Cost & Management Accouinting

Introduction
• Cost: Amount sacrificed to obtain goods and
services
• Costing: the technique and process of
ascertaining costs.
• Cost Accounting: Cost Accounting is the process
of accounting for cost which begins with
recording of income and expenditure and ends
with the preparation of statistical data. It is the
formal mechanism by means of which cost of
products or services are ascertained and
controlled
 Cost Accountancy
• Cost Accountancy is defined as ‘the application of
Costing and Cost Accounting principles, methods
and techniques to the science, art and practice of
cost control and the ascertainment of
profitability’. It includes the presentation of
information derived there from for the purposes
of managerial decision making. Thus, Cost
Accountancy is the science, art and practice of a
Cost Accountant.
 Objectives of Cost Accounting
• To ascertain the Costs under different situations using different
techniques and systems of costing
• To determine the selling prices under different circumstances
• To determine and control efficiency by setting standards for
Materials, Labor and Overheads
• To determine the value of closing inventory for preparing financial
statements of the concern
• To provide a basis for operating policies which may be determination
of Cost Volume relationship, whether to close or operate at a loss,
whether to manufacture or buy from market, whether to continue
the existing method of production or to replace it by a more
improved method of production....etc.
• To achieve real and permanent reduction in the unit cost of goods
manufactured or services rendered without impairing their
suitability for the use intended or diminution in the quality of the
product.
 Scope of Cost Accountancy
• 1. Cost Ascertainment: In this region of cost accounting, cost accounting
collects product's material, labor and overhead cost and try to calculate
total and per unit cost of product. This total cost calculation will be based
on historical or standard or estimated basis. After this, cost accountant
will use any method of costing like specific order costing, operation
costing, and direct costing technique. These techniques and methods may
be used for calculating different nature products in same organization.
2. Cost Records: In this part of cost accounting, cost accountant maintains
cost books, vouchers, ledgers, reports and other cost related documents
for future comparison and reference. It will also be under the scope of
cost accounting.
3. Cost Control:This is the end boundary of cost accounting scope. In this
division, cost accountant used different techniques and methods for
controlling the cost. Save One Rupees in the cost of product means we
have earned one rupees in the production of goods. So, Cost accountant
uses budgetary control, standard costing, break even point analysis and
many other techniques for controlling the cost.
 Advantages of Cost Accounting
• reveals unprofitable activities
• locates the exact causes for decrease or increase in the profit
• information to the management
• useful for price fixation purposes
• Setting optimum Efficiency
• Cost comparison
• ready figures for use by the Government
• cost reduction programme
• suggesting courses of action to be taken
• Determination of cost centres or responsibility centres
• cost audit in the organization prevents manipulation and fraud
 Limitations of Cost Accounting system
• Classification of costs into its elements.
• Materials issue pricing based on average or standard costs.
• Apportionment of overhead expenses and their allocation to
cost units / centres.
• Arbitrary allocation of joint costs.
• Division of overheads into fixed and variable.
• Maintenance of Cost Accounting system appears to be
expensive since the cost analysis, allocation and absorption of
overheads etc. require considerable amount of additional
work causing additional expenditure.
• Since the results shown by the financial accounts differ from
those shown by the cost accounts, there is a need for
preparing reconciliation statements for verification of
accuracy.
Financial Accounting and Cost Accounting
 Management Accounting

• Chartered Institute of Management

Accountants, London. “Management
Accounting is the application of professional
knowledge and skill in the preparation of
accounting information in such a way as to
assist management in the formation of policies
and in the planning and control of the
operations of the undertaking”.
 Characteristics of Management Accounting
• Future Oriented:
• Talent Based
• Rationale behind Decisions
• Selective:
• Means Not the End
• Tools/Techniques
• Planning and Controlling:
 Techniques or Tools of Management
Accounting
• Common-size Statements
• Comparative Statements
• Ratio Analysis
• Trend Analysis
• Cash Flow Statement
• Funds Flow Statement
• Standard Costing
• Budgetary Control
• Marginal Costing
 Advantages of Management Accounting
• Prompt and Good Decisions:
• Increase in Profits
• Strong Financial Position
• Cost Control
• Competitive Selling Price
• More Revenue Generation
• Expansion and Modernization
• More Employment Generation
• Helps in Removing Poverty
• Better Standards of Living
• Overall Economic Growth and Development:
• Proper Utilization of Resources
• Increases the Efficiency
Scope of Management Accounting
• Financial Accounting:
• Cost Accounting:
• Budgeting and Forecasting
• Management Reporting System
• Tax Accounting
• Human Resource Accounting
• Financial Analysis
• Interpretation:
 Limitations of Management Accounting
• Wide Scope
• Emerging Area
• Change in the Organization
• Expensive
• Personal Bias
• Not a substitute of Management
 Functions of Management Accountant

• Collection of data.
• Transcribing the collected data to make it
more meaningful.
• Analyzing the data with appropriate
techniques.
• Interpretation of results.
• Preparation of Reports.
• Sharing the reports with management
 Techniques of Costing
• Marginal Costing
• Standard Costing
• Budgetary Control
• Uniform Costing
 Marginal Costing
• Marginal Costing is the ascertainment of
marginal costs and of the effect on profit of
changes in volume or type of output by
differentiating between fixed costs and
variable costs. Several other terms in use like
Direct Costing, Contributory Costing, Variable
Costing, Comparative Costing, Differential
Costing and Incremental Costing are used
more or less synonymously with Marginal
Costing.
 Standard Costing
• Standard Costing is defined as the preparation and use
of standard cost, their comparison with actual costs
and the measurement and analysis of variances to
their causes and points of incidence. Standard Cost is a
predetermined cost unit that is calculated from the
management’s standards of efficient operation and the
relevant necessary expenditure. Standard Costs are
useful for the cost estimation and price quotation and
for indicating the suitable cost allowances for products,
process and operations but they are effective tools for
cost control only when compared with the actual costs
of operation
 Budgetary Control
• Budgetary Control may be defined as the process of
continuous comparison of actual costs and
performance with the pre-established budgets in
relation to the responsibilities of the executives to
the specific budgets for the achievement of a target
in accordance with the policy of the organisation
and to provide a basis for revision of budget.
Therefore, Budgetary Control involves mainly
establishment of budgets, continuous compassion
of actual with budgets for achievement of targets,
revision of budgets in the light of changed
circumstances.
 Uniform Costing
• Uniform Costing may be defined as the application
and use of the same costing principles and
procedures by different Organizations under the
same management or on a common understanding
between members of an association. It is thus not
a separate technique or method. It simply denotes
a situation in which a number of organizations may
use the same costing principles in such a way as to
produce costs which are of the maximum
comparability. From such comparable costs
valuable conclusions can be drawn
 Cost Accounting Methods
• Cost estimation and cost accounting system is referred to as
the costing method
Job Costing
• Job costing is a type of accounting that monitors costs and
revenues by “work” and allows for uniform profitability
reporting by the job. An accounting system must allow job
numbers to be allocated to specific expenses and revenues to
support job costing.
Contract Costing
• Contract costing is the tracking of costs associated with a
specific contract with a customer. For example, a company
submits a bid for a large construction project with a possible
customer. The two sides also agree in a contract that the
company will be reimbursed in a specified method.
Batch Costing
• Batch cost is a collection of costs paid when a group of items or services
is manufactured that cannot be traced back to individual products or
services within the group. It may be essential to assign the batch cost to
individual units within a batch for cost accounting reasons.
Process Costing
• Process costing is an accounting method for tracking and accumulating
direct expenses in a manufacturing process and allocating indirect
costs. Costs are given to items in huge batches, which can span a
month’s worth of production.
Unit Costing
• A company’s unit cost is the cost of producing, storing, and selling one
unit of a given product. All fixed and variable expenses in production
are included in unit costs. A cost unit is a unit of measurement used to
determine the volume of a service or product. Mines, oil drilling units,
cement works, brickwork, or unit production cycles, such as radios and
washing machines, all use unit costs.
Operation Costing
• Job costing and process costing are combined in operation costing. It may
be employed when a product is made from various raw materials and
then finished using a standardised procedure for a group of items. The
main goal of this strategy is to figure out the cost of each procedure.
Multiple Costing
• When things are sold that contain various other processed parts, multiple
costing, also known as composite costing, is an accounting method used
when these parts cost differently. Each of the elements made by other
processes, like the ultimate product, has a cost connected with it.
Operating Costing
• Operating costs, often known as operational expenses, are expenses
connected to the running of a business or a product, component, piece of
equipment, or facility. They seem to be the costs of resources used by a
company just to stay in business. Airlines, trains, road transport
companies (both products and passengers), hotels, cinema halls, power
plants, and other businesses employ operating costs.