Cost & Management Accounting (ACT 301)

Department: BBA
Group: 1

Term Paper

Submission date: 11th December 2017

Submitted
to
Suzona Asad
Lecturer, Faculty of Business Administration

Submitted
by
Farzanul Haque Mony (161200138)
Cost Accounting

Cost accounting is that branch of the accounting information system, which

records, measures and reports information about costs.
The primary purpose of cost accounting is cost ascertainment and its use in
decision making and performance evaluation.
Cost accounting is concerned with recording, classifying and appropriate
allocation of expenditure for the determination of the costs of products or
services, and for the suitably arranged data for purposes of control and
guidance of information to management for making.
Cost means the price paid for something
Cost is computation of actual costs incurred
Cost estimation is a process of predetermining costs of goods and service.

Materials

The substance from which the finished product is made is known as material.

DIRECT MATERIAL: is one which can be directly or easily identified in

the product Eg: Timber in furniture, Cloth in dress, etc.
INDIRECT MATERIAL: is one which cannot be easily identified in the
product.
Eg: disposable safety equipment, disposable tools, glue, tape, oil, etc.

Labor

DIRECT LABOUR: is one which can be conveniently identified or

attributed wholly to a particular job product or process. Eg: wages paid to
carpenter, fees paid to tailor, etc
 INDIRECT LABOUR: is one which cannot be conveniently identified or
attributed wholly to a particular job, product or process. Example: At factory
level foremens salary, works managers salary, gate keepers salary, etc.
At office level Accountants salary, GMs salary, Managers salary, etc.

Fixed Costs expenses that do not alter in the short run in relation to
changes in output e.g. rent, insurance and depreciation. These costs are
linked to time rather the level of business activity
Variable Costs expenses that alter in the short run to changes in output
e.g. raw materials, packaging and components. They are payments for the use of
inputs

Semi Variable Costs expenses that vary with output but not in direct
proportion
e.g. maintenance costs. They often comprise a fixed element and a variable
element

Cost-volume-profit (CVP) analysis is used to determine how changes in costs

and volume affect a company's operating income and net income. In performing
this analysis, there are several assumptions made, including:

Sales price per unit is constant.

Variable costs per unit are constant.
Total fixed costs are constant.
Everything produced is sold.
Costs are only affected because activity changes.
If a company sells more than one product, they are sold in the same mix.

Break-even analysis can be approached in two ways:

1. Equation method
2. Contribution margin method
 Uses of Break-Even Analysis:
It helps in the determination of selling price which will give the desired
profits.
It helps in the fixation of sales volume to cover a given return on capital
employed.
It helps in forecasting costs and profit as a result of change in volume.
It gives suggestions for shift in sales mix.
It helps in making inter-firm comparison of profitability.
It helps in determination of costs and revenue at various levels of output.
It is an aid in management decision-making (e.g., make or buy, introducing a
product etc.), forecasting, long-term planning and maintaining profitability.
It reveals business strength and profit earning capacity of a concern without
much difficulty and effort.

Variable and absorption Costing

Variable and absorption are two different costing methods. Almost all successful
companies in the world use both the methods. Variable costing and absorption
costing cannot be substituted for one another because both the systems have their
own benefits and limitations.

These costing approaches are known by various names. For example, variable
costing is also known as direct costing or marginal costing and absorption costing
is also known as full costing or traditional costing.

The information provided by variable costing method is mostly used by internal

management for decision making purposes. Absorption costing provides
information that is used by internal management as well as by external parties like
creditors, government agencies and auditors etc.
Keys to Segmented Income Statements

There are two keys to building segmented income statements:

A contribution format should be used because it separates fixed from

variable costs and it enables the calculation of a contribution margin.
Traceable fixed costs should be separated from common fixed costs to
enable the calculation of a segment margin.

Identifying Traceable Fixed Costs

Traceable fixed costs arise because of the existence of a particular segment and
would disappear over time if the segment itself disappeared.

Identifying Common Fixed Costs

Common fixed costs arise because of the overall operation of the company and
would not disappear if any particular segment were eliminated.

Traceable Costs Can Become Common Costs

For example, the landing fee paid to land an airplane at an airport is traceable
to the particular flight, but it is not traceable to first-class, business-class, and
economy-class passengers.

Basic Framework of Budgeting

A budget is a detailed quantitative plan for acquiring and using financial and other
resources over a specified forthcoming time period.

1. The act of preparing a budget is called budgeting.

2. The use of budgets to control an organizations activities is known
as budgetary control.
Operating budgets ordinarily cover a one-year period corresponding to a
companys fiscal year. Many companies divide their annual budget into four
quarters.

Continuous budget is a 12-month budget that rolls forward one month (or quarter)
as the current month (or quarter) is completed

Sales Budget influences many of the other components of master budget either
directly or indirectly. This is due to the reason that the total sales figure provided
by sales budget is used as a base figure in other component budgets. For example
the schedule of receipts from customers, the production budget, pro forma income
statement, etc.

Production budget is prepared after sales budget since it needs the expected sales
units figure which is provided by the sales budget. It is important to note that only
a manufacturing business needs to prepare the production budget.

Direct labor budget shows the total direct labor cost and number of direct labor
hours needed for production. It helps the management to plan its labor force
requirements. Direct labor budget is a component of master budget. It is prepared
after the preparation of production budget because the budgeted production in units
figure provided by the production budget serves as starting point in direct labor
budget.

Manufacturing overhead budget contains all manufacturing costs other than the
costs of direct materials and direct labor (which are itemized separately in the
direct materials budget and the direct labor budget). The information in the
manufacturing overhead budget becomes part of the cost of goods sold line item in
the master budget.

Ending finished goods inventory budget calculates the cost of the finished goods
inventory at the end of each budget period. It also includes the unit quantity of
finished goods at the end of each budget period, but the real source of that
information is the production budget.
Selling and administrative expense budget is comprised of the budgets of all
non-manufacturing departments, such as the sales, marketing, accounting,
engineering, and facilities departments. In aggregate, this budget can rival the size
of the production budget, and so is worthy of considerable attention. The selling
and administrative expense budget is typically presented in either a monthly or
quarterly format. It may also be split up into segments for a separate sales and
marketing budget and a separate administration budget.

Cash Budget

All businesses need to maintain a safe level of cash to enable them to carry on
business activities. The managers of a business need to determine that safe level.
The cash budget is then prepared by taking into consideration, that safe level of
cash. Thus, if a cash shortage is expected during a period, a plan is made to borrow
cash.

Cash budget is a component of master budget and it is based on the following

components of master budget:

Schedule of expected cash collections

Schedule of expected cash payments
Selling and administrative expense budget