Management Accounting

For B.Com. (General), B.Com. (Accounting & Finance)

as per
Tamil Nadu State Council for Higher Education (TANSCHE) Syllabus

DR. S.N. MAHESHWARI

Professor Emeritus and Academic Director
Delhi Institute of Advanced Studies
Delhi – 1100085
[Formerly, Principal, Hindu College, University of Delhi, Professor & Dean,
Faculty of Commerce and Business Management, Goa University]

DR. SUNEEL K. MAHESHWARI

Professor of Accounting
Eberly College of Business, Indiana University of Pennsylvania, U.S.A.
[Formerly, Professor of Accounting in the Division of Accountancy and
Legal Environment, Marshall University, U.S.A]

CA SHARAD K. MAHESHWARI
Maheshwari Sharad & Co.
Chartered Accountants
Gurugram, Haryana

SULTAN

SULTAN CHAND & SONS®

Educational Publishers
New Delhi
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First Edition: 2025

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 P
Preface

Welcome to the world of Management Accounting! This textbook is designed specifically for 5th
semester B.Com. students, and adheres strictly to the syllabus prescribed by the Tamil Nadu State
Council for Higher Education (TANSCHE). As you embark on this journey, consider this book
your comprehensive guide to understanding the intricate workings of financial management within
businesses.
Management Accounting is not just about recording transactions. It equips managers with
the necessary tools to make informed decisions on critical aspects like costing, budgeting, and
performance analysis. This book is meticulously structured into five units, each meticulously crafted
to build your knowledge.
Unit I – Introduction to Management Accounting: This foundational unit lays the groundwork
by introducing you to the core concepts of Management Accounting, its nature, and its vast scope
within the business landscape. The unit concludes by equipping you with the skills to analyze
and interpret financial statements, the key source of financial data for effective decision-making.
Unit II – Ratio Analysis delves into the powerful tool of Ratio Analysis. It explores different
types of ratios and their application in evaluating various aspects of a company’s financial health,
performance, and solvency.
Unit III - Funds Flow and Cash Flow Analysis: Understanding the movement of cash within an
organization is crucial for effective financial planning. This unit explores the concepts of Funds
Flow Analysis and Cash Flow Analysis, equipping you to assess a company’s liquidity, ability to
meet short-term obligations, and potential for future growth.
Unit IV – Budget and Budgetary Control: Budgets act as a roadmap for a company’s financial
future. Unit IV introduces you to the intricacies of Budgetary Control, a system that helps managers
plan, control, and monitor business activities.
Unit V – Marginal Costing: This unit introduces you to the world of Marginal Costing, a powerful
costing technique that focuses on the variable costs directly associated with changes in production.
This book is enriched with 125 Illustrations, over 200 Theory Questions, and 137 Practical
Problems, supporting students in both conceptual learning and practical application. Each chapter
includes real-world examples to connect theory to practice, preparing students for professional
challenges they may encounter.
This textbook is your stepping stone into the captivating world of Management Accounting. The
combination of comprehensive explanations, engaging illustrations, and diverse learning resources
will empower you to excel in your studies and prepare for a rewarding career in the exciting world
of business. Let’s embark on this learning journey together!
Dr. S.N. Maheshwari
Dr. Suneel K. Maheshwari
CA Sharad K. Maheshwari

 S
Syllabus

Tamilnadu State Council for Higher Education (TANSCHE)

Management Accounting
Unit-I – Introduction to Management Accounting: Management Accounting – Meaning –
Scope – Importance- Limitations – Management Accounting vs Cost Accounting – Management
Accounting vs Financial Accounting – Analysis and Interpretation of Financial Statements – Nature
and Significance – Types of Financial Analysis – Tools of Analysis – Comparative Statements –
Common Size Statement – Trend Analysis.

Unit-II – Ratio Analysis: Meaning – Advantages – Limitations – Types of Ratios – Liquidity

Ratios – Profitability Ratios – Turnover Ratios – Solvency Ratios – Leverage Ratios – Preparation
of Financial Statements from Ratios.

Unit-III – Funds Flow & Cash Flow Analysis: Introduction, Meaning of Funds Flow Statement –
Ascertainment of Flow of Funds – Schedule of Changes in Working Capital – Adjusted Profit and
Loss Account – Preparation of Funds Flow Statement.

Cash Flow Statement: Meaning – Advantages – Limitations – Preparation of Cash Flow

Statement as per AS 3 – Cash Flow from Operating, Financing and Investing Activities

Unit-IV – Budget and Budgetary Control: Meaning – Preparation of Various Budgets – Cash
Budget – Flexible Budget– Production Budget – Sales Budget – Master Budget – Budgetary
Control – Benefits.

Unit-V – Marginal Costing: Meaning – Features – Marginal Costing vs Absorption Costing – Fixed
Cost, Variable Cost and Semi Variable Cost – Contribution – Marginal Cost Equation – P/V Ratio
– Break Even Point – Margin of Safety – Cost-Volume Profits Analysis.

Decision-making: Selection of a Product Mix – Make or Buy Decision – Discontinuance of

a Product Line – Change or Status quo – Limiting Factor or Key Factor.
 C
Contents

Unit I – Introduction to Management Accounting

1. Management Accounting: Nature and Scope 1 – 18
Development of Accounting 1
Functions of Accounting 2
Classification of Accounting 2
Financial Accounting 2
Meaning 2
Functions 2
Limitations of Financial Accounting 3
Management Accounting 4
Meaning 4
Functions of Management Accounting 5
Scope of Management Accounting 6
Utility of Management Accounting 6
Limitations of Management Accounting 7
Installation of Management Accounting System 8
Tools of Management Accounting 8
The Management Accountant 8
Functions of the Management Accountant 9
Requisites for a Successful Management Accountant 10
The Controller 10
Functions of Controllership 11
Duties of Controller 11
The Treasurer 12
Management Accounting Principles 13
Management Accounting and Financial Accounting 14
Cost Accounting and Management Accounting 15
Test Questions 16
Objective Type 16
Essay Type 17
Select References 18
2. Financial Accounting Principles 19 – 37
Meaning of Accounting Principles 19
Accounting Concepts 19
Accounting Conventions 19
vi | Contents

Accounting Concepts 20
Separate Entity Concept 20
Going Concern Concept 20
Money Measurement Concept 22
Cost Concept 22
Dual Aspect Concept 23
Accounting Period Concept 24
Periodic Matching of Costs and Revenues 24
Realisation Concept 24
Accounting Conventions 25
Conservatism 25
Full Disclosure 25
Consistency 25
Materiality 26
Accounting Standards and International Accounting Standards
Committee / Board 26
International Accounting Standards 27
International Financial Reporting Standards 28
Fundamental Accounting Assumptions 28
Accounting Policies 29
Difference between Fundament Accounting Assumptions
and Accounting Policies 29
Accounting Principles and the Institute of Chartered
Accountants of India 29
Issue of Accounting Standards 30
AS 1. Disclosure of Accounting Policies 31
IFRS – Convergence in India 33
Notification of Indian Accounting Standards (Ind ASs) 33
Recent Amendments in Indian Accounting Standards (Ind ASs) 35
Difference between Accounting Standards and Indian Accounting Standards 35
Test Questions 36
Objective Type 36
Essay Type 37
Select References 37
3. Financial Statements: Analysis and Interpretation 39 – 60
Meaning and Types of Financial Statements 39
Income Statement 39
Balance Sheet 40
Statement of Retained Earning 40
Statement of Changes in Financial Position (SCFP) 40
Financial Statements and the Companies Act, 2013 40
Meaning of Financial Statements 40
Format of Financial Statements 42
Analysis and Interpretation of Financial Statements 42
Types of Financial Analysis 42
On the Basis of Material Used 43
On the Basis of Modus Operand 43
 Contents | vii

Steps Involved in Financial Statements Analysis 43

Methodical Classification 43
Application of Tools / Techniques of Financial Analysis 48
Techniques of Financial Analysis 48
Comparative Financial Statements 48
Common-size Financial Statements 50
Trend Percentages 54
Funds Flow Analysis 55
Cash Flow Analysis 55
Cost-Volume-Profit Analysis 55
Ratio Analysis 56
Limitations of Financial Analysis 56
Financial Analysis is only a Means 56
Ignores Price Level Changes 56
Financial Statements are Essentially Interim Reports 56
Accounting Concepts and Conventions 56
Influence of Personal Judgement 56
Disclose only Monetary Facts 56
Test Questions 57
Objective Type 57
Essay Type 57
Practical Problems 58
Select References 60

Unit II – Ratio Analysis

4. Ratio Analysis 61 – 141
Meaning of Ratio Analysis 61
Classification of Ratios 62
Profitability Ratios 62
Overall Profitability Ratio 63
Earning per Share (EPS) 67
Price Earning Ratio (PER) 71
Gross Profit Ratio 71
Net Profit Ratio 72
Operating or Expenses Ratio 72
Pay-out Ratio 73
Dividend Yield Ratio 74
Coverage Ratios 74
Fixed Interest Cover 74
Fixed Dividend Cover 74
Debt Service Coverage Ratio 75
Turnover Ratios 76
Fixed Assets Turnover Ratio 76
Working Capital Turnover Ratio 77
Financial Ratios 82
Liquidity Ratios 82
Stability Ratios 86
Categories of Ratios 90
Summary of Basic Ratios and their Purpose 91
viii | Contents

Advantages of Ratio Analysis 92

Limitations of Accounting Ratios 93
Du Pont Control Chart 115
SWOT Analysis 116
Inter-Firm and Intra-Firm Comparison 116
Meaning of Inter-firm Comparison 116
Meaning of Intra-firm Comparison 117
Requisites for Inter-firm or Intra-firm Comparison 117
Advantages of Inter-firm or Intra-firm Comparison 118
Limitations of Inter-firm or Intra-firm Comparison 118
Value Analysis 119
Value Added Concept 119
Treatment of Certain Items 120
Advantages of Value Added Statement 121
Limitations of Value Added Statement 122
Economic Value Added Concept 124
What does EVA Show? 124
When will EVA Increase? 124
Utility of Economic Value Added (EVA) 125
Test Questions 126
Objective Type 126
Essay Type 128
Practical Problems 129
Select References 141

Unit III – Funds Flow and Cash Flow Analysis

5. Funds Flow Analysis 143 –185
Meaning of Funds Flow Statement 143
Meaning of Funds 143
Meaning of “Flow of Funds” 145
Finding Out of Transactions Involving Change in Working Capital 147
Uses of Funds Flow Statement 149
Funds Flow Statement and Income Statement 151
Parties Interested in Funds Flow Statement 151
Limitations of Funds Flow Statement 152
Preparation of Funds Flow Statement 152
Sources of Funds 152
Applications of Funds 154
Technique for Preparing a Funds Flow Statement 155
Schedule of Changes in Working Capital 155
Rules for Preparing the Schedule 155
Funds Flow Statement 156
Treatment of Provision for Taxation and Proposed Dividends 156
Provision of Taxation 156
Proposed Dividends 157
Depreciation as Source of Funds 159
Statement of Changes in Financial Position 172
Definition 173
 Contents | ix

Importance 173
Preparation 173
Test Questions 176
Objective Type 176
Essay Type 177
Practical Problems 178
Select References 185
6. Cash Flow Statement 187 – 236
Meaning of Cash Flow Statement 187
Preparation of Cash Flow Statement 188
Sources of Cash 188
Applications of Cash 198
Format of a Cash Flow Statement 199
Differences between Cash Flow Analysis and Funds Flow Analysis 200
Utility of Cash Flow Analysis 200
Helps in Efficient Cash Management 200
Helps in Internal Financial Management 201
Discloses the Movements of Cash 201
Discloses Success or Failure of Cash Planning 201
Limitations of Cash Flow Analysis 201
Accounting Standard 3 (Revised): Cash Flow Statements 203
Scope of Cash Flow Statement 203
Definitions – Cash Flow Statement as AS-3 203
Presentation of Cash Flow Statement 203
Use of Cash Flow Statement 204
Advantages of Cash Flow Statement 204
Disadvantages of Cash Flow Statement 204
Distinction between Cash Flow Statement and Fund Flow Statement 205
Distinction between Cash Flow Statement and Income Statement 205
Classification of Cash Flows 205
Operating Activities 205
Investing Activities 206
Financing Activities 206
Main Difference between AS-3 and Ind AS-7 207
Key Points to be Considered while Preparation of Cash Flow Statement 207
Treatment of Bank Overdraft 209
Free Cash Flow to Equity (FCFE) 227
Cash Forecasts 227
Key Terms 228
Test Questions 228
Objective Type 228
Essay Type 229
Practical Problems 229
Select References 236

Unit IV – Budget and Budgetary Control

7. Budgetary Control 237 – 303
Meaning of Budget 237
Meaning of Control 238
x | Contents

Meaning of Budgetary Control 238

Budgetary Control as a Management Tool 239
Limitations of Budgetary Control 240
Forecasts and Budgets 241
Installation of Budgetary Control System 241
Determination of the Objectives 242
Organisation for Budgeting 242
Budget Manual 242
Responsibility for Budgeting 242
Fixation of the Budget Period 243
Budget Procedure 243
Effective Budgetary Control 244
Budgetary Control and Behavioural Aspects 245
Classification of Budgets 245
Classification According to Time 246
Classification According to Function 246
Classification According to Flexibility 247
Operating Budget 247
Sales Budget 250
Production Budget 252
Cost of Production Budget 253
Materials Budget 254
Direct Labour Budget 255
Factory Overhead Budget 256
Administration Overheads Budget 257
Selling and Distribution Overhead Budget 257
Capital Expenditure Budget 258
Cash Budget 258
Research and Development Budget 267
The Final or Master Budget 268
Fixed and Flexible Budgeting 272
Fixed Budget 272
Flexible Budget 272
Performance Budgeting 277
Budgetary Control Applied under Conditions of Uncertainty 280
Control Ratios 280
Activity Ratio 280
Capacity Ratio 280
Efficiency Ratio 280
Responsibility Accounting 281
Meaning 281
Steps Involved 282
Responsibility Centres 282
Type of Responsibility Centres 282
Responsibility Centres Distinguished from Cost Centres 283
Zero-Base Budgeting 285
Limitations of Traditional Budgeting Technique 286
Meaning of Zero-Base Budgeting 286
Process of Zero-Base Budgeting 287
Advantages of Zero-base Budgeting 290
Limitations of Zero-base Budgeting 290
 Contents | xi

Test Questions 291

Objective Type 291
Essay Type 292
Practical Problems 294
Select References 303

Unit V – Marginal Costing

8. Marginal Costing and Profit Planning 305 – 372
Absorption Costing 305
Marginal Costing 307
Difference between Absorption Costing and Marginal Costing 307
Marginal Costing and Direct Costing 309
Marginal Costing and Differential Costing 309
Marginal Cost 311
Segregation of Semi-Variable Costs 312
Levels of Output Compared to Levels of Expenses Method 312
Range Method 313
Degree of Variability Method 313
Scattergraph Method 313
Method of Least Squares 314
Profit Planning 315
Cost Volume Profit Analysis 318
Break-Even Analysis 318
Contribution 318
Profit/Volume Ratio (P/V Ratio) 319
Break-even Point 320
Financial Break-even Point 325
Composite Break-even Point 327
Cost Break-even Point 331
Margin of Safety 332
Key Factor 335
Break-Even Chart 339
Forms of Break-even Chart 339
Angle of Incidence 345
Assumptions Underlying CVP Analysis/Break-even Charts 347
Advantages of Break-even Charts 347
Limitations of Break-even Charts 348
Utility of CVP Analysis 350
Fixation of Selling Price 350
Maintaining a Desired Level of Profit 351
Accepting of Price Less than the Total Cost 354
Decisions Involving Alternative Choices 356
Test Questions 356
Objective Type 356
Essay Type 357
Practical Problems 359
Select References 372
 BC
Brief Contents

Pratical Problems
Objective Types
No. of Pages

Illustrations

Essay Types
Questions
Examples
Figures
Chp No. Chapter Name
Unit I – Introduction to Management Accounting
1. Management Accounting: Nature and Scope 1-18 1 – – 3 36 –
2. Financial Accounting Principles 19-38 1 – – 3 11 –
3. Financial Statements: Analysis and Interpretation 39-60 2 – 6 2 16 5

Unit II – Ratio Analysis

4. Ratio Analysis 61-142 2 6 36 5 40 27

Unit III – Funds Flow and Cash Flow Analysis

5. Funds Flow Analysis 143-186 1 3 12 3 13 14
6. Cash Flow Statement 187-236 1 9 14 3 8 13

Unit IV – Budget and Budgetary Control

7. Budgetary Control 237-304 1 1 24 2 36 23

Unit V – Marginal Costing

8. Marginal Costing and Profit Planning 305-372 13 6 33 3 37 55

Total 22 25 125 24 197 137