Chapter 1

Introduction to
Cost and Management Accounting

Instructor: Md. Jahirul Islam

Assistant Professor of Accounting
Department of Business Administration
BGMEA University of Fashion and Technology (BUFT)

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What is Cost Accounting?
The branch of accounting that measures the costs
of the products or services or other cost objects
for the purpose of management decision making
and financial reporting.

[Cost object is referred to as anything for which

separate measurement of cost is required.
Examples include the product, service,
department, job, customer etc.]

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Objectives of Cost Accounting

The main objectives of cost accounting are as

follows:

1. Cost Ascertainment
2. Cost Control
3. Cost Reduction
4. Fixation of Selling Price
5. Providing information for framing business
policy.

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 Objectives of Cost Accounting
1. Cost Ascertainment:
The main objective of cost accounting is to find out the
cost of product, process, job, contract, service or any
unit of production. It is done through various methods
and techniques.

2. Cost Control:
The very basic function of cost accounting is to control
costs. Comparison of actual cost with standards reveals
the discrepancies (Variances). The variances reveal
whether cost is within control or not. Remedial actions
are suggested to control the costs which are not within
control.

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 Objectives of Cost Accounting
3. Cost Reduction:
Cost reduction refers to the real and permanent reduction
in the unit cost of goods manufactured or services
rendered without affecting the use intended. It can be
done with the help of techniques called budgetary control,
standard costing, material control, labour control and
overheads control.
4. Fixation of Selling Price:
The price of any product consists of total cost and the
margin required. Cost data are useful in the determination
of selling price or quotations. It provides detailed
information regarding various components of cost. It also
provides information in terms of fixed cost and variable
costs, so that the extent of price reduction can be decided.

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 Objectives of Cost Accounting
5. Framing business policy:
Cost accounting helps management in formulating
business policy and decision making. Break even analysis,
cost volume profit relationships, differential costing, etc.
are helpful in taking decisions regarding key areas of the
business like as:
a. Continuation or discontinuation of production.
b. Utilization of capacity
c. The most profitable sales mix
d. Key factor
e. Export decision
f. Make or buy
g. Activity planning, etc.

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 What is Management
Accounting?

Management/Managerial Accounting is the

process of identifying, measuring, analyzing,
interpreting, and communicating financial and
non-financial information to the managers who
takes the decision in achieving business goal. It is
an extension of the horizon of cost accounting
towards newer areas of management.

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Objectives of Management Accounting

1. Planning and policy formulation:

Planning involves forecasting on the basis of
available information, setting goals, framing
polices, determining the alternative courses of
action and deciding on the programme of
activities. Management accounting can help
greatly in this direction. It facilitates the
preparation of statements in the light of past
results and gives estimation for the future.

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Objectives of Management Accounting

2. Interpretation process:

Management accounting is to present financial

information to the management. Financial
information is technical in nature. Therefore, it
must be presented in such a way that it is easily
understood. It presents accounting information
with the help of statistical devices like charts,
diagrams, graphs, etc.

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Objectives of Management Accounting

3. Assists in decision-making process:

With the help of various modern techniques
management accounting makes decision-
making process more scientific. Data relating
to cost, price, profit and savings for each of
the available alternatives are collected and
analyzed and provides a base for taking
sound decisions.

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Objectives of Management Accounting

4. Controlling:
Management accounting is useful for managerial
control. Management accounting tools like
standard costing and budgetary control are
helpful in controlling performance. Cost control
is effected through the use of standard costing
and departmental control is made possible
through the use of budgets. Performance of each
and every individual is controlled with the help
of management accounting.

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Objectives of Management Accounting

5. Reporting:
Management accounting keeps the management
fully informed about the latest position of the
concern through reporting. It helps management
to take proper and quick decisions. The
performance of various departments is regularly
reported to the top management.

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Objectives of Management Accounting

6. Facilitates Organizing:
“Return on Capital Employed” is one of the
tools of management accounting. Since
management accounting stresses more on
Responsibility Centres with a view to control
costs and responsibilities, it also facilitates
decentralization to a greater extent. Thus, it is
helpful in setting up effective and efficient
organization framework.

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Objectives of Management Accounting

7. Facilitates Coordination of Operations:

Management accounting provides tools for
overall control and coordination of business
operations. Budgets are important means of
coordination.

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 Cost Accounting Vs. Management Accounting

Cost Accounting Management Accounting

1. The recording, The accounting in which
Meaning classifying and the both financial and
summarising of non-financial
cost data of an information are
organisation is provided to managers is
known as cost known as Management
accounting. Accounting.
2. Quantitative Quantitative and
Information Qualitative
Type

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 Cost Accounting Vs. Management Accounting

Cost Accounting Management Accounting

3. Ascertainment of cost Providing information

Objective of production to managers to set
goals and forecast
strategies
4. Concerned with
Scope ascertainment, Impart and effect
allocation, aspect of costs
distribution and
accounting aspects of
cost

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 Cost Accounting Vs. Management Accounting

Cost Accounting Management Accounting

5.
Specific Yes No
Procedure

6. Records past and It gives more stress on

Recording present data the analysis of future
projections

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 Cost Accounting Vs. Management Accounting

Cost Accounting Management Accounting

7. Short range Short range and long

Planning planning range planning

8. Can be installed Cannot be installed

Interdepend without without cost
ency management accounting
accounting

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Management Accounting Vs. Financial Accounting

Management accounting Financial accounting

provides financial and provides general
non-financial information purpose financial
for managers of an information to those
organization and other who are outside
decision makers. the organization.

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 Differences between Financial Accounting and
Management/Managerial Accounting
Financial Management
Accounting Accounting
1. Users External persons Managers who plan
who make for and control an
financial decisions organization

2. Time focus Historical Future emphasis

perspective
3. Verifiability Emphasis on Emphasis on
versus Relevance verifiability relevance for
planning and control

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 Differences between Financial Accounting
and Management/Managerial Accounting
Financial Accounting Management Accounting

4. Precision Emphasis on Emphasis on

versus precision timeliness
Timeliness
5. Focus of Primary focus is on Focuses on segments
information the whole of an organization
organization
6. GAAP Must follow GAAP Need not follow
and prescribed GAAP or any
formats prescribed format

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Differences between Financial Accounting
and Management/Managerial Accounting

Financial Accounting Management Accounting

7. Frequency Quarterly, half yearly, As frequently as

of or yearly needed
the reports
8. Purpose of General purpose Special purpose for
the reports special decisions

9. Independent audit is No independent

Verification required audit is required
Process

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 Differences between Financial Accounting
and Management/Managerial Accounting

Financial Accounting Management Accounting

10. Nature of Monetary Monetary and non-

information information monetary
information

11. Mandatory for Not mandatory

Requirement external reports

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 Customer Value Propositions

A customer value proposition (CVP) is a business or

marketing concept that communicates the unique
benefits and value that a product or service provides
to its customers. It is a statement or proposition that
explains why a customer should choose a particular
product or service over alternatives available in the
market. Essentially, it answers the question, "What's
in it for the customer?"

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 Customer Value Propositions

Here are some key points to understand about a customer

value proposition:

Unique Benefits: A CVP highlights the specific benefits

and advantages that a product or service offers compared
to competitors. These benefits can include features,
performance, quality, price, convenience, or any other
factor that sets the offering apart.

Customer-Centric: A CVP is focused on the customer's

perspective and needs. It should address how the product
or service solves a customer's problems, fulfills their
desires, or meets their requirements.
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 Customer Value Propositions

Clear and Compelling: A well-crafted CVP is clear,

concise, and compelling. It should communicate the
value proposition in a way that resonates with the target
audience and is easy to understand.

Differentiation: CVPs are often used to differentiate a

product or service from competitors. By highlighting
what makes the offering unique or superior, businesses
can attract and retain customers.

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 Customer Value Propositions

Value Perception: The goal of a CVP is to influence the

customer's perception of value. It helps customers see
why they should choose a particular product or service
even if it might be priced higher than alternatives.

Tailored to Segments: Businesses may create different

customer value propositions for different customer
segments or target markets. This allows them to address
the specific needs and preferences of different groups of
customers.

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 Customer Value Propositions

Evolving: CVPs may evolve over time as market

conditions change, customer preferences shift, or the
product/service undergoes updates or improvements.

In summary, a customer value proposition is a crucial

element of marketing and business strategy. It helps
businesses communicate why their offering is valuable
and why customers should choose them, ultimately
leading to customer acquisition, satisfaction, and loyalty.

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 Customer Value Propositions

Customer
Understand and respond to
Intimacy
individual customer needs.
Strategy

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
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 Value Chain

The value chain is the set of business functions that

add value to the products or services of an
organizations. In short, it is the chain of value
added activities. These functions are as follows:

Product Customer
R & D Design Manufacturing Marketing Distribution Service

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 Value Chain

1. Research and development: the generation of

and experimentation with ideas related to new
products, services, or processes.

2. Design: the detailed design and engineering of

products.

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 Value Chain

3. Production: the coordination and assembly of

resources to produce a product or deliver a
service.

4. Marketing: the manner by which individuals

or groups learn about the value and features of
products or services (for example advertising).

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 Value Chain

5. Distribution: the mechanism by which a

organization delivers products or services to the
customers.

6. Customer Service: the support activities

provided to the customers.

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 Value Added vs. Non-value Added
Activities

Value Added Activities: Value added activities

are those activities or actions that increase the
value or worth of the goods or service to the
customers. Customers are willing to pay for the
value added activities.
Examples: R & D, product design,
manufacturing, marketing, distribution and
customer service.

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 Value Added vs. Non-value Added
Activities

Non-value Added Activities: Non-value added

activities are those activities or actions that do not
increase the value or worth of the goods or
service to the customers. Customers are not
willing to pay for the non-value added activities.

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 Value Added vs. Non-value Added
Activities

Examples of non-value added activities :

Scheduling, recording, transferring raw materials
from store to factory, moving work-in-process
from one point to another point, transferring
finished goods from factory to warehouse, billing
the customers, storing the raw materials or
finished goods in store or warehouse, inspecting
different departments etc.
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 Traditional Manufacturing
or Push Manufacturing

Push manufacturing, also known as traditional

manufacturing, is a production approach where
products are manufactured based on forecasts
and pushed through the production process
according to a predetermined schedule. This
approach can lead to several costs and problems,
which include:

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 Traditional Manufacturing
or Push Manufacturing

Overproduction: Push manufacturing often results in

overproduction because products are made in anticipation
of demand rather than in response to actual customer
orders. This leads to excess inventory, increased carrying
costs, and potential obsolescence.

Higher Inventory Costs: Maintaining large inventories of

raw materials, work-in-progress, and finished goods is a
common consequence of push manufacturing. This ties up
capital, increases storage costs, and can result in write-offs
due to obsolete or unsellable inventory.
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 Traditional Manufacturing
or Push Manufacturing
Inefficient Resource Utilization: Push manufacturing can
lead to inefficient use of resources, including labor,
equipment, and floor space. Resources may be
underutilized during slow production periods and
overutilized during peak production, leading to
inefficiencies and potential bottlenecks.

Waste: Overproduction, excess inventory, and inefficient

resource utilization are forms of waste in push
manufacturing, and they are contrary to lean
manufacturing principles.

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 Traditional Manufacturing
or Push Manufacturing

Inflexibility: Push manufacturing systems are often less

flexible and responsive to changes in customer demand. It
can be challenging to adapt production schedules quickly
when demand patterns change.

Quality Issues: Rushed production to meet

predetermined schedules can lead to quality issues and
defects, especially if proper quality control measures are
not in place.

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 Traditional Manufacturing
or Push Manufacturing

Higher Costs: The costs associated with excess inventory,

storage, rework, and inefficiencies can drive up the
overall cost of production.

Mismatched Supply and Demand: Push manufacturing

can result in a mismatch between supply and demand,
leading to the need for sales and marketing efforts to clear
excess inventory or the risk of stockouts when actual
demand doesn't align with forecasts.

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 Traditional Manufacturing
or Push Manufacturing

To address these costs and problems, many

organizations have shifted towards pull
manufacturing systems, like Just-In-Time (JIT)
production, which focus on producing goods in
response to actual customer demand. Pull
systems are designed to reduce waste, improve
resource utilization, shorten lead times, and
enhance overall efficiency and customer
satisfaction.

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 Lean Production or
Pull Manufacturing System

The five step process results in a pull

manufacturing system that reduces inventories,
decreases defects, reduces wasted effort, and
shortens customer response times.

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 Steps of Lean Production
1) Identify value 2) Identify the
in specific business process
products/services. that delivers value.

3) Organize work
The lean arrangements around
thinking the flow of the
model is a five business process.
step approach.

5) Continuously pursue 4) Create a pull

perfection in the system that responds
business process. to customer orders.
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 Lean Production

Customer places Create Production Generate component

an order Order requirements

Goods delivered Production begins Components

when needed as parts arrive are ordered
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Total Quality Management (TQM)

Total Quality Management (TQM) is a management

approach and philosophy that focuses on
continuous improvement in the quality of products,
services, and processes within an organization.
TQM emphasizes the involvement of all employees
in the pursuit of quality and customer satisfaction.

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Total Quality Management (TQM)

Key principles and concepts associated with TQM

include:

Customer Focus: TQM places a strong emphasis on

understanding and meeting customer needs and
expectations. Customer satisfaction is a primary
goal.

Continuous Improvement: TQM encourages ongoing

efforts to improve processes, products, and
services. It often involves the use of techniques like
Six Sigma, Lean, and Kaizen to identify and
eliminate defects and inefficiencies.
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Total Quality Management (TQM)
Employee Involvement: TQM recognizes that all
employees play a role in ensuring quality. It
encourages employee participation, empowerment,
and teamwork.

Process Management: TQM emphasizes the

importance of well-defined processes and their
control. It involves process mapping, analysis, and
optimization.

Data-Driven Decision Making: TQM relies on data

and measurement to monitor and improve
processes. Statistical tools and data analysis are
often used to make informed decisions.
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Total Quality Management (TQM)

Leadership Commitment: Successful TQM

implementation requires strong leadership
commitment and support at all levels of an
organization.

Supplier Relationships: TQM extends beyond an

organization's boundaries to include its
relationships with suppliers and partners. Quality
standards and expectations are often extended to
suppliers to ensure the quality of incoming
materials and components.

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Total Quality Management (TQM)

TQM is a holistic approach that aims to create a

culture of quality and continuous improvement
throughout an organization. It has been applied in
various industries and sectors to enhance product
and service quality, reduce costs, and improve
overall performance.

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Just-In-Time Inventory Methods
Just in time (JIT) is a production and inventory
management system that aims to minimize waste
and optimize efficiency by delivering materials,
components, or products exactly when they are
needed, neither too early nor too late in the
production process. JIT is often associated with lean
manufacturing principles and is widely used in
manufacturing industries, although its principles
can also be applied to other sectors like logistics and
supply chain management. Its origin and
development was in Japan, largely in the 1960s and
1970s and particularly at Toyota.
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 Just-In-Time Inventory Methods
Key principles and characteristics of JIT include:

Inventory Minimization: JIT seeks to reduce or eliminate

the need for large inventories of raw materials, work-in-
progress, and finished goods. This reduces storage costs
and the risk of obsolescence.

Demand-Driven: Production and procurement are driven

by actual customer demand rather than forecasts. This
helps in avoiding overproduction and excess inventory.

Continuous Flow: JIT aims to establish a continuous flow of

materials and components through the production
process, with minimal interruptions or delays.
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 Just-In-Time Inventory Methods

Takt Time: Takt time is the rate at which products need to

be produced to meet customer demand. JIT production is
synchronized with this takt time.

Pull System: JIT often uses a "pull" system, where

production is triggered by customer orders or demand
signals, rather than a "push" system that produces goods
based on forecasts.

Quality Control: Emphasis is placed on maintaining high-

quality standards throughout the production process to
avoid defects and rework.
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 Just-In-Time Inventory Methods

Supplier Relationships: Close relationships with suppliers

are important in JIT systems. Suppliers are expected to
provide materials and components on time and in the
required quantities.

Waste Reduction: JIT focuses on identifying and eliminating

various types of waste, including excess inventory,
overproduction, waiting times, and defects.

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 Just-In-Time Inventory Methods

JIT can lead to several benefits, including reduced carrying

costs, improved production efficiency, shorter lead times,
and increased flexibility to respond to changes in
customer demand. However, it also requires careful
planning, effective supply chain management, and
strong coordination between different parts of the
organization and with suppliers to be successful.

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 Theory of Constraints
A constraint (also called a bottleneck) is anything
that prevents you from getting more of what
you want. Constraints (“bottlenecks” ) limit the
company’s potential profitability. The constraint
in a system is determined by the step that has
the smallest capacity.
Theory of Constraints is a specific approach to
identify and manage these constraints in order
to achieve company goals.

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Steps of Theory of Constraints
2. Allow the
weakest link to
set the tempo.

3. Focus on
1. Identify the improving
weakest link. the weakest
link.

4. Recognize that
the weakest link
is no longer so.
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 Steps of Theory of Constraints
The theory of constraints approach to process improvement
involves four steps:
 Identify the weakest link in the chain which is the
constraint.
 Do not place a greater strain on the system than the
weakest link can handle – if you do, the chain will break.
 Concentrate improvement efforts on strengthening the
weakest link.
 If the improvement efforts are successful, the weakest
link will improve to the point that it is no longer the weakest
link. At this point, a new weakest link must be identified
and the improvement process starts over again.
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Thank You

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