SEBI GRADE A 2020: COSTING: OVERVIEW OF COST & MANAGEMENT ACCOUNTING

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 SEBI GRADE A 2020: COSTING: OVERVIEW OF COST & MANAGEMENT ACCOUNTING
Table of Content
Table of Content ........................................................................................................... 2
Cost Accounting: ........................................................................................................... 3
Objectives of Cost Accounting: ..................................................................................................... 3
Importance of Cost Accounting: .................................................................................................... 3
Scope of Cost Accounting: ........................................................................................................... 4
Classification of Costs:................................................................................................................. 4
Management Accounting: ............................................................................................... 5
Features of Management Accounting: ............................................................................................ 5
Uses of Management Accounting: ................................................................................................. 5
Role of Management Accounting: .................................................................................................. 6

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 SEBI GRADE A 2020: COSTING: OVERVIEW OF COST & MANAGEMENT ACCOUNTING
Cost Accounting:
It is a form of accounting that aims to maximize profit by managing revenues and expenses. A measure in
monetary terms, it provides for the amount of resources required for the purpose of production of goods or
rendering of services. This type of data and report is used by managers to plan out the strategies around
the long-term profit and growth. In other words, it is the application of accounting and costing principles,
methods and techniques in the ascertainment of costs and the analysis of savings as compared with previous
experience or standards. The following are some of the basic principles and concepts of cost accounting:

1. Cost: It is defined as an expenditure (either actual or notional) incurred or attributable to a given

substance. It can also be defined as a resource that has or must be sacrificed in order to attain a
particular objective. For instance, to prepare a cup of tea, the amount to be incurred will be on elements
like material, labour, and other expenses. Hence, one can calculate the cost of production or cost of
service by ascertaining the resources used for the production or services
2. Costing: It is “the technique and process of ascertaining costs”. In other words, Costing refers to a
procedure involved in ascertaining the costs. Any business organization would like to ascertain the cost
and do this by following a scientific procedure. Hence, “Costing” is the steps which help the business to
find out the costs of products or services
3. Cost Accounting: This primarily deals with the collection and analysis of cost data for interpretation
and presentation for various problems of management.
4. Cost Accountancy: This can be 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 the presentation of information for the purpose of managerial decision making”.

Objectives of Cost Accounting:

The following are the main objectives of cost accounting:
1. It helps to analyze and classify all expenditures with reference to the cost of products and operations
2. To ascertain the cost of production on per unit, job, operations, process, department or service and
develop cost standard.
3. It helps in determining the selling price of the products or services, as it helps to ascertain the cost of
production on a scientific basis.
4. It enables management to make short-term decisions of various types, such as quotation of price to
special customers or during a slump, make or buy decision, assigning priorities to various products, etc.
5. Cost accounting helps in cost control and cost reduction.
6. It helps management identify any inefficiencies and the extent of various forms of waste, be it of
materials, time, and expense or in the use of machinery, equipment, and tools. These analyses can help
in taking remedial measures.
7. Provides data for periodical profit and loss accounts and balance sheets at various intervals, such as
weekly, monthly, quarterly, annually, or as per the wishes of the management during the financial year.
The data provided can be for whole business, departments or even individual products. It also helps to
explain the reasons for profit or loss revealed in total in the profit and loss account.
8. It provides actual cost data for comparison with the estimates and serves as a guide for future estimates
or quotations and to assist the management in their price-fixing policy.

Importance of Cost Accounting:

The importance of cost accounting tries to overcome the limitation of financial accounting as it can help
businesses to ascertain the cost of production and also avoid the possibility of waste at various stages of
the production cycle. Cost accounting is of importance not only to the management but also to creditors and
employees. The following are some of the advantages of cost accounting:

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 SEBI GRADE A 2020: COSTING: OVERVIEW OF COST & MANAGEMENT ACCOUNTING
1. Aid to management: Cost accounting helps management in the decision by providing them with
detailed costing information which enables them to maintain effective control over stores and inventory,
to increase the efficiency of the organization and to check wastage and losses. It also helps management
to fix the price of its products and services besides helping them make estimates for quoting for tenders.
Also, cost records provide costing data for comparisons which in turn helps the management in the
formulation of future lines of action
2. Aid to Creditors: Stakeholders such as investors, banks and other money lending institutions benefits
from an efficient system of costing as they can base their judgment about the profitability and future
prospects of the enterprise on the costing records
3. Aid to Employees: Employees look forward to an efficient cost system as they are benefited, through
continuous employment and higher remuneration by way of incentives, bonus plans, etc.
4. Importance to National Economy: An increase in production efficiency can lead to overall economic
development. Further cost control, elimination of wastages and inefficiencies led to the progress of the
industry and, in consequence of the nation as a whole.

Scope of Cost Accounting:

The following can be considered to be the scope of accounting:
1. Ascertainment of cost: This is one of the main functions of cost accounting and includes
2. the collection, analysis of expenses and measurement of production at different stages of manufacture.
The collection, analysis, and measurement require different methods of costing for different types of
products such as Historical costs, Standard costs, Process cost, Operation cost, etc. A cost can be
ascertained using the following two methods:
a. Post Costing, where the cost is ascertain based on actual information as recorded in financial
books
b. Continuous Costing, where the cost information is available as and when a particular activity or
a job is finished so that the entire cost of a particular job is available the moment it is completed
3. Cost control: Every business aims to control cost while increasing operating efficiency. Hence, they
analyze each item of cost in the light of the services or benefits obtained so that maximum utilization of
the money expended or it may be recovered. This can be done only by planning and using the standard
cost for each item and identifying deviations if any, so as to make remedial measures.
4. Proper matching of cost with revenue: In case of cost accounting, a manager may be required to
prepare daily, monthly or quarterly statements of cost and income data identified with the sale of that
period
5. Decision making: Cost accounting can help management in deciding between two or more alternatives.
For this, they can do a cost-benefit analysis, which can only be done through a good cost accounting
system.

Classification of Costs:
Costs can be classified on the following basis:

1. Nature of expense: Material, Labour, Expenses

2. Relation of Cost Centre traceability: Direct and Indirect
3. Functions/activities: Production; Administration, Research & Development and Selling and
Distribution
4. Behavior wise: Variable, Fixed, and Semi-variable
5. Management decision making: Marginal Cost, Differential Cost, Opportunity Cost, Replacement Cost,
Relevant Cost, Sunk Cost, Imputed Cost, Normal Cost, Abnormal cost, Avoidable Cost and Unavoidable
Cost

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 SEBI GRADE A 2020: COSTING: OVERVIEW OF COST & MANAGEMENT ACCOUNTING
6. Production Process: Batch Cost, Process Cost, Operation Cost, Operating Cost, Contract costs, Joint
Cost and By-product Cost
7. Time period: Historical Cost, Pre-determined Cost, Standard Cost, and Estimated Cost.
8. Relationship with accounting period: Capital and Revenue

Management Accounting:
The primary purpose of management accounting is to help management improve efficiency as it enables
management to determine the policy and formulate plans to achieve its desired objectives. Basically, it helps
the management in planning, controlling and analyzing the performance of the organization in order to
follow the path of continuous improvement. It borrows the principles and practices of financial accounting
and cost accounting in addition to other modern management techniques for the effective operation of a
company. Though there does exist some overlapping in various areas of cost and management accounting,
management accounting does have certain distinguishing features.

Features of Management Accounting:

The following are some of the features of management accounting:
1. It is derived from both financial accounting and cost accounting
2. It focuses on determining the policies and formulating plans in order to achieve management’s objectives
3. Makes corporate planning and strategy effective and meaningful
4. Concerned with short and long-range planning and uses techniques such as 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. It cannot be installed without proper cost accounting
7. The reports generated by the management accounting systems are a quite helpful form the management
point of view

Uses of Management Accounting:

Management Accounting Information provides information for purposes like Measurements, Control and
Decision Making, which in turn generates vital information for the management. The following are the use
of information for each of the purposes.

1. Measurements: It focuses on the measurement of full costs, i.e. the total cost required for producing
goods or rendering services. These costs can be divided into Direct (i.e. cost that can be directly
identifiable or traceable to the products or services offered) or Indirect (i.e. those costs that are not
traceable to the products or services). Besides this, it also measures the other costs required to run
activities such as conducting a research project or running a welfare scheme.
2. Control: The Management Accounting information provides information to the management that can be
used for “Control”. Further, it is designed in such a way that the information is generated for every
“Responsibility Centre” (or the business unit/division responsible for its operations and performance). It
also helps to prepare a budget for each of the responsibility center and then compare the budgeted cost
with the actual cost.
3. Decision Making: The information generated by the management accounting information is useful in
making several decisions during the normal course of business. Those decisions can be Make vs Buy,
Accepting or rejecting of an Export Order, Fixing the selling price, Capital Expenditure decision, Product
Mix Optimization, etc. These decisions cannot be made unless the management accounting generates
the required information.

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 SEBI GRADE A 2020: COSTING: OVERVIEW OF COST & MANAGEMENT ACCOUNTING

Role of Management Accounting:

Management Accounting has a different set of roles to be performed when compared with financial
accounting or cost accounting. The following are some of the roles that a management accounting can
perform:

1. To implement the strategy by translating them into actions. The strategic planning and implementation
may include the followings:
a. decisions regarding the design of products,
b. services or processes,
c. research and development,
d. production,
e. marketing,
f. distribution,
g. customer services.
2. To perform supply chain analysis and efficiently perform activities in order to reduce costs and maintain
the quality and easy availability of the products.
3. Help management in taking business decisions.
4. To measure the performance of the business by comparing the budgeted with actuals.

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