COST & MANAGEMENT ACCOUNTING (CMA)

COST & MANAGEMENT ACCOUNTING:

COST TERMS:
COST is the expenditure incurred in the production of goods or services.
It includes both monetary and non-monetary resources (Time and Labour)

COST OBJECT can be a Product (book), a Service (airline), a Project,

a Customer, a Brand category etc.

COST OBJECTS are used for valuing their profitability for allocation of
resources
COST & MANAGEMENT ACCOUNTING:
COST OBJECT:
COST & MANAGEMENT ACCOUNTING:
COST TERMS:
COST UNITS is a unit of PRODUCT, SERVICE or TIME (or combination) to which
costs can be ascertained or expressed.
COST UNITS are used to quantifying & allocating costs.
COST UNITS are for determining the COST OF PRODUCING specific goods
or services and assessing profitability. Example Power - Kilo Watt hour (kWh).

COST DRIVERS: are the factors or variables which effect LEVEL OF COST.
Example Number of purchase orders (Cost Objects).
COST & MANAGEMENT ACCOUNTING:
KEY TERMS RELATED TO COSTS:
1. Direct Costs: Traceable Expenses (Specific Product, Project, or Department)
Example: Raw Materials, Labour, and Manufacturing supplies.

2. Indirect Costs: Not directly Traceable Expenses ( Generalized for overall Operations)
Example: Rent, Consumables, and Administrative Office Expenses.

3. Variable Costs: Costs that Increases or decreases with the Activity levels (Outputs).
These costs remain CONSTANT ON PER UNIT BASIS but FLUCTUATE IN TOTALITY.
Example: Cost of Raw Materials increases as production volume rises.
COST & MANAGEMENT ACCOUNTING:
KEY TERMS RELATED TO COSTS:
4. Fixed Costs: Costs that remain CONSTANT WITHIN A CERTAIN RANGE of production or
activity. These cost FLUCTUATE ON PER UNIT basis but remains CONSTANT IN TOTALITY
up to a certain level.
Example: Factory Rent does not change with production volume.

5. Semi-Variable Costs: Costs with variable and fixed components.

Example: Salary Fixed base pay and a variable commission.
COST & MANAGEMENT ACCOUNTING:
KEY TERMS RELATED TO COSTS:
6. Marginal Costs: Additional cost of producing one more unit of a product or service.
Marginal cost is the change in total production cost on account of producing 1 more unit
MC = Change in Cost / Change in Quantity

Marginal Costing is the INCREASE or DECREASE in the overall Cost of Production due to
changes in the quantity of output. (COST-VOLUME-PROFIT Analysis)
COST & MANAGEMENT ACCOUNTING:
KEY TERMS RELATED TO COSTS:
7. Total Costs: TOTAL of all costs (Variable and Fixed costs)

8. Opportunity Costs: It is the cost of benefits or profits foregone. Opportunity cost

is the value of the option not taken in a decision.

9. Period Costs: These costs are expenses incurred during a specific accounting
period, such as marketing and administrative expenses.
COST & MANAGEMENT ACCOUNTING:
KEY TERMS RELATED TO COSTS:
10. Product Costs: All Direct Costs (Direct Materials, Direct Labour & Manufacturing.

11. Avoidable Costs:

Example Closing a production line saves the building cost.

12. Committed Costs : Investments

Example Machine purchased.
COST & MANAGEMENT ACCOUNTING:
KEY TERMS RELATED TO COSTS:
13. Conversion Costs: Costs for converting Raw materials into Finished – Factory Rent
Conversion costs = Direct labour + Manufacturing overhead
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost by NATURE or ELEMENT
B. Classification of Cost by FUNCTION
C. Classification of Cost by BEHAVIOUR
D. Classification of Cost for MANAGERIAL DECISION MAKING
E. Classification of Cost by CONTROLLABILITY
F. Classification of Cost by NORMALITY
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost by NATURE or ELEMENT
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost by FUNCTION
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost by BEHAVIOUR
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost by BEHAVIOUR
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost by CONTROLLABILITY
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost by NORMALITY
COST & MANAGEMENT ACCOUNTING:
CHALLENGES IN COST ALLOCATION….?
COST & MANAGEMENT ACCOUNTING:
CHALLENGES IN COST ALLOCATION
1. Overhead Allocation:
How to allocate indirect costs (overheads) to different products or
departments.

2. Cost Heterogeneity:
Cost that vary significantly within an overhead category.
Example: Office rent supporting support multiple departments.
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
How costs changes with changes in the level of activity or production?
Cost behavior is important for Financial Management Decisions.

VARIABLE COSTS
FIXED COSTS
Variable costs are expenses that increases or decreases in direct
proportion to the level of production or activity within a business. These
costs fluctuate as the volume of output or sales changes (Linear relation)
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
VARIABLE COSTS

VARIABLE COSTS Increases or Decreases in direct proportion to the

level of production or activity. These costs fluctuate as the volume of
output or sales changes (Linear relation).
Examples: Cost of Raw Materials, Direct Labour and Logistics Costs based on the
number of units shipped.
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
TOTAL VARIABLE COST:
Variable Cost per Unit x Number of units produced or sold.

VARIABLE COST PER UNIT:

Variable Cost per Unit remains constant but VARIES IN TOTAL
with production or sales volume.
DECISION-MAKING SIGNIFICANCE: Variable costs are essential in
determining BREAK-EVEN POINTS, PRICING STRATEGIES, and PROFITABILITY
of particular products or services
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
FIXED COST:

FIXED COSTS:
Fixed costs remain constant within a certain range of production or activity
levels. These costs DO NOT CHANGE WITH SHORT-TERM FLUCTUATIONS in
production or sales volume.
Examples: Insurance premiums, Depreciation of assets etc.
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
FIXED COST:
TOTAL FIXED COST: It remains the same regardless of changes in production
or sales volume.
FIXED COST PER UNIT:
Total Fixed Cost / Number of units produced or sold.
Fixed Cost per unit decreases with increase in production (Output)
DECISION-MAKING SIGNIFICANCE: Fixed costs are crucial in determining the
BREAK-EVEN POINT. Fixed costs after BEP contribute to profit.
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
Units Produced = 10,000
Selling Price per unit =Rs.5
Total Cost =Rs.35,000
PROFIT =Rs.????
Management wants to OPTIMIZE Production
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
Units Produced = 10,000
Selling Price per unit =Rs.5
Total Cost =Rs.35,000
Fixed Operational Cost per unit =Rs.20,000
Variable Cost per unit =Rs.15,000 = 15,000/10,000 = Rs.1.5
PROFIT =Rs.
Management wants to reduce the Total Cost.
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
SALES = 10,000 @ Rs.5 50,000
Less Variable Cost @Rs. 1.5 15,000
CONTRIBUTION 35,000
Less Fixed Operational Cost 20,000
PROFIT 15,000
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
SALES = 20,000 @ Rs.5 100,000
Less Variable Cost @ Rs.1.5 for 20,000 units 30,000
CONTRIBUTION 70,000
Less Fixed Operational Cost 20,000
PROFIT 50,000

For 10,000 units profit was 15,000

For 20,000 units …..profit should be 30,000
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
SALES = 20,000 @ Rs.5 100,000
Less Variable Cost @ Rs.1.5 30,000
CONTRIBUTION 70,000
Less Fixed Operational Cost 20,000
PROFIT 50,000

For 10,000 units profit was 15,000

For 20,000 units …..profit should be 30,000 ???????
COST & MANAGEMENT ACCOUNTING:
COST BEHAVIOR:
COST STRUCTURE when 10,000 units are produced and sold
Fixed Cost = Rs.20,000
Fixed Cost per unit = Rs.20,000/10,000
Fixed Cost per unit = Rs.2

COST STRUCTURE when 20,000 units are produced and sold

Fixed Cost = Rs.20,000
Fixed Cost per unit = Rs.20,000/20,000
Fixed Cost per unit = Rs.1
COST & MANAGEMENT ACCOUNTING:
Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
Classification of Cost for MANAGERIAL DECISION MAKING
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost for MANAGERIAL DECISION MAKING
1. PRE-DETERMINED COST Insurance Premium, Rent, EMI etc.
2. STANDARD COST Expected Direct Material and Direct Labour Cost
3. MARGINAL COST
4. ESTIMATED COST Cost of Equity, Budget for a Project
5. DIFFERENTIAL COST Comparing Costs and benefits of two options
6. IMPUTED COST Hypothetical Cost Not involving a cash outlay.
7. CAPITALIZED COST Additional expenses associated with Assets
8. PRODUCT COST Material, Labour and Overheads
9. OPPORTUNITY COST Value of the next-highest-valued alternative
COST & MANAGEMENT ACCOUNTING:
CLASSIFICATION OF COSTS:
A. Classification of Cost for MANAGERIAL DECISION MAKING
1. SHUT DOWN COST Cost incurred when Operations are temporarily shut down
2. SUNK COST Historical or Retrospective Cost
3. ABSOLUTE COST Total Cost of Product or Service
4. DISCRETIONARY COST Costs not having Cause n Effect relationship
5. FIXED COST
6. PERIOD COST Cost charged to time period
7. IMPLICIT COST Imputed Cost
8. EXPLICIT COST Immediate payment of cash
COST & MANAGEMENT ACCOUNTING:
COST UNITS:
COST & MANAGEMENT ACCOUNTING:
RESPONSIBILITY CENTERS:
COST & MANAGEMENT ACCOUNTING:
METHODS OF COSTING:
COST & MANAGEMENT ACCOUNTING:
METHODS OF COSTING:
COST & MANAGEMENT ACCOUNTING:
METHODS OF COSTING:
COST & MANAGEMENT ACCOUNTING:
SUMMARY:
COST & MANAGEMENT ACCOUNTING:
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COST & MANAGEMENT ACCOUNTING:
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COST & MANAGEMENT ACCOUNTING:
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COST & MANAGEMENT ACCOUNTING:
SUMMARY:
Management Accounting and Informed Decision Making process:
1. Cost Analysis
2. Profit Margin Analysis
3. Break-Even Analysis
4. Pricing Decisions
5. Discounts and Promotional Strategies
6. Contribution Margin Analysis
7. Sensitivity Analysis
COST & MANAGEMENT ACCOUNTING:
REVIEW QUESTIONS:
1. Differentiate between COST ACCOUNTING and MANGEMENT ACCOUNTING?
2. Explain how Management Accounting helps in making Informed
Decisions by taking a suitable example?
3. Why it is essential to have a fully functional Cost and Management
Accounting System implemented in any Manufacturing Organization?
4. Explain how the concept of Responsibility Centre can be related to
Strategic Business Units of any Organizations?
5. How understanding of Cost Behaviour helps in reducing the cost of a
product or a service?
COST & MANAGEMENT ACCOUNTING (CMA)