In order to enable cost and management accounting to fulfill its role as an aid to planning, control and decision making, a number of techniques and methods have evolved. The main ones include:
Budgetary planning and control
A budget is a planof action expressed in monetary terms. It is therefore a quantified plan of what one intends to do.
All business should prepare a budget which is a document that:
- Quantify the strategy which management have decided to implement in order to achieve the business objectives for a future period. The budget will show planned income and expenditure and may be analysed to include details for each product type and department;
- Provide a base for control cycle; The control cycle is as follows:
- Establish the budget or plan
- Measure actual performance
- Compare plan with actual performance
- Take corrective action as required
- Provide a mechanism by which management responsibility may be matched with the budgetary information and assisted by the budgetary control cycle.
Standard Costing and variance analysis
Standard costing is defined by CIMA as a technique which uses standards for costs and revenues for the purpose of control through variance analysis. CIMA also defines a standard costs. In this text, we will restrict ourselves to CIMA’s definition of a standard cost
Standard cost is defined as ‘predetermined calculation of how much costs should be under specified working conditions.
Standard costing and variance analysis is a technique used by management accountants in the implementation of their service to management in the areas of planning, control and decision making in the following ways:-
- As a planning aid, standard costs provide useful building blocks in the preparation of budgets for departments products and cost
- As a control aid, standard costs provide data which show where the deviation from the plan have arisen and where corrective action by management is required
- As a decision making aid, standard costs may be used in building up estimated cost data for new products in order that decision.