Cost & Management Accounting

BBA-II TermUnit-1Sharda University

Neeraj Bhandari

cost and Management Accounting- Introduction

After going through this chapter you should be After going through this chapter you should be able toable to

Understanding the meaning , definition and objectives of cost accounting.

Understanding the meaning and definition of management accounting,

Understanding the various objectives of management accounting,

Deference among management, cost and financial accounting

Elements of cost

Application of cost accounting

Cost accounting generally considered as being applicable only to manufacturing concerns. This is not so,

All types of activities, manufacturing and non- manufacturing, in which monetary value is involved should consider the use of cost accounting

For example- Wholesale & retail business, banking and insurance companies, transport companies, hospitals, and farming, all may employ cost accounting techniques to operate efficiently

Introduction of cost accounting

2. Cost accounting-cost accounting is an essential part of accounting. Cost sheet, marginal costing, opportunity cost analysis and other cost techniques play a useful role in operation & control of business undertaking. Theses techniques provide the information about the total cost and per unit cost of the product and services.

What is Cost: The amount of expenditure incurred on

manufacture a particular product.

Expense: refers to expenditure which appear in the P&L account of a given period as matched against revenue

Or Cost related to the production & Expenses related to the administration &

marketing. expenses is a part of cost of doing business

Cost Accounting- Definition

Cost accounting is a branch of Accounting. It is the recording, classification and appropriate allocation of expenditure for the determination of the costs of product or services.

Cost Accounting:-

(a) To ascertain the cost per unit of the different products

(b) To provide a correct analysis of cost

(c) To disclose sources of wastage & loss- in material,time,expenses & use of machinery for increase profit.

(d) Effective control of stocks

Cont.. (e) To helpful in decision making and planning,

like- Make or buy component, continuing with the existing machinery or replace them.

(f) To helpful in forecasting and budgeting-price fixation, future production policies: provide data that production can be appropriately planned

(g) Providing necessary information to management- regarding new product cost, replacement of labour.

Management accounting-introduction

As indicated by its name accounting for management, accounting which provides necessary information to the management for discharging its functions. Management accounting covers various area such as budgetary control, ratio analysis inventory control, marginal costing and standard costing.

Management accounting-introduction

Management accounting is the field of accounting which deals with providing information to managers for their uses in planning, decision-making & controlling.

Management accounting is accounting for effective management

m

Is the presentation of planning of accounting information to assist management in the creation of policy and day to day operation of an undertaking.

Objectives of management accounting Helpful in Planning & policy formation:-

forecasting , setting goals, framing policies on the basis of available information.

Help in decision-making:-makes decision on cost, price, profit & savings.

Helpful in controlling: management accounting devices like standard costing & budgetary control are helpful in controlling performance

Motivating to employee: delegation increase the job satisfaction of employees & encourage them to look forward

Provides accounting information to management.

of accounting

b

Accounting

Financial accountin

g

Cost accounting

Management accounting

Distinguish Among FA and CA & MA

Financial A/C Cost A/C Management A/C

Int + ext part of org

Internal part of organization

Internal part of org

Gives information about P&L and Financial position

To management for proper planning & control of expenditure to manufacture a product

To magt about planning & creating policy of day to day operation

distinguishPrepare report, mostly annually

Half yearly, quarterly, or monthly

Half yearly, quarterly or monthly

Monetary information used only in F.A

Both monetary & non-monetary (quantitative)

Both monetary and non-monetary

Mandatory statement

May be Mandatory

May be Mandatory

It emphasizes only on recording of transaction of data in the financial statement

It emphasizes on cost control with help of standards budgets

It emphasizes on impact and effect aspect of costs

The F.A data is historical in nature

Historical & futuristic in approach

Futuristic & analytical in nature

F.A system can be installed without proper cost A/C system

C.A system can not be installed without proper F.A system

It includes both cost and financial accounting.

ELEMENTS OF COSTS

The element of cost are three– material, labour, and other expenses :

Material

Labour

Expenses

Material/ Labour/ Expenses

Direct material and indirect material Direct labour and indirect labour Direct expenses and indirect

expenses

Direct material

All items such as raw material, standard parts and sub-assemblies to required to assemble or manufacture a complete product.

or directly enter the production & form a part of the finished product.

Exam: (a) wood used in production of table & chair

Conti..

(b) cloth in dress making (c) clay used in bricks. (d) leather used in shoes (e) paper used in the printing books

Indirect materials

Can not be classified as direct material and miner in importance.

exam- threads, oil, cleaning materials, material of repairs-nuts and bolts, gum.

Or

Indirect material required in production process but not necessary built into the production.

Direct labour

The labour cost incurred on the employee who are engaged directly in making the product like converting raw material into finished product.

Exam- machine operator, shoe- maker, carpenter, tailor and wages as paid to the workers, engaged in matching department and assembling dep.

Indirect labour

Indirect labour is not directly engaged in the production operation but only to assist or help in production operation.

supervisors, inspectors, clerk, peon etc.

Direct expenses: those expenses which are specifically incurred in connection with a particular job or cost unit.

Are also known chargeable expenses.

Example of direct expenses

Hire charge of a plant, cost of design & layout, cost of patent right and royalty paid in mining

Indirect expenses: are incurred by the organization in carrying out their total business activities apart from indirect material and labour.

Exam: rent, taxes, insurance, lighting, telephone, postage and depreciation etc.

Thank you for First Unit

cost and Management Accounting- unit-2

After going through this chapter you should be After going through this chapter you should be able toable to

Understanding the meaning and various types of overhead

Understanding the various concepts and classification of cost,

Understanding the meaning of cost sheet and preparation of cost sheet

Overhead

Overhead Are all expenses other than direct expenses

or

“Aggregate of the cost of indirect material, labour & expenses”.

Overhead

o

Works overhead

DistributionoverheadAdministration

overhead

Indirect labour

Indirectexpenses

Indirectmaterial

Sellingoverhead

Administrationoverhead

(a) Works/production overhead factory rent, rates,& lighting Insurance of plant & machinery and furniture Carriage inward Wages & incentive to indirect workers Depreciation of plant and machinery Repair & maintenance of plant and machinery

& factory premise

(b) Administration overherad

Office rent, rates & tax Office light Depreciation, insurance of office building Salaries of administrative staff Printing & stationary Audit fee

(c) Selling and distribution overhead

Sales men’s salary & commission, showroom expenses Advertisement charges Cost of catalogues, price list & sample Bad debts and costs incurred for collection of bad debt

discount. Distribution overhead Carriage & freight outwards, Packing & delivery charge Depreciation, insurance & maintain of delivery vehicle. Wages of packers & delivery boys. Running expenses of delivery vehicles

Classification of cost

Classification by nature or element.

(a) material (b) labour (c) expenses

Classification by functions:

(a) production cost (b) administration cost

(c) selling & distribution cost

Classification by behaviour

(a) Fixed cost: which does not vary with the change in the volume activity in the short runexp: salaries, rent, audit fee, depreciation(b) Variable cost: which directly vary with the volume of activity exp: material consumed, direct labour, sales commission, fright, packing etc.

(c) Semi-variable cost: Contain both cost fixed & variable elements. They are partly affected by fluctuation in the level of activity.

For example: factory supervision, maintenance etc.

Classification by time:

(a) historical cost: actual cost of acquiring asset or producing goods or services

(b) Estimated Cost: are prepare in advance prior to the performance of operation before the acceptance of sales orders

Classification by management decision- making

(a) Differential cost: Differential cost is the change in cost due to change in activity from one level to another. If the change increase the cost , it will be called incremental cost. If these is decrease in cost the difference is known as decrement cost

Classification by management decision- making

(b) Opportunity cost: (Next best alternative)

exp: a person has three job offers 1 for Rs.4000 pm. II Rs. 3500 pm. III Rs. 2800 pm. By selecting best offer of Rs. 4000. the opportunity cost will be Rs. 3500.

the next best alternative. the opportunity cost should not exceed the value of option selected

(c) Sunk cost:

A sunk cost is the cost that has already been incurred, it is a past cost which will not be recorded if the project is terminated.

Cost sheet

Cost sheet is a statement which shows various component of total cost of a product. it classifies & analyses the component of cost of a product.

Format of cost sheet

Particular amounts

Direct costs:

direct material cost

direct labour cost

direct expenses cost

……………………………..prime cost

(+) factory overhead.

…………………………….factory cost

…..

…..

…..

………

…..

……….

……

Conti….

factory cost

(+) office or administrative overheads

cost of production

(+) selling & distributing overheads

total cost or cost of sale

(+) profit margin

selling price

…..

……

……

…..

….

…….

……

Costs Prime cost = direct material +

direct labour + direct expanses

Works or factory cost = prime cost + factory overheads

Cost of production = factory cost + administration overheads

Conti..

Total cost or cost of sales = cost of production + selling & distribution overheads

note: the difference between cost of sales and selling price represents profit or loss.

Cost sheet (when purchase exp, work in process & opening or closing stock given)

particulates amounts

A. Material consumed:

Purchased ……….

(+) opening stock of raw material ……….

& expenses on purchase ……….

(-) closing stock of raw material ………..

direct material consumed ……….

B. Direct labour

C. Direct expenses prime cost=A+B+C

……..

…….

CONTI..

Particulars Amounts

prime cost (A+B+C+)

(+) factory overheads ………

add: opening stock of work in process….

less: closing stock of work in process……

factory cost

(+) office & administrative overheads ……

cost of production

…….

………

…….

Conti…

Particulars amounts

cost of production

add :opening stock of finished goods ……

less : closing stock of finished goods …….

cost of goods sold ………..

(+) selling & distribution overheads ……..

cost of sale ……..

(+) profit margin ……….

selling price

……

……..

……..

Thank you