CONCEPTUAL FOUNDATION

After comprehensive studying of this chapter, you will be able to understand:

 concept, objective and limitations of financial accounting
 concept, objective and importance and limitations of cost accounting
 concept, importance, objective, scope and limitations of management accounting
 differences between cost and management accounting
 differences between financial and management accounting
 differences between cost and financial accounting
2 COST AND MANAGEMENT ACCOUNTING

 Introduction of Accounting Information System

Modern business needs regular information for making accurate plan. For, control and for the
performance evaluation of persons working in an organization. The fulfillment of these goals the
accounting is the act of recording, classifying, summarizing, interpreting and communicating the
financial information. The accounting in a organization is a information system, it collect information
from different branch of accounting and proper classification of the financial information in to different
statistical data and communicate the data to the different level of management for the better decision.
The coverage of financial transaction, the recording nature of financial transaction, the objective of
recording financial transaction there are difference types of accounting which are listed below:
 Financial Accounting
 Cost Accounting
 Management Accounting
 Social Responsibility Accounting

 Financial Account
Concept of Financial Account
Financial accounting is a specialized branch of accounting that keeps track of a company's financial
transaction. Using standardized, guidelines, the transaction are recorded, summarized, and
presented in a financial report of financial statement such as an income statement or a balance sheet.
Companies issue financial statement on a routine schedule the statement are considered external
because they are given to people outside of the company with the primary (internal) recipients being
owners/stockholders as well as certain lenders. It a corporation's stock is publicly traded, however
its financial statement (and other financial reporting) tends to be widely circulated and information
will likely reach secondary (external) recipients such as competitions, customers, employees, labour
organization and investment analysis.
Figure: Financial Accounting
Financial Accounting

Input Process Output

Accounting Financial Statement: Income

Transactions and
principles and statement balance sheet Funds
events of a firm
Procedures flow statement cash flow statement

Users

Investors & Employers &

Management Supplies Government Shareholders Customers Society

Generally financial accounting applies in all business organization. The other branches of accounting
were developed from financial accounting. It is based on double entry book-keeping system, generally
accepted accounting principle (GAAP) and universally accepted principles. The accounts are prepared
on money measurement concept, period concept, accrual concept, Cash based concept etc.
  CHAPTER 1 3

Advantages/Objectives of Financial Accounting

The advantages/objectives of financial accounting are mentioned below:
1. Maintenance of business records: All financial transactions are recorded in a systematic manner
in the books of accounts so that there is no need to reply on memory. Human memory is limited
by its very nature. Accounting helps to overcome this limitation.
2. Preparation of financial statements: Systematic records enables the accountants to prepare the
financial statements trading and profit and loss account to ascertain profit or loss during a
particular accounting period and balance sheet to state the financial position of the business on a
particular date.
3. Comparison of result: Systematic maintain of business record enables the accountant to compare
profits of one year with those of earlier years to know the significant facts about the change.
4. Acts as legal evidence: Proper books of accounts maintained in systematic manner act as legal
evidence in case of disputes.
5. Facilitates Raising loans: Accounting facilitates raising loans from lenders by providing them
required financial information.
6. Facilitates the Ascertainment of value of Business: Accounting facilitates the ascertainment of
value of business in case of transfer of business to another entity.
7. Assist the Management : Accounting assists the management in taking managerial decisions. For
Example, Projected cash flow statement facilitates the management to know future receipts and
payment and to take decision regarding anticipated surplus or shortage of funds.
8. Helps in taxation matter: Accounting facilitates the settlement of tax liability with the authorities
by maintaining proper books of accounts in systematic manner
9. Facilitates control over Assets: Accounting facilitates control over assets by providing
information regarding cash balance, Bank balance, stock debtors, fixed assets, etc.

Limitations of Financial Accounting

Following are the limitations of financial accounting:
1. Provides collective results only: Financial accounting only provides the information regarding
the collective or overall results of a business firm. It does not disclose the separate information
about profit and loss according to the products, processes, sales areas, departments etc.
2. Based on historical information: Financial accounting provides only the historical information
on the basis of recorded transactions. It may be unsuitable for making future plans.
3. No analysis of cost and loss: financial accounting cannot make difference between avoidable
and unavoidable cost in the absence of records relating to the losses resulting from defective
material, idle time and idle capacity etc.
4. No control on cost: Although there is provision for cost control, Financial Accounting lacks
proper mechanism for controlling different element of cost such as materials, resulting as well as
indirect cost or overheads.
5. Difficulty in Price determination: Since financial accounting does not allocate the expenses
separately according to the manufactured goods or services or job orders. It is difficult to
determine the appropriate price according to goods or services or job orders.
4 COST AND MANAGEMENT ACCOUNTING

6. No standard for comparison: It becomes difficult to measure the performance efficiency as there
is no standards set in Financial Accounting regarding materials, labour and indirect cost for cost
comparison and control.
7. Ignorance as to operating efficiency: Financial accounting fails to disclose the actual operating
efficiency or inefficiency or due to other factors like inflation, depression in the absence of
detailed analysis of costs.

 Cost Accounting
Concept of Cost Accounting
Cost accounting refers to that branch of accounting, which maintains the complete records to cost and
provides necessary information according the cost objectives. Cost Accounting determines the cost by
collecting, classifying and allocating the cost as per the cost objectives such as products or services or
processes or departments or job orders. Again, it provides detailed information regarding the cost of
production facilitating cost control and other decision making process. In the beginning, Cost
Accounting was emerged for the purpose of facilitating the valuation of inventory. Later on, it was
widely developed to meet the present need of minimizing the cost of production for the sustainability
in the competition as well as for making the tentative plans for facing the uncertain future.
Cost accounting is the process of accounting for cost where beings with the incurrence of cost ends
with the control of cost. In other words, it is formed system of accruing by means or which cost of
products services or activities are ascertained and controlled.
Chartered Institute of Management Accounts (CIMA) defines cost accounting as "The process of
accounting from the point at which expenditure is incurred or committed to the establishment of its
ultimate relationship with cost centers and cost units. In its widest usage, it embraces the preparation
of statistical data application of cost control methods and the ascertainment of profitability of
activities carried out or planned."
 Collecting, Classifying, recording, allocating and analyzing the costs.
 Preparation of periodical statements and reports for ascertaining and controlling cost.
 Application of cost control methods.
 Ascertainment of profitability of activities carried out or planned.
According to Harold J. Wheldon, "Cost Accounting is the classification, recording, and appropriate allocation of expenditure for
the determination of the cost of products or services, and for the presentation of suitably arranged data for the purposes of
control and guidance of management."
According to National Association of Accountants, USA, "Cost Accounting is a systematic set of procedure for recoding and
reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in details."

 Objectives and Functions of Cost Accounting

Objectives and function of cost accounting can be mentioned as given below:
1. To ascertain cost: The main objective of cost accounting is to determine the cost per unit and
total cost of products or services. Ascertainment of costs of products or services is necessary for
the determination of selling price of products or services, valuation of semi-finished goods and
finished goods and taking necessary decisions. Cost Accounting facilitates the process of cost
determination by providing inter information regarding the cost incurred while producing goods
or services or borne otherwise.
  CHAPTER 1 5

2. To facilitate planning and control: Another objective of cost accounting is to facilitate the
organization in planning and control. An organization has to carry out its activities in a planned
and systematic manner to exist in the present competitive and changing business era. And for
this, as system of budgetary control is applied. If a remarkable distinction is found between the
budget and actual, reasons and effects for such differences are identified and necessary action is
taken for the control. Accurate and detailed information regarding cost should be relayed under
all these conditions of planning and control and these facts are revealed by cost accounting only.
3. To supply information for decision making: The next objective of cost accounting is to supply
necessary information regarding costs that are required for taking any business decision. Such
decisions to be made by business generally related to different conditions such as to drop or
continue any department or process, replacement or the old plant, make or buy the parts required
for the commodities to be produced, accept or reject the special offers obtained for supplying the
products at low price than the usual one, sell or further process etc.
4. To determined selling price: Cost accounting provides cost information to determine the selling
price of products or service. During the period of depression, it guides the management to decide
how much reduction in selling price may be made to meet the solution.
5. To ascertain costing profit: Cost accounting aims at ascertaining the costing profit or loss of any
activity by matching cost with the revenue of that activity.

 Importance and Advantages of Cost Accounting

The following are the advantage of cost accounting to the different parties involved:
1. Management: Cost accounting is advantageous to the management for preserving its place in the
market by producing and supplying qualitative products at low cost and ascertaining the price of
detailed information about the cost data required for formulating plans and policies, identifying
the problem areas for improvement. Advantages to management are as follows:
 Helps is ascertainment of cost.
 Helps in control of cost.
 Helps in decision making.
 Helps in fixing selling price.
 Helps in inventory control.
 Helps in cost reduction.
 Helps in measurement of efficiency.
 Helps in preparation of budget.
 Helps in identifying unpredictability activities.
 Helps in identifying material losses.
 Helps identifying idle time and labor turnover.
 Helps in identifying idle capacity.
 Helps in cost comparison.
2. Employees and laborers: Various welfare provisions, conduction of trainings implementation of
incentive plans, time and motion study etc. are made for controlling cost and increasing the
efficiency of human resources. Thus, cost accounting assists the employees and labourers in their
development.
6 COST AND MANAGEMENT ACCOUNTING

3. Government: Cost accounting serves as a source for the government for obtaining factual and
detailed information regarding cost. Such data are essential for the government for determining
the industrial and import-export policy, determining the rates of carious taxes quantity of
government subsidies required on essential commodities etc.
4. Public: Effective system of cost accounting leads to the production of qualitative goods services at
minimum cost. In this condition, people are directly benefited from the consumption of products
and services at low price. The living standard of the people likely to improved.

 Limitations of Cost Accounting

The following are the limitations of cost accounting:
1. Costlier accounting: Cost accounting is the costlier system because it required maintaining
various types of records relating to loss reducing measures, steps taken for increasing the
efficiency, accumulation, classification and determination of cost for the purpose of achieving
various objectives of cost accounting etc. It is suitable for big firms only. Generally, small and
middle-sized firms cannot afford this system.
2. Lack of uniform procedures: Since there is no uniformity in costing methods to determine the
results, different cost accounting experts can draw different results from the same information
issued to them. As such, such results may have limited application.
3. Less contribution towards future: There is less contribution of cost accounting towards the
solution of the critical situations that may occur in the future. For example, no method has been
developed yet to incorporate the effect of inflation in cost accounting.

 Management Accounting
Concept of Management Accounting
Management accounting is that branch of Accounting Information System of a business enterprise
which used accounting information for planning, controlling and decision making. Management
accounting provides information to assist managers in their planning and controlling activities. It
includes collecting, classifying, processing, analyzing and reporting information to managers.
Figure: Relationship between Management and Accounting
Management Accounting
Planning Organizing Application of
Decision -making Financial Accounting
Information
Coordinating Controlling Cost Accounting
Management Accounting
Cost Data and
Reports Financial
Statements and
Source of
Reports
Information Other Qualitative
Information

Management accounting system communicates information to decision makers for internal and
external users. The decision makers include: investors, creditors, suppliers, auditors, shareholders,
competitors, customers, government, etc. Management Accounting Information should be designed
to help decision making within the firm. The purpose of Management Accounting is to provide
quantitative information that managers need for planning and controlling the activities of an
organization in order to reach the organizational goal.
  CHAPTER 1 7

According to T. Lucey, "Management Accounting is primarily concerned with the data gathering, analysis, processing,
interpreting and communicating the resulting information for use within the organization so that management can more
effectively plan, make decisions and control operations."
According to American Accounting Association, "Management Accounting is the application of appropriate techniques and
concepts in processing historical and projected economic data of an entity to assist management in establishing plans for
reasonable economic objectives and in making the rational decisions with a view to achieving these objectives."
According to Batty, "Management Accounting is the term used to describe accounting methods, systems and techniques which
coupled with special knowledge and ability, assists management in its task of maximizing profits or minimizing losses.

 Need and Importance of Management Accounting

Management accounting is essential part of management in the modern competitive world.
Management accounts provides following benefits to be business organization.
 Creator harmony between the management and employees.
 Enables the management to improve its service to its customers
 Various operations can be planned with the help of accounting information, budgeting and
forecasting.
 Avoid business from facing seasonal fluctuations.
 Helps in communicating up to date information to various parties interested in successful
working of the business organization.

 Objectives or Functions of Management

Accounting
The main objective of Management Accounting is to the management for achieving the goal of the
organization i.e. maximization of profit. Management Accounting supplies accounting information
to the management for planning, organizing, directing, controlling and decision making to the
management for planning, organizing, directing, controlling and decision making. The major
objectives of Management Accounting are as follows:
1. To help in planning: Under the process of planning, management formulates policies and
executes plans to achieve the desired objective. Management Accounting can help greatly in this
process. Formulation of policies and plans needs various forecasts and Management Accounting
adequately provides those tools with the help of which various forecasts in respect of production,
sales cash and expenses etc. can be made.
2. To help in organizing: Management Accounting stresses more on budget centers, investment
centers, cost centers and profit centers with a view to controlling costs and responsibilities. It also
contributes to principles of decentralization to a greater extent. By following this method or
technique of Management Accounting, each department or center of the organization can be
examined separately and the weakest one may be asked to improve or altogether be eliminated. It
may also help in reviewing the existing methods and procedures followed in the organization
and thus in establishing a sound organization structure.
3. To help in controlling: Management Accounting devices like standard costing and budgetary
control are helpful in controlling performance. The actual results are compared with
predetermined objectives. The management is able to find out the deviations and take necessary
corrective measures. Thus management is able to control performance of each and every
individual with the help of Management Accounting devices.
8 COST AND MANAGEMENT ACCOUNTING

4. To help in interpreting financial information: Management Accounting presents the financial

information to the management. It helps the management in analyzing and interpreting different
accounting information for selecting the most profitable course of action.
5. To help in motivating employees: A key purpose of Management Accounting is to motivate
managers and other employees to direct their efforts towards achieving the organizational goals.
One means of achieving this purpose is through budgeting. When actual operations do not
conform to the budget, managers will be asked to explain the reasons for the deviation.
6. To help in communicating: Communication is a very important function of the management.
Management Accounting has to play a special role in assisting this function of management. All
economic data and business facts are presented in the forms of various reports and statements.
These reports communicate vital information to internal parties in respect of several aspects of
business operations. Shareholders, debenture holders and other institutions external to the
business are conveyed about the business affairs through published annual accounts. Special
reports dealing with a special problem are also prepared for the purpose of conveying it to the
different levels of management, Chief executives and employees etc.
7. To help in decision making: Decision making is an important and prime function of top-
management. Management Accounting may make the decision making process more modern
and scientific by providing significant information relating to various alternatives in terms of cost
and revenue. With the help of techniques provided by Management Accounting data relating to
cost, price profit or saving for each of the available alternative may be collected and analyzed and
these provide a base for taking sound decision. Management Accounting deals with a number of
techniques, which could be used in judging the profitability and feasibility of the alternative,
selected on the basis of cost and revenue data.
8. To help in coordination: Management Accounting is helpful in coordinating the activities of
different departments. It is done through functional budgeting.
9. To help in tax administration: Tax system is important in everyday life. Management
Accounting helps in assessing various tax liabilities and depositing correct among of tax with the
concerned authorities. Various tax returns are to be field under different tax law. Tax
administration is carried on with the advice and guidance of Management Accounting.

Scope of Management Accounting

Management Accounting is a new approach to accounting. It provides techniques for interpretation
and analysis of data. It helps management for planning, directing and controlling. So, Management
Accounting is related to a number of fields.
1. Financial accounting: It deals with the historical data. The recorded facts about an organization
are useful for planning the future course of action. Though planning is always for the future but
still it has to be based and past and present data. Those data are provided by Financial
Accounting. So, Management Accounting is closely related to Financial Accounting.
2. Cost accounting: Cost accounting used financial data for finding out cost of various jobs or
products. The system of standard costing, managerial costing, differential costing and
opportunity costing are all helpful to the management for planning various business activities. It
also helps in finding out economical and non-economical fields of production. So, cost accounting
is essential part of management accounting.
  CHAPTER 1 9

3. Budgeting and forecasting: Budgeting means expressing the plans, policies and goals of the
enterprise for a definite period in future. The targets are set for different departments and
responsibility is fixed for achieving targets. The comparison of actual performance with budgeted
figures will give an idea to the management about the performance of different department.
Forecasting is a prediction for what will happen as a result of a given set of circumstances. So,
budgeting and forecasting are useful for management accounting in planning the various activities.
4. Mathematics and statistics: Management accounting analyzes and interprets the data, which is
helped by statistics. Various statistical tools such as graphs, charts, diagrams, time series,
sampling, probability, regression analysis etc. are useful for it. So, statistics is a part of
Management Accounting.
5. Auditing: It is necessary to judge the performance of every department. The actual performance
of every department and individual is compared with standard set. Management is able to know
deviation in performance. It helps management in fixing responsibility of different individual.
6. Tax system: Tax system and tax planning are the most important parts of management
accounting. Income statement or Profit and loss account is prepared and tax liabilities are
calculated. The management is informed about tax burden from government. Various tax returns
are to be filed with different department. So, it is useful for management accounting.
7. Office services: It is required to control office. Maintenance of proper data processing, filing,
copying, duplicating, and communicating and of the management services are included in office
service. Above data are more related in management accounting.
8. Inventory control: It is used to do note stock of raw material, work in progress and finished
goods. Inventory has a special role in accounting for determining correct income for a given
period. Management should determine different level of stock i.e. Maximum, stock level,
minimum stock level, danger level, average stock level, safety stock level, reorder level for
inventory control. Management will need effective inventory control for controlling stocks. So, it
is a useful part of management accounting.

 Limitations of Management Accounting

Following are the limitations of management accounting:
1. Continuance of intuitive decision-making: Management Accounting eliminates the intuitive
decision-making process of management and replaces it with scientific decision-making.
Unfortunately, much management is prone to take the easy and simple path of intuitive decision-
making rather than the difficult but reliable scientific decision making process in the day to day
management.
2. Broad based scope: The scope of management accounting is wide and broad-based and this
creates many difficulties in the implementation process. It is easy to record, analyze, and interpret
an historical event concerted into monetary terms in a most objective manner. But it will be
difficult to perform the same functions in respect of future and unquantifiable situations in the
light of the past records.
3. Comprehensive coverage: The fusion of a number of subjects like financial accounting, statistics,
engineering, economics, taxation etc. has culminated in the emergence of management
accounting. Under the circumstances, it should be remembered that lack of knowledge and
understanding of any one or more of these subject will have its impact on the fixation of
standards as well as solutions to the problems connected with the management performance.
10 COST AND MANAGEMENT ACCOUNTING

4. Evolutionary stage: Management accounting is a new discipline and a growing subject too. It is still
in the infancy stage and undergoing evolutionary process. Naturally, it faces certain obstacles
before achieving perfection and finality. This necessitates sharpening of the analytical tools and
improving of techniques for removing the air of doubts as regards uncertainly in their applications.
5. Psychological resistance: The Management accounting system spells a radical change in the
management approach towards solving day-to-day problems confronted by it. This calls for a
reorganization of personnel as well as reorientation of their activities. This is bound to attract
opposition especially from the labour force. It is very common on the part of human beings to resist
a change. Like any new innovation, management accounting is also facing psychological resistance.
Moreover, the very aim of management accounting i.e., to reduce the importance of intuition
(intuition refer to the decisions not based on reason and scientific techniques) in decision-making is
being frustrated by 'easy going' managers who still tend to take decisions by intuition.
6. Costly installation: For installation of a system of management accounting in a business concern,
an elaborate organization and a large number of manuals are essential. This in turn escalates the
establishment charges such that only large-scale organizations can afford.

 Differences between Cost and Management

Accounting
Following are the differences between Cost and Management Accounting are mentioned in the
following tables:
Basis of Differences Cost Accounting Management Accounting
Objective Determination of the cost of The purpose of management accounting is to
product produced and the service communicate information to management for
rendered is the prime objective of planning and coordinating business activities.
cost accounting. It needs systematic Unlike that, management accounting covers financial
recording to cost and its control. accounting, cost accounting, application of the
Scope Cost accounting is specifically principles of management, tax planning, budgeting,
concerned with assessment of cost reporting of information to management etc.
Nature Cost accounting takes only Management accounting is concerned with future
consideration the present and past projections. Such future projection is linked with
cost figures. preparing guidelines, and framing relevant plans
and policies.
Data used Cost accounting takes only Management accounting takes into account both
monetary data into account. monetary and non-monetary and non-monetary
data that enlighten decision.
Development Cost accounting came into practice Management accounting exists with the prime
to overcome the deficiencies objective of overcoming the drawbacks of cost
observer in financial accounting and financial accounting.
Procedure followed Costing principles and procedures Management accounting follows the procedures
are applied and followed in cost required for collecting and analyzing necessary
accounting. data and they provides required information to
the management. Therefore, there are no specific
rules and procedures to be followed in
management accounting. The rules and
procedures to be followed are governed by the
nature of information to be supplied.
  CHAPTER 1 11

 Differences between Financial & Management

Accounting
Following are the differences between Financial and Management Accounting are mentioned in the
following tables:

Basis of Differences Financial Accounting Management Accounting

Object The object of financial accounting is to Main object is formulation of plans and
record various transactions with the policies.
purpose of maintaining accounts to
know the financial position.
Nature It is mainly concerned with the It deals with projection of data for the
historical data and use of actual data. future.
Principle It must be prepared in accordance with It is not governed by generally accepted
generally accepted accounting accounting principles.
principles.
Compulsion Preparation of financial accounting is Preparation of management accounting is
compulsory. not compulsory.
Audit Auditing is compulsory. Auditing is not necessary.
Publication Financial accounts like profit and loss Management accounting statements are
and balance sheet are published for prepared for the benefit or management
the benefit of public. only and these are not published
Period It is prepared at the end of year i.e. Management accounting supplies information
income statement and balance sheet. tine to time during the whole year. So,
preparation of management accounting does
not have specific period.
Money measurement Financial accounting records only Management accounting uses both
those things which can be measured monetary and non-monetary terms.
in monetary terms.
Quickness Reporting of financial accounting is Reporting of management accounting is
slow and time consuming. very quick.
Precision There is precision in the information There is approximation in the information
collected in financial accounting. collected by management accounting.
Subject matter Financial accounting is objective in Management accounting is subjective which
nature. is fundamentally based on judgment rather
than on the measurement.

 Differences between Cost and Financial

Accounting
Even though, both Financial and Cost Accounting aim at providing the information regarding the
business and its activities on the basis of systematic records and analysis of the transactions.
Following are the differences between these two accountings:
12 COST AND MANAGEMENT ACCOUNTING

Basis of differences Cost accounting Financial accounting

Objectives The main purpose of cost accounting is The main purpose of financial accountings is to
to facilitate the determination and keep the systematic records of financial
control of cost, formulation of plans and transactions and to determine profit and loss
policies, decision making process by and disclose the financial position of the
maintaining the detailed cost records. business on the basis of such financial
information.
Reporting Cost accounting can provide the report Under financial accounting, financial reports
to the management regarding the cost at are generally prepared at the end of each
any time intervals as per the necessity. fiscal year except in special circumstances.
Dependence Cost accounting serves as a Financial accounting is as an independent
complementary to financial accounting. accounting.
Users of information Mainly the persons holding different Mainly the external parties like creditors,
positions in the management internally investors, employees, government,
are the users of the cost accounting researchers are the users of information
information. provided by financial accounting. It is
prepared for external purpose also.
Precision Since cost accounting also relates to the Financial accounting maintains the records
future decision process, the information actual income and expenses. Therefore, the
contained in it, is not only real but also information used in financial accounting is
estimated. Thus, it may lack accuracy. accurate.
Scope Mainly, cost accounting is associated Financial accounting is related with all
with the production cost of products or items of expenses and incomes.
services and the amount obtained from
the sale of products or services.
Classification of cost Under cost accounting, cost is classified Cost is not generally classified in the form of
as unit and total, direct and indirect, unit and total, direct and indirect, fixed and
fixed and variable etc. variable etc. under financial accounting.
Unit of Unit of measurement can be the unit Inn financial accounting, unit of
measurement products, labor hours and machine hour measurement of transactions is always a
along with the monetary unit in cost monetary unit.
accounting.
Emphasis Cost accounting not only keeps the Under financial accounting, there is no
records of expenses but also emphasizes provision for the control of expenses
on the control over the materials, labor because it emphasized only on the
and overheads through standard costing recording transactions.
and budgetary control system.
Information relating Cost accounting easily provides It is not possible to obtain information
to efficiency information relating to the relative relating to the relative efficiency of working
efficiency of working departments, departments, laborers and machinery etc.
laborers and machinery etc. due to lack of detailed records under
Financial Accounting.
Valuation of Under cost accounting, the value of raw In financial accounting, the valuation of
inventory materials, semi-finished goods and inventory is done on the basis of the cost
finished products are determined on the price or market price whichever is less.
basis of cost.
  CHAPTER 1 13

 Write the meaning of cost accounting. 2. Based on historical information: Financial

 Cost accounting is the process of accounting for cost accounting provides only the historical information
where beings with the incurrence of cost end with the on the basis of recorded transactions. It may be
control of cost. In other words, it is formed system of unsuitable for making future plans.
accruing by means or which cost of products services 3. No analysis of cost and loss: financial
or activities are ascertained and controlled. accounting cannot make difference between
 Write any five objective/function of cost avoidable and unavoidable cost in the absence of
accounting. records relating to the losses resulting from
 The major five objective/function of cost accounting defective material, idle time and idle capacity etc.
are as follows: 4. No control on cost: Although there is provision
1. To ascertain cost: The main objective of cost for cash control, Financial Accounting lacks
accounting is to determine the cost per unit and proper mechanism for controlling different
total cost of products or services. element of cost such as materials, resulting as
2. To facilitate planning and control: Another well as indirect cost or overheads.
objective of cost accounting is to facilitate the 5. Difficulty in Price determination: Since financial
organization in planning and control. accounting does not allocate the expenses
3. To supply information for decision making: separately according to the manufactured goods
The next objective of cost accounting is to supply or services or job orders.
necessary information regarding costs that are  Write any four advantage of cost accounting.
required for taking any business decision.  The four advantage of cost accounting are as follow:
4. To determined selling price: Cost accounting 1. Management: Cost accounting is advantageous
provides cost information to determine the selling to the management for preserving its place in the
price of products or service. market by producing and supplying qualitative
5. To ascertain costing profit: Cost accounting products at low cost and ascertaining the price of
aims at ascertaining the costing profit or loss of detailed information about the cost data required
any activity by matching cost with the revenue of for formulating plans and policies, identifying the
that activity. problem areas for improvement.
2. Employees and laborers:
 Write in brief about limitations of cost accounting.[2015 BBA] Various welfare
 The major five limitations of cost accounting are as provisions, conduction of trainings implementation
below: of incentive plans, time and motion study etc. are
1. Costlier accounting: Cost accounting is the made for controlling cost and increasing the
costlier system because it required maintaining efficiency of human resources.
various types of records relating to loss reducing 3. Government: Such data are essential for the
measures, steps taken for increasing the government for determining the industrial and
efficiency, accumulation, classification and import-export policy, determining the rates of
determination of cost for the purpose of achieving carious taxes quantity of government subsidies
various objectives of cost accounting etc. required on essential commodities etc.
2. Lack of uniform procedures: Since there is no 4. Public: Effective system of cost accounting leads
uniformity in costing methods to determine the to the production of qualitative goods services at
results, different cost accounting experts can minimum cost. In this condition, people are
draw different results from the same information directly benefited from the consumption of
issued to them. products and services at low price. The living
3. Less contribution towards future: There is less standard of the people likely to improve.
contribution of cost accounting towards the solution  Define management accounting.
of the critical situations that may occur in the future.  Management accounting is that branch of Accounting
 Write any four limitations of financial accounting. Information System of a business enterprise which
 The four limitations of financial accounting are given used accounting information for planning, controlling
below: and decision making. Management accounting
1. Provides collective results only: Financial provides information to assist managers in their
accounting only provides the information regarding planning and controlling activities.
the collective or overall results of a business firm
14 COST AND MANAGEMENT ACCOUNTING

 Critically examine the limitations of management 5. To help in motivating employees: A key

accounting. purpose of Management Accounting is to motivate
 The limitations of management accounting are: managers and other employees to direct their
1. Continuance of intuitive decision-making: efforts towards achieving the organizational goals.
Management Accounting eliminates the intuitive  "Management accounting is concerned with
decision-making process of management and providing accounting information to the
replaces it with scientific decision-making. management"
2. Broad based scope: It is easy to record, Or, Management accounting provides information for
analyze, and interpret an historical event decision making.
concerted into monetary terms in a most objective Or, "Management accounting is cornered with accounting
manner. But it will be difficult to perform the same information, which is useful to the management."
functions in respect of future and unquantifiable  Management accounting collects monetary as well
situations in the light of the past records.
as non monetary information and supplies the same
3. Comprehensive coverage: The fusion of a to the management for planning, implantation and
number of subjects like financial accounting, controlling. It collects information from cost
statistics, engineering, economics, taxation etc. accounting, financial accounting, tax accounting and
has culminated in the emergence of management provide them to the management. The cost
accounting. accounting and provide monetary information only
4. Evolutionary stage: Management accounting is but management needs non-monetary information
a new discipline and a growing subject too. It is as well. This needs of management is fulfilled by
still in the infancy stage and undergoing management accounting.
evolutionary process.
 Write any five differences between cost accounting
5. Psychological resistance: The Management
and management accounting.
accounting system spells a radical change in the
Cost Accounting Management Accounting
management approach towards solving day-to-
day problems confronted by it. It needs systematic The purpose of management
recording to cost and accounting is to communicate
 Write any five objectives or function or its control. information to management for
importance of management accounting. Cost accounting is planning and coordinating business
 The five objectives or function or importance of specifically concerned activities.
management accounting are as below: with assessment of Unlike that, management accounting
1. To help in planning: Under the process of cost covers financial accounting, cost
planning, management formulates policies and accounting, application of the
executes plans to achieve the desired objective. principles of management, tax
planning, budgeting, reporting of
2. To help in organizing: Management Accounting
information to management etc.
stresses more on budget centers, investment
centers, cost centers and profit centers with a Cost accounting takes Such future projection is linked with
view to controlling costs and responsibilities. only consideration the preparing guidelines, and framing
present and past cost relevant plans and policies.
3. To help in controlling: Management Accounting figures.
devices like standard costing and budgetary
Cost accounting takes Management accounting takes into
control are helpful in controlling performance. The
only monetary data account both monetary and non-
actual results are compared with predetermined
into account. monetary and non-monetary data
objectives. that enlighten decision.
4. To help in interpreting financial information:
Management Accounting presents the financial
information to the management. It helps the
management in analyzing and interpreting
different accounting information for selecting the
most profitable course of action.
  CHAPTER 1 15

 Exercise
 THEORETICAL QUESTIONS
SHORT ANSWER QUESTIONS
1. Define financial, cost and management accounting.
2. Write the importance of cost accounting.
3. Write in brief, any five functions of management accounting.
4. Write brief about cost of accounting. [2015 BIM]
5. Write in brief, any two limitations of financial accounting.
6. Write about any two objectives of management accounting. [BBA 2075]
7. Write any two advantage of cost accounting.
8. Write briefly to clarify the meaning of management accounting [2014 BBA]
9. Write about any two objectives of management accounting
10. State, in brief, any five limitations of management accounting.
11. Differentiate between cost and management accounting.

DESCRIPTIVE ANSWER QUESTIONS

1. "Cost accounting is more concerned with short term planning and its reporting period much
lesser than financial accounting." Comment in 5 to 7 effective sentences.
2. "Financial accounting is historical in nature and management accounting is futuristic in its
approach." Justify the statement precisely.
3. Cost accounting is more concerned with cost accumulation, classifications, and analysis.
Comment in five to seven sentences.
4. "Cost accounting is a tool of managerial planning and control." Comment this statement briefly.
5. "Business planning is one of the basic functions of management accounting." Comment briefly.
6. Management accounting is concerned with accounting information. "Give your view briefly.
7. State, in brief, any two scopes of management accounting in the light of cost control parameters.
8. "Management accounting provides information for decision making" comment briefly.
9. "Management accounting is more than a shift from record keeping." Comment briefly.
10. Write in brief, any five importance of management accounting.
11. "Management accounting provides necessary information for decision making." Justify.
12. "Management accounting provides monetary and non-monetary information for decision
making." Explain. [BBA/BIM 2016]
13. "Management accounting better serves management in decision making." Comment briefly.
14. Explain, briefly, the reasons for gaining popularity by the management accounting in modern
business world.
15. "Management accounting serves as a tool for management decisions." Comment briefly.
16. "Management accounting helps management in running the business efficiently and
economically." Comment briefly.
16 COST AND MANAGEMENT ACCOUNTING

17. "The objectives of managing accounting are far wider than that of financial accounting." Briefly
comment on this statement.
18. "Management accounting is concerned with accounting information that is useful management
for decision making." How would justify this statement? [Model 2015 BBA/BIM]
19. "Management accounting is concerned with accounting information that is useful to
management". Discuss.
20. "Management accounting is the art of presenting to management such figures, in items of money
or other units and assisting management to do its job." Discuss.

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