Module1
Introduction to Cost
Management
Introduction
Financial accountants provide information to
external parties
Managerial accountants provide information to
internal users
Investors
Creditors
Regulators
Managers
Cost accountants provide information to both
internal and external users
Product cost information
Relationship of Financial, Management, and
Cost Accounting
Product
Costs
FINANCIAL
COST
MANAGEMENT
ACCOUNTING ACCOUNTIN ACCOUNTING
G
Accounting Information System
Accounting Information System
Financial accounting system
Follows established rules and conventions to
provide information (financial statements) to
external users such as investors, government
agencies, and banks.
Cost management system
Identifies, collects, measures, classifies, and
reports information that is useful to managers in
costing (determining what something costs),
planning, controlling, and decision making.
5
Management Accounting
Modern concept of accounts as a tool of
management. Any form of accounting which
enables a business to be conducted more
efficiently can be regarded as Management
Accounting
Subsystems of the
Accounting Information System
Cost Management System
Cost accounting system
Assigns costs to individual products and services
and other cost objects as specified by
management; satisfies financial reporting and
management decision-making needs
Operational control system
Provides accurate and timely feedback concerning
performance; concerned with what activities
should be performed and assessing those
activities.
8
Factors Affecting
Cost Management
Global Competition
Growth of the Service Industry
Advances in Information Technology
Advances in Management Environment
Consumer Orientation
New Product Development
Total Quality Management
Time as a Competitive Element
Efficiency
Components of the Value Chain
Limitations of Financial Accounting
Shows only overall performance
Historical in Nature
No performance appraisal
No material control system
No labour cost control
No proper classification of costs
No analysis of losses
Inadequate information for price fixation
No cost comparison
Fails to supply useful data to management
Objectives and Functions of Cost
Accounting
Ascertainment of Cost
Cost Control and Cost Reduction
Guide to Business Policy
Determination of selling price
Contd.
1.
2.
3.
4.
To analyse and classify all expenditures with reference to the
cost of products and operations.
To arrive at the cost of production of every unit, job,
operation, process, department or service and to develop
cost standard.
To indicate to the management any inefficiencies and the
extent of various forms of waste, whether of materials, time,
expenses or in the use of machinery, equipment and tools.
To provide data for periodical profit and loss accounts and
balance sheets at such intervals, e.g., weekly, monthly or
quarterly, as may be desired by the management during the
financial year, not only for the whole business but also by
departments or individual products.
5.
6.
7.
8.
To provide actual figures of cost for comparison with
estimates and to serve as a guide for future estimates or
quotations and to assist the management in their pricefixing policy.
To show, where standard costs are prepared, what the
cost of production ought to be and with which the actual
costs which are eventually recorded may be compared.
To present comparative cost data for different periods
and various volumes of output.
To provide information to enable management to make
short-term decisions of various types, such as quotation
of price to special customers or during a slump, make or
buy decision, assigning priorities to various products, etc
Cost Accounting vs. Financial Accounting
Basis
Financial A/C
Cost A/c
Purpose
External Users
Internal Users
Statutory
Requirements
Legal requirements of
Companies Act and
Income tax Act
Maintenance of these
accounts is voluntary
Analysis of cost and
Profit
Reveal the P/L of the
business as a whole
for a particular period
Shows the detailed
cost data for each
product, department
etc
Periodicity of
reporting
Annual basis
Reporting is a
continuous basis
Control Aspect
Lays emphasis on
recording of financial
transactions
Provides detailed
system of controls
Contd.
Basis
Financial A/C
Cost A/c
Historical and
Predetermined
Cost
It is concerned
exclusively with
historical records
It extends to plans and
policies to improve
performance in the future
Format of
presenting
Information
Uniform format of
presenting the
information
It has varied form of
presenting information
which are tailored to meet
the needs of management
Types of
transactions
recorded
External transactions
like Sales, purchases
etc.. With outside
parties
Records not only external
transactions but also
internal and inter
departmental
transactions.
Types of
statements
prepared
General purpose
statements
P& L a/c
Balance Sheet
Special Purpose
Statements
Report on loss of materials
Idle time report
Variance report
Cost Centre
For the purpose of cost ascertainment the
whole organization is divided into small parts
or sections
Each small section is treated as a cost centre
for which cost is ascertained
It may be a location (a department, sales
area), equipment(a machine, delivery van) a
person (machine operator)
E.g.: 1.Weaving department in textile mill,
melting shop in a steel mill, cane crushing
shop in a sugar mill.
2. Service cost centers are power house,
stores department, repair shop etc.
Cost Unit
Unit of product or service in relation to which
costs are ascertained
E.g.: In a sugar mill the cost per tonne of
sugar may be ascertained, In a textile mill the
cost per metre of cloth may be ascertained.
Thus a tonne of sugar and a metre of cloth
are cost units
Methods of Costing
Job order costing: Applies where work is undertaken to
customers special requirements
E.g.: Interior Decoration, Painting etc
Contract Costing: Applies for a longer duration and may
continue for more than a year
e.g.: Constructions of buildings, Dams, Ship Buildings etc
Batch Costing: Cost of a batch or group of identical
products is ascertained
E.g.: Production of readymade garments, Tyres and tubes,
Component parts etc
Contd.
Process Costing: Applied in mass production industries
manufacturing
standardized
products
in
continuous
processes of manufacturing
E.g.; Textile mills, Chemical works etc.
Unit Costing: Applied when production is uniform, the
cost per unit is found by dividing the total cost by number
of units produced.
E.g.: Mines, Steel production
Service Costing: Applied in service undertakings
E.g.: Transport undertakings, Electricity companies
Contd.
Multiple or Composite Costing: Applied
where a number of components are
separately manufactured and then assembled
into a final product
E.g.:
Television
set
manufacturing,
Refrigerators, cars etc
Techniques of Costing
Standard Costing
Budgetary Control
Marginal Costing- Only Variable Costing
Total absorption costing- Total costs
Classification Of Costs
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
By time (Historical, Pre-determined).
By nature or elements (Material, Labour and Overhead).
By degree of traceability to the product (Direct, Indirect).
Association with the product (Product, Period).
By Changes in activity or volume (Fixed, Variable, Semivariable).
By function (Manufacturing, Administrative, Selling, Research
and development, Pre-production).
Relationship with accounting period (Capital, Revenue).
Controllability (Controllable, Non-controllable).
Cost for analytical and decision-making purposes (Opportunity,
Sunk,
Differential,
Common,
Out-of-pocket,
Marginal,
Replacement).
Others (Conversion, Traceable, Normal, Avoidable, Unavoidable,
Total).
Importance and Advantages of CA
I.
.
.
.
.
.
.
.
II
.
.
To the Management
It discloses profitability of activities
It helps in cost control
Helps in Inventory control
It aids in formulating policies
Helps in decision making
It guides in fixation of selling price
It discloses idle capacity
To the workers
Helps for fixing the standard of efficiency for
workers
Rewards the efficient workers.
Contd.
III.
.
To the Creditors
Cost reports are useful to the creditors for
ascertaining the future prospects and
profitability of the enterprise
IV To the Society
.
Quality goods at a reasonable price
.
Curbing inflationary trend in the economy
Elements of Cost
Meaning
Element of cost means the essential parts/
components of goods or services. It is the
total cost and includes the main item of
expenditure incurred for production of goods
and services
Element wise Classification
1.
Material cost
Labour Cost
Expenses
Function wise Classification
2.
Production cost/ works cost/ factory cost
Administrative cost
Selling cost
Distribution cost
According to Behavior
3.
Variable cost
Fixed cost
Semi variable
Elements Of Cost
Cost
Materia
l
Direct
Materi
al
Expenses
Labour
Indirec
t
Materi
al
Indire
ct
Labou
r
Direct
Labou
r
Direct
Expens
es
Indirect
Expens
es
Overhea
ds
Factory
Administrati
ve
Selling
Distributio
n
