MA 2 Cost and Management Accounting (CMA)

Text Books

Management Accounting by Paresh Shah (PS)

Oxford University Press, 2009 Edition

Cost Accounting by Charles T. Hongren, S M Datar, George Foster, Madhav Rajan, Christopher Ittner (CS)
Pearson Education, 13th Edition

Other Books

Cost Management: Strategies for Business Decisions by Hilton, Maher, Selto (TMH) Costing for Management by S.K. Bhattacharya and John Deardean (Vikas) Management Accounting by Khan and Jain Cost and Management Accounting by Ravi Kishore (Taxmann)
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Cost and Management Accounting Overview

Introduction

Business Manager has to answer following questions

What is the maximum profit that a business can draw? Has the profit margin increased or reduced as compared to previous years? Which product line is making more profit? Has too much capital been blocked in raw materials?
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Cost Accounting

Is the process of accounting for cost

Begins with recording of income & expenditure Ends with preparation of statistical data Primarily concerned with cost determination of product, service, process or operations

Cost Accounting

Is the process of accounting for cost

Helps the management
to have a clear indication of their economic performance direction in which they must move in order to improve economic efficiencies To solve complex mgmt problems like determination of most profitable mix, make or buy decisions, replacement of equipments, introduction of new products, discontinuance of non-profitable products
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Cost Accounting
Generally concerned with internal reporting for mgmt requirement Development of cost accounting is of recent origin due to

Heavy industrialisation Overall cut throat competition Bulky and time consuming traditional acctg system lacks efficiency to solve complicated cost-related problems
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Definitions

Costing
A tool to determine the cost of products or services or operations

Cost Accounting
Process of classifying and analysing the costs (CIMA, The Chartered Institute of Mgmt
Accounts, UK)

Branch of general accounting and covers application or accounting principles relating to recording, classifying and analysis of cost within the organisation (Water Scott)

Definitions

Cost Accountancy
Application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of information derived for managerial decision making (CIMA)

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Functions of Cost Accounting

To calculate the cost per unit of the various products manufactured by the firm To prepare a correct cost analysis of both process or operations, and by the different elements of cost To ascertain wastage in each process of manufacture and to prepare reports which can assist wastage control

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Functions of Cost Accounting

To provide necessary information for the determination selling prices To compute product-wise profit, and advise the management for the enhancement of profit To serve the management in the valuation of goods-in-process and finished goods, so that the minimum capital is blocked up in the stocks

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Functions of Cost Accounting

To install and implement cost control systems (budgetary control or standard cost system) for the control of material, labour, and overhead expenses To advise the management for the formulation of future expansion policies and proposed capital outlays To establish an effective reporting system

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Functions of Cost Accounting

To guide the mgmt in the preparation and implementation of incentive schemes based on productivity and cost savings To advise the management on the profitability of present or new lines of products, the comparative advantages and disadvantages of different types or production methods, the replacement of manual operations by automation

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Additional Functions of Cost Accounting

To supervise punched card accounting or data processing To organise internal audit system so that effective working of the accounting control and production control methods can be introduced from time to time and well be ensured

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Additional Functions of Cost Accounting

To coordinate with the industrial engineers for the introduction and implementation of methods suggested for improvement and or redundancy of programes and data To provide the Govt or other public bodies with the specialised service of cost audit

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Financial Actg v/s Cost Actg

Point of difference Financial Accounting Provides info about organisation in a general way, ie. Profit, Assets, Liabilities, Owners Equity Cost Accounting

Provides info to guide the management for proper Purpose planning, operation, coordination, control and decision-making Kept as per requirement P&L A/cs and B/S are kept of management. for the requirement of Recently, the Co Act has Forms of Accounts Companies Act and Income made it obligatory to keep Tax Act costing records in some mfg companies

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Financial Acctg v/s Cost Acctg

Point of difference Recording Financial Accounting in subjective manner Cost Accounting In objective manner Items of costs are analysed, classified, apportioned, and allocated in order to calculate the cost per unit

Items of Costs

Items of costs are expressed in totals

Analysis of Profit

It is only a part of financial accounts. It shows the result of operation, These reveal the profits of process, job or product so the whole business that the unprofitable lines of businesses can be eliminated
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Financial Acctg v/s Cost Acctg

Point of difference Financial Accounting Emphasis on recording only. No importance to control aspect Cost Accounting Control It provides a detailed system of cost control with the help of standards and budgets It is a continuous system of accounting. It submits These are prepared at the the cost reports to the end of accounting year management weekly or monthly or as and when desired

Periodicity

Inventory Valuation

Valued at cost or market price whichever is less

Valued at cost

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Financial Acctg v/s Cost Acctg

Point of difference Financial Accounting a) Relate to commercial transactions of the business b) Concerned with transactions related to third parties Cost Accounting a) Relate to manufacturing activities b) Concerned with transactions related to internal & third parties Nature of Transaction

Figures

Cost accounts deal partly Mainly deal with actual data with actual figures and partly with estimates

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Management Accounting
Extension of managerial aspects of cost accounting Accounting to assist the mgmt in planning and decision making Employs various techniques like standard costing, budgetary control, marginal costing, uniform costing with inter-firm comparison, ratio accounting, capital budgeting decisions, internal audit

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Cost Acctg v/s Mgmt Acctg

Cost Accounting AAnalyses costs to control maximising efficiency Management Accounting AAssists the management in planning, decision-making and control

It uses the principles and It uses the principles and practices practices of cost accounting and of cost accounting financial accounting

It provides internal reporting to managers for use in planning and controlling routine operations

It provides internal reporting to managers for use in decision making before formulating major plans and policies

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Cost Acctg v/s Mgmt Acctg

Cost Accounting Management Accounting TThe management accountant CCost Accountant reports to the mgmt about suggests how to improve upon the variances from budgets or standards and the operating results by presents a comparative data of various suggesting ways for cost periods control and cost reduction
Management Accountant works out future operating statements

CCost Accountant works out the years operating results

It is the complement of management accounting

It is an extension of managerial aspects of cost accounting

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Role of Management Accountant

The Accountant chooses the information to be reported to a manager by

Identifying the specific purpose for which information is needed Determining the relevance of the information. Information is relevant if it
affects the accomplishment of the objectives of the decision maker will change as a result of the decisions or choice made by the decision maker
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Role of Management Accountant

Controller or Chief Management Accountant title is applied to various accounting positions In some organisations, they are just book keepers and in others they are executives who help top mgmt in planning and controlling Many people confuse Controller and Treasurer, but they are different terms

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Cost Acctg v/s Mgmt Acctg

Controller PPlanning and Control RReporting and interpreting EEvaluating and Consulting Tax Administration Treasurer PProcurement of long-term finance Investor Short-term financing Banking

Government Reporting
Protection of assets

Credits and Collections

Investments

Economic Appraisal

Insurance

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Objects of Cost Accounting

Cost Finding
To determine the actual cost of each article, process, operation, service, department, segment of activity

Cost reduction
To reveal and report efficiencies in the form of material wastage, loss of time in material buying, storing and issuing

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Objects of Cost Accounting

Cost Saving
To provide actual figures of cost comparison with estimates of costs and price fixing To find out the degree of efficiency and productive capacity of men and machines and ideal standard for their working

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Objects of Cost Accounting

Cost Control
To reduce cost thro budgetary control and standard costing To ensure continuous check and adjustment of stores and materials with help of perpetual inventory

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Objects of Cost Accounting

Managerial Decision, Policy Making

To study trends at different volumes of output, and to determine production policies and programs To implement incentive wage plans for workers

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Objects of Cost Accounting

Managerial Decision, Policy Making

To organise internal audit system, and interlocking of financial and cost accounts to verify accuracy of each other To furnish necessary data for the preparation of profit and loss account and balance sheet at short intervals (eg. Monthly, quarterly, etc.) for each department or business as a whole

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Advantages of Cost Accounting

Price Fixation Control on unprofitable activities Managerial Decision, Policy Making Useful Information Cost Control Provides valuable data Effective check

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Advantages of Cost Accounting

Preparation of budgets and regulations of production Fixation of responsibilities Independent Check Prevention of manipulation, misappropriation, and frauds

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Objections against Cost Acctg

Expensive Differences in results Unnecessary Worthless Inapplicability

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Principles of Costing
Every concern must design its own costing system, keeping in view its peculiar problems If financial books can afford the necessary information, separate costing system is not needed Reasonable accuracy is enough, of course, this depends upon the nature of industry

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Principles of Costing
Costing information should be collected as and when work proceeds A proper unit of cost should be determined

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Essentials of Cost Acctg System

Should be simple and easy Arrangement of Costing system should be adopted to suit the general organisation of the factory There should be coordination and cooperation among executives of various departments It should ensure proper accounting and allocation of material cost, labour cost, and overheads

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Essentials of Cost Acctg System

Cost Accounts should be capable of reconciling with financial accounts, or else, integral accounting system is to be followed Expenses of costing system should be commensurate with the results (economical)

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Importance of costing

Not only assists management in various ways but also beneficial to employees, creditors, Government, public enterprises and the society
To whom Nature of Benefit PPlanning, Organising, Controlling, Budgeting, Decision-making, Pricing, Evaluation Incentive bonus, Higher earnings thro time and motion study, Right man in right job thro job evaluation

MManagement

EEmployees

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Importance of costing
To whom CCreditors Nature of Benefit SSupport to access more information as compared to financial accounts More taxes thro higher production, Useful in the import and export policy and preparation of national plans for economic development, Policy of price differentials, Lower prices thro cost reduction measures. Better quality of products and services

GGovernment

SSociety

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