Description
NOTES OF COST ACCOUNTING
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CHAPTER 1: MANAGEMENT ACCOUNTING Int o!"ct#on: Accounting may be broadly classified into two categories – accounting which is meant to serve all parties external to the operating responsibility of the firms and the accounting which is designed to serve internal parties who take care of the operational needs of the firm. The first category which is conventionally referred to as financial accounting, looks to the interest of those who have primarily a financial stake in the organization’s affairs – creditors, investors, employees etc. n the other hand the second category of accounting is primarily concerned with providing information relating to the conduct of the various aspects of a business like cost or profit associated with some portions of business operations to the internal parties viz., management. This category of accounting is called as !anagement accounting. "n order to perform the primary task of decision making managers of business enterprises need information about the past, present and future in the functional areas of management such as personnel, finance, marketing and production. #ight decision making has to be based on $uantitative and $ualitative information. The management thus constantly needs accounting information to base its decisions upon. Thus management accounting provides the information needed by management personnel. $e%#n#t#on: The "nstitute of %hartered Accountants of &ngland has defined management accounting as' (Any form of accounting which enables a business to be conducted more efficiently can be regarded as !anagement Accounting). As per American Accounting Association, (!anagement Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances. As per "nstitute of %hartered Accountants of "ndia, (*uch of its techni$ues and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting). The %hartered "nstitute of !anagement Accounts +,-. defines management accounting as under' (!anagement accounting is an integral part of management concerned with identifying, presenting and interpreting information used for' /. 0ormulating strategy 1. 2lanning and controlling activities 3. 4ecision making 5. ptimizing the use of resources 6. 4isclosures to shareholders and others external to the entity 7. 4isclosure to employees 8. *afeguarding assets.) Nat" e o% management acco"nt#ng: !anagerial personnel are entrusted with authority and responsibility of operating business activities. !anagement accounting provides information to the personnel are entrusted with authority and responsibility of operating business activities. !anagement accounting provides information to the managerial personnel at three levels of management viz., top, middle and lower levels of management. "t provides the management with the tools for an analysis of its administrative action that can lay suitable emphasis on the possible alternatives
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# am &#'as g"pta( age )1 *ea s . # sta t a gam#ng we+s#te name! www.Games,ala.com wh#ch has PR- an! at#ngs +elow - la'h. # nee! he e 1 help % om *o"( as # ha&e no mone* to p omote m* gam#ng s#te(# am "nn#ng g aph#c shop w#th 1 PC .*es 1 PC :/ th#n' how # am s" &#&#ng w#th 1 PC an! a %am#l* w#th 0 '#!s
/( I !o not 'now m"ch a+o"t how to p omote m* we+s#te( so # !ec#!e! to tal' w#th *o" % #en!s to come an! 1o#n m* s#te an! pla* all the games %o % ee( all games a e pe sonall* selecte! +* me % om tho"san!s o% games. I am "p!at#ng m* we+s#te !a#l* w#th lots o% awesome games.2o" can pla* w#tho"t eg#ste o eg#ste *o" #! o *o" also can pla* w#th *o" %ace+oo' I$.hope *o" all w#ll l#'e m* s#te an! pla* % ee onl#ne games the e( an! !on3t %o got to tell *o" % #en!s a+o"t m* www.Games,ala.com :/
in terms of costs, prices and profits. The decisions made by management are based on $uantitative information and common sense, foresight, knowledge and experience. !anagement accounting includes financial accounting information and raw material from several other disciplines such as costing, statistics, mathematics, political science, sociology, psychology, management economics, law etc. 9ith all these data he can ensure optimum utilization of all the resources including employees by maintaining sound morale of the employees, maximization of output and minimization of inputs, analyze the managerial $uestions in terms of costs, revenues, profits and growth. "t is thus a highly personalized service with the help of which management can explore and exploit business opportunities and take sound and correct decisions. "t is not a precise science as it uses its own conventions rather than standardized principles. Therefore the inferences drawn from the facts provided, depends on the skill, :udgment and common sense of different management accountants. Thus it is said that management accounting serves as a management information system which enables the effective management of an enterprise. 4cope o% management acco"nt#ng: !anagement accounting is a wide and diverse sub:ect. As stated earlier it includes various branches of knowledge such as psychology, sociology, economics, laws, political science, mathematics, statistics, finanacial accounting, cost accounting etc. "t is thus very difficult to define its scope, as it is a dynamic and ever growing discipline of knowledge. The important techni$ues and systems used by management accounting are briefly stated below. a. ;istorical cost accounting' !aintenance of books of cost accounting enables to know the actual costs incurred by the firm. b. *tandard costing' The standard costs laid down by experts are compared with the natural costs in order to know the deviations c. !arginal costing' The costs are divided into fixed and variable costs which help is making vital decisions. d. 4ecision accounting' 4ecisions are made after studying the impact of decisions in terms of costs, resource, profits, growth etc. e. ordinate the various activities of the organization for the preparation of master budget and other such activities. @. 4ecision making' The management accountant has to assist the management in taking realistic decisions through analysis and interpretation of data that suggests a particular course of action with the help of various tools of management accounting. Management acco"nt#ng &s. %#nanc#al acco"nt#ng 0inancial accounting and management accounting are two interrelated facets of the accounting system. They are not independent of each other but they are interdependent. 0inancial accounting provides the basic data which are analysed and interpreted suitably and in the re$uired manner by management accounting. Although there exists close relationships between financial accounting and management accounting, distinction is always drawn between financial accounting and management accounting since they differ in their emphasis and approaches. $#mens#on /. b:ective Management Acco"nt#ng To provide information for internal management ?aries according to use of the information 9hatever is useful to management 5#nanc#al Acco"nt#ng To make periodical reports to shareholders, creditors, debenture holders and the Aovernment. ,nified structure Aenerally accepted accounting principles +AAA2s.
1. *tructure 3. *ources of principles
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5. Beed 6. Time>orientation 7. #eport entity 8. 2urpose @. ,sers D. "nformation content /E. "nformation precision //. #eport fre$uency ptional ;istorical and estimates of the future #esponsibility centers A means to the end of assisting management #elatively small group' known identity !onetary and non>monetary !any approximations ?aries with purpose, monthly and weekly. *tatutory obligation ;istorical verall organization &xternal reporting C statements for outside users #elatively large group' mostly unknown 2rimarily monetary 0ew approximations Fuarterly and annual 4elay of weeks or even months Aenerally adopts twelve months period for reporting financial performance. 0ew lawsuits but threat is always present. #ecords maintained in the form of personal, property and nominal accounts. Gimits the role to a book> keeper.
/1. #eport timeliness #eports issued promptly after end of period covered /3. 2eriod of reporting /5. Giability potential /6. #ecord maintenance = reporting /7. #ole of accountant #eports are for shorter durations. The data is also collected for preparing long term plans for five or more years. ?irtually none. %osts and revenues reported by responsibility centres or cost centres Transcends beyond book>keeping into the managerial process of planning, organizing, control and evaluating and also to different functional areas.
Management acco"nt#ng &s. cost acco"nt#ng %osting has been defined as classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services. %ost accounting will tell the management as to how the business has fared at each stage of operation. year. %ost accounting deals primarily with cost data. / +%ost Accounting *tandard /, issued by the "%9A, "ndia. defines %ost as' %ost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. Cost#ng: %osting means the process of ascertainment of costs. %osting involves the following steps +i. Ascertaining or collecting costs +ii. Analysing or classifying costs into basic elements such as !aterial, Gabour, &xpenses etc. and +iii. Allocating total costs to a Hparticular thing’ i.e. a product, a contract or a process. Thus cost can now be defined as the total expenditure, duly classified into materials, labour, expenses etc. allocated to a particular product or contract or process. Cost Acco"nt#ng: The "nstitute of %ost and !anagement Accountant, &ngland +"%!A. has defined %ost Accounting as – (the process of accounting for the costs from the point at which expenditure incurred, to the establishment of its ultimate relationship with cost centres and cost units. "n its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned). %ost accounting is a term broader than costing. "t covers costing plus the reporting and control of costs. Thus %ost Accounting I %osting J %ost #eporting J %ost %ontrol. %ost accounting can be defined as the techni$ue of recording, classification, allocation, reporting and control of costs. O+1ect#&es o% cost acco"nt#ng: %ost accounting has the following basic aspects or ob:ectives' /. %osting' "t involves the following basic aspects or 6 HA’s' a. Ascertain costs relating to a particular period, b. Analyse or classify costs under different heads of accounts such as material, labour, expenses etc., c. Allocate costs fully to the direct expenses or the specific costs such as raw materials, labour to the relevant products, contracts or processes, d. Apportion or distribute common costs to each product, contract or process on a suitable basis and e. Absorb the total expenses of a department over its products so as to finalise the cost of each product that is then reported to the management. 1. %ost reporting' %ost reporting has the following aspects'> a. What to report or the nature of information to be presented should be relevant and precise. b. Whom to report will determine the scope of the report to be submitted to the top management. c. When to report – daily, weekly, monthly, $uarterly or yearly etc. d. How to report or the format will depend on the factors mentioned above. nce the cost report is received, management can take action to control the costs. 3. %ost %ontrol' %ost control has been defined by the "%!A as (the guidance and regulation by executive action of the costs of operating an undertaking). Thus cost
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control means the control of costs by management. 0ollowing are the aspects or stages of cost control. a. Set targets for cost, production, profits etc. for each period. b. Measure Actual Performance relating to cost, production profits for the period concerned. c. Compare targets with actuals to find out the variations d. Analyse variations, the causes for variations whether favourable or adverse are to be investigated. 9hile adverse variations denote wastages and loses, favourable variations may indicate the targets fixed are very low. "n both cases the exact reasons for the variations are to be known. e. Take action once the causes are known to eliminate avoidable losses etc. 5. ther aspects' The other aspects or ob:ectives of cost accounting are as follows' a. 2rovide re$uired data for fixing sales price for submitting tenders, $uotations etc. b. Assist the management in controlling inventory for raw materials, goods in process, finished goods, spares and consumables etc. c. Advice management on future policies regarding expansion, growth, capital investment etc. d. "nstall labour incentive system for getting maximum productivity from labour at optimum cost. e. Advice management in eci ing optimum pro uct!mix( merits and demerits of alternative courses of actions +make or buy etc"#$ introduction of automation, mechanization, rationalization of system of production etc. Thus the ob:ectives can be summarized as follows' /. Ascertainment of costs 1. &stimation of costs 3. %ost control 5. %ost reduction 6. 4etermining selling price 7. 0acilitating preparation of financial and other statements 8. 2roviding basis for operating policy Impo tance an! a!&antages o% Cost Acco"nt#ng: %ost accounting is not only important to the management and owners but also to many others like the workers, the Aovernment, the consumers, the public at large and so on. The advantages are as follows. /. To the management and the owners' %ost accounting helps the management of the concern to ascertain the cost and profitability of each individual product C serviceC contractC processC divisionC branch separately. This also helps in valuation of the closing stock of goods at the end of the year. "t helps the management of the concern in controlling costs in reducing the avoidable expenditure, and minimizing wastages and losses. "t ensures the reconciliation of %uantity of input with the $uantities of output, wastages and scrap. The management is thus able to regulate and monitor the movement of materials thus preventing theft and loss of materials during processing and handling. "t is of great help to the management in taking several decisions such as, which products to produce more, how much to produce, whether to make or buy a component, what price to charge or $uote. Thus cost accounting is an invaluable
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decision aid to ecision making" "t also facilitates in preparation of budgets and implementation of budgetary control in the organization. The end result of all the above advantages of cost accounting is maximi&ation of profits of the concern thus benefiting the owners by increasing their net worth or the share prices, higher dividends etc. 1. To the workers' %ost accounting has an elaborate system of assessing the performance of workers and rewarding them suitably through incentives and bonus. The increase in profits due to a cost accounting system also leads to higher remuneration and bonus to the workers. 3. To the Aovernment C %onsumers C 2ublic' "n case the products are under price control, cost accounting furnishes the data re$uired by the government for fixing fair prices. %onsumers benefit since the prices fixed on the basis of the cost data are :ust and reasonable and cannot be too high. "t also leads to efficiency and productivity in the industrial sector. "t ensure optimum utilization of the scarce economic resources of the country. %ost accounting leads to maximum profits for an organization. Baturally the Aovernment also gains by way of more taxes on production, income and sales etc. The higher revenue is used by the Aovernment for public welfare and economic development. C #t#c#sms o% Cost acco"nt#ng: /. 4uplication' "t is argued that cost accounting is duplication when a good financial accounting system is already in operation. %ost accounting takes its basic data from books of accounts and :ust rearranges it in a different way. 1. "napplicable' "n a concern producing a single product involving no complex processes, cost accounting is inapplicable. "t is also of no use in non>profitable organizations or in agriculture etc. 3. Bot useful for decision making' "n many cases, the decisions of the management are not based on cost accounting data. Thus the decision regarding which item to produce and how much to produce depends on the license given by the Aovernment and the market forces of demand and supply. 5. &xpensive and routine' A cost accounting system is $uiet expensive to install and operate. At times the cost accounting systems become mere routing of filling the forms and submitting standard reports. Bon>cooperation from staff also may lead to failure of the system in many concerns. ;owever, proper planning and implementation of the cost accounting system will overcome these criticisms and would stand null and void in view of the ob:ectives, importance and advantages of the cost accounting system. 5"nct#ons o% Cost Acco"ntant: The main functions of a cost accountant can be summarized as follows' /. 4etermining cost and analyzing income' A cost accountant determines the cost of a
b, product or process as the case may be. ;e analyses and classifies costs according to different cost elements, viz., materials, labour and expenses. *uch analysis enables him to tell the management the significance of the different cost elements and fixation of the selling prices of the products manufactured by the business. ;e advises the management about the profitability or otherwise of each b, product or process. Thus, he helps the management in maximizing business profits.
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1. 2roviding cost data for planning and control' A cost accountant collects, classifies and presents in appropriate form suitable data to the management for planning and controlling the operations of the business. ;e makes constant endeavour to control and reduce the cost by the following techni$ues' a. ;e submits regular reports to the management regarding wastage of material, idle time, idle capacity, etc. ;e identifies the causes and suggests suitable controlling measures to prevent or reduce losses on account of these causes. b. ;e makes product>wise or process>wise comparisons to identify non>profitable products or processes. c. ;e develops cost consciousness in the organization by adoption of budgetary control and standard costing techni$ues. d. ;e maintains an even flow of materials and at the same time prevents unnecessary investment of materials through different material control techni$ues e.g. Aoperation and co> ordination of different departmental heads. 3. ,ndertaking special cost studies for managerial decision>making' A cost accountant undertakes special cost studies and carries out investigation for collecting and presenting suitably the data to the management for decision>making regarding the following areas' a. "ntroduction of new products, replacement of manual labour by machines etc. b. !ake or buy decisions, replacing or repairing old machines, accepting orders below cost, etc. c. &xpansion plans, installation of new capital pro:ect, etc. d. ,tilisation of idle capacity and development of a proper information system to provide prompt and correct cost information to the management. e. "nstallation of a cost audit system. All types of manufacturing concerns can broadly be classified into two categories – +i. !ass> production concerns, +ii. *pecial order concerns. !ass production concerns such as chemical plants, flour mills, paper manufacturing, tyre and rubber companies etc., produce uniform standard products and involve generally a continuous production process. The finished products are the result of successive operations. n the other hand, special>order concerns manufacture products in clearly distinguishable lots in accordance with special orders and individual specifications. 2rinting shops, construction companies, machine tool manufacturing, repair shops, wood>working shops etc., come in this category. "n case of mass production concerns the products when produced are of the same type, and involve the same material and labour and pass through the same set of process. "n such industries each process is designated as a separate cost>centre and the cost per unit is calculated by dividing total cost of the process with the total number of units produced by the process. The cost of production of the product is obtained by adding the unit costs of various processes through which the product has passed. This method of costing is known as process costing. 6o+ Cost#ng: "n case of special>order concerns products produced orbs undertaken are of diverse nature. They involve materials and labour in different $uantities and entail different amounts of overhead costs. "n such concerns it is necessary to keep a separate record of each lot of products or bs from the time the work on the b or product begins till it is completed. A
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separateb card or sheet is maintained for each b or product in which all expenses of materials, labour, overheads are entered and cost of completing a b or manufacturing a product is found out. *uch a cost system is known as b or terminal or specific costing. b:ectives of b costing' /. "t helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss made out on its execution. The management can :udge the profitability of each b and decide its future courses of action. 1. "t helps management in making more accurate estimates about the costs of similar bs to be executed in future on the basis of past records. The management can conveniently and accurately determine and $uote prices for orders of a similar nature which are in prospect. 3. "t enables management to control operational inefficiency by comparing actual costs with the estimated ones. A system of b costing should be adopted after considering the following two factors. a. &ach order or b should be continuously identifiable from the raw material stage to the stage of completion. b. The system is very expensive because it re$uires a lot of clerical work in estimating costs, designing and scheduling of production. "t should, therefore, be adopted when absolutely warranted. 2rocedure' The following is the procedure adopted for costing purposes in a concern using b costing' /. Kob order number' &very order received is allotted a certain number from a running list maintained for this purpose. &very order or b will be known by its number throughout its production process in the factory. 1. 2roduction C b order' A production C b order is a written order issued to the manufacturing department to proceed with a b. "t is issued by the production planning department on receipt of a b order to the foreman of the relevant department. "nstructions to the costing department to collect particulars of costs on execution of the b are also issued simultaneously. The production order is prepared with sufficient copies for all the departmental managers or foreman who will be re$uired to take any part in the production. 3. in>progress account for each department of the factory has been opened, it will be necessary to find out the cost of completed bs regarding each department. The balance in work>in>process account at any time represents the cost of bs not yet completed. 7. Kob ticket' "n order to provide information regarding the progress of each b at each operation, generally a b ticket is issued by the production control department. The ticket contains detachable portions for different operations. The b ticket is useful for both production control and costing departments. n completion of an operation, the relevant portion of ticket is detached and sent to production control department. This enables production control department in keeping production schedule up>to>date. n the basis of detached portion a departmental summary of production can be prepared which is very useful for costing purposes. !oreover, the amount of work>in>process as shown by the cost ledger can be checked by listing the ticket number of bs in process in any department and valuing this list. 8. 2rogress advice' The foreman of a department may be re$uired to send periodically a statement regarding the stage of completion of each b to ensure completion of bs by scheduled dates. *uch a note is called (progress advice). Advantages of b costing' /. Kob costing enables the management to identify spoiled and defective work in respect to particular production orders, departments or groups of workers and hence the management can fix up responsibility for inefficiency. 1. !anagement can determine the trends in costs and compare the operating efficiency of men and machines in each cost centre. "t can also determine the completion cost of each b. 3. "t enables the preparation of estimates of costs of bs before production. 5. "t enables comparison of estimated costs with actual costs as the costs are analysed on the basis of costs, services and production.
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6. "t makes available to the management a complete file of production orders which contains valuable statistics on cost. 7. "t enables ascertainment of profit or loss on eachb immediately after their completion. 8. "t enables the management to identify unprofitable bs. @. "n case of cost plus contracts, b costing enables to provide precise $uotations. D. "t helps in production planning. /E. "t facilitates fixation of selling price. Gimitations of b costing' /. Kob costing involves a lot of clerical work in identifying materials, labour and overheads with specific bs and departments. 1. !anagement cannot evaluate precisely the operating efficiency of men and machines. 3. *ince costs ascertained and compiled are historical costs, they are not of much utility to the management. 5. "t does not apply budgetary control to important cost elements such as labour, materials and overheads. 6. Kob costs over any period of time cannot be compared if mar economic changes take place in between. 7. "t is expensive to operate and errors are possible due to increased clerical work. 7atch Cost#ng: per tonne *ale price per tonne P ocess = A /,EEE tonnes #s. 1EE #s. 86,EEE 6P 6E tonnes 5EES P ocess A 7 >>> >>> #s. 5/,EEE /EP 3E tonnes 6EE P ocess = C >>> >>> #s. //,EEE 1EP 6/ tonnes @EE
!anagement expenses were #s. /6,EEE, selling expenses were #s. /E,EEE. Two>third output of 2rocess A and one>half output of 2rocess < are passed on the next process and the balance was sold. Tou are re$uired to prepare process cost accounts and costing 2rofit and Goss Account for the year 1EE/.
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CHAPTER B: 7U$GETAR2 CONTRO: %ontrolling costs by making use of budgets is known as budgetary control. 1EE@. 1. !aya Gimited has made the following sales estimates for April, !ay and Kune of the year 1EED from which you are re$uired to prepare sales budget by units and rupees for each of the three months for each sales area and in total *ales Area April !ay Kune A 5EP 3EP 3EP < 56P 36P 1EP % 5EP 36P 16P 4 3EP 5EP 3EP The area>wise unit sales expected is as follows' *ales Area *ales +,nits. A 1,6EE < 1,EEE % 3,EEE 4 7,EEE Total /3,6EE The selling price has been fixed at #s.7 per unit in Area A, #s.@ per unit in Area
NOTES OF COST ACCOUNTING
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CHAPTER 1: MANAGEMENT ACCOUNTING Int o!"ct#on: Accounting may be broadly classified into two categories – accounting which is meant to serve all parties external to the operating responsibility of the firms and the accounting which is designed to serve internal parties who take care of the operational needs of the firm. The first category which is conventionally referred to as financial accounting, looks to the interest of those who have primarily a financial stake in the organization’s affairs – creditors, investors, employees etc. n the other hand the second category of accounting is primarily concerned with providing information relating to the conduct of the various aspects of a business like cost or profit associated with some portions of business operations to the internal parties viz., management. This category of accounting is called as !anagement accounting. "n order to perform the primary task of decision making managers of business enterprises need information about the past, present and future in the functional areas of management such as personnel, finance, marketing and production. #ight decision making has to be based on $uantitative and $ualitative information. The management thus constantly needs accounting information to base its decisions upon. Thus management accounting provides the information needed by management personnel. $e%#n#t#on: The "nstitute of %hartered Accountants of &ngland has defined management accounting as' (Any form of accounting which enables a business to be conducted more efficiently can be regarded as !anagement Accounting). As per American Accounting Association, (!anagement Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances. As per "nstitute of %hartered Accountants of "ndia, (*uch of its techni$ues and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting). The %hartered "nstitute of !anagement Accounts +,-. defines management accounting as under' (!anagement accounting is an integral part of management concerned with identifying, presenting and interpreting information used for' /. 0ormulating strategy 1. 2lanning and controlling activities 3. 4ecision making 5. ptimizing the use of resources 6. 4isclosures to shareholders and others external to the entity 7. 4isclosure to employees 8. *afeguarding assets.) Nat" e o% management acco"nt#ng: !anagerial personnel are entrusted with authority and responsibility of operating business activities. !anagement accounting provides information to the personnel are entrusted with authority and responsibility of operating business activities. !anagement accounting provides information to the managerial personnel at three levels of management viz., top, middle and lower levels of management. "t provides the management with the tools for an analysis of its administrative action that can lay suitable emphasis on the possible alternatives
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# am &#'as g"pta( age )1 *ea s . # sta t a gam#ng we+s#te name! www.Games,ala.com wh#ch has PR- an! at#ngs +elow - la'h. # nee! he e 1 help % om *o"( as # ha&e no mone* to p omote m* gam#ng s#te(# am "nn#ng g aph#c shop w#th 1 PC .*es 1 PC :/ th#n' how # am s" &#&#ng w#th 1 PC an! a %am#l* w#th 0 '#!s
/( I !o not 'now m"ch a+o"t how to p omote m* we+s#te( so # !ec#!e! to tal' w#th *o" % #en!s to come an! 1o#n m* s#te an! pla* all the games %o % ee( all games a e pe sonall* selecte! +* me % om tho"san!s o% games. I am "p!at#ng m* we+s#te !a#l* w#th lots o% awesome games.2o" can pla* w#tho"t eg#ste o eg#ste *o" #! o *o" also can pla* w#th *o" %ace+oo' I$.hope *o" all w#ll l#'e m* s#te an! pla* % ee onl#ne games the e( an! !on3t %o got to tell *o" % #en!s a+o"t m* www.Games,ala.com :/in terms of costs, prices and profits. The decisions made by management are based on $uantitative information and common sense, foresight, knowledge and experience. !anagement accounting includes financial accounting information and raw material from several other disciplines such as costing, statistics, mathematics, political science, sociology, psychology, management economics, law etc. 9ith all these data he can ensure optimum utilization of all the resources including employees by maintaining sound morale of the employees, maximization of output and minimization of inputs, analyze the managerial $uestions in terms of costs, revenues, profits and growth. "t is thus a highly personalized service with the help of which management can explore and exploit business opportunities and take sound and correct decisions. "t is not a precise science as it uses its own conventions rather than standardized principles. Therefore the inferences drawn from the facts provided, depends on the skill, :udgment and common sense of different management accountants. Thus it is said that management accounting serves as a management information system which enables the effective management of an enterprise. 4cope o% management acco"nt#ng: !anagement accounting is a wide and diverse sub:ect. As stated earlier it includes various branches of knowledge such as psychology, sociology, economics, laws, political science, mathematics, statistics, finanacial accounting, cost accounting etc. "t is thus very difficult to define its scope, as it is a dynamic and ever growing discipline of knowledge. The important techni$ues and systems used by management accounting are briefly stated below. a. ;istorical cost accounting' !aintenance of books of cost accounting enables to know the actual costs incurred by the firm. b. *tandard costing' The standard costs laid down by experts are compared with the natural costs in order to know the deviations c. !arginal costing' The costs are divided into fixed and variable costs which help is making vital decisions. d. 4ecision accounting' 4ecisions are made after studying the impact of decisions in terms of costs, resource, profits, growth etc. e. ordinate the various activities of the organization for the preparation of master budget and other such activities. @. 4ecision making' The management accountant has to assist the management in taking realistic decisions through analysis and interpretation of data that suggests a particular course of action with the help of various tools of management accounting. Management acco"nt#ng &s. %#nanc#al acco"nt#ng 0inancial accounting and management accounting are two interrelated facets of the accounting system. They are not independent of each other but they are interdependent. 0inancial accounting provides the basic data which are analysed and interpreted suitably and in the re$uired manner by management accounting. Although there exists close relationships between financial accounting and management accounting, distinction is always drawn between financial accounting and management accounting since they differ in their emphasis and approaches. $#mens#on /. b:ective Management Acco"nt#ng To provide information for internal management ?aries according to use of the information 9hatever is useful to management 5#nanc#al Acco"nt#ng To make periodical reports to shareholders, creditors, debenture holders and the Aovernment. ,nified structure Aenerally accepted accounting principles +AAA2s.
1. *tructure 3. *ources of principles
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5. Beed 6. Time>orientation 7. #eport entity 8. 2urpose @. ,sers D. "nformation content /E. "nformation precision //. #eport fre$uency ptional ;istorical and estimates of the future #esponsibility centers A means to the end of assisting management #elatively small group' known identity !onetary and non>monetary !any approximations ?aries with purpose, monthly and weekly. *tatutory obligation ;istorical verall organization &xternal reporting C statements for outside users #elatively large group' mostly unknown 2rimarily monetary 0ew approximations Fuarterly and annual 4elay of weeks or even months Aenerally adopts twelve months period for reporting financial performance. 0ew lawsuits but threat is always present. #ecords maintained in the form of personal, property and nominal accounts. Gimits the role to a book> keeper.
/1. #eport timeliness #eports issued promptly after end of period covered /3. 2eriod of reporting /5. Giability potential /6. #ecord maintenance = reporting /7. #ole of accountant #eports are for shorter durations. The data is also collected for preparing long term plans for five or more years. ?irtually none. %osts and revenues reported by responsibility centres or cost centres Transcends beyond book>keeping into the managerial process of planning, organizing, control and evaluating and also to different functional areas.
Management acco"nt#ng &s. cost acco"nt#ng %osting has been defined as classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services. %ost accounting will tell the management as to how the business has fared at each stage of operation. year. %ost accounting deals primarily with cost data. / +%ost Accounting *tandard /, issued by the "%9A, "ndia. defines %ost as' %ost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services. Cost#ng: %osting means the process of ascertainment of costs. %osting involves the following steps +i. Ascertaining or collecting costs +ii. Analysing or classifying costs into basic elements such as !aterial, Gabour, &xpenses etc. and +iii. Allocating total costs to a Hparticular thing’ i.e. a product, a contract or a process. Thus cost can now be defined as the total expenditure, duly classified into materials, labour, expenses etc. allocated to a particular product or contract or process. Cost Acco"nt#ng: The "nstitute of %ost and !anagement Accountant, &ngland +"%!A. has defined %ost Accounting as – (the process of accounting for the costs from the point at which expenditure incurred, to the establishment of its ultimate relationship with cost centres and cost units. "n its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned). %ost accounting is a term broader than costing. "t covers costing plus the reporting and control of costs. Thus %ost Accounting I %osting J %ost #eporting J %ost %ontrol. %ost accounting can be defined as the techni$ue of recording, classification, allocation, reporting and control of costs. O+1ect#&es o% cost acco"nt#ng: %ost accounting has the following basic aspects or ob:ectives' /. %osting' "t involves the following basic aspects or 6 HA’s' a. Ascertain costs relating to a particular period, b. Analyse or classify costs under different heads of accounts such as material, labour, expenses etc., c. Allocate costs fully to the direct expenses or the specific costs such as raw materials, labour to the relevant products, contracts or processes, d. Apportion or distribute common costs to each product, contract or process on a suitable basis and e. Absorb the total expenses of a department over its products so as to finalise the cost of each product that is then reported to the management. 1. %ost reporting' %ost reporting has the following aspects'> a. What to report or the nature of information to be presented should be relevant and precise. b. Whom to report will determine the scope of the report to be submitted to the top management. c. When to report – daily, weekly, monthly, $uarterly or yearly etc. d. How to report or the format will depend on the factors mentioned above. nce the cost report is received, management can take action to control the costs. 3. %ost %ontrol' %ost control has been defined by the "%!A as (the guidance and regulation by executive action of the costs of operating an undertaking). Thus cost
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control means the control of costs by management. 0ollowing are the aspects or stages of cost control. a. Set targets for cost, production, profits etc. for each period. b. Measure Actual Performance relating to cost, production profits for the period concerned. c. Compare targets with actuals to find out the variations d. Analyse variations, the causes for variations whether favourable or adverse are to be investigated. 9hile adverse variations denote wastages and loses, favourable variations may indicate the targets fixed are very low. "n both cases the exact reasons for the variations are to be known. e. Take action once the causes are known to eliminate avoidable losses etc. 5. ther aspects' The other aspects or ob:ectives of cost accounting are as follows' a. 2rovide re$uired data for fixing sales price for submitting tenders, $uotations etc. b. Assist the management in controlling inventory for raw materials, goods in process, finished goods, spares and consumables etc. c. Advice management on future policies regarding expansion, growth, capital investment etc. d. "nstall labour incentive system for getting maximum productivity from labour at optimum cost. e. Advice management in eci ing optimum pro uct!mix( merits and demerits of alternative courses of actions +make or buy etc"#$ introduction of automation, mechanization, rationalization of system of production etc. Thus the ob:ectives can be summarized as follows' /. Ascertainment of costs 1. &stimation of costs 3. %ost control 5. %ost reduction 6. 4etermining selling price 7. 0acilitating preparation of financial and other statements 8. 2roviding basis for operating policy Impo tance an! a!&antages o% Cost Acco"nt#ng: %ost accounting is not only important to the management and owners but also to many others like the workers, the Aovernment, the consumers, the public at large and so on. The advantages are as follows. /. To the management and the owners' %ost accounting helps the management of the concern to ascertain the cost and profitability of each individual product C serviceC contractC processC divisionC branch separately. This also helps in valuation of the closing stock of goods at the end of the year. "t helps the management of the concern in controlling costs in reducing the avoidable expenditure, and minimizing wastages and losses. "t ensures the reconciliation of %uantity of input with the $uantities of output, wastages and scrap. The management is thus able to regulate and monitor the movement of materials thus preventing theft and loss of materials during processing and handling. "t is of great help to the management in taking several decisions such as, which products to produce more, how much to produce, whether to make or buy a component, what price to charge or $uote. Thus cost accounting is an invaluable
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decision aid to ecision making" "t also facilitates in preparation of budgets and implementation of budgetary control in the organization. The end result of all the above advantages of cost accounting is maximi&ation of profits of the concern thus benefiting the owners by increasing their net worth or the share prices, higher dividends etc. 1. To the workers' %ost accounting has an elaborate system of assessing the performance of workers and rewarding them suitably through incentives and bonus. The increase in profits due to a cost accounting system also leads to higher remuneration and bonus to the workers. 3. To the Aovernment C %onsumers C 2ublic' "n case the products are under price control, cost accounting furnishes the data re$uired by the government for fixing fair prices. %onsumers benefit since the prices fixed on the basis of the cost data are :ust and reasonable and cannot be too high. "t also leads to efficiency and productivity in the industrial sector. "t ensure optimum utilization of the scarce economic resources of the country. %ost accounting leads to maximum profits for an organization. Baturally the Aovernment also gains by way of more taxes on production, income and sales etc. The higher revenue is used by the Aovernment for public welfare and economic development. C #t#c#sms o% Cost acco"nt#ng: /. 4uplication' "t is argued that cost accounting is duplication when a good financial accounting system is already in operation. %ost accounting takes its basic data from books of accounts and :ust rearranges it in a different way. 1. "napplicable' "n a concern producing a single product involving no complex processes, cost accounting is inapplicable. "t is also of no use in non>profitable organizations or in agriculture etc. 3. Bot useful for decision making' "n many cases, the decisions of the management are not based on cost accounting data. Thus the decision regarding which item to produce and how much to produce depends on the license given by the Aovernment and the market forces of demand and supply. 5. &xpensive and routine' A cost accounting system is $uiet expensive to install and operate. At times the cost accounting systems become mere routing of filling the forms and submitting standard reports. Bon>cooperation from staff also may lead to failure of the system in many concerns. ;owever, proper planning and implementation of the cost accounting system will overcome these criticisms and would stand null and void in view of the ob:ectives, importance and advantages of the cost accounting system. 5"nct#ons o% Cost Acco"ntant: The main functions of a cost accountant can be summarized as follows' /. 4etermining cost and analyzing income' A cost accountant determines the cost of a
b, product or process as the case may be. ;e analyses and classifies costs according to different cost elements, viz., materials, labour and expenses. *uch analysis enables him to tell the management the significance of the different cost elements and fixation of the selling prices of the products manufactured by the business. ;e advises the management about the profitability or otherwise of each b, product or process. Thus, he helps the management in maximizing business profits.http://www.gameswala.com/
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1. 2roviding cost data for planning and control' A cost accountant collects, classifies and presents in appropriate form suitable data to the management for planning and controlling the operations of the business. ;e makes constant endeavour to control and reduce the cost by the following techni$ues' a. ;e submits regular reports to the management regarding wastage of material, idle time, idle capacity, etc. ;e identifies the causes and suggests suitable controlling measures to prevent or reduce losses on account of these causes. b. ;e makes product>wise or process>wise comparisons to identify non>profitable products or processes. c. ;e develops cost consciousness in the organization by adoption of budgetary control and standard costing techni$ues. d. ;e maintains an even flow of materials and at the same time prevents unnecessary investment of materials through different material control techni$ues e.g. Aoperation and co> ordination of different departmental heads. 3. ,ndertaking special cost studies for managerial decision>making' A cost accountant undertakes special cost studies and carries out investigation for collecting and presenting suitably the data to the management for decision>making regarding the following areas' a. "ntroduction of new products, replacement of manual labour by machines etc. b. !ake or buy decisions, replacing or repairing old machines, accepting orders below cost, etc. c. &xpansion plans, installation of new capital pro:ect, etc. d. ,tilisation of idle capacity and development of a proper information system to provide prompt and correct cost information to the management. e. "nstallation of a cost audit system. All types of manufacturing concerns can broadly be classified into two categories – +i. !ass> production concerns, +ii. *pecial order concerns. !ass production concerns such as chemical plants, flour mills, paper manufacturing, tyre and rubber companies etc., produce uniform standard products and involve generally a continuous production process. The finished products are the result of successive operations. n the other hand, special>order concerns manufacture products in clearly distinguishable lots in accordance with special orders and individual specifications. 2rinting shops, construction companies, machine tool manufacturing, repair shops, wood>working shops etc., come in this category. "n case of mass production concerns the products when produced are of the same type, and involve the same material and labour and pass through the same set of process. "n such industries each process is designated as a separate cost>centre and the cost per unit is calculated by dividing total cost of the process with the total number of units produced by the process. The cost of production of the product is obtained by adding the unit costs of various processes through which the product has passed. This method of costing is known as process costing. 6o+ Cost#ng: "n case of special>order concerns products produced or
bs undertaken are of diverse nature. They involve materials and labour in different $uantities and entail different amounts of overhead costs. "n such concerns it is necessary to keep a separate record of each lot of products or bs from the time the work on the b or product begins till it is completed. Ahttp://www.gameswala.com/
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separate
b card or sheet is maintained for each b or product in which all expenses of materials, labour, overheads are entered and cost of completing a b or manufacturing a product is found out. *uch a cost system is known as b or terminal or specific costing. b:ectives of b costing' /. "t helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss made out on its execution. The management can :udge the profitability of each b and decide its future courses of action. 1. "t helps management in making more accurate estimates about the costs of similar bs to be executed in future on the basis of past records. The management can conveniently and accurately determine and $uote prices for orders of a similar nature which are in prospect. 3. "t enables management to control operational inefficiency by comparing actual costs with the estimated ones. A system of b costing should be adopted after considering the following two factors. a. &ach order or b should be continuously identifiable from the raw material stage to the stage of completion. b. The system is very expensive because it re$uires a lot of clerical work in estimating costs, designing and scheduling of production. "t should, therefore, be adopted when absolutely warranted. 2rocedure' The following is the procedure adopted for costing purposes in a concern using b costing' /. Kob order number' &very order received is allotted a certain number from a running list maintained for this purpose. &very order or b will be known by its number throughout its production process in the factory. 1. 2roduction C b order' A production C b order is a written order issued to the manufacturing department to proceed with a b. "t is issued by the production planning department on receipt of a b order to the foreman of the relevant department. "nstructions to the costing department to collect particulars of costs on execution of the b are also issued simultaneously. The production order is prepared with sufficient copies for all the departmental managers or foreman who will be re$uired to take any part in the production. 3. in>progress account for each department of the factory has been opened, it will be necessary to find out the cost of completed bs regarding each department. The balance in work>in>process account at any time represents the cost of bs not yet completed. 7. Kob ticket' "n order to provide information regarding the progress of each b at each operation, generally a b ticket is issued by the production control department. The ticket contains detachable portions for different operations. The b ticket is useful for both production control and costing departments. n completion of an operation, the relevant portion of ticket is detached and sent to production control department. This enables production control department in keeping production schedule up>to>date. n the basis of detached portion a departmental summary of production can be prepared which is very useful for costing purposes. !oreover, the amount of work>in>process as shown by the cost ledger can be checked by listing the ticket number of bs in process in any department and valuing this list. 8. 2rogress advice' The foreman of a department may be re$uired to send periodically a statement regarding the stage of completion of each b to ensure completion of bs by scheduled dates. *uch a note is called (progress advice). Advantages of b costing' /. Kob costing enables the management to identify spoiled and defective work in respect to particular production orders, departments or groups of workers and hence the management can fix up responsibility for inefficiency. 1. !anagement can determine the trends in costs and compare the operating efficiency of men and machines in each cost centre. "t can also determine the completion cost of each b. 3. "t enables the preparation of estimates of costs of bs before production. 5. "t enables comparison of estimated costs with actual costs as the costs are analysed on the basis of costs, services and production.http://www.gameswala.com/
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6. "t makes available to the management a complete file of production orders which contains valuable statistics on cost. 7. "t enables ascertainment of profit or loss on each
b immediately after their completion. 8. "t enables the management to identify unprofitable bs. @. "n case of cost plus contracts, b costing enables to provide precise $uotations. D. "t helps in production planning. /E. "t facilitates fixation of selling price. Gimitations of b costing' /. Kob costing involves a lot of clerical work in identifying materials, labour and overheads with specific bs and departments. 1. !anagement cannot evaluate precisely the operating efficiency of men and machines. 3. *ince costs ascertained and compiled are historical costs, they are not of much utility to the management. 5. "t does not apply budgetary control to important cost elements such as labour, materials and overheads. 6. Kob costs over any period of time cannot be compared if mar economic changes take place in between. 7. "t is expensive to operate and errors are possible due to increased clerical work. 7atch Cost#ng: per tonne *ale price per tonne P ocess = A /,EEE tonnes #s. 1EE #s. 86,EEE 6P 6E tonnes 5EES P ocess A 7 >>> >>> #s. 5/,EEE /EP 3E tonnes 6EE P ocess = C >>> >>> #s. //,EEE 1EP 6/ tonnes @EE!anagement expenses were #s. /6,EEE, selling expenses were #s. /E,EEE. Two>third output of 2rocess A and one>half output of 2rocess < are passed on the next process and the balance was sold. Tou are re$uired to prepare process cost accounts and costing 2rofit and Goss Account for the year 1EE/.
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CHAPTER B: 7U$GETAR2 CONTRO: %ontrolling costs by making use of budgets is known as budgetary control. 1EE@. 1. !aya Gimited has made the following sales estimates for April, !ay and Kune of the year 1EED from which you are re$uired to prepare sales budget by units and rupees for each of the three months for each sales area and in total *ales Area April !ay Kune A 5EP 3EP 3EP < 56P 36P 1EP % 5EP 36P 16P 4 3EP 5EP 3EP The area>wise unit sales expected is as follows' *ales Area *ales +,nits. A 1,6EE < 1,EEE % 3,EEE 4 7,EEE Total /3,6EE The selling price has been fixed at #s.7 per unit in Area A, #s.@ per unit in Area