Management accounting According to the Chartered institute of management accountants (CIMA), Management Accounting is "the process of identification, measurement,

accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology). The Institute of Management Accountants (IMA) recently updated its definition as follows: "management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organizations strategy." The American Institute of Certified Public Accountants (AICPA) states that management accounting as practice extends to the following three areas:
y

Strategic Managementadvancing the role of the management accountant as a strategic partner in the organization.

Performance Managementdeveloping the practice of business decision-making and managing the performance of the organization.

Risk Managementcontributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.

The Institute of Certified Management Accountants (ICMA), states "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking." Management Accountants therefore are seen as the "value-creators" amongst the accountants. They are much more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and

compliance (score keeping) aspects of the profession. Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc. In the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment. Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants. The distinction between traditional and innovative accounting practices can be illustrated by reference to cost control techniques. Cost accounting is a central method in management accounting, and traditionally, management accountants principal technique was variances analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity based costing, which are designed with specific aspects of the modern business environment in mind. Life cycle costing recognizes that managers ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product life-cycle (i.e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the products. Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of activities (e.g., the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Activity-based accounting is also known as Cause and Effect accounting.

Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, such as the provision of a service or the production of a product component.

The Importance of Management Accounting in Business

Management is related to the group of people who are in charge of controlling a business and measuring up to its profitability and meeting its financial goals. If a business is very large, then the management will most often need more than just a single person handling accounting needs. Managers have to answer important question such as what was the companys net income, and if they have a substantial rate of return. Also they must ask does the company have enough assets. When taking decision, managers often follow a systematic method. Although larger businesses need a more concrete analysis, they follow a similar pattern to small businesses. The accountant of the business must answer these entire questions, as they are the roots of what the business is building. Accountants are the people or a company which are able to analyze every single financial activity of a business and is able to draft a complete profit and loss statement. Most businesses generally release their financial report. This shows how they plan on meeting their profitability and liquidity goals. These statements display how good a company did in the past and can predict how well they are going to do in the future. Accountants must be aware that many people outside the business also study the financial reports. They are the investors and the creditors of the business in which these numbers mean a lot to them. The investors are the individuals that invest in a business are partial owners of the business. They are interested in their past success and failures, and also will like to know the possible profits. A practical analysis of the financial report will help prospective investors base their

decisions. Once they finish investing they must carry on to study a business financial statement. Creditors are the companies that add money to businesses for short or long term needs. Creditors are the people that deliver money or offer services for parties in advance before getting paid. Their main worry is whether a business will have the money to repay with interest in a estimated amount of time. The most important things they study come on this financial statement. Whether you're in a small business or large corporation accounting is very important and this department should be handled very much with complete accuracy.

Cost-volume-profit (CVP) Cost-volume-profit (CVP) analysis expresses the relationship between a companys expenses, its volume of business, and the resulting profit or net income. It is a systematic method of examining the relationship between changes in activity (output) and changes in total sales revenue, expenses and net profit. It is supplementary tool of profit planning. It tells many things about the relationship between the business variables. As the traditional approach to profitability analysis, which considers only unit-level activity cost drivers, is identified as cost-volume-profit (CVP) analysis. It is a technique used to examine the relationships among the total volume of an independent variable, total costs, total revenues, and profits for a time period (typically a quarter or year). With CVP analysis, volume refers to a single unit-level activity cost driver, such as unit sales, that is assumed to correlate with changes in revenues, costs, and profits. Cost-volume-profit analysis is useful in the early stages of planning because it provides an easily understood framework for discussing planning issues and organizing relevant data. CVP analysis is widely used by for-profit as well as not-for-profit organizations. It is equally applicable to service, merchandising, and manufacturing firms. Cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume level at which total revenues are equal to total costs. When total costs and total revenues

are equal, the business organization is said to be "breaking even." The analysis is based on a set of linear equations for a straight line and the separation of variable and fixed costs. Total variable costs are considered to be those costs that vary as the production volume changes. In a factory, production volume is considered to be the number of units produced, but in a governmental organization with no assembly process, the units produced might refer, for example, to the number of welfare cases processed. There are a number of costs that vary or change, but if the variation is not due to volume changes, it is not considered to be a variable cost. Examples of variable costs are direct materials and direct labor. Total fixed costs do not vary as volume levels change within the relevant range. Examples of fixed costs are straight-line depreciation and annual insurance charges. Total variable costs can be viewed as a 45 line and total fixed costs as a straight line.

Revenue(R) Total cost TC

profit

Variable cost VC Break even point

loss

Fixed cost(VC)

Output level

In above figure line VC is variable cost which is zero and zero level of production and increase as production increase FC is fixed cost line which is fixed for certain level of output

TC is total cost curve which is sum of fixed cost and variable cost R is revenue curve At point a firm is in break even where its total Revenue is equal to total cost

The straight-line equation for total cost is: Total cost = total fixed cost + total variable cost Total variable cost is calculated by multiplying the cost of a unit, which remains constant on a per-unit basis, by the number of units produced. Therefore the total cost equation could be expanded as: Total cost = total fixed cost + (variable cost per unit number of units) Total fixed costs do not change. Thus total cost equation is: Y = a + bx Where, a is the fixed cost, b is the variable cost per unit, x is the level of activity, and Y is the total cost. Break even (unit) = fixed cost / contribution margin per unit Breakeven point in amount=breakeven unit * selling price per unit The financial information required for CVP analysis is for internal use and is usually available only to managers inside the firm; information about variable and fixed costs is not available to the general public. CVP analysis is good as a general guide for one product within the relevant range. If the company has more than one product, then the contribution margins from all products must be averaged together. But, any cost-averaging process reduces the level of accuracy as compared to working with cost data from a single product. Furthermore, some organizations, such as nonprofit organizations, do not incur a

significant level of variable costs. In these cases, standard CVP assumptions can lead to misleading results and decisions. Managerial application of the cost-volume-profit analysis CVP simplifies the computation of breakeven in break even analysis, and more generally allows simple computation of Target Income Sales. It simplifies analysis of short run tradeoffs in operational decisions. The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR = TC). A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative. Break even analysis can also be used to analyze the potential profitability of an expenditure in a sales-based business. Break-even point (for output) = fixed cost / contribution per unit Contribution (P.U.) = selling price P.U.) - variable cost P.U.) Break- even point (for sales) = fixed cost / contribution (P.U.) * sp (P.U.) In cost accounting, Target Income Sales are the sales necessary to achieve a given Target Income (or Targeted Income). It can be measured either in units or in currency (sales proceeds), and can be computed using contribution margin similarly to break-even point:

Thus CVP is applied for 1. determining the margin of safety 2. assessing the profit at forecasted sales volume 3. estimation of sales for target profit 4. determining the selling price 5. determining breakeven at different sales volume and cost

Limitations of CVP analysis: y y y y y The analysis assumes a linear revenue function and a linear cost function. The analysis assumes that what is produced is sold. The analysis assumes that fixed and variable costs can be accurately identified. For multiple-product analysis, the sales mix is assumed to be known and constant. The selling prices and costs are assumed to be known with certainty.

In performing CVP analysis, there are several assumptions made:

y y y y y y

Sales price per unit is constant. Variable costs per unit are constant. Total fixed costs are constant. Everything produced is sold. Costs are only affected because activity changes. If a company sells more than one product, they are sold in the same mix.

Cost- volume profit- analysis of business Introduction

Selected business type: fast food restaurant Name of firm: Testy Burger Home Location: Birauta, pokhara

With growing the service and trading sector people are busier in their work. With increase in business they have limited to have food. Thus they go search for healthy, hygienic fast food. Similarly, trend of having western food like burger, pizza, sandwich etc. are growing in Nepalese market. Thus knowing this and to serve very hygienic fast food we are launching fast food restaurant Testy burger Homes in Birauta, pokhara.

Pokhara is one of the biggest trading and tourism city of Nepal. Thousands of people are engaged in service and trading sector. Due to the busy working schedule they look search of fast food. People working this area hardly find place they search for. They force to have unhygienic food selling on street. A good fast food restaurant is lacking in this busy market of Birauta. People are suggesting opening restaurant in this area. Thus opening the burger home in this area has seams profitable. Targeted customer is office and bank employee, tourist, students and people of pokhara. Product of business 1. Burger veg. and chicken 2. cold drinks 3. tea 4. coffee 5. miscellaneous (snacks, mineral water etc)

Fixed costs associated Depreciation of fixed cost Rent of building Salary of manager, cook, helper, waiter

Semi-variable Telephone Electricity

Variable cost For burger: bread, butter, cheese, vegetable (onion, tomato, ladiespatta, cabbage, potato etc), chicken, spices, and sauces, water For cold drinks: unit price per cold drinks Tea and coffee: milk. Sugar coffee, tea leafs, water, ginger and spices, electricity and gas Purchase price of miscellaneous product Miscellaneous (napkin, artificial cups etc) Price of product Price of product is determining considering the market price and demand. Besides this cost associated with product, profit, industry standard, expenses habit and income is also considered. Burger veg: Burger chicken: Cold drinks: Rs. 40 Rs. 60 Rs. 25

Tea: Coffee:

Rs.10 Rs. 15

list of fixed assets particular amount fridge 15,000.00 furniture 24,000.00 cofee machine 12,000.00 cup plates and kitchen utensiles 20,000.00 telephone sets and calculator 1,250.00 total 72,250.00 estimated capacity of resturant burger pcs tea cups coffee cups colddrinksn (250ml bottle) miscellaneous (avg. worthof Rs. 20 total unit

list of employee particular manager cook helper waiter

no 1 1 3 2

monthly salary 9,000.00 8,000.00 4,500.00 5,500.00

18,000.00 18,000.00 12,000.00 18,000.00 7,500.00 73,500.00

monthly fixed cost of burger homes list of fixed cost in Rs. depreciation 1,104.17 rent 10,000.00 salary cook 8,000.00 manager 9,000.00 waiter 11,000.00 helper 13,500.00 stationery 3,000.00 telephone 3,156.00 total 58,760.17 variable cost of coffee milk 125ltr sugar electricity coffee per unit 1250 cups 3125 2000 478.125 6250 total 11853.125 9.4825

variable cost(burger) yearly for 1500 cost bread piece 1,500.00 9,000.00 chicken kg 15.00 4,500.00 lady patta 60.00 2,100.00 sauce 15.00 4,650.00 butter 4,291.67 spices 15.00 3,750.00 water 500.00 cauliflower 16.67 850.00 tamato 75.00 3,750.00 cheese 4,166.67 total 37,558.33 per unit 25.04 variable cost(cold drinks) 1500 bottle cold drinks 1,500.00 elecricity 100.00 total per unit variable cost tea milk sugar spices gas tea leaf total per unit

25,500.00 765.00 26,265.00 17.51

1500 cups 75 1,875.00 30 2,400.00 500.00 1,250.00 7.5 1,875.00 7,900.00 5.27

Miscellaneous item as per as tagged price by manufacturer

Monthly Break even analysis

monthly break even analysis of burger home rate particular units sales vc per unit variable cost Contribution margin less fixed cost net income

urger(

50 25 12 20 20 th) cold drinks tea coffee miscellaneous total 1500 1500 1500 1250 625 6375 75000 37500 18000 25000 12500 168000 25.04 17.51 5.27 9.4825 17 37,560.00 26,265.00 7,905.00 11,853.13 10,625.00 94,208.13 37,440.00 11,235.00 10,095.00 13,146.88 1,875.00 73,791.88 58,760.17 15,031.71

eightedaverage cm per unit eightedaverage cm percent

break even unit breakeven in unit 5,076.39 break even in amount 133,777.72 breakeven unit of each product 1,194.44 breakeven sales for each produc 59,722.20

sensitivity analysis particular per unit sales of salesmix sales unit sales vc perunit of salesmix less variable cost contribution margin less fixed cost net profit cm per unit cm percent break even unit break even amount 10% increase in sales 26.35 7012.5 184,800.00 14.78 103,628.94 81,171.06 58,760.17 22,410.89 10% sales decrease 26.35 5737.5 151,200.00 14.78 84,787.31 66,412.69 58,760.17 7,652.52 10% vc increase 26.35 6375 168,000.00 16.26 103,628.94 64,371.06 58,760.17 5,610.89 10% vc decrease 26.35 6375 168,000.00 13.30 84,787.31 83,212.69 58,760.17 24,452.52 10% both 10% both sales and vc sales and vc increase decrease 26.35 26.35 7012.5 5737.5 184,800.00 151,200.00 16.26 13.30 113,991.83 76,308.58 70,808.17 74,891.42 58,760.17 58,760.17 12,048.00 16,131.25 13.05 49.53 4501.6703 118632.253

From sensitivity analysis table most critical variable is variable cost if it increase profit decreases gradually There is not effect in break even unit if increase or decrease in sales only. But breakeven increases with increase in variable cost.

11.58 43.92

1,194.44 29,861.10

1,194.44 14,333.33

995.37 19,907.40

497.68 9,953.70

5,076.39 133,777.72

11.58 11.58 10.10 13.05 10.10 43.92 43.92 38.32 49.53 38.32 5076.386577 5076.386577 5819.32423 4501.670298 5819.324231 133777.7169 133777.7169 153356.309 118632.2526 153356.3091

Prospect of Burger Home

Fast food restaurant business seams very bright, as no big competitor is around with such product and quality as well as analyzing the data of this restaurant it seams very less risky in term of investment. Opening this type of restaurant in this location with hygienic fast food with affordable price is heartily welcome by the customer.

In Nepal there is no application of methods as prescribed in the text book. Practice of methods given in the book is rarely found. Even small firm like restaurant and other are not practice of cost volume analysis. Firm follows the project scheme mandate provide by ministry of small and cottage industry which is based on 20 year old market condition of Nepal and not relevant in actual field.