Amity School of Business

Amity School of Business

BBA, II SEMESTER
COST AND MANAGEMENT ACCOUNTING

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MEANING
Cost Accounting is accounting for costs.
Costs are resources sacrificed or foregone
to achieve a specific objective.
These are the benefits given up to acquire
goods and services
Accounting provides financial information
that measures and communicates effects
of transactions & events.

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DEFINITION
According to CIMA, London, Cost
Accountancy is- the application of costing
and cost accounting principles, methods
and techniques to the science, arts and
practice of cost control. It includes the
presentation of information derived
therefrom for the purpose of managerial
decision making.

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SCOPE
Cost accountancy consists of several areas-
COSTING
Costing is the technique and process of
ascertaining costs. Techniques consists of
principles and rules for determining the
costs for product and services. Its dynamic
& changes with the change of time.

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COST CONTROL
Cost accountancy is not only concerned with
i. the ascertainment of costs and
ii. fixing selling prices, but also
iii. furnishing information that enable the
management to control costs of operating
the business.
Cost control is exercised by techniques such
as standard costing, budgetary control and
quality control etc.
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COST REDUCTION
Reduction in the unit cost of product without
impairing their quality.
i. In current scenario only those business
will survive that can deliver quality product
and services, at the least cost.
ii. This needs constant research and
development in the area of product design,
production procedures etc.
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COST ACCOUNTING
COMPARED
Accounting can be broadly classified into
two categories-
1.Financial accounting
2.Management accounting

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Financial accounting is concerned with

recording, classifying and summarizing
financial transactions and preparing
statements relating to the business in
accordance with generally accepted
accounting concepts and conventions.
It is meant to serve all parties external to
the business such as creditors,
shareholders etc

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Management accounting is concerned with

accounting information which is useful for
the management.
It includes the methods and concepts
necessary for planning, controlling and
interpreting the performance of the
concern.

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Costing differs from financial accounting in

following respects:
i. Purpose
FA prepares P/L account & B/S for reporting
to outsiders whereas CA provides detailed
cost information to managers for planning
& control
ii. Scope
FA reveals profit & loss of a business as a
whole
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whereas CA measures the profitability of

each product, job, process, department and
operations.
iii.Analysis of costs
In FA no distinction is made between direct
and indirect costs, fixed and variable costs
and controllable and uncontrollable costs. In
CA such distinctions are made.

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iv. GAAP vs. flexibility

FA are prepared in accordance with
generally accepted accounting principles
(GAAP). CA is presented in a more
flexible manner.
v. Report frequency
FA is generally published annually whereas
CA supply qtrly, monthly or even weekly
& daily reports needed for planning &
control
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vi. Legal requirements

FA are kept according to the provisions of
Companies Act and IT Act.
Maintenance of cost accounts is not
compulsory except where cost
accounting record rules have been
framed for its preparation.

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Cost accounting differs from Management

accounting in following ways-
Historical vs. predetermined costs
Costs in CA is determined on the basis of
past data whereas in MA predicted or future
cost data is taken for decisions
Decision making vs. Control
MA aids management in its primary function
of decision making whereas CA focuses on
cost control as its objective
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Use of financial accounting

MA uses certain FA techniques like ratio
analysis, fund flow statements etc., whereas
CA do not use such techniques, but only
analyses costs.
Scope
MA is wider in scope as it employs statistics,
OR and computers. CA is much less
sophisticated & use of such techniques is
limited.
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COST CONCEPTS
Cost
Cost means the amount of expenditure
incurred on, or attributable to, a given thing
Cost object
Cost object can be anything for which a
separate measurement of cost is desired.
Eg: Product, Services, Project

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Cost unit
It refers to the unit with which expenditure
may be identified or conveniently allocated.
Eg: per unit of electricity, per 1000 bricks
made

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Cost centre
According to CIMA, a location, person or
item of equipment or group of these for
which costs may be ascertained and used
for the purpose of cost control. Such unit
may consists of a department or sub-
department or equipment or machinery etc.

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ELEMENTS OF COSTS
Material
The substance from which product is made,
is known as material. It is of two types-
Direct material- It comprises of integral part
of finished goods & can be assigned to
specific physical unit.
Indirect Material- It is used for purpose
ancillary to the business & cannot be
assigned to specific unit.
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Labour
Human efforts required to convert raw
material into finished goods. It is of two
types-
Direct labour- Eg; process labour, direct
wages, productive labour
Indirect labour- Eg; Wages of time keeper,
foremen, directors fees, salaries of
salesmen etc.
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Expenses
Direct & Indirect Expenses
Overheads
It includes costs of indirect material, indirect
labour & indirect expenses. Expences can
be classified into following categories:
a)Factory expenses- these are incurred in a
factory & are concerned with the running
of a factory.
Eg; Rent, Insurance of factory, power,
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b) Office & administrative Expenses

They pertain to the management and
administration of business.
Eg;- Office rent, telephone charges,
depreciation of building
c) Selling & distribution Expenses
It includes expenses incurred for marketing
a commodity & making it available to the
customers.
Eg;- Adv. expenses, warehousing charges 22
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CLASSIFICATION OF COSTS
Fixed, Variable & Semi Variable costs-
The cost which increases or decreases exactly
in the same proportion as the volume of output
produced, are variable costs.
The cost which remains constant irrespective
of change in output, are fixed costs.
The costs which neither vary proportionately
nor remain stationery are semi variable costs.
Eg;- Depreciation, repairs, supervision costs.
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Product & period costs

Costs which become part of the cost of the
product and are included in the inventory, are
Product costs. Eg; cost of raw material,
labour etc
Costs which are not associated with
production & are treated as the expense of
the period in which they are incurred, are
called Period costs. Eg: Depreciation, salaries
& commission etc
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Relevant & irrelevant costs

Relevant costs are those which would be
changed by the managerial decisions, while
irrelevant costs are those which would not
be affected by the decision.

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