COST AND MANAGEMENT

ACCOUNTING
Jeet R.Shah
M.Com , CFP
CM
EVOLUTION OF COST ACCOUNTING
15th Century Barter Exchange
1494 - Luca Pacioli, an Italian found out the double
entry system of accounting
The period 1880 AD- 1925 saw the development of
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The period 1880 AD- 1925 saw the development of
complex product designs and the emergence of multi
activity diversified corporations like Du Pont, General
Motors etc. It was during this period that scientific
management was developed which led the accountants
to convert physical standards into Cost Standards, the
latter being used for variance analysis and control
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Some Important Definitions
Cost
Cost can be defined as the expenditure
(actual or notional) incurred on or
attributable to a given thing.
In other words, cost is the amount of
resources used for something which
must be measured in terms of money.
Chai
Costing
According Wheldon,
Costing is classifying, recording, allocation and
appropriation of expenses for the
determination of cost of products or services
and for the presentation of suitably arranged
data for the purpose of control and guidance
of management. It includes the ascertainment
of every order, job, contract, process, service
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Chai
of every order, job, contract, process, service
units as may be appropriate. It deals with the
cost of production, selling and distribution.
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Cost Accounting
is defined as, the establishment of
budgets, standard costs and actual costs
of operations, processes, activities or
products and the analysis of variances,
profitability or the social use of funds.
Cost Accountancy
is defined as, the application of costing and cost
accounting principles, methods and techniques to
the science and art and practice of cost control
and the ascertainment of profitability as well as
presentation of information for the purpose of
managerial decision making.
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Objectives of Cost Accounting
1. To ascertain the cost of production on per unit basis, for example, cost per kg, cost
per meter, cost per liter, cost per ton etc.
2. Cost accounting helps in the determination of selling price. Cost accounting enables
to determine the cost of production on a scientific basis and it helps to fix the selling
price.
3. Cost accounting helps in cost control and cost reduction.
4. Ascertainment of division wise, activity wise and unit wise profitability becomes
possible through cost accounting.
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4. Ascertainment of division wise, activity wise and unit wise profitability becomes
possible through cost accounting.
5. Cost accounting also helps in locating wastages, inefficiencies and other loopholes in
the production processes/services offered.
6. Cost accounting helps in presentation of relevant data to the management which
helps in decision making. Decision making is one of the important functions of
Management and it requires presentation of relevant data. Cost accounting enables
presentation of relevant data in a systematic manner so that decision making
becomes possible.
7. Cost accounting also helps in estimation of costs for the future.
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Essentials of a good Costing system
A. Costing system adopted in any organization should be suitable to its
nature and size of the business and its information needs.
B. A costing system should be such that it is economical and the benefits
derived from the same should be more than the cost of operating of
the same.
C. Costing system should be simple to operate and understand.
Unnecessary complications should be avoided.
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C. Costing system should be simple to operate and understand.
Unnecessary complications should be avoided.
D. Costing system should ensure proper system of accounting for
material, labor and overheads and there should be proper
classification made at the time of recording of the transaction itself.
E. Before designing a costing system, need and objectives of the system
should be identified.
F. The costing system should ensure that the final aim of ascertaining of
cost as accurately possible should be achieved.
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Management Accounting
The scope of Management Accounting is broader than the scope of cost accounting.
In cost accounting, as we have seen, the primary emphasis is on cost and it deals with collection, analysis,
relevance, interpretation and presentation for various problems of management.
Management Accounting is an accounting system which will help the Management to improve its efficiency.
The main thrust of Management Accounting is towards determining policy and formulating plans to achieve
desired objectives of management.
The distinguishing features of Management Accounting are given below.
1. The Management Accounting data are derived from both, the financial accounting and cost accounting.
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1. The Management Accounting data are derived from both, the financial accounting and cost accounting.
2. The main thrust in management accounting is towards determining policy and formulating plans to achieve
desired objectives of management.
3. Management Accounting makes corporate planning and strategy effective and meaningful.
4. It is concerned with short and long range planning and uses highly sophisticated techniques like sensitivity
analysis, probability techniques, decision tree, ratio analysis etc for planning, control and evaluation.
5. It is futuristic in approach and predictive in nature.
6. Management Accounting system cannot be installed without proper cost accounting system.
7. Management Accounting systems generate various reports which are extremely useful from the Management
point of view.
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The central theme to focus on is this:
(1) business value results from good management decisions,
(2) decisions must occur across a spectrum of activities (planning, directing, and
controlling), and
(3) quality decision making can only consistently occur by reliance on information
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What is Strategy?
Strategy is the creation of a unique and valuable
position, involving a different set of activities.
The essence of strategy is choosing what not to
do. Michael Porter
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do. Michael Porter
Strategy can be viewed as building defenses
against the competitive forces or finding a position
in the industry where the forces are weakest.
Michael Porter
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What Creates a Successful Strategy?
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Strategic Positioning
Achieving Superior Performance
Strategic positioning
attempts to achieve
sustainable competitive
advantage by
preserving what is
distinctive about a
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distinctive about a
company.
It means performing
different activities from
rivals, or performing
similar activities in
different ways.
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It is imperative for
managers to understand
the nature of cost behavior
and how changes in
volume impact
profitability.
You will begin to think
about business models and
the ability (or inability) to
bring them to profitability
via increases in scale
Taxes etc To build a brand
requires considerable
investment with an
uncertain payback
Budgets Financial Plans
Operating
Budgets
A plan must provide definition of the anticipated revenues and expenses of an organization
and more.
These operating budgets can become fairly detailed, to the level of mapping specific inventory
purchases, staffing plans, and so forth. .
The budgets, oftentimes, delineate allowable levels of expenditures for various departments.
Capital budgets will also reveal the need for capital expenditures relating to new facilities and
equipment.
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Capital
Budgets
equipment.
These longer term expenditure decisions must be evaluated logically to determine whether an
investment can be justified and what rate and duration of payback is likely to occur.
Financial
Budgets
A company must assess financing needs, including an evaluation of potential cash shortages.
These tools enable companies to meet with lenders and demonstrate why and when additional
support may be needed.
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Directing
Costing
Job
Costing
Batch
Costing
Production Analysis
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Batch
Costing
Process
Costing
Activity
Based
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This costing method is used in firms which work on the basis of job work.
The main feature of some organizations is that they produce according to the requirements and specifications of the
consumers
Production is only on specific order and there is no pre demand production
The job cost sheet helps to compute the cost of the job in a phased manner and finally arrives the total cost of
production
Job Costing
This method of costing is used in those firms where production is made on continuous basis.
Each unit coming out is uniform in all respects and production is made prior to the demand, i.e. in anticipation of
demand.
One batch of production consists of the units produced from the time machinery is set to the time when it will be shut
down for maintenance .
The total cost incurred during this period will be divided by the number of units produced and unit cost will be
worked out.
Batch
Costing
Process 1 to Process 2 to Process 3 = FG
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Process 1 to Process 2 to Process 3 = FG
In process costing, cost per process is worked out and per unit cost
is worked out by dividing the total cost by the number of units
Process
Costing
Activity
Based
Costing
Achitectural firms that design homes
an allocation model can be used to attribute activities to jobs, enabling a reasonable cost assignment.
Such activity-based costing (ABC) systems can be used in many settings, but are particularly well suited to situations
where overhead is high, and/or a variety of products and services are produced.
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Costing Concepts or Theories-
Absorption concept
Under the absorption concept, a product or service would be
assigned its full cost, including amounts that are not easily identified
with a particular item.
Overhead items (sometimes called burden) include facilities
depreciation, utilities, maintenance, and many other similar shared
costs.
With absorption costing, this overhead is schematically allocated
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With absorption costing, this overhead is schematically allocated
among all units of output.
In other words, output absorbs the full cost of the productive process.
Absorption costing is required for external reporting purposes under
generally accepted accounting principles.
But, some managers are aware that sole reliance on absorption
costing numbers can lead to bad decisions.
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Costing Concepts or Theories-Direct
Costing
As a result, internal cost accounting processes in
some organizations focus on a direct costing
approach.
With direct costing, a unit of output will be assigned
only its direct cost of production (e.g., direct
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only its direct cost of production (e.g., direct
materials, direct labor, and overhead that occurs
with each unit produced).
You will study the differences between absorption
and direct costing, and consider how they influence
the management decision process
Jeet R.Shah
Directing
Costing
Job
Costing
Batch
Costing
Production Analysis
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Batch
Costing
Process
Costing
Activity
Based
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Production
As you would suspect, successfully directing an organization
requires prudent management of production.
Managerial accounting provides numerous tools for
managers to use in support of production and production
logistics (moving goods through the production cycle to a
customer).
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customer).
To generalize, production management is about running a
lean business model.
This means that costs must be minimized and efficiency
maximized, while seeking to achieve enhanced output and
quality standards.
ERP , B2B system , M2M systems
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Responsibility Considerations
Enabling and motivating employees to work at peak performance is an
important managerial role.
For this to occur, employees must perceive that their productive efficiency
and quality of output are fairly measured.
A good manager will understand and be able to explain to others how such
measures are determined.
Your study of managerial accounting will lead you through various related
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Your study of managerial accounting will lead you through various related
measurement topics. For instance, direct productive processes must be
supported by many service departments (maintenance, engineering,
accounting, cafeterias, etc.).
These service departments have nothing to sell to outsiders, but are
essential components of operation.
The costs of service departments must be recovered for a business to
survive. It is easy for a production manager to focus solely on the area
under direct control, and ignore the costs of support tasks.
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Responsibility Considerations
Yet, good management decisions require full consideration of the costs of support
services.
You will learn alternative techniques that managerial accountants use to allocate
responsibility for organizational costs.
A good manager will understand the need for such allocations, and be able to
explain and justify them to employees who may not be fully cognizant of why
profitability is more difficult to achieve than it would seem.
In addition, techniques must be utilized to capture the cost of quality -- or perhaps
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In addition, techniques must be utilized to capture the cost of quality -- or perhaps
better said, the cost of a lack of quality.
Finished goods that do not function as promised entail substantial warranty costs,
including rework, shipping (back and forth!), and scrap.
There is also an extreme long-run cost associated with a lack of customer
satisfaction.
A manager must be held accountable, but to do this requires the ability to monitor
costs incurred and deliverables produced by circumscribed areas of accountability
(centers of responsibility).
Jeet R.Shah
Directing
Costing
Job
Costing
Batch
Costing
Production Analysis
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Batch
Costing
Process
Costing
Activity
Based
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