MA 2

Cost and Management

Accounting (CMA)

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Text Books
Management Accounting by Paresh Shah
(PS)
◦ Oxford University Press, 2009 Edition
Cost Accounting by Charles T. Hongren,
S M Datar, George Foster, Madhav Rajan,
Christopher Ittner (CS)
◦ Pearson Education, 13th Edition

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Other Books
Cost Management: Strategies for
Business Decisions by Hilton, Maher,
Selto (TMH)
Costing for Management by S.K.
Bhattacharya and John Deardean (Vikas)
Management Accounting by Khan and
Jain
Cost and Management Accounting by
Ravi Kishore (Taxmann)

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Cost and Management
Accounting Overview

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Introduction
Business Manager has to answer
following questions
◦ What is the maximum profit that a business
can draw?
◦ Has the profit margin increased or reduced as
compared to previous years?
◦ Which product line is making more profit?
◦ Has too much capital been blocked in raw
materials?

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Cost Accounting
Is the process of accounting for cost
◦ Begins with recording of income &
expenditure
◦ Ends with preparation of statistical data
◦ Primarily concerned with cost determination
of product, service, process or operations

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Cost Accounting
Is the process of accounting for cost
◦ Helps the management
 to have a clear indication of their economic
performance
 direction in which they must move in order to
improve economic efficiencies
 To solve complex mgmt problems like
determination of most profitable mix, make or buy
decisions, replacement of equipments, introduction
of new products, discontinuance of non-profitable
products

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Cost Accounting
Generally concerned with internal
reporting for mgmt requirement
Development of cost accounting is of
recent origin due to
◦ Heavy industrialisation
◦ Overall cut throat competition
◦ Bulky and time consuming traditional acctg
system lacks efficiency to solve complicated
cost-related problems

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Definitions
Costing
◦ A tool to determine the cost of products or
services or operations
Cost Accounting
◦ Process of classifying and analysing the costs
(CIMA, The Chartered Institute of Mgmt Accounts, UK)
◦ Branch of general accounting and covers
application or accounting principles relating to
recording, classifying and analysis of cost
within the organisation (Water Scott)
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Definitions
Cost Accountancy
◦ Application of costing and cost accounting
principles, methods and techniques to the
science, art and practice of cost control and
the ascertainment of information derived for
managerial decision making (CIMA)

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Functions of Cost Accounting
To calculate the cost per unit of the
various products manufactured by the
firm
To prepare a correct cost analysis of both
process or operations, and by the different
elements of cost
To ascertain wastage in each process of
manufacture and to prepare reports which
can assist wastage control
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Functions of Cost Accounting
To provide necessary information for the
determination selling prices
To compute product-wise profit, and
advise the management for the
enhancement of profit
To serve the management in the valuation
of goods-in-process and finished goods,
so that the minimum capital is blocked up
in the stocks
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Functions of Cost Accounting
To install and implement cost control
systems (budgetary control or standard
cost system) for the control of material,
labour, and overhead expenses
To advise the management for the
formulation of future expansion policies
and proposed capital outlays
To establish an effective reporting system

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Functions of Cost Accounting
To guide the mgmt in the preparation and
implementation of incentive schemes
based on productivity and cost savings
To advise the management on the
profitability of present or new lines of
products, the comparative advantages and
disadvantages of different types or
production methods, the replacement of
manual operations by automation

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Additional Functions of Cost
Accounting
To supervise punched card accounting or
data processing
To organise internal audit system so that
effective working of the accounting
control and production control methods
can be introduced from time to time and
well be ensured

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Additional Functions of Cost
Accounting
To coordinate with the industrial
engineers for the introduction and
implementation of methods suggested for
improvement and or redundancy of
programes and data
To provide the Govt or other public
bodies with the specialised service of cost
audit

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 Financial Actg v/s Cost Actg
Point of difference Financial Accounting Cost Accounting
Provides info to guide the
Provides info about
management for proper
organisation in a general
Purpose planning, operation,
way, ie. Profit, Assets,
coordination, control and
Liabilities, Owners’ Equity
decision-making
Kept as per requirement
P&L A/cs and B/S are kept of management.
for the requirement of Recently, the Co Act has
Forms of Accounts
Companies Act and Income made it obligatory to keep
Tax Act costing records in some
mfg companies

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 Financial Acctg v/s Cost Acctg
Point of difference Financial Accounting Cost Accounting

Recording in subjective manner In objective manner

Items of costs are

analysed, classified,
Items of costs are
Items of Costs apportioned, and
expressed in totals
allocated in order to
calculate the cost per unit
It is only a part of financial
accounts. It shows the
result of operation,
These reveal the profits of
Analysis of Profit process, job or product so
the whole business
that the unprofitable lines
of businesses can be
eliminated
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 Financial Acctg v/s Cost Acctg
Point of difference Financial Accounting Cost Accounting
It provides a detailed
Emphasis on recording
system of cost control
Control only. No importance to
with the help of standards
control aspect
and budgets
It is a continuous system
of accounting. It submits
These are prepared at the the cost reports to the
Periodicity
end of accounting year management – weekly or
monthly or as and when
desired

Valued at cost or market

Inventory Valuation Valued at cost
price whichever is less

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 Financial Acctg v/s Cost Acctg
Point of difference Financial Accounting Cost Accounting
a) Relate to commercial a) Relate to
transactions of the manufacturing
Nature of
business activities
Transaction
b) Concerned with b) Concerned with
transactions related to transactions related to
third parties internal & third parties

Cost accounts deal partly

Figures Mainly deal with actual data with actual figures and
partly with estimates

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Management Accounting
Extension of managerial aspects of cost
accounting
Accounting to assist the mgmt in planning
and decision making
Employs various techniques like standard
costing, budgetary control, marginal
costing, uniform costing with inter-firm
comparison, ratio accounting, capital
budgeting decisions, internal audit
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 Cost Acctg v/s Mgmt Acctg
Cost Accounting Management Accounting

AAnalyses costs to control AAssists the management in

maximising efficiency planning, decision-making and
control

It uses the principles and

It uses the principles and practices practices of cost accounting and
of cost accounting financial accounting

It provides internal reporting to

It provides internal reporting to
managers for use in decision
managers for use in planning and
making before formulating major
controlling routine operations
plans and policies

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 Cost Acctg v/s Mgmt Acctg
Cost Accounting Management Accounting

TThe management accountant

CCost Accountant reports to the mgmt about
suggests how to improve
the variances from budgets or standards
upon the operating results
and presents a comparative data of
by suggesting ways for cost
various periods
control and cost reduction

Management Accountant
CCost Accountant works out the year’s
works out future operating
operating results
statements

It is the complement of management It is an extension of managerial

accounting aspects of cost accounting
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Role of Management Accountant
The Accountant chooses the information
to be reported to a manager by
◦ Identifying the specific purpose for which
information is needed
◦ Determining the relevance of the information.
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 decision maker

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Role of Management Accountant
‘Controller’ or ‘Chief Management
Accountant’ title is applied to various
accounting positions
In some organisations, they are just book
keepers and in others they are executives
who help top mgmt in planning and
controlling
Many people confuse ‘Controller’ and
‘Treasurer’, but they are different terms
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 Cost Acctg v/s Mgmt Acctg
Controller Treasurer

PPlanning and Control PProcurement of long-term finance

RReporting and interpreting Investor

EEvaluating and Consulting Short-term financing

Tax Administration Banking

Government Reporting Credits and Collections

Protection of assets Investments

Economic Appraisal Insurance

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Objects of Cost Accounting
Cost Finding
◦ To determine the actual cost of each article,
process, operation, service, department,
segment of activity
Cost reduction
◦ To reveal and report efficiencies in the form of
material wastage, loss of time in material
buying, storing and issuing

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Objects of Cost Accounting
Cost Saving
◦ 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

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Objects of Cost Accounting
Cost Control
◦ To reduce cost thro’ budgetary control and
standard costing
◦ To ensure continuous check and adjustment of
stores and materials with help of perpetual
inventory

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Objects of Cost Accounting
Managerial Decision, Policy Making
◦ To study trends at different volumes of output,
and to determine production policies and
programs
◦ To implement incentive wage plans for
workers

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Objects of Cost Accounting
Managerial Decision, Policy Making
◦ To organise internal audit system, and
interlocking of financial and cost accounts to
verify accuracy of each other
◦ To furnish necessary data for the preparation
of profit and loss account and balance sheet at
short intervals (eg. Monthly, quarterly, etc.)
for each department or business as a whole

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Advantages of Cost Accounting
Price Fixation
Control on unprofitable activities
Managerial Decision, Policy Making
Useful Information
Cost Control
Provides valuable data
Effective check

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Advantages of Cost Accounting
Preparation of budgets and regulations of
production
Fixation of responsibilities
Independent Check
Prevention of manipulation,
misappropriation, and frauds

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Objections against Cost Acctg
Expensive
Differences in results
Unnecessary
Worthless
Inapplicability

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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
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Principles of Costing
Costing information should be collected
as and when work proceeds
A proper unit of cost should be
determined

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Essentials of Cost Acctg System
Should be simple and easy
Arrangement of Costing system should be
adopted to suit the general organisation of the
factory
There should be coordination and cooperation
among executives of various departments
It should ensure proper accounting and
allocation of material cost, labour cost, and
overheads

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Essentials of Cost Acctg System
Cost Accounts should be capable of
reconciling with financial accounts, or
else, integral accounting system is to be
followed
Expenses of costing system should be
commensurate with the results
(economical)

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 Importance of costing
Not only assists management in various
ways but also beneficial to employees,
creditors, Government, public enterprises
and the society
To whom Nature of Benefit

PPlanning, Organising, Controlling,

MManagement Budgeting, Decision-making,
Pricing, Evaluation

Incentive bonus, Higher earnings

EEmployees thro’ time and motion study, Right
man in right job thro’ job evaluation

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 Importance of costing
To whom Nature of Benefit

SSupport to access more information as

CCreditors
compared to financial accounts

More taxes thro’ higher production, Useful in

the import and export policy and preparation
GGovernment
of national plans for economic development,
Policy of price differentials,

Lower prices thro’ cost reduction measures.

SSociety
Better quality of products and services

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