CMA

PGP

Arun Kumar Gopalaswamy

Ph (O): 044-2257 4563

Email: garunk@yahoo.com

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Needs of Management
Financial accounting is concerned with
reporting financial information to external
parties, such as stockholders, creditors, and
regulators.

Managerial accounting is concerned with

providing information to managers within an
organization so that they can formulate plans,
control operations, and make decisions.
Purposes of Cost Classification

1. Assigning costs to cost objects

2. Accounting for costs in manufacturing
companies
3. Preparing financial statements
4. Predicting cost behavior in response to changes
in activity
5. Making decisions
• Accounting systems process economic events and
transactions into information helpful to managers.
• This data is collected, categorized, summarized, and
analyzed.
• Accounting systems provide information found in the
financial statements as well as in internal performance
reports.
• Managers use this information to administer the activities of
their area of responsibility.
• Information needs may vary depending on managerial needs.

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Managerial versus Financial Accounting
the perspective of cost accounting and how it differs from that of financial accounting

Accounting
Accounting System
System
(accumulates
(accumulates financial
financial and
and
managerial
managerial accounting
accounting data
data in
in the
the cost
cost
accounting
accounting system)
system)

Managerial
Managerial Accounting
Accounting Financial
Financial Accounting
Accounting
Information
Information for
for decision
decision Published
Published financial
financial
making,
making, planning,
planning, and
and statements
statements and and other
other
controlling
controlling an
an financial
financial reports.
reports.
organization’s
organization’s
operations.
operations.
Internal External
Users Users 5
 Management accounting
• Process that provides info used by managers for:
• Planning, implementing, and controlling.
• Applies to all organizations.
·Management needs more detailed info.
·Accounting systems provide operating info needed
for operating decisions.
·Managers are interested in summaries.
· In general, management accounting is summary
information.

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

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on

versus relevance objectivity and verifiability relevance

4. Precision versus Emphasis on Emphasis on

timeliness precision timeliness

5. Subject Primary focus is on Focus on

companywide reports segment reports

6. Rules Must follow GAAP / IFRS Not bound by GAAP / IFRS

and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
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Difference between Cost Accounting and Management Accounting
Cost Accounting
The main purpose of cost accounting is to
ascertain the cost of business activities.
Cost accounting deals with costs and other
related aspects.
Cost accounting only utilises quantitative
information related to transactions.
Cost accounting deals with financial transactions
of the past. It is historical in its approach.
Management Accounting
The key objective of management accounting is
to provide useful information to help the
management in making better decisions for the
business.
Management accounting has a very wide scope. It
includes financial accounting, cost accounting,
methods of statistics, taxation, law, etc.
Both qualitative and quantitative information is
used in management accounting.
Management accounting is concerned with
making future projections for the business. It is
futuristic in its approach.
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Difference between Cost Accounting and Management Accounting
Cost Accounting
Cost accounting ends with the presentation of
information
Cost accounting follows a specific procedure for
ascertaining cost and a definite format for
recording.
Cost accounting is not dependent upon
management accounting.
Management Accounting
Management accounting commences from the
point where cost accounting ends. The key inputs
in management accounting are provided by cost
accounting.
Management accounting does not follow any
specific procedure or format. The information
that is to be provided depends on the needs of
the management.
Management accounting depends upon cost
accounting.
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 Work of Management

Planning
Planning
Controlling
Controlling

Decision
Decision
Making
Making

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Managerial Accounting Activities: Marketing
Majors

Planning
Planning

How much should we budget for TV,

print, and internet advertising?

How many salespeople should we

plan to hire to serve a new territory?

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Managerial Accounting Activities: Marketing
Majors

Controlling
Controlling

Is the budgeted price cut increasing

unit sales as expected?

Are we accumulating too much

inventory during the holiday
shopping season?
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Managerial Accounting Activities: Marketing
Majors
Decision
Decision
Making
Making

Should we sell our services as one

bundle or sell them separately?

Should we sell directly to customers

or use a distributor?
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 Managerial Accounting
Managerial accounting is the process of
 Identifying
 Measuring
 Analyzing
 Interpreting
 Communicating ------- information

in pursuit of an organization’s goals/strategy

Managerial accounting is an integral part of the management process.

Successful management accounting systems capture and report information that helps managers make decisions to fulfill
organizational goals in an effective and efficient manner. Management accounting also provides information critical to the
planning and control and decisions of managers.
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Management accounting helps answer important questions
such as:

• Who are our most important customers, and how can we be

competitive and deliver value to them?

• What substitute products exist in the marketplace, and how do

they differ from our own?

• What is our most critical capability?

• Will adequate cash be available to fund the strategy or will

additional funds need to be raised?

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 How Managerial Accounting Adds
Value to the Organization : objectives
•• Providing
Providing information
information for
for decision
decision making
making andand
planning.
planning.
•• Assisting
Assisting managers
managers in
in directing
directing and
and controlling
controlling
activities.
activities.
•• Motivating
Motivating managers
managers and
and other
other employees
employees towards
towards
organization’s
organization’s goals.
goals.
•• Measuring
Measuring performance
performance ofof subunits,
subunits, activities,
activities,
managers,
managers, andand other
other employees.
employees.
•• Assessing
Assessing the
the organization’s
organization’s competitive
competitive position.
position.

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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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 The Value Chain Illustrated

In addition to each of our functions previously discussed, you see “administration” as an additional function.

This includes accounting, human resources, information technology and supports the six primary business
functions.

Management accounting provides information to inform each of these functions in the value chain.
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 Cost

• Refers to the amount of expenditure (actual or notional) incurred on

or attributed to a given thing
• Costing refers to the technique and process of accounting costs

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 Kinds of Cost
• Notional Cost
• Opportunity Cost
• Sunk Cost
• Relevant Cost

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 Two Important Classification Of Costs
• Fixed cost and variable cost
• Direct cost and indirect cost

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Fixed Cost
• The total FC does not change with change with change
volume
• Per unit Fixed cost changes with volume
Should not commit for more fixed cost to achieve Economies of scale.

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Variable cost
• Total Variable cost changes with change in volume
• Per unit variable cost does not changes with the change in
volume

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Assigning Costs to Cost Objects
Direct costs
• Costs that can be
easily and conveniently
traced to a unit of product
or other cost object.
• Examples: direct material
and direct labor
Indirect costs
• Costs that cannot be easily
and conveniently traced to
a unit of product or other
cost object.
• Example: manufacturing
overhead

Common costs
• Indirect costs incurred to support a number of cost
objects. These costs cannot be traced to any
individual cost object.
 Advantages of Cost Accounting

• Reveals unprofitable activities

• locates exact causes of increase in decrease in p & L
• helps in decision making
• price fixation
• optimum level of efficiency
• cost control
• value of stock

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 Why Cost is being discussed ??????

• Clients give Projected Statements

• Financial Projections
• Projected Income and Expenditure statement
• Forecasted profit
• etc

cost of goods sold changes..

Selling price - Cost of goods sold = Profit.
If Cost of Goods Sold = Opening stock + direct exp + Purchases Closing Stock .
If Closing stock is valued at marginal cost what happens and fi valued at full cost what happens

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Leading Companies Use Accounting System
to...
• Help design product and services that meet customer’s expectations
and can produce and deliver at a profit
• Signal where either continuous or discontinuous (reengineering)
improvement in quality, efficiency and speed are needed
• Assist front-line employees in the learning and continuous
improvement activities

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 Leading Companies Use Accounting
System to...
• Guide product mix and investment decisions
• Help to choose among alternative suppliers
• Help negotiate about price, product features, quality, delivery and
service with customers
• Help to structure efficient and effective distribution and service
process to target market and customer segments

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Companies need Accounting/Cost system to:
• Value inventory and measure cost of goods sold for financial reporting
• Estimate cost of activities, product, services and customers
• Providing economic feedback to managers and operators about
process efficiency
Theme: Accounting is the most important MIS

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Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the short-term
significantly reduced in the short by current managerial decisions
term.

Examples Examples
Depreciation on Buildings and Advertising and Research and
Equipment and Real Estate Taxes Development

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Fixed Costs and the Relevant Range
For example, assume office space is available at a rental rate of
$30,000 per year in increments of 1,000 square feet.

Fixed costs would increase in a step

fashion at a rate of $30,000 for each
additional 1,000 square feet.

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 Multiple Classifications of Costs

• Costs may be classified as:

• Direct/Indirect, and
• Variable/Fixed

• These multiple classifications give rise to important cost combinations:

• Direct and variable
• Direct and fixed
• Indirect and variable
• Indirect and fixed

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Examples of the Multiple Classifications
of Costs

Once again using the BMW

X6 as an example, we see
here examples of the various
combinations that can occur
for direct/indirect and
variable/fixed costs.

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Classifications of Manufacturing Costs

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
Direct Materials
Direct materials are raw materials that
become an integral part of the product and
that can be conveniently traced directly to it.

Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile
Direct Labor
Direct labor costs are those labor costs that
can be easily traced to individual units of
product.

Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly
workers
workers
Manufacturing Overhead
Manufacturing overhead includes all
manufacturing costs except direct material
and direct labor. These costs cannot be readily
traced to finished products.

Includes indirect materials Includes indirect labor costs

that cannot be easily or that cannot be easily or
conveniently traced to conveniently traced to
specific units of product. specific units of product.
Manufacturing Overhead – Examples
Examples
Examples of
of manufacturing
manufacturing overhead:
overhead:
•• Depreciation
Depreciation of
of manufacturing
manufacturing equipment
equipment
•• Utility
Utility costs
costs
•• Property
Property taxes
taxes
•• Insurance
Insurance premiums
premiums incurred
incurred to
to operate
operate aa
manufacturing
manufacturing facility
facility

Only those indirect costs associated with

operating the factory are included in
manufacturing overhead.
Prime Costs and Conversion Costs
Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
Nonmanufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to
All executive,
secure the order and
organizational, and clerical
deliver the product.
costs. Administrative costs
Selling costs can be
can be either direct or
either direct or indirect
indirect costs.
costs.
Manufacturing Product Costs
For
For manufacturing
manufacturing companies,
companies, product
product costs
costs
include:
include:
•• Raw
Raw materials:
materials: includes
includes any
any materials
materials that
that go
go
into
into the
the final
final product.
product.
•• Work
Work in in process:
process: consists
consists of
of units
units of
of product
product
that
that are
are only
only partially
partially complete
complete and
and will
will require
require
further
further work
work before
before they
they are
are ready
ready for
for sale
sale to
to
the
the customer.
customer.
•• Finished
Finished goods
goods costs:
costs: consists
consists ofof completed
completed
units
units of
of product
product that
that have
have not
not yet
yet been
been sold
sold to
to
customers.
customers.
Transfer of Product Costs
• When direct materials are used in production, their
costs are transferred from Raw Materials to Work in
Process.
• Direct labor and manufacturing overhead costs are
added to Work in Process to convert direct materials
into finished goods.
• Once units of product are completed, their costs are
transferred from Work in Process to Finished
Goods.
• When a manufacturer sells its finished goods to
customers, the costs are transferred from Finished
Goods to Cost of Goods Sold.
Cost Classifications for Preparing Financial Statements
Product costs include direct Period costs include all
materials, direct labor, and selling costs and
manufacturing overhead. administrative costs.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
Cost flows illustrated
Here, we see the flow of costs
through the balance sheet
accounts (for inventoriable costs
only)

and into the income statement

for both inventoriable and
period costs.

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Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory

Manufacturing
As direct material is consumed in
Overhead production, its cost is added to work-in-
process inventory.
Similarly, the costs of direct labor and
manufacturing overhead are accumulated
in work in process.

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Manufacturing Cost Flows
When products are
finished, their costs
Direct Material are transferred from
work-in-process
Work in inventory to
Direct Labor Process finished-goods
Inventory inventory.

Manufacturing The total cost of

direct material,
Overhead
direct labor, and
Finished manufacturing
Goods overhead
transferred from
Inventory
work-in-process
inventory to
finished-goods
inventory is called
the cost of goods
manufactured.
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 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold

•The costs then are stored in finished goods until the time period when the products are sold.
•At that time, the product costs are transferred from finished goods to cost of goods sold,
which is an expense of the period when the sale is made.
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 A Cost Caveat
• Unit costs should be used cautiously. Because unit costs change with a
different level of output or volume, it may be more prudent to base
decisions on a total cost basis.
• Unit costs that include fixed costs should always reference a given level of
output or activity.
• Unit costs are also called average costs.
• Managers should think in terms of total costs rather than unit costs for many
decisions.

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