≈ 6,002 (A) ≈ 6,000 (A) (rounding)
Example (Fixed Overhead – basic idea)
Standard fixed OH rate = ₹50 per hour.
Standard hours for full capacity = 2,000 hrs → Budgeted fixed OH = 1,00,000.
Standard hours for actual output = 1,800 hrs.
Actual fixed OH = 1,05,000.
Fixed OH Expenditure Variance
= Budgeted FOH − Actual FOH
= 1,00,000 − 1,05,000 = ₹5,000 (Adverse)
Fixed OH Volume Variance
= (SH for actual output − Budgeted hours) × SR
= (1,800 − 2,000) × 50 = (−200) × 50 = ₹10,000 (Adverse)
Then total FOH variance = Expenditure + Volume = 5,000 (A) + 10,000 (A) = 15,000 (A),
which equals Standard FOH for actual output − Actual FOH (can be checked).
10. Sales / Profit Variances (Price, Volume etc.)
Here, standards are set for selling price and sales quantity (or revenue).
Assume:
Standard selling price (SP) = ₹200 per unit.
Standard quantity expected = 1,000 units → Standard sales = ₹2,00,000.
Actual:
- Actual selling price (AP) = ₹190 per unit
- Actual units sold (AQ) = 1,100 units → Actual sales = 1,100×190 = ₹2,09,000.
(a) Total Sales Value Variance (SVV)
SVV = Actual Sales − Budgeted (Standard) Sales
= 2,09,000 − 2,00,000 = ₹9,000 (Favourable)
Even though price is lower, sold more units → more revenue.
(b) Sales Price Variance (SPV)
SPV = (AP − SP) × Actual Qty
= (190 − 200) × 1,100
= (−10) × 1,100 = ₹11,000 (Adverse)
Reason: reduced price.
(c) Sales Volume Variance (SVVOLUME)
Sales Volume Variance = (AQ − SQ) × SP
= (1,100 − 1,000) × 200
= 100 × 200 = ₹20,000 (Favourable)
Reason: sold 100 units more than planned.
Check: Price + Volume = −11,000 + 20,000 = 9,000 F = Total Sales Variance ✔
Profit / Contribution Variances (usage, price, volume)
Sometimes syllabus says “Profit – Usage, Price, Volume and Sale Price Variances”.
Idea is same as sales variances but using contribution or profit instead of sales value.
At your level, usually writing definitions + relation is enough:
- Profit Price Variance – change in profit due to change in selling price.
- Profit Volume Variance – change in profit due to different quantity sold.
- Profit Usage Variance – change in profit due to changes in input usage (materials, labour) affecting cost.
For numericals, most teachers stop at Material & Labour variances; some give simple sales value variance.
11. Quick Formula Sheet (for last-minute revision)
Material
- MCV = SC − AC
- MPV = (SP − AP) × AQ
- MUV = (SQ − AQ) × SP
Labour
- LCV = SLC − ALC
- LRV = (SR − AR) × AH
- LEV = (SH − AH) × SR
Overheads (simple)
- VOH cost variance = Standard VOH − Actual VOH
- VOH expenditure variance = (SR − AR) × AH
- VOH efficiency variance = (SH − AH) × SR
- FOH expenditure variance = Budgeted FOH − Actual FOH
- FOH volume variance = (SH − Budgeted hours) × SR
Sales
- Sales value variance = Actual sales − Budgeted sales
- Sales price variance = (AP − SP) × AQ
- Sales volume variance = (AQ − SQ) × SP
12. How to score in exam using this topic
- Before exam, revise definitions of standard costing and variance.
- Memorise formula sheet above.
- Always show:
- Standard qty / hours
- Standard rate
- Actual qty / hours
- Actual rate
- Mark each variance clearly as Favourable (F) or Adverse (A).
- For theory questions, write:
- meaning
- objectives / advantages
- steps in system
- limitations.