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Cost and Management Accounting (Com704)

Introduction:
Chapter# 1
Cost Accounting :
Cost Accounting provides information for Management accounting and
financial accounting.
Cost accounting is generally considered applicable only to
manufacturing operation. This opinion is not valid in todays economy.
Every type of activity regardless of size should consider the use of Cost
accounting concepts and techniques to operate efficiently.

Functions of Cost Accounting :

1)
2)
3)
4)

Establishing costing methods and procedures.

Creation and execution of plans and budgets.
Valuation of inventories as per law and controlling physical quantities.
Determination of company costs and profits for Monthly/Quarterly and
Annual basis.
5) Providing information to management for decision making regarding
addition/deletion of products.
6) This department issue significant control reports and other decision
making data to management for improving and controlling costs and
operation.

Sources of Cost Accounting Data:

1)
2)
3)
4)
5)
6)
7)

Reports of time studies, records of workers

Bills of materials, lists of operating and planning schedules.
Capacity studies and efficiency reports.
Power ratings and consumption.
Yield reports.
Production reports.
Material reconciliation.

Management Accounting:
It measures, analyses and reports financial and non financial
information that helps management make decisions to fulfill the goals
of an organization.
It helps to choose, communicate and implement strategy.
It helps in product design, production and marketing decisions and to
evaluate performance.

Financial Accounting:
It focuses on reporting to external parties such as investors,
government agencies, banks and suppliers.
It measures and records business transactions and provides financial
statements that are based on Generally Accepted Accounting Principles
(GAAP).
It provides financial statements according to International Accounting
Standards (IAS).
It based on historical financial data.

Difference
Accounting;

Management

Management
Accounting
of Help managers make
decisions
to
fulfill
organization goals

Purpose
information

Primary users
Focus
emphasis

between

Managers
organizations

and Future oriented

and

Financial

Financial Accounting

Communicate
organizations financial
position to investors,
banks, regulators, other
outside agencies
of Investors,
banks,
regulators, suppliers
Past oriented

Rules
of Internal measures and Financial
reporting
measurement
reports do not have to according to GAAP/IAS
and reporting
follow GAAP
Time span

Time frame according Issuance

of
reports
to management wish
with-in stipulated times

ORGANOGRAM

Board of
Directors

Managing
Director

DMD
Operations
SGM

GM

Islamab

GM Audit

CIO

SGM
Admin

GM IT
GM
Faisalabad

GM Corr

GM
Admin
GM
Proc

GM Multan

GM Met

GM Tel

GM QA

SGM
HR

SGM CS

GM Lahore

GM Comp

SGM
Planning

GM Acct

GM HR

GM Fin

GM
Train

GM Bill

HR
Committe
e

SGM
Distributio
n

GM
Operation
s

CFO

Committee

Finance
Committee

DMD
Services

SGM
Transmis
sion

Projects

Audit

GM
Corp.Sal
e
GM
Ret.Sale

Financial Statements
Chapter# 2
Financial Statements in the Annual Report
What is Annual Report: An annual report is a comprehensive
report on a company's activities throughout the preceding year. Annual
reports are intended to give shareholders and other interested people
information about the company's activities and financial performance.
Annual report consists of Balance Sheet, Income Statement, Cash Flow
Statement and Statement of Changes in Equity.
Balance Sheet: Balance sheet is a systematic exhibit based upon the
general ledger account balances at the end of accounting period after
adjustment and closing. It is a statement of Financial position and
based on historical data.
Balance Sheet Format :
ABC Manufacturing Company
Balance Sheet
As on June 30, 2010

Assets

Current Assets :
Cash -----------------------------------------------------------------Rs.
2,320,000
Marketable
securities
-------------------------------------------820,000
Accounts receivable ----------------------------------------------2661,000
Inventories --------------------------------------------------------3,231,800
Prepared insurance ----------------------------------------------220,000
Total current assets ---------------------------------------------9,252,800
Fixed Assets :
Land -------------------------------------------Buildings -------------------- 3,406,100
Machinery Equipment----- 12,529,000

289,000
15,935,100

Less accumulated depreciation ------8,118,000

7,817,100
Total
Fixed
assets-----------------------------------------------------------8,106,100
Total Assets -----------------------------------------------------------------17,358,900

Liabilities
Current Liabilities :
Accounts payable----------------------------------------------------------------------------- Rs.
990,800
Accrues payroll -----------------------------------------------------------------------------1,045,000
Estimated Income taxes ------------------------------------------------------------------190,700
Due interest on long-term debt --------------------------------------------------------200,000
Total current liabilities --------------------------------------------------------------------2,426,500
Long term debt -----------------------------------------------------------------------------2,677,500
Total liabilities ------------------------------------------------------------------------------5,104,000

Stockholders Equity
Common stock ------------------------------------------------------- 4,258,000
Retained earnings --------------------------------------------------12,254,900

7,996,900

Total liabilities and stockholders equity --------------------------------------17,358,900

==================================================
===================================

ABC Manufacturing Company

Income Statement

For the Year Ended June 30, 2010

Sales (4,500,000 units @ Rs. 5.50 per unit) ----------------------------24,750,000
Less : Cost of goods sold ( schedule) --------------------------------------

21,285,000

Gross profit ----------------------------------------------------------------------

3,465,000

Less : Commercial expenses :

Marketing expenses -------------------------------

580,000

Administrative expenses ---------------------------

533,750

1,113,750
Income from operations --------------------------------------------------------------------2,351,250

Cost of Goods Sold Statement

For Year Ended June 30, 2010
Direct materials :
Materials inventory, Jul 01, 2009
-------------------------1,572,400
Purchases (net) ---------------------------------------------------8,378,000

Rs.

Material available for use -------------------------------------------9,950,400

Less : Materials inventory, June 30, 2010 ------------------------1,270,600
Direct material consumed
----------------------------------------------------------------------------

8,679,800

1) Direct labor
---------------------------------------------------------------------------------------------7,346,400
2) Factory overhead :
Indirect labor ------------------------------------------------- 1,329,300
Salaries --------------------------------------------------------Payroll taxes --------------------------------------------------

972,000
489,000

Power ----------------------------------------------------------

112,000

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Heat /Light ---------------------------------------------------Factory supplies --------------------------------------------Depreciation-Factory building, machinery ---------Repair maintenance --------------------------------------Patent amortization --------------------------------------Tools dies used --------------------------------------------Insurance on building and machinery ----------------

113,500
50,000
471,300
145,800
33,200
178,600
21,200

Total Factory overhead -----------------------------------------3,915,900

Total manufacturing cost
---------------------------------------------------------------------

19,942,100

Add : Work in process inventory, July 01, 2009 --------------------------------------------------2,338,000

22,280,100
Less : Work in process inventory, June 30, 2010 ------------------------------------------------1,303,200
Cost of goods manufactured --------------------------------20,976,900
Add : Finished goods inventory, July 01, 2009 ---------------------------------------------------966,100
Cost of goods available for sale ----------------------------21,943,000
Less : Finished goods inventory, June 30, 2010 -------------------------------------------------658,000
Cost of goods sold ---------------------------------------------21,285,000

Costs: Concepts, Uses and Classifications

Chapter # 3

Cost:
Cost is forgoing, measured in monetary terms, incurred or
potentially to be incurred to achieve objective
Cost is defined as an exchange price, a foregoing, a sacrifice made
to secure benefit.

Expense:
An expired portion of cost is called expense.
Example: Plant cost charged to annual depreciation is called
depreciation expense.

Uses of Cost Data:

1)
2)
3)
4)
5)

Planning profit by means of budgets.

Controlling costs via responsibility accounting
Measuring annual or periodic profit including inventory costing
Assisting in establishing selling prices and pricing policy.
Furnishing relevant cost data for analytical process for decision
making.

Classification of Costs
Natural Classification:
Manufacturing Expenses: It is often named as production
cost/factory cost.
This is sum of these costs;
1) Direct material
2) Direct labor
3) Factory overhead

Commercial Expenses:
1) Marketing expenses
2) Administrative expenses

Classification with respect to Accounting Period:

1) Capital expenditures

2) Revenue expenditures

Classification with respect to volume/activity:

1) Direct material
2) Direct labor

Characteristics of Variable Expenses:

1) Variability of total amount in direct proportion to volume.
2) Constant cost per unit in the face of changing volume within
a relevant range.
3) Easy and reasonably accurate assignments to operating
departments.
4) Control of their incurrence and consumption by the
responsible department head.
5) Examples : Direct material, direct labor, Supplies, fuel power,
small tools

Characteristics of Fixed Expenses:

1) Fixed amount within a relevant output range.
2) Decrease of fixed cost per unit with increased output.
3) Assignment to department often made by managerial
decisions or cost allocation methods.
4) Control for incurrence resting in most cases executive
management rather than operating supervisors.
5) Examples: Salaries of permanent staf, depreciation,
property tax, rent, patent amortization.

Semi Variable Expenses:

1) Supervision

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2) Inspection
3) Payroll department services
4) Factory office services
5) Material and inventory services
6) Cost department services

Costs in their Relation to Product:

1) Direct Material
2) Direct Labor
3) Factory Overhead

Prime Cost: Direct material + Direct labor

Conversion Cost: Direct labor + FOH

Sunk Cost: A cost that has been incurred and cannot be reversed.
Example:

1) A worn-out piece of equipment bought several years ago is a

sunk cost because the cost of buying it cannot be reversed.
2) Lets say you rent a movie and after half an hour decide it is
unbearable to watchits not even good enough that you
can make fun of it. Most of us would watch the rest of the
movie since we paid for it, but the truth is, the price of rental
is a sunk cost
3) There are a couple rare times that Ive ordered food so bad I
wanted to stop after a few bites. And I should have the cost
of the meal is a sunk cost. I can either sufer the rest of the
meal by continuing to eat it, or I could order something else
and enjoy it

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Out of Pocket Cost : An expense incurred and paid for by an

individual for personal use, or relating to one's employment or
business. This can also relate to ongoing costs of operating a fixed
asset, such as a car or a home.
Examples :
1) Common examples of out-of-pocket expenses include
gasoline for a car, taking a business client to lunch and
certain medical payments such as prescription costs
Opportunity Cost : The cost of an alternative that must be
forgone in order to pursue a certain action. Put another way, the
benefits you could have received by taking an alternative action
Examples :
1) The diference in return between a chosen investment and
one that is necessarily passed up. Say you invest in a stock
and it returns a paltry 2% over the year. In placing your
money in the stock, you gave up the opportunity of another
investment - say, a risk-free government bond yielding 6%.
In this situation, your opportunity costs are 4% (6% - 2%).
2) The opportunity cost of going to college is the money you
would have earned if you worked instead. On the one hand,
you lose four years of salary while getting your degree; on
the other hand, you hope to earn more during your career,
thanks to your education, to ofset the lost wages.
3) Here's another example: if a gardener decides to grow
carrots, his or her opportunity cost is the alternative crop
that might have been grown instead (potatoes, tomatoes,
pumpkins, etc.).
Imputed Cost : Imputed costs are hypothetical costs
representing cost or value of a resource measured by its use
value. Imputed costs do not involve actual cost outlay, they are
not recorded in books, and they are not considered in a
companys regular cost and profit calculation.

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Example: Interest on invested capital, rental value of company

owned properties, salaries of owner operators of sole
proprietorship.

Sectors of Economy
1) Manufacturing Sector : Such companies purchase
materials and components and convert them into various
finished goods.
Examples : Automobiles companies, Textiles, Food
processing.
2) Merchandising Sector : Such companies purchase and sell
tangible products without changing their basic form.
Examples : Book stores, Departmental stores, Wholesaling.
3) Service Sector : Such companies provide services
Examples : Law firms, Accounting firms, Audits, Banks,
Insurance.

Types of Inventories
1) Direct material inventory
2) Work in process inventory
3) Finished goods inventory