OVERVIEW TO COST AND

MANAGEMENT ACCOUNTING
INTRODUCTION
In todays business world, the resources available are very scarce.
Hence, every business unit must strive hard to obtain maximum
output with the available input in order to ensure the optimum
utilization of scarce resources.
The value of input is measured against the value of output.
In the present era of cut-throat competition, the need to study this
subject is growing very fast.
Every businessman makes a constant effort to improve his/her
business.
Cost may be defined as
1. the amount of expenditure (actual or notional) incurred on or
attributable to a given thing, or
2. to ascertain the cost of a give nthing
Costing is the techniques and process of ascertaining costs .
Cost unit is a quantitative unit of product or service in relation to which costs are
ascertained.
Cost unit is a unit of product or unit of service to which costs are ascertained by
means of allocation, apportionment and absorption.
Cost object is any activity for which a separate measurement of costs is desired
COST ACCOUNTING
Cost accounting is the process of accounting for cost.
Cost accounting is generally concerned with internal reporting for
management requirement.
The development of cost accounting is of recent origin.
DEFINITION
The Chartered Institute of Management Accountants, U.K. (CIMA)
defines costing as the technique and process of ascertaining costs.
Costing is a tool to determine the cost of products or service.
Cost accounting analysis and classification of costs or expenditure.
Cost accountancy application of costing and cost accounting
principles.
FUNCTIONS OF COST ACCOUNTING
Cost Accounting is to serve management in the execution of policies
and in the comparison of actual and estimated results in order that the
value of each policy may be appraised and changed to meet the
future conditions.
To calculate cost per unit
To prepare a correct cost analysis
To ascertain the wastage in each process of manufacture
To provide necessary information for the determination of
selling price
FUNCTIONS OF COST ACCOUNTING
To compute product-wise profit
To serve the management in the valuation of W-I-P
To install and implement cost control systems
To advice management for future expansion
To establish an effective reporting system
To guide the management in the preparation and
implementation of incentive schemes based on productivity
and cost savings.
FINANCIAL ACCOUNTING
The functions of financial accounting are concerned with that of
bookkeeping, i.e. maintenance of records of costs, debtors, and
creditors, etc.
As per the company law requirements, the company has to maintain
the accounts for their adoption by the shareholders in the Annual
General Meeting.
LIMITATIONS OF FINANCIAL
ACCOUNTING
Financial accounting doesnt aims at continuous reporting of financial
data, which the cost accounting does
Financial accounts will not reveal the data by jobs, process, products,
etc.
It provides only historical data, and it would be too late for any
corrective action.
It does not provide data for adequate control over materials,
labour, and overheads.
In financial accounting, there are no systems to set predetermined
estimates, standards, or budgets.
FINANCIAL ACCOUNTING VS. COST
ACCOUNTING
Purpose
Forms of Accounts
Recording
Items of Costs
Analysis of Profits
Control
Periodicity
Nature of Transaction
Inventory Valuation
Figures
 COST ACCOUNTING AND MANAGEMENT
ACCOUNTING
To quote J. Batty, Management Accountancy is the term
used to describe the accounting methods, systems and
techniques, which coupled with special knowledge and
ability, assists management in its tasks of maximizing
profits or minimizing losses.
Management Accountancy is the blending together into a
coherent whole, financial accounting, cost accountancy
and all aspects of financial management.
Management Accounting is an extension of managerial
aspects, of cost accounting.
Thus, it is the accounting to assist the management in
planning and decision-making.
 ROLE OF MANAGEMENT ACCOUNTANT
A great variety of accounting information is available to managers.
The accountant chooses the information to be reported to a manager by:
Identifying the purpose for which the information is needed.
Determining the relevance of the information.
The accountant has to identify the specific purpose for which cost accounting
information is required by the manager.
Information is relevant if it
Affects the accomplishment of the objectives of the decision maker.
Will change as a result of the decisions or choice made by the deci- sion maker.
Historically, the Management Accountant was known as Controller since he/she was
in charge of all financial accounting and cost accounting functions.
Line managers are directly responsible for attaining this objective as efficiently as
possible.
When a departments primary task is to advise and serve other departments in the
organization, it is a staff department.
FUNCTIONS OF CONTROLLER AND
TREASURER
Controller Treasurer

Planning and Controlling Procurement of Long term

Finance

Reporting and Interpreting Investor

Evaluating and Consulting Short Term Financing

Tax Administration Banking

Government Reporting Credits and Collections

Protection of Assets Investments

Economic Appraisal Insurance

 OBJECTS OF COST ACCOUNTING
To determine the actual cost of each article, process, operation, service, department or
segment of activity.
To reveal and report inefficiencies in the form of material wastage, loss of time in material
buying, storing, and issuing.
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 machines and
ideal standard for their working.
To implement incentive wage plans for workers.
To reduce cost through budgetary control and standard costing.
To study trends at different volumes of output, and to determine production policies and
programs.
To ensure continuous check and adjustment of stores and materials with the help of
perpetual inventory.
To organize internal audit system, and interlocking of financial and cost accounts to verify
the accuracy of each other.
To furnish necessary data for the preparation of profit and loss account and balance sheet
at short intervals [e.g., monthly, quarterly, etc.] for each department or business as a whole.
 ADVANTAGES OF COST ACCOUNTING
Price Fixation
Control on Unprofitable Activities
Useful Information
Cost Control
Provides Valuable Data
Effective Check
Preparation of Budgets and Regulations of
production
Fixation of Responsibilities
Independent Check
Prevention of Manipulation, misappropriation, and
OBJECTIONS AGAINST COST ACCOUNTING

Expensive
Differences in Results
Unnecessary
Worthless
Inapplicability
 PRINCIPLES OF COSTING
Every concern must design its own costing system,
keeping in view its peculiar problems.
If financial books can afford the necessary
information, separate costing system is not needed.
Reasonable accuracy is enough, of course, this
depends upon the nature of industry.
As a rule, costing information should be collected as
and when the work proceeds.
 ESSENTIALS OF
COST ACCOUNTING SYSTEM
Simple and Easy
Should suit the organization
Co-ordination and co-operation among executives
Ensure proper accounting and allocation of
material
Cost accounts should be able to reconcile with
Financial accounts
It should be Economical
IMPORTANCE OF COSTING

To the Management
Planning
Organizing
Controlling
Budgeting
Decision-making
Pricing
Evaluation of operating efficiency
IMPORTANCE OF COSTING

To the Employees
Incentive Bonus
Higher earnings through time and
motion study
Overtime payments
Benefit of job evaluation
Continuous employment and job
security
 IMPORTANCE OF COSTING
To the creditors
Can access more information in comparison to
Financial accounts
To ascertain the solvency, profitability
To the government
More taxes through higher production
Useful in preparing import and export policy
To the society
Lower prices through cost reduction
Better quality of products and services