Cost and Management Accounting Overview

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MA 2Cost andManagement

Accounting (CMA)

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Text Books

Management Accounting by PareshShah (PS)

Oxford University Press, 2009 Edition

Cost Accounting by Charles T.Hongren, S M Datar, George Foster,Madhav Rajan, Christopher Ittner (CS)

Pearson Education, 13th Edition

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Other Books Cost Management: Strategies for

Business Decisions by Hilton, Maher,Selto (TMH)

Costing for Management by S.K.

Bhattacharya and John Deardean(Vikas)

Management Accounting by Khan and

Jain Cost and Management Accounting by

Ravi Kishore (Taxmann)

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Cost and

ManagementAccounting

Overview

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Introduction

Business Manager has to answerfollowing questions

What is the maximum profit that a

business can draw? Has the profit margin increased or

reduced as compared to previous years?

Which product line is making more profit? Has too much capital been blocked in raw

materials?

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Cost Accounting

Is the process of accounting for cost Begins with recording of income &

expenditure

Ends with preparation of statistical data Primarily concerned with cost

determination of product, service, processor operations

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Cost Accounting

Is the process of accounting for cost Helps the management

to have a clear indication of their economic

performance direction in which they must move in order to

improve economic efficiencies

To solve complex mgmt problems like

determination of most profitable mix, make orbuy decisions, replacement of equipments,introduction of new products, discontinuance ofnon-profitable products

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Cost Accounting

Generally concerned with internalreporting for mgmt requirement

Development of cost accounting is of

recent origin due to Heavy industrialisation

Overall cut throat competition

Bulky and time consuming traditionalacctg system lacks efficiency to solvecomplicated cost-related problems

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Definitions

Costing A tool to determine the cost of products or

services or operations

Cost Accounting Process of classifying and analysing the

costs (CIMA, The Chartered Institute of MgmtAccounts, UK)

Branch of general accounting and coversapplication or accounting principlesrelating to recording, classifying and

analysis of cost within the organisationWater Scott 9


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Definitions

Cost Accountancy Application of costing and cost accounting

principles, methods and techniques to the

science, art and practice of cost controland the ascertainment of informationderived for managerial decision making(CIMA)

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Functions of Cost Accounting

To calculate the cost per unit of thevarious products manufactured by thefirm

To prepare a correct cost analysis ofboth process or operations, and by thedifferent elements of cost

To ascertain wastage in each processof manufacture and to prepare reportswhich can assist wastage control

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To provide necessary information forthe determination selling prices

To compute product-wise profit, and

advise the management for theenhancement of profit

To serve the management in the

valuation of goods-in-process andfinished goods, so that the minimumcapital is blocked up in the stocks

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To install and implement cost controlsystems (budgetary control orstandard cost system) for the control

of material, labour, and overheadexpenses

To advise the management for the

formulation of future expansionpolicies and proposed capital outlays

To establish an effective reporting

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To guide the mgmt in the preparationand implementation of incentiveschemes based on productivity and

cost savings To advise the management on the

profitability of present or new lines of

products, the comparative advantagesand disadvantages of different typesor production methods, thereplacement of manual operations byautomation 14


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Additional Functions of CostAccounting To supervise punched card accounting

or data processing

To organise internal audit system so

that effective working of theaccounting control and productioncontrol methods can be introduced

from time to time and well be ensured

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Additional Functions of CostAccounting To coordinate with the industrial

engineers for the introduction andimplementation of methods suggested

for improvement and or redundancy ofprogrames and data

To provide the Govt or other public

bodies with the specialised service ofcost audit

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Financial Actg v/s Cost Actg

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Point of difference Financial Accounting Cost Accounting

Purpose

Provides info aboutorganisation in a general

way, ie. Profit, Assets,Liabilities, Owners Equity

Provides info to guide themanagement for properplanning, operation,coordination, control anddecision-making

Forms of Accounts

P&L A/cs and B/S are keptfor the requirement ofCompanies Act and IncomeTax Act

Kept as per requirementof management.Recently, the Co Act hasmade it obligatory to keepcosting records in somemfg companies


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Financial Acctg v/s CostAcctg

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Recording in subjective manner In objective manner

Items of CostsItems of costs areexpressed in totals

Items of costs areanalysed, classified,apportioned, andallocated in order tocalculate the cost per unit

Analysis of ProfitThese reveal the profits ofthe whole business

It is only a part of financialaccounts. It shows theresult of operation,process, job or product sothat the unprofitable linesof businesses can be

eliminated


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ControlEmphasis on recordingonly. No importance tocontrol aspect

It provides a detailedsystem of cost controlwith the help of standardsand budgets

PeriodicityThese are prepared at theend of accounting year

It is a continuous systemof accounting. It submitsthe cost reports to themanagement weekly ormonthly or as and whendesired

Inventory ValuationValued at cost or marketprice whichever is less

Valued at cost


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Nature ofTransaction

a) Relate to commercialtransactions of thebusiness

b) Concerned withtransactions related tothird parties

a) Relate tomanufacturingactivities

b) Concerned withtransactions related tointernal & third parties

Figures Mainly deal with actual dataCost accounts deal partlywith actual figures and

partly with estimates


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Management Accounting

Extension of managerial aspects ofcost accounting

Accounting to assist the mgmt in

planning and decision making Employs various techniques like

standard costing, budgetary control,

marginal costing, uniform costing withinter-firm comparison, ratioaccounting, capital budgeting

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Cost Acctg v/s Mgmt Acctg

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Cost Accounting Management Accounting

AAnalyses costs to controlmaximising efficiency

AAssists the management inplanning, decision-making andcontrol

It uses the principles and practicesof cost accounting

It uses the principles andpractices of cost accounting andfinancial accounting

It provides internal reporting tomanagers for use in planning andcontrolling routine operations

It provides internal reporting tomanagers for use in decisionmaking before formulating majorplans and policies


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Cost Accounting Management Accounting

CCost Accountant reports to the mgmt aboutthe variances from budgets or standards andpresents a comparative data of variousperiods

TThe management accountantsuggests how to improve uponthe operating results by

suggesting ways for costcontrol and cost reduction

CCost Accountant works out the years

operating results

Management Accountantworks out future operating

statements

It is the complement of managementaccounting

It is an extension of managerialaspects of cost accounting


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Role of ManagementAccountant The Accountant chooses the

information to be reported to amanager by

Identifying the specific purpose for whichinformation is needed

Determining the relevance of theinformation. Information is relevant if it

affects the accomplishment of the objectives ofthe decision maker

will change as a result of the decisions orchoice made by the decision maker

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Role of ManagementAccountant Controller or Chief ManagementAccountant title is applied to various

accounting positions

In some organisations, they are justbook keepers and in others they areexecutives who help top mgmt in

planning and controlling Many people confuse Controller and

Treasurer, but they are different

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Controller Treasurer

PPlanning and Control PProcurement of long-term finance

RReporting and interpreting Investor

EEvaluating and Consulting Short-term financing

Tax Administration Banking

Government Reporting Credits and Collections

Protection of assets Investments

Economic Appraisal Insurance


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Objects of Cost Accounting

Cost Finding To determine the actual cost of each

article, process, operation, service,

department, segment of activity Cost reduction

To reveal and report efficiencies in theform of material wastage, loss of time inmaterial buying, storing and issuing

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Cost Saving To provide actual figures of cost

comparison with estimates of costs and

price fixing To find out the degree of efficiency and

productive capacity of men and machinesand ideal standard for their working

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Cost Control To reduce cost thro budgetary control and

standard costing

To ensure continuous check andadjustment of stores and materials withhelp of perpetual inventory

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Managerial Decision, Policy Making To study trends at different volumes of

output, and to determine production

policies and programs To implement incentive wage plans for

workers

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Managerial Decision, Policy Making To organise internal audit system, and

interlocking of financial and cost accounts

to verify accuracy of each other To furnish necessary data for the

preparation of profit and loss account andbalance sheet at short intervals (eg.

Monthly, quarterly, etc.) for eachdepartment or business as a whole

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Advantages of CostAccounting Price Fixation Control on unprofitable activities

Managerial Decision, Policy Making

Useful Information

Cost Control

Provides valuable data

Effective check

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Advantages of CostAccounting Preparation of budgets and

regulations of production

Fixation of responsibilities

Independent Check Prevention of manipulation,

misappropriation, and frauds

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Objections against CostAcctg Expensive Differences in results

Unnecessary

Worthless

Inapplicability

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Principles of Costing

Every concern must design its owncosting system, keeping in view itspeculiar problems

If financial books can afford thenecessary information, separatecosting system is not needed

Reasonable accuracy is enough, ofcourse, this depends upon the natureof industry

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Principles of Costing

Costing information should becollected as and when work proceeds

A proper unit of cost should be

determined

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Essentials of Cost AcctgSystem Should be simple and easy Arrangement of Costing system

should be adopted to suit the general

organisation of the factory There should be coordination and

cooperation among executives of

various departments It should ensure proper accounting

and allocation of material cost, labour

cost, and overheads 37

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Essentials of Cost AcctgSystem Cost Accounts should be capable of

reconciling with financial accounts, orelse, integral accounting system is to

be followed Expenses of costing system should be

commensurate with the results

(economical)

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Importance of costing

Not only assists management invarious ways but also beneficial toemployees, creditors, Government,

public enterprises and the society

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To whom Nature of Benefit

MManagementPPlanning, Organising, Controlling,Budgeting, Decision-making,Pricing, Evaluation

EEmployeesIncentive bonus, Higher earningsthro time and motion study, Right

man in right job thro job evaluation


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Importance of costing

To whom Nature of Benefit

CCreditorsSSupport to access more information ascompared to financial accounts

GGovernment

More taxes thro higher production, Useful in

the import and export policy and preparationof national plans for economic development,Policy of price differentials,

SSocietyLower prices thro cost reduction measures.

Better quality of products and services

Cost and Management Accounting Overview

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