Overview of COst and Management Accounting

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1. Unit 1 Introduction to Cost and Management Accounting

2. Topics to be Covered Definition Features Objectives Function Scope Advantage & Limitation Relation between Cost , Management and Financial Accounting

3. Categorisation of Accounting

4. Cost Accounting

5. Definition Cost accounting developed to help the internal management in decision making. The information provided by cost accounting acts as a managerial tool so that business can utilise the available resources at optimum level. Cost accounting may be regarded as ``A specialised branch of accounting which involves classification, accumulation, assignment and control of costs. The Costing terminology of C.I.M.A. London defines cost accounting as ``The establishment of budgets, standard costs and actual costs of operations, processes, activities or products, and the analysis of variances, profitability or the social use of funds”.

6. Concept of Cost The Chartered Institute of Management Accountants, London defines cost as “The amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity”. The process of ascertaining the cost is known as costing .

7. Associated Terms Costing Cost Accountancy

8. Costing Costing is the techniques and processes of ascertaining costs. These techniques consist of principles and rules which govern the procedure of ascertaining cost of products or services. The techniques to be followed for the analysis of expenses and the processes of different products or services differ from industry to industry. The main object of costing is the analysis of financial records, so as to subdivide expenditure and to allocate it carefully to selected cost centers, and hence to build up a total cost for the departments, processes or jobs or contracts of the undertaking.

9. Cost accountancy Cost Accountancy has been 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 purpose of managerial decision making”.

10. Review Question State whether the following statement is “True” or “False” Costing and Cost Accounting are the same thing: • True • False

11. Objective (1) To analyse and classify all expenditures with reference to the cost of products and operations. (2) To arrive at the cost of production of every unit, job, operation, process, department or service and to develop cost standard. (3) To indicate to the management any inefficiencies and the extent of various forms of waste, whether of materials, time, expenses or in the use of machinery, equipment and tools. Analysis of the causes of unsatisfactory results may indicate remedial measures. To provide data for periodical profit and loss accounts and balance sheets at such intervals, e.g., weekly, monthly or quarterly, as may be desired by the management during the financial year, not only for the whole business but also by departments or individual products. Also, to explain in detail the exact reasons for profit or loss revealed in total, in the profit and loss account.

12. - Contd - (5) To reveal sources of economies in production having regard to methods, types of equipment, design, output and layout. Daily, weekly, monthly or quarterly information may be necessary to ensure prompt and constructive action. (6) To provide actual figures of cost for comparison with estimates and to serve as a guide for future estimates or quotations and to assist the management in their price-fixing policy. (7) To show, where standard costs are prepared, what the cost of production ought to be and with which the actual costs which are eventually recorded may be compared. (8) To present comparative cost data for different periods and various volumes of output.

13. - Contd - (9) To provide a perpetual inventory of stores and other materials so that interim profit and loss account and balance sheet can be prepared without stock taking and checks on stores and adjustments are made at frequent intervals. Also to provide the basis for production planning and for avoiding unnecessary wastages or losses of materials and stores. (10) To provide information to enable management to make short-term decisions of various types, such as quotation of price to special customers or during a slump, make or buy decision, assigning priorities to various products, etc.

14. Importance of Cost accounting Costing as an Aid to Management Costing as an Aid to Creditors Costing as an Aid to Employee Costing as an Aid to National economy

15. Scope of Cost accounting Cost Ascertainment Control of Cost Matching of Cost Aid to Decision making.

16. Classification of Cost 1) By time (Historical, Pre-determined). (2) By nature or elements (Material, Labour and Overhead). (3) By degree of traceability to the product (Direct, Indirect). (4) Association with the product (Product, Period). (5) By Changes in activity or volume (Fixed, Variable, Semi-variable). (6) By function (Manufacturing, Administrative, Selling, Research and development, Pre-production). (7) Relationship with accounting period (Capital, Revenue). (8) Controllability (Controllable, Non-controllable). (9) Cost for analytical and decision-making purposes (Opportunity, Sunk, Differential, Joint, Common, Imputed, Out-of-pocket, Marginal, Uniform, Replacement). (10) Others (Conversion, Traceable , Normal, Avoidable , Unavoidable , Total).

17. Classification on Basis of Time (a) Historical Costs: These costs are ascertained after they are incurred. Such costs are available only when the production of a particular thing has already been done. They are objective in nature and can be verified with reference to actual operations. (b) Pre-determined Costs: These costs are calculated before they are incurred on the basis of a specification of all factors affecting cost. Such costs may be: ( i ) Estimated costs: Costs are estimated before goods are produced; these are naturally less accurate than standards. (ii) Standard costs: This is a particular concept and technique. This method involves: (a) setting up predetermined standards for each element of cost and each product; (b) comparison of actual with standard to find variation; (c) pin-pointing the causes of such variances and taking remedial action. Obviously, standard costs, though pre-determined, are arrived with much greater care than estimated costs.

18. On Basis of Element Material Labour Expense

19. Cost Centre According to the Chartered Institute of Management Accountants, London, cost centre means, “a production or service location, function, activity or item of equipment whose costs may be attributed to cost units”. Cost centre is the smallest organisational sub-unit for which separate cost collection is attempted. Thus cost centre refers to one of the convenient unit into which the whole factory organisation has been appropriately divided for costing purposes. Each such unit consists of a department or a sub-department or item of equipment or, machinery or a person or a group of persons

20. Cost Unit The Chartered Institute of Management Accountants, London, defines a unit of cost as “ a unit of product or service in relation to which costs are ascertained”. A cost unit is a devise for the purpose of breaking up or separating costs into smaller sub-divisions.

21. Method of Costing Job Costing Contract Costing Batch Costing Terminal costing Operation Costing Process Costing Output Costing Composite Costing Department Costing

22. Techniques of costing Historical Costing Standard Costing Marginal Costing Uniform Costing Absorption Costing Uniform costing Direct Costing Activity Based Costing.

23. Role of Cost Accountant in Decision Making 1. To analyze material, labour and the overhead expenses 2. To reconcile daily productions with accounting transactions 3. To coordinate with R&D for production of new items 4. To Assist the controller in developing cost improvement opportunities 5. To prepare the new product costing as well as do the gross profit analysis for the marketing in order to determine the feasibility and profitability before presenting the samples and pricing to the customers.

24. Management Accounting

25. Meaning Management accounting collects and provides accounting, cost accounting, economic and statistical information to the men at various managerial levels to assist them in the performance of managerial functions and their evaluations. It is the development and application of various techniques of recording, analysis, interpretation and presentation, making the financial, costing, and other data active and effective in the performance of managerial functions, viz., planning, decision-making and control. It should be noted that management accounting makes use of not only accounting techniques but also of statistical and mathematical techniques. Management accounting is forward looking and should, therefore, be able to treat economic information and data to make it suitable for use by the management.

26. Definition According to CIMA, London: “Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for: (a) formulating strategy; (b) planning and controlling activities; (c) decision taking; (d) optimising the use of resources; (e) disclosure to shareholders and others external to the entity; (f) disclosure to employees; (g) safeguarding assets.

27. Objective of Management Accounting To formulate Planning and Policy To interpret financial accounts To assist decision making process To help in control To provide report To facilitate coordination of operation

28. Nature of Management Accounting ( i ) Management accounting is a decision making system: Management accounting provides accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations. Though management accountant is not taking any decision but provides data which is helpful to management in decision making. It communicates a great variety of facts in a systematic and meaningful manner. (ii) Management accounting is futuristic: Management accounting unlike the financial accounting, deals with the future. It helps in planning the future-because decisions are always taken for the future course of action. In the decision making process management accounting provides selective and fruitful information out of the data collected.

29. - Contd - (iii) Management accounting is a technique of selective nature: Management accountant takes into account only those data from the financial statement and communicates to the management which is useful for taking decisions. (iv) Management accounting analyses different variables: Management accounting helps in analysing the reasons for variations in profit as compared to the past period. It analyses the effects of different variables on the profits and profitability of the concern. (v) Management accounting does not set particular formats for information: It provides necessary information to the management in the form which may be more useful to the management in taking various decisions on different aspects of the business.

30. Scope of Management Accounting Formation, installation and operation of accounting, cost accounting, tax accounting and information systems. Management accountant has to construct and reconstruct these systems to meet the changing needs of management functions. The compilation and preservation of vital data for management planning. The accounts and the document files are repository of vast quantities of details about the past progress of the enterprise, without which forecasts of the future is very hazardous for the enterprise. Providing means of communicating management plans to the various levels of organisation . This, on the one hand ensures the coordination of various segments of the enterprise plans and on the other defines the role of individual segments in the whole plan and assists the management in directing their activities.

31. - Contd - 4. Providing and installing an effective system of feed-back reports. This would enable the management in its controlling function. By pin-pointing the significant deviations between actual and expected activities, and by adhering to the principles of selectivity and relevance, such reports help in the installation and operation of the system of ‘management by exceptions’. 5. Analysing and interpreting accounting and other data to make it understandable and usable to the management. It is only through such analysis and clarification that the management is enabled to place the various data and figures in proper perspective in the performance of its functions. Such analysis assists management in the location of responsibilities and to effect necessary changes in the organisational set up to achieve the objectives of the enterprise in a more efficient manner.

32. - Contd - 6. Assisting management in decision-making by (a) providing relevant accounting, other data and (b) analysing the effect of alternative proposals on the profits and position of the enterprise. Management accountant helps the management in a proper understanding and analysis of the problem in hand and presentation of factual information obviously in financial terms. 7. Providing methods and techniques for evaluating the performance of the management in the light of the objectives of the enterprises, thus assisting in the implementation of the principle of management by objectives. 8. Improving, modifying and sharpening the effectiveness of co-existing techniques of analysis. The management accountant should always think of increasing the practicability of existing techniques. He should be on the lookout for the development of new techniques as well.

33. Tools and Techniques of Management Financial Planning Financial Statement Analysis Decision making Control Techniques Graphical and Statistical Technique. Reporting.