MA 2 Cost and Management Accounting (CMA)*

Nitin Patel

Text BooksManagement Accounting by Paresh Shah (PS)Oxford University Press, 2009 EditionCost Accounting by Charles T. Hongren, S M Datar, George Foster, Madhav Rajan, Christopher Ittner (CS)Pearson Education, 13th Edition

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Nitin Patel

Other BooksCost 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 JainCost and Management Accounting by Ravi Kishore (Taxmann)

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Nitin Patel

Cost and Management Accounting Overview*

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IntroductionBusiness Manager has to answer following questionsWhat 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 AccountingIs the process of accounting for costBegins with recording of income & expenditureEnds with preparation of statistical dataPrimarily concerned with cost determination of product, service, process or operations

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Nitin Patel

Cost AccountingIs the process of accounting for costHelps the management to have a clear indication of their economic performancedirection in which they must move in order to improve economic efficienciesTo 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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Nitin Patel

Cost AccountingGenerally concerned with internal reporting for mgmt requirementDevelopment of cost accounting is of recent origin due to Heavy industrialisationOverall cut throat competitionBulky and time consuming traditional acctg system lacks efficiency to solve complicated cost-related problems

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Nitin Patel

DefinitionsCostingA tool to determine the cost of products or services or operationsCost AccountingProcess 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)

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

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Functions of Cost AccountingTo provide necessary information for the determination selling pricesTo compute product-wise profit, and advise the management for the enhancement of profitTo 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 AccountingTo install and implement cost control systems (budgetary control or standard cost system) for the control of material, labour, and overhead expensesTo advise the management for the formulation of future expansion policies and proposed capital outlaysTo establish an effective reporting system*

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Functions of Cost AccountingTo guide the mgmt in the preparation and implementation of incentive schemes based on productivity and cost savingsTo 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 AccountingTo supervise punched card accounting or data processingTo 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 AccountingTo coordinate with the industrial engineers for the introduction and implementation of methods suggested for improvement and or redundancy of programes and dataTo 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 differenceFinancial AccountingCost AccountingPurposeProvides info about organisation in a general way, ie. Profit, Assets, Liabilities, Owners EquityProvides info to guide the management for proper planning, operation, coordination, control and decision-makingForms of AccountsP&L A/cs and B/S are kept for the requirement of Companies Act and Income Tax ActKept as per requirement of management. Recently, the Co Act has made it obligatory to keep costing records in some mfg companies

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Financial Acctg v/s Cost Acctg*

Point of differenceFinancial AccountingCost AccountingRecordingin subjective mannerIn objective mannerItems of CostsItems of costs are expressed in totalsItems of costs are analysed, classified, apportioned, and allocated in order to calculate the cost per unitAnalysis of ProfitThese reveal the profits of the whole businessIt is only a part of financial accounts. It shows the result of operation, process, job or product so that the unprofitable lines of businesses can be eliminated

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Financial Acctg v/s Cost Acctg*

Point of differenceFinancial AccountingCost AccountingControlEmphasis on recording only. No importance to control aspectIt provides a detailed system of cost control with the help of standards and budgetsPeriodicityThese are prepared at the end of accounting yearIt is a continuous system of accounting. It submits the cost reports to the management weekly or monthly or as and when desiredInventory ValuationValued at cost or market price whichever is lessValued at cost

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Financial Acctg v/s Cost Acctg*

Point of differenceFinancial AccountingCost AccountingNature of TransactionRelate to commercial transactions of the businessConcerned with transactions related to third partiesRelate to manufacturing activitiesConcerned with transactions related to internal & third partiesFiguresMainly deal with actual dataCost accounts deal partly with actual figures and partly with estimates

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Management AccountingExtension of managerial aspects of cost accountingAccounting to assist the mgmt in planning and decision makingEmploys 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 AccountingManagement AccountingAAnalyses costs to control maximising efficiencyAAssists the management in planning, decision-making and controlIt uses the principles and practices of cost accountingIt uses the principles and practices of cost accounting and financial accounting

It provides internal reporting to managers for use in planning and controlling routine operationsIt 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 AccountingManagement AccountingCCost Accountant reports to the mgmt about the variances from budgets or standards and presents a comparative data of various periodsTThe management accountant suggests how to improve upon the operating results by suggesting ways for cost control and cost reductionCCost Accountant works out the years operating resultsManagement Accountant works out future operating statementsIt is the complement of management accountingIt is an extension of managerial aspects of cost accounting

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Role of Management AccountantThe Accountant chooses the information to be reported to a manager byIdentifying the specific purpose for which information is neededDetermining the relevance of the information. Information is relevant if itaffects the accomplishment of the objectives of the decision makerwill change as a result of the decisions or choice made by the decision maker*

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Role of Management AccountantController or Chief Management Accountant title is applied to various accounting positionsIn some organisations, they are just book keepers and in others they are executives who help top mgmt in planning and controllingMany people confuse Controller and Treasurer, but they are different terms*

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Cost Acctg v/s Mgmt Acctg*

ControllerTreasurerPPlanning and ControlPProcurement of long-term financeRReporting and interpretingInvestorEEvaluating and ConsultingShort-term financingTax AdministrationBankingGovernment ReportingCredits and CollectionsProtection of assetsInvestmentsEconomic AppraisalInsurance

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Objects of Cost AccountingCost FindingTo determine the actual cost of each article, process, operation, service, department, segment of activityCost reductionTo 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 AccountingCost SavingTo provide actual figures of cost comparison with estimates of costs and price fixingTo 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 AccountingCost ControlTo reduce cost thro budgetary control and standard costingTo ensure continuous check and adjustment of stores and materials with help of perpetual inventory*

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Objects of Cost AccountingManagerial Decision, Policy MakingTo study trends at different volumes of output, and to determine production policies and programsTo implement incentive wage plans for workers

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Nitin Patel

Objects of Cost AccountingManagerial Decision, Policy MakingTo organise internal audit system, and interlocking of financial and cost accounts to verify accuracy of each otherTo 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 AccountingPrice FixationControl on unprofitable activitiesManagerial Decision, Policy MakingUseful InformationCost ControlProvides valuable dataEffective check*

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Advantages of Cost AccountingPreparation of budgets and regulations of productionFixation of responsibilitiesIndependent CheckPrevention of manipulation, misappropriation, and frauds*

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Objections against Cost AcctgExpensiveDifferences in resultsUnnecessaryWorthlessInapplicability*

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Principles of CostingEvery concern must design its own costing system, keeping in view its peculiar problemsIf financial books can afford the necessary information, separate costing system is not neededReasonable accuracy is enough, of course, this depends upon the nature of industry*

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Principles of CostingCosting information should be collected as and when work proceedsA proper unit of cost should be determined*

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Essentials of Cost Acctg SystemShould be simple and easyArrangement of Costing system should be adopted to suit the general organisation of the factoryThere should be coordination and cooperation among executives of various departmentsIt should ensure proper accounting and allocation of material cost, labour cost, and overheads*

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Essentials of Cost Acctg SystemCost Accounts should be capable of reconciling with financial accounts, or else, integral accounting system is to be followedExpenses of costing system should be commensurate with the results (economical)*

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Importance of costingNot only assists management in various ways but also beneficial to employees, creditors, Government, public enterprises and the society *

To whomNature of BenefitMManagementPPlanning, Organising, Controlling, Budgeting, Decision-making, Pricing, EvaluationEEmployeesIncentive bonus, Higher earnings thro time and motion study, Right man in right job thro job evaluation

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Importance of costing*

To whomNature of BenefitCCreditorsSSupport to access more information as compared to financial accountsGGovernmentMore taxes thro higher production, Useful in the import and export policy and preparation of national plans for economic development, Policy of price differentials, SSocietyLower prices thro cost reduction measures. Better quality of products and services

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