Cost and Management accounting introduction MBA study material

Introduction to management accounting:
          Relationship of management accounting to cost accounting and financial accounting:
Financial accounting

Preparing P&L , balance sheet

Cost accounting

Analysis cost for control & maximizing efficiency

Management accounting

For planning decision making and control
            Cost accounting is a branch of accounting and has been developed due to limitations of financial accounting. Financial accounting is primarily concerned with record keeping directed towards the preparation of profit and loss. Account & balance sheet. It provides information regarding the P&L that the business enterprise is making and also its financial position on a particular date.
limitations of financial accounting:
I.        Shows only overall performance;        Financial accounting provides information about profit, loss, cost etc.. of the collective activities of the business as a whole. It does not give data regarding costs by departments, products process and sales territories etc.
II.      Not helpful in the price fixation:                     The  financial accounting costs are not available as an aid in determining prices of the product , services, production order and lines of products.
III.   Provides only historical information:   Financial accounting is mainly historical and tells about the cost already incurred. It doesn’t provide day to day cost information, to the mgt for making effective plans for coming years.
IV.    No control on cost:      It doesn’t provide for a proper control of materials, suppliers, wages, labor and overheads.
V.      No analysis of losses: it doesn’t give complete analysis of losses due to detective material, ideal, time, plant and equipment.
VI.    No data for comparison and decision making to supply useful data to management:  It doesn’t supply useful data to management for comparison with previous period and for taking various financial decisions as introduction of new products replacement of labor by machines, price in normal (or) special circumstances etc..
VII. Inadequate information for reports:     It does not provide adequate information for reports to outside agencies such as banks, governments insurance companies and trade associates.
Management accounting:
Management accounting is one  of the branches of accounting. It provide relevant information to mgt. So that planning, organizing, directing, controlling, and co-ordination of business operations can be done in an effective manner.
According to R.N.ANTHONY “management accounting is concerned with accounting information that is useful to management”
                        “accounting association mgt accounting includes the methods and concepts necessary for effective planning for control through the evaluation and interpretation of performances”
Nature and scope of management accounting:
      Financial accounting.
      Budget and Forecasting.
      Interpretation of data.
      Internal audit.
      Tax accounting.
      Statistical method and procedures.

Objectives of mgt accounting:

I.        Formulating the plans and policies:      Planning is one of the important function of mgt. Planning is essentially related to future. It includes, forecasting, setting goals and deciding alternative course of actions and deciding on the programmed of activities to be undertaken.
II.      Helps in organizing:     The process of organizing includes dividing the whole enterprise into departments divisions with the clear cut operations.
III.   Helps in interpretation of financial information:          Mgt accounting financial information to the mgt in such a way that it is easily understood.
IV.    Reporting:                    It helps the mgt in take in timely decisions. The mgt accountant informs the financial position to the management from time to time through reports.
V.      Motivating the employee:        By fixing target to be achieve and providing. The incentives the mgt accounting motivates the employees to put in the best.
VI.    Helpful in decision making:                 During the course of business mgt has to take certain important decision like replace of labor with machines or introduction of latest technology, expansion or diversification of production etc..
VII. Helpful in controlling:             Mgt accounting devises like stranded costing and budgetary control.
VIII.                       Helpful in co-ordination:                     Mgt accounting helps the mgt by providing various tool to co-ordinate various departments or sections.
IX.    Helpful in tax administration:  Mgt accounting helps in assessing various tax liabilities and depositing correct amount  of taxes with the authorities concerned.

Functions of management accounting:
      Modification of data:          management accounting modifies the accounting data presented in financial data such away which is more suitable and highly useful to mgt.
      Financial analysis and interpretation:                      management accounting helps in interpretation the financial data presented in the financial statement in simplified way and presence in non-technical manner with comments and suggestion.
      Planning and forecasting:                Planning and forecasting are essential for achieving the desired business activities. Management accounting by providing necessary information assist the management in forecasting.
      Communication;                              In business concept different levels of management needs different types of information.
      Strategic decision making:   In management as to take strategic decisions such as make decisions replace the old machinery with latest decisions to expertly new market etc..
      Co-ordination:                                             management accountant by acting as co-coordinator among various departments. Through budgeting and financial reports and work to achieve co-ordination.
  Importance or advantages of management accounting
I.        Proper planning:                      management accounting helps the mgt to plan various business operations. By providing accounting information. The mgt formulates policies, programs and strategies with the help of accounting information.
II.      Increase efficiency:     It encourages efficiency in business operations the targets of different depts. Are fixed in advance and achieve of targets forms a yard stick for measuring their efficiency.
III.   Maximum profitability:            mgt accounting through the  process of planning the various mgt techniques are used to control cost of production the reduction in cost of production increases the sales volume maximum profits the concern.
IV.    Maximum return on capital employed:                        mgt accounting through the process of planning control and co-ordination helps the mgt in getting maximum return of capital employed.
V.      Effective mgt control:              the technique of budgetary control, standard control, standard costing and departmental operating statements helps in performing the control function.
VI.    Helps in communication:         mgt accounting helps in communicating upto date information to various parties interested in the successful working of a business org.
limitations of management accounting:
            Based on accounting records:
                        Management accounting derives information from financial accounting, cost accounting and other records. The accuracy of data and conclusion drawn from them depend to a large extent on the accuracy of basic records such as financial and cost records.
            Wider scope:
                        The scope of management accounting is very wide and brand based it create my difficult is in the implementation process It’s considered both monitory as well as non-monitory factory.
            Lack of knowledge:
                        The use of management accounting requires thing knowledge of a number of related subjects such as accountancy, statistics, management and engineering etc.
            Lack of well establish conventions:
                        Management accounting is to recent origin, it is still in developing stage. It does not have well established conventions as other branches of accounting.

Scope of management accounting:
            Financial accounting:
            Financial accounting is in the historical data. The recorded facts about an organization are useful for planning the future course of action.

cost accounting:
            it provides various techniques for determining, cost of manufacturing products of costs of providing service. It uses financial data for finding out cost of various jobs, products or process.

Budgeting and forecasting:
            Budgeting means expressing the plans, policies & goals of the enterprise for a different period in future.
Internal audit:
            It is necessary to judge the performance of every dept the actual performance of every department and individual is compare the free determined standards.
Tax accounting:
            Tax planning is an important part of mgt accounting income statements are prepare and tax liabilities are calculated the mgt is informed from central government, state government and local authorities.
Interpretation of data:
            Management accountant employees various statements to analysis and interpret financial data to making understandable, useable to the management to achieve objects of management in a more efficient manner.
2)Difference between cost accounting and management accounting ?
Cost accounting
Management accounting






It’s main objective is to Determine the end record of the cost per unit of output.

It is limited to the ascertainment of cost.

It considers both the present and past figures are considered for cost determination.

It has certain principles and procedures and preformed for recording and analyzing data.

This information is useful to both internal and external parties.

It is considered only with cost determination.

Only quantitative aspect is considered.

Costing can be installed without mgt a/c’s are prepared for a particular period of time.
Its main objective is to provide information to management to formulate plans.

Its scope is very wide.
 It includes budgeting, tax planning interpretation of financial results etc..

It deals with the future projections and plans on the basis of past and present cost data.

It has no specific rules and procedures are followed in mgt accounting.

The information provided by mgt accounting is useful only to the mgt.

It highlights both cost and revenues also.

It considers both quantitative and qualitative information.

For the management installation of mgt accounting system both financial and cost accounting  are required it supplies the needed information to the mgt from time to time throughout the year.

3Q)Difference between financial accounting and management accounting ?
Financial accounting
Management accounting




5.accounting principles




Its main objectives to provide info in the form of profit & loss a/c and balance sheet to various parties insert in accounting information such as share holders, creditors, bankers, investors, government etc..

It covers only that information which can be measured in terms of money.

It is concerned with historical records i.e. transactions which have already taken place.

Financial accounting reports reveal, what had happened in the past.

It is gathered by GAAP and conventions.

Financial statements are prepared under financial a/c’s useful to outsiders like creditors, bankers, investors etc..

Financial accounts are prepared for a particular period of time.

It deals with actual cost and revenues only. It ignores national cost.

Financial statements such as profit & loss, a/c & B/s are subject to the verification under companies act audited.
The main objective is to help the mgt in the formulation of plans & policies.

It considers quantitative information and also others information.

It is concerned with the activities of different units, depts. And cost centers.

It takes into account the past events only to the extent. They effect the future position.

It has no such set of accounting principles  and conventions are followed in mgt. accounting.

Reports prepared under mgt accounting are useful for internal mgt only.

It supplies the needed information to the mgt from time to time throughout the year.

Sometimes it considers even national cost.

It can be audited as it is not based on actual figures. It is not possible to get the mgt a/c’s audited.
Cost accounting definition:
            According to institute of cost and mgt accountants cost accountancy is the application of costing and cost a/c principles, methods, techniques etc.. to the science all & practice of cost control, cost audit and ascertainment of profitability.
Cost accounting:
            It is a formal system of accounting for costs  by means of which costs of products & service are ascertained and controlled.
Costing Definition:
            Costing is the classification recording and appropriate allocation of expenditure for the determination of costs of products or services.
Scope or functions of cost accounting:
Cost ascertainment:
            It deals with the collection and analysis of expense the measurement of production of the different stages. of manufacturing and the linking up of production with the expenses.

Cost accounting;
            It is the process of accounting  for cost which begins with recording of expenditure and ends with the preparation of statistical data.
Cost control:
            Cost control is the guidance and regulation by executive action of the cost operating an standard costing, budgetary control, proper presentation and reporting of cost data and cost audit.
            According to KOHLER cost accounting is the branch of accounting dealing with the classification recording, allocation, summarizing & reporting current and prospects cost.
      It is a process of a/c for cost
      It records income & expenditure relating to production of goods & service.
      It provides statistical data or the basis of which future estimates are submitted.
      It concerned with the cost ascertain and cost control.
      It establishes budgets and standards. So that actual cost may be compared find out deviations.
      It involves the preparation of right information to right person at right time  so that it may be helpful to mgt. For planning control and decision making.
Objectives of accounting:
Ascertainment of costs:
            It enable mgt to ascertain the cost of a product job (or) operation in a systematic way expenses relating to a product are collected from diverted sources.
Determination of selling price:
     Cost a/c provides useful cost data for fixing the selling price of a product by dividing the exps into  failed and variable components its helps  mgt to fix the price of a product  in a scientific manner.
Control of Inefficiencies:
            Cost accounting involves the study  of various operations in an undertaking. All activities are put to a close examination with a view to find out the source of efficiency or inefficiency.
Advantages of cost accounting:
Profitable and unprofitable activities are disclosed:
            These activities are disclosed and steps can be taken to eliminate or reduce these activities from which little or no benefit is obtained or change the method of production in order to order to make such activities more profitable.
It  guides future production policies:
            It explains the cost incurred and profit made in various lines of business and process these by provides data on the basis of which production can be appropriately planned.
It helps in increasing profits:
            By disclosing the source of loss or waste and by suggesting such contracts so that wastage, leakages and inefficiencies of all departments may be detected and prevented
Helpful to the government:
            It helps the government in preparing national plans to economic development.
Ex: Assessment of exercise, duties, Income tax, Export, Import etc..
Helpful to consumers:
            The ultimate aim of costing is to reduce cost production to the minimum and benefit resulting from the reduction of the cost is usually possessed on the consumers in the form of lower prices.

Helpful to public enterprises
            It measures the efficiency and profitability of under taking to justify its running in the public sector.
Limitations of cost accounting:
Very expensive:
            As the installation of costing is very expensive only business concerns are costing.
It is applicable:
            A costing system must be specially designed to meet the needs. If a business only then the system until successfully and achieve the objectives for which it is introduced in fact application of costing are very wide all types of activities mfg and non-mfg. Should consider the use of cost accounting.
It is  a failure:
            If a system doesn’t produce the desired results it is wrong to jump to the conclusion.
Role of management accounting planning & control or management process:
            It is formulating short term and long term plans and actions to achieve a particular expectation of the future during the 3-5 years or sometimes, even wrong planning requires. Setting objectives and identify methods to achieve those objectives. A budget is the financial planning showing how resources to be acquired a specified time internal.
            Managerial accounting helps the manager in planning by providing reports which estimates the effects of alternative action on an enterprise ability to achieve desired results.
            It is a process of establishing an organization frame work and assigning responsibility to people working in an org for achieving business goals and objectives.
            Managerial accounting helps managers in organizing by providing reports which estimates the effects of alternative actions on an enterprises ability to achieve desired results and necessary information to regulate and adjust operations and activities in the light of changing conditions mgt a/c can provide sales reports, production to the respective manager has taking suitable action about the sales & production position.
            It is the process of monitoring measuring and evaluating and correcting actual results to ensure that a business enterprise goals and plays are activated.
            Controlling is accomplished with the use of feedback is information that can be used to evaluate or correct the steps being to implement a plan.
            Managerial accounting helps in the control function by producing performance reports and control reports which high variances between expected and actual performance.
Decision making:
            A manager can’t plan without walking decisions and has to choose among coupling objectives and methods to carry of chosen objectives in organizing managers need to decision on an org structure and an specific action to take on day to day operations.
Decision making process methods the following process:
      Identifying a problem requiring managers action
      Specify the objective or goal to the achieved
      Using the possible alternative course of action
      Gathering the information about the each alternative
      Making a decision, by selecting on the alternatives

Cost concept and classification of cost:
Cost definition:
            The character institutes of mgt account London defines cost a “the amount of expenditure actual or national incurred on attributable to a specified thing activity”
Classification of costs:
Classification of Costs

Time        Activity volume        Function      Controllability       Decision making
  Historical                fixed cost                  mfg cost                 controlling cost         sunk cost
      cost                                                       admin cost                                              differential
pre determined          variable cost             selling cost             un-controlling                          cost
cost                                                             r & d cost                         cost                  marginal
estimated cost            semi variable            pre-reduction                                             cost   
                                    cost                              cost                                                     opportunity
standard cost                                              distribution                                                  cost
                                                                        cost                                                      joint cost
Cost classification by time:
On the basis of the time of computing costs can be classified into historical and predetermined costs.
Historical costs:
            These costs are computed after they are incurred such costs are available only after the product of a particular thing is over.
Pre-determined costs:
            These costs are computed in advance of production on the basis of a specification of all factors influencing cost such costs may be.
Estimated cost:
            These costs are based on lot of guess work. They try to ascertain what the costs will be based on certain factory. They are less accurate.
Standard costs:
            Standard cost is a pre-determined cost based on a technical estimate for material, labor and other expenses for a selected period of time, and for a prescribed set of working conditions.
Cost classification by activity / volume:
Fired cost:
            Fixed cost is a cost which trends to be unaffected by variations in volume of output.
Ex: Rent, Influence, Depreciations on building.
Variable cost:
            Cost which trends to very directly with volume of output are called variable cost it is a direct cost includes direct material, direct labor, direct expenses etc.
Semi – variable cost:
            These costs are partly fixed partially variable because of the variable element. They filtrate with volume and because of the fixed element. They do not change in direct proportion to output.
Ex : Telephone expenses, current charges, introduction of new shift in the factory will require additional supervisors.

Cost classification by functions:
Manufacturing / production cost:
            It is the cost of operating the manufacture division of an enterprise  it is defined as the cost of the sequence of operations which begins with supplying material, services and ends with the primary packing of the product.
Administration/office cost:
            It is the cost of formulating the policy directing the org and controlling the operations of an undertaking which is not directly related to production selling, distribution and research and development.
Selling cost:
            Selling cost is the cost of seeking to create and stimulate demand.
Ex: advertisement, showroom expenses.
Distribution cost:
            It is the cost of sequence of operation which begins with making the packed product available for dispatch and ends into making the reconditioned returned empty package if any available for resource.
Ex: ware house rent depreciation, delivery vehicle, special packing.
Research & development cost:
            It is the cost of discovering new ideas process, products by experiment and implementing such results on commercial basis.
Pre – production cost:
            Expenses incurred before a factory is started and expenses involved in introducing a new product are pre production cost.
Cost classification by controllability :
Controllable cost;
            A cost which can be influenced by the action of a specified member of an undertaking is a controllable cost.
Ex : direct material, direct labor etc..
Uncontrollable cost:
            A cost which cannot be influenced by the action of a specified member of and undertaking is an uncontrollable cost.
Ex: Rent, Rates, Taxes, Salary, Insurance etc..
Cost classification by decision making:
Opportunity cost:
            It is the value of the benefit sacrificed in favor of choosing a particular alternative it is cost of best alternative foregone.
Sunk cost:
            A cost which was incurred or sunk in the past and it is not relevant for a decision making is a sunk cost.
Different cost:
            The difference in total cost & b/w two alternatives is called differential cost. Increase in total cost such increase. In total cost such increase in costs are if the choice results in decrease in total cost the resulting decrease is known as detrimental cost.
Joint cost:
            Whenever two or more products are products out of one and the same raw material or process the cost of material purchased and the processing are called joint costs.
Marginal cost:
            Marginal cost is the additional cost of producing one additional unit.
                                                Elements of cost


Material                              Labor                               Expenses

Direct                 indirect             direct           indirect              direct           indirect
Material             material       labor     labor         expenses      expences
             The substance from which the product is made is called material. It can be direct as well as indirect.
      Direct material:
            It  refers to those materials which become an integral part of  the finished . It can be easily traceable to specific physical unit  .
      Indirect material:
All materials which is used for purpose ancillary to the
business and which cannot conveniently be assigned to specific physical units is known as “Indirect Material”
Ex: Lubricating oil, nut and bolts , Coal etc..
            In order to convert materials into finished product human effort is required such human effort is known as labor .Labor can be Direct as well as Indirect.
      Direct Labor:
 The  term direct labor or  wages paid to the cost of wages paid to those who directly carry out the services.
      Indirect Labor:
Wages which cannot be directly identified with a job process or operation are generally treated as indirect wages.
iii) Expenses:-
            expenses may be classified as direct and indirect
      Direct expenses:-
            These are expenses which can be directly conveniently and wholly identified with a job, process or operation
Ex : Cost of layout, cost patent rights.
      Indirect expenses;-
Expenses which cannot be charged to production directly and which are neither indirect material not indirect wages are known as indirect expenses.
Ex : Rent, Rates and taxes, insurance, depreciation, Repairs etc..
 Overheads :-
            The term overheads includes indirect materials, indirect expense overheads may be incurred in the factors office selling and distribution depts..
            Thus overheads may be three types
            Factory overheads

            office and administration overheads