Page 209 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Feasibility

The convention of feasibility emphasizes that the time, labour and cost of analyzing accounting
information should be compared vis-à-vis benefit arising out of it.

Example: The cost of ‘oiling and greasing’ the machinery is so small that its break-up
per unit produced will be meaningless and will amount to wastage of labor and time of the
accounting staff.

Self Assessment

Fill in the blanks:
7. The convention of feasibility emphasizes that the ........................ , ........................ and
........................ of analyzing accounting information should be compared vis-à-vis benefit
arising out of it.
8. Coventionally, a manager should only be held responsible for those aspects of performance
that he or she can ........................

10.3 Accounting Concepts

Responsibility accounting is based on certain concepts. They are utmost important to be followed
while accounting the responsibility. A detailed discussion on each of them follows.

Materiality

It refers to the relative importance of an item or event. Those who make accounting decisions
continually confront the need to make judgments regarding materiality. Is this item large enough
for users of the information to be influenced by it?

The essence of the materiality concept is the omission or misstatement of an item is material if,
in the light of surrounding circumstances, the magnitude of the item is such that it is probable
that the judgment of a reasonable person relying on the report would have been changed or
influenced by the inclusion or correction of the item.

Accounting Period

Though accounting practice believes in continuing entity concept i.e. life of the business
is perpetual but still it has to report the ‘results of the activity undertaken in specific period
(normally one year). Thus, accounting attempts to present the gains earned or losses suffered
by the business during the period under review. Normally, it is the calendar year (1st January
to 31st December) but in other cases it may be financial year (1st April to 31st March) or any
other period depending upon the convenience of the business or as per the business practices in
country concerned.
Due to this concept it is necessary to take into account during the accounting period, all items
of revenue and expenses accruing on the date of the accounting year. The problem confronting
this concept is that proper allocation should be made between capital and revenue expenditure.
Otherwise the results disclosed by the financial statements will be affected.

Realization

This concept emphasizes that profit should be considered only when realized. The question is at
what stage profit should be deemed to have accrued? Whether at the time of receiving the order

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