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MA 2Cost andManagement
Accounting (CMA)
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Text Books
Management Accounting by PareshShah (PS)
Oxford University Press, 2009 Edition
Cost Accounting by Charles T.Hongren, S M Datar, George Foster,Madhav Rajan, Christopher Ittner (CS)
Pearson Education, 13th Edition
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Other Books Cost Management: Strategies for
Business Decisions by Hilton, Maher,Selto (TMH)
Costing for Management by S.K.
Bhattacharya and John Deardean(Vikas)
Management Accounting by Khan and
Jain Cost and Management Accounting by
Ravi Kishore (Taxmann)
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Cost and
ManagementAccounting
Overview
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Introduction
Business Manager has to answerfollowing questions
What is the maximum profit that a
business can draw? Has the profit margin increased or
reduced as compared to previous years?
Which product line is making more profit? Has too much capital been blocked in raw
materials?
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Cost Accounting
Is the process of accounting for cost Begins with recording of income &
expenditure
Ends with preparation of statistical data Primarily concerned with cost
determination of product, service, processor operations
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Cost Accounting
Is the process of accounting for cost Helps the management
to have a clear indication of their economic
performance direction in which they must move in order to
improve economic efficiencies
To solve complex mgmt problems like
determination of most profitable mix, make orbuy decisions, replacement of equipments,introduction of new products, discontinuance ofnon-profitable products
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Cost Accounting
Generally concerned with internalreporting for mgmt requirement
Development of cost accounting is of
recent origin due to Heavy industrialisation
Overall cut throat competition
Bulky and time consuming traditionalacctg system lacks efficiency to solvecomplicated cost-related problems
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Definitions
Costing A tool to determine the cost of products or
services or operations
Cost Accounting Process of classifying and analysing the
costs (CIMA, The Chartered Institute of MgmtAccounts, UK)
Branch of general accounting and coversapplication or accounting principlesrelating to recording, classifying and
analysis of cost within the organisationWater Scott 9
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Definitions
Cost Accountancy Application of costing and cost accounting
principles, methods and techniques to the
science, art and practice of cost controland the ascertainment of informationderived for managerial decision making(CIMA)
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Functions of Cost Accounting
To calculate the cost per unit of thevarious products manufactured by thefirm
To prepare a correct cost analysis ofboth process or operations, and by thedifferent elements of cost
To ascertain wastage in each processof manufacture and to prepare reportswhich can assist wastage control
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Functions of Cost Accounting
To provide necessary information forthe determination selling prices
To compute product-wise profit, and
advise the management for theenhancement of profit
To serve the management in the
valuation of goods-in-process andfinished goods, so that the minimumcapital is blocked up in the stocks
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Functions of Cost Accounting
To install and implement cost controlsystems (budgetary control orstandard cost system) for the control
of material, labour, and overheadexpenses
To advise the management for the
formulation of future expansionpolicies and proposed capital outlays
To establish an effective reporting
system 13
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Functions of Cost Accounting
To guide the mgmt in the preparationand implementation of incentiveschemes based on productivity and
cost savings To advise the management on the
profitability of present or new lines of
products, the comparative advantagesand disadvantages of different typesor production methods, thereplacement of manual operations byautomation 14
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Additional Functions of CostAccounting To supervise punched card accounting
or data processing
To organise internal audit system so
that effective working of theaccounting control and productioncontrol methods can be introduced
from time to time and well be ensured
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Additional Functions of CostAccounting To coordinate with the industrial
engineers for the introduction andimplementation of methods suggested
for improvement and or redundancy ofprogrames and data
To provide the Govt or other public
bodies with the specialised service ofcost audit
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Financial Actg v/s Cost Actg
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Point of difference Financial Accounting Cost Accounting
Purpose
Provides info aboutorganisation in a general
way, ie. Profit, Assets,Liabilities, Owners Equity
Provides info to guide themanagement for properplanning, operation,coordination, control anddecision-making
Forms of Accounts
P&L A/cs and B/S are keptfor the requirement ofCompanies Act and IncomeTax Act
Kept as per requirementof management.Recently, the Co Act hasmade it obligatory to keepcosting records in somemfg companies
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Financial Acctg v/s CostAcctg
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Point of difference Financial Accounting Cost Accounting
Recording in subjective manner In objective manner
Items of CostsItems of costs areexpressed in totals
Items of costs areanalysed, classified,apportioned, andallocated in order tocalculate the cost per unit
Analysis of ProfitThese reveal the profits ofthe whole business
It is only a part of financialaccounts. It shows theresult of operation,process, job or product sothat the unprofitable linesof businesses can be
eliminated
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Financial Acctg v/s CostAcctg
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Point of difference Financial Accounting Cost Accounting
ControlEmphasis on recordingonly. No importance tocontrol aspect
It provides a detailedsystem of cost controlwith the help of standardsand budgets
PeriodicityThese are prepared at theend of accounting year
It is a continuous systemof accounting. It submitsthe cost reports to themanagement weekly ormonthly or as and whendesired
Inventory ValuationValued at cost or marketprice whichever is less
Valued at cost
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Financial Acctg v/s CostAcctg
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Point of difference Financial Accounting Cost Accounting
Nature ofTransaction
a) Relate to commercialtransactions of thebusiness
b) Concerned withtransactions related tothird parties
a) Relate tomanufacturingactivities
b) Concerned withtransactions related tointernal & third parties
Figures Mainly deal with actual dataCost accounts deal partlywith actual figures and
partly with estimates
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Management Accounting
Extension of managerial aspects ofcost accounting
Accounting to assist the mgmt in
planning and decision making Employs various techniques like
standard costing, budgetary control,
marginal costing, uniform costing withinter-firm comparison, ratioaccounting, capital budgeting
decisions, internal audit 21
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Cost Acctg v/s Mgmt Acctg
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Cost Accounting Management Accounting
AAnalyses costs to controlmaximising efficiency
AAssists the management inplanning, decision-making andcontrol
It uses the principles and practicesof cost accounting
It uses the principles andpractices of cost accounting andfinancial accounting
It provides internal reporting tomanagers for use in planning andcontrolling routine operations
It provides internal reporting tomanagers for use in decisionmaking before formulating majorplans and policies
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Cost Acctg v/s Mgmt Acctg
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Cost Accounting Management Accounting
CCost Accountant reports to the mgmt aboutthe variances from budgets or standards andpresents a comparative data of variousperiods
TThe management accountantsuggests how to improve uponthe operating results by
suggesting ways for costcontrol and cost reduction
CCost Accountant works out the years
operating results
Management Accountantworks out future operating
statements
It is the complement of managementaccounting
It is an extension of managerialaspects of cost accounting
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Role of ManagementAccountant The Accountant chooses the
information to be reported to amanager by
Identifying the specific purpose for whichinformation is needed
Determining the relevance of theinformation. Information is relevant if it
affects the accomplishment of the objectives ofthe decision maker
will change as a result of the decisions orchoice made by the decision maker
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Role of ManagementAccountant Controller or Chief ManagementAccountant title is applied to various
accounting positions
In some organisations, they are justbook keepers and in others they areexecutives who help top mgmt in
planning and controlling Many people confuse Controller and
Treasurer, but they are different
terms 25
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Cost Acctg v/s Mgmt Acctg
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Controller Treasurer
PPlanning and Control PProcurement of long-term finance
RReporting and interpreting Investor
EEvaluating and Consulting Short-term financing
Tax Administration Banking
Government Reporting Credits and Collections
Protection of assets Investments
Economic Appraisal Insurance
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Objects of Cost Accounting
Cost Finding To determine the actual cost of each
article, process, operation, service,
department, segment of activity Cost reduction
To reveal and report efficiencies in theform of material wastage, loss of time inmaterial buying, storing and issuing
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Objects of Cost Accounting
Cost Saving To provide actual figures of cost
comparison with estimates of costs and
price fixing To find out the degree of efficiency and
productive capacity of men and machinesand ideal standard for their working
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Objects of Cost Accounting
Cost Control To reduce cost thro budgetary control and
standard costing
To ensure continuous check andadjustment of stores and materials withhelp of perpetual inventory
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Objects of Cost Accounting
Managerial Decision, Policy Making To study trends at different volumes of
output, and to determine production
policies and programs To implement incentive wage plans for
workers
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Objects of Cost Accounting
Managerial Decision, Policy Making To organise internal audit system, and
interlocking of financial and cost accounts
to verify accuracy of each other To furnish necessary data for the
preparation of profit and loss account andbalance sheet at short intervals (eg.
Monthly, quarterly, etc.) for eachdepartment or business as a whole
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Advantages of CostAccounting Price Fixation Control on unprofitable activities
Managerial Decision, Policy Making
Useful Information
Cost Control
Provides valuable data
Effective check
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Advantages of CostAccounting Preparation of budgets and
regulations of production
Fixation of responsibilities
Independent Check Prevention of manipulation,
misappropriation, and frauds
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Objections against CostAcctg Expensive Differences in results
Unnecessary
Worthless
Inapplicability
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Principles of Costing
Every concern must design its owncosting system, keeping in view itspeculiar problems
If financial books can afford thenecessary information, separatecosting system is not needed
Reasonable accuracy is enough, ofcourse, this depends upon the natureof industry
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Principles of Costing
Costing information should becollected as and when work proceeds
A proper unit of cost should be
determined
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Essentials of Cost AcctgSystem Should be simple and easy Arrangement of Costing system
should be adopted to suit the general
organisation of the factory There should be coordination and
cooperation among executives of
various departments It should ensure proper accounting
and allocation of material cost, labour
cost, and overheads 37
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Essentials of Cost AcctgSystem Cost Accounts should be capable of
reconciling with financial accounts, orelse, integral accounting system is to
be followed Expenses of costing system should be
commensurate with the results
(economical)
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Importance of costing
Not only assists management invarious ways but also beneficial toemployees, creditors, Government,
public enterprises and the society
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To whom Nature of Benefit
MManagementPPlanning, Organising, Controlling,Budgeting, Decision-making,Pricing, Evaluation
EEmployeesIncentive bonus, Higher earningsthro time and motion study, Right
man in right job thro job evaluation
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Importance of costing
To whom Nature of Benefit
CCreditorsSSupport to access more information ascompared to financial accounts
GGovernment
More taxes thro higher production, Useful in
the import and export policy and preparationof national plans for economic development,Policy of price differentials,
SSocietyLower prices thro cost reduction measures.
Better quality of products and services