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MB0041 set2 : Q.1 Explain the tools of Management accounting?

Answer: Tools of Management Accounting
Management Accounting uses the following tools or techniques to fulfill its responsibilities and duties towards management.
• Financial Statement Analysis
• Funds Flow Analysis
• Cash Flow Analysis
• Costing Techniques that includes marginal costing, differential costing, standard costing, and responsibility costing
• Budgetary control
• Management Reporting.

Financial Statements are indicators of two significant factors that include profitability and financial soundness. Analysis and interpretation of financial statements enables full diagnosis of the profitability and financial soundness of the firm. Analysis means methodical classification of the data given in the financial statements. Methodical classification enables comparison of the various inter-connected figures with each other. Interpretation explains the meaning and significance of the data.
Funds Flow Analysis is an important tool for management accountant. It reveals the changes in working capital position, the sources from which the working capital was obtained and the purpose for which it was used. It also reveals the changes that have taken place behind the Balance Sheet.

Cash Flow Statement identifies the sources and application of cash. It is prepared on the basis of actual or estimated data. It depicts the changes in the cash position from one period to another. A projected cash flow or a cash budget will help the management in ascertaining how much cash will be available to meet obligations to trade creditors, to pay bank loans and to pay dividends to the shareholders.

Standard Costing is the preparation and use of standard costs, their comparison with actual costs and the analysis of variance. It discloses the cost of deviations from standards. It aims at assessing the cost of a product, process or operation under standard operating conditions.

Budgetary Control has become an essential tool of management for controlling costs and to maximize profit. It helps to compare the current performance with pre-planned performance thereby correcting the deviations if any.

Management Reporting System is an organized method of providing each manager with all the data and only those data which he needs for his decisions, when he needs them and in a form which aids his understanding and stimulates his action.

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