MANAGEMENT

AND COST
ACCOUNTING
 CHAPTER I

THE IMPORTANCE OF COST

AND MANAGEMENT
ACCOUNTING AND
A BRIEF HISTORY
 THE IMPORTANCE OF COST AND
MANAGEMENT ACCOUNTING AND
A BRIEF HISTORY
• Cost accounting is one of a main field of accounting,
which provides company managers or owners with a
wide range of cost data to find out the cost of a
production.
• Management accounting, on the other hand, is an
accounting area that deals with the decision-making
process. It analyzes and interprets the cost data obtained
by cost accounting so as to make decision-making
process be more efficient.
 Financial Accounting, Cost Accounting and
Management Accounting
• Financial accounting is a system that identifies, defines,
collects, measures, records and reports financial
informational for internal and external users. The
internal users are owners, employees and managers; the
external users are investors, creditors and governmental
authorities. The company managers use accounting
information to manage their businesses, to evaluate
employee performances and to calculate taxes to be
paid. Moreover, implementing financial accounting is
mandatory for companies since it undertakes corporate
social responsibility.
 Cost Accounting
• Cost accounting, on the other hand, is a process of cost
determination of products or services produced. This process
of cost determination is although performed both for internal
and external users, it is mainly done for internal users. The
data obtained by cost accounting has been particularly used by
financial accountants because, financial accounting
determines profit or loss by comparing sales costs with
revenues. In addition, inventory costs and cost of goods sold
data should be disclosed in financial statements, such as
balance sheet and income statements. From this respect, the
use of cost accounting is mandatory, especially for
manufacturing companies
 Management Accounting
• Management accounting (or managerial accounting)
is concerned with providing both financial and non-
financial information to managers, for planning,
organizing, staffing, directing, motivating,
coordinating, budgeting, controlling, and reporting.
Managers, who are the people inside an
organization, use the data obtained by managerial
accounting for internal purposes since their primary
role is to direct and manage the company to
improve its effectiveness and profitability.
 The Importance of Cost Accounting in Manufacturing
Companies

Manufacturing companies should use cost accounting to

find cost of a product, to perform planning and control
activities and to decide how to manage their activities and
businesses. Therefore, cost accounting can be defined as a
system in which financial and non-financial information is
collected, analysed, classified, recorded, calculated and
reported in an organised manner and using an accounting
system to find cost of a product or service; to help planning
and control activities; and to make decisions. Thus, as
stated in the above definition, there are three important
functions of cost accounting. These functions are:
Evaluating Cost of a Product or Service
• Manufacturing companies not only desire to evaluate the cost of
production in total, but also need to calculate the product cost per
unit. Because, many companies produce hundreds of different
products which should be separately costed and priced in today’s
global markets. Each product produced may have required different
amount of raw material, labour and other manufacturing costs. As a
result, although the total cost of production remains unchanged,
unit cost of each different product may vary depending on the
consumption of those cost elements such as material, labour and
other items, known as factory overhead. Therefore, the cost of each
product should be determined separately. This also helps planning,
control and decision-making processes be performed properly.
 Planning and Control
• Planning and control is a basic process of companies for realizing
their activities and for earning profit in the long-run. Planning is
referred to as the determination of activities to be held in the future
by analyzing internal and external opportunities or threats. Data
related to these activities can only be obtained using cost
accounting. For example, assume that a company wants to plan
which type, and how many products to produce next year. A
manager of a company will decide on these subjects using cost
information. The number or types of a product can only be obtained
by means of cost accounting since it provides information by
considering the capacity of the business, by analyzing the
production processes, and finally by computing capacity cost rates
for each unit of a product.
 Planning and Control
• Control is a process of comparing actual results with the
results that were evaluated during the planning process. In this
respect, companies can analyze success of their activities. If
the actual result is the same with the desired result, it can be
said that companies achieve their goals. However, if the actual
result is different from that of planned or desired result, the
company will examine the entire production process to realize
the reasons of their unsuccessful activities. Moreover,
processes being done perfectly are also determined in the
controlling phase and their philosophies can be implemented
to other areas. As a result, all processes of the company will be
improved.
 Helping Decision-Making Process
• Managers cannot make an efficient decision without using cost
accounting data. For example, product pricing decision is
generally based on the data obtained by cost accounting.
Product prices applied to different market segments require
proper cost information. Also managerial decisions regarding
performance evaluation; to make or buy; to shut off the factory;
to change the machine with a new one; to penetrate different
markets; to price for contract manufacturing, to identify the
factory capacity; to establish different product lines, etc., are
determined in the context of cost accounting information. In this
respect, companies especially manufacturing ones widely use
cost accounting data in their decision making processes.
 Historical Development of Cost and
Management Accounting
• Cost accounting is probably one of the oldest
managerial tools, which may go far back to ancient
times, used in the determination of the amount of
taxes that were taken by kings; or used in pricing the
products that trading people of antiquity were
selling. The trading people of ancient times such as
the Chinese, Egyptians and Arabs had accountants in
the service of the royal courts, some of whom were
experts in the determination of costs.
 CHAPTER II

DEFINITIONS IN COST
ACCOUNTING