Fundamentals of Management Accounting KASNEB Notes

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This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply management accounting principles and concepts in business.


A candidate who passes this paper should be able to:

  • Estimate the cost of goods and services
  • Analyse product costs for manufacturing and non-manufacturing activities
  • Prepare marginal and absorption cost statements
  • Analyse an organisation’s activities through budgetary control process
  • Analyse variances for decision making
  • Use computers in cost management.


Nature and purpose of cost and management accounting

  • The nature of cost accounting and costing terms
  • The role of cost accounting in management
  • The purposes of cost accounting information
  • Scope of cost accounting
  • Meaning of management accounting, scope, limitations, applications
  • Relationship between cost, financial and management accounting
  • Selection of an ideal cost accounting system

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Cost classification

  • Definition and purpose of cost classification
  • Methods of cost classification: by nature/elements of manufacturing costs; functional classification; behavioural classification; controllability; time; financial accounting; identification with inventory; for decision making

Cost estimation

  • Meaning of cost estimation
  • Methods of estimating cost; non-mathematical methods like engineering method, accounts analysis method and high-low method; mathematical methods like scatter graph method, OLS regression method (simple linear regression only)

Accounting, for material, labour and overheads

  • Accounting for materials and inventory; material cost records, purchasing procedures, receipt and issues of material, methods of valuing material issues, inventory control procedures; economic order quantity (EOQ) and economic batch quantity(EBQ) models and back flush
  • Accounting   for   labour:    Methods    of   labour   remuneration,    labour    control procedures, maintenance of labour records
  • Accounting for overheads: Types of overheads, manufacturing, distribution and administration, service departmental cost allocation and apportionment, overheads analysis, overhead absorption rates, over or under absorption

Cost bookkeeping

  • The flow of costs in a business enterprise
  • Cost bookkeeping- interlocking and integrated ledger systems

Costing methods

  • Job order costing
  • Batch costing
  • Process costing (including work in progress; joint and by-products)
  • Service costing
  • Unit costing

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Marginal and absorption costing

  • Distinction between marginal and absorption costing
  • Valuation of products under marginal and absorption costing
  • Preparation of marginal and absorption statements; cost of production and profit determination
  • Applications of marginal costing: break-even analysis and charts (single product)
  • Simplified decision problems; accept or reject, special order, dropping a product, make or buy
  • Operating statements

Activity based costing

  • Meaning of ABC
  • Types of activities
  • Overhead absorption rates
  • Incomes statement

Budgeting and budgetary control

  • Nature and purposes of budgets
  • Preparation of budgets; master budgets, functional (department budgets, cash budgets), proforma financial reports (income statements and balance sheets)
  • Purpose of budgetary control; operation of a budgetary control system, organisation and coordination of the budgeting function
  • Distinction between budgeting and budgetary control in the private and public sectors

Standard costing

  • Types of standards
  • Principles of setting standards
  • Standard cost card
  • Behavioural aspects of standard costing
  • Generation of standard cost information
  • Materials, labour and overheads variances; price ,efficiency mix and yield variances

Cost management

  • Value chain-research    and    development;    design;     production;    marketing distribution; customer care
  • Just in time (JIT)
  • Use of computers in costing; job costing, inventory management,  labour  costing, cost entre analysis, coding, budgeting and decision making

Emerging issues and trends

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