Cost and Management Accounting

Project

Name: SRIKANTH BAVANI

Course: E-MBA (Finance)
AUD No.: AUD6190
Professor-In-Charge: Ms. Nisha Bhandari
Academic Year – 2016-2018

Acknowledgement

I take this opportunity to express my thoughtful gratitude and deep regards to my Faculty
guide, Ms. Nisha Bhandari, for her ideal guidance, throughout the course of this project. The
teachings and guidance given by her, time to time, shall carry me a long way in the journey
of life on which I am about to get on.

I would also like to thank Dr. Narayanan Ramachandran, our Pro Vice Chancellor for his vital
encouragement and support.

I am obliged to the faculty members of Amity University Dubai, for the valuable information
provided by them in their respective fields. I am grateful for their cooperation during the
period of my project task.

I would also like to thank my parents and my friends for their constant encouragement
without which this report would not be possible.
 Summary

Cost accounting measures and reports financial and non-financial information related to
The organization’s acquisition or consumption of resources. It provides information for both
management accounting and financial accounting.
Cost accounting is a type of accounting process that aims to capture a company's costs of
production by assessing the input costs of each step of production as well as fixed costs such
as depreciation of capital equipment. Cost accounting will first measure and record these
costs individually, then compare input results to output or actual results to aid company
management in measuring financial performance.
 Table of Contents
1. Introduction to Cost Accounting ……….…………………………………………..….5
2. General Principles of Cost Accounting …...……………………………………………6
3. Methods of Costing …………………………………………………………….………...7
4. Techniques of Costing …………………………………………………………………..8
5. Role of Cost Accounting in an Organization …………………………………………9
6. Role of Cost Accounting in Decision Making …………………………………………10
7. Pricing Strategy …………………………………………………………………………..12
8. Conclusion ………………………………………………………………………………………14
 Introduction
Cost accounting is the classifying, recording and appropriate allocation of expenditure for
the determination of the costs of products or services, and for the presentation of suitably
arranged data for purposes of control and guidance of management. It includes the
ascertainment of the cost of every order, job, contract, process, service or unit as may be
appropriate. It deals with the cost of production, selling and distribution.

It is thus the provision of such analysis and classification of expenditure as will enable the
total cost of any particular unit of production or service to be ascertained with reasonable
degree of accuracy and at the same time to disclose exactly how such total cost is
constituted (i.e. the value of material used, the amount of labor and other expenses
incurred) so as to control and reduce its cost.
Principles of Cost Accounting
The principles of cost accounting are:
1. Cause-Effect Relationship:
Cause-effect relationship should be established for each item of cost. Each item of
cost should be related to its cause as minutely as possible and the effect of the same
on the various departments should be ascertained. A cost should be shared only by
those units which pass through the departments for which such cost has been
incurred.

2. Charge of Cost Only after its Incurrence:

Unit cost should include only those costs which have been actually incurred. For
example unit cost should not be charged with selling cost while it is still in factory.

3. Past Costs Should not Form Part of Future Costs:

Past costs (which could not be recovered in past) should not be recovered from
future costs as it will not only affect the true results of future period but will also
distort other statements.

4. Exclusion of Abnormal Costs from Cost Accounts:

All costs incurred because of abnormal reasons (like theft, negligence) should not be
taken into consideration while computing the unit cost. If done so, it will distort the
cost figures and mislead management resulting in wrong decisions.
 5. Principles of Double Entry Should be Followed Preferably:
To lessen the chances of any mistake or error, cost ledgers and cost control
accounts, as far as possible, should be maintained on double entry principles. This
will ensure the correctness of cost sheets and cost statements which are prepared
for cost ascertainment and cost control.

Methods of Cost Accounting

The methods of cost accounting are:

 Unit costing: This method is also known as "single output costing." This method of
costing is used for products that can be expressed in identical quantitative units. Unit
costing is suitable for products that are manufactured by continuous manufacturing
activity: for example, brick making, mining, cement manufacturing, dairy operations,
or flour mills. Costs are ascertained for convenient units of output.

 Job costing: Under this method, costs are ascertained for each work order separately
as each job has its own specifications and scope. Job costing is used, for example, in
painting, car repair, decoration, and building repair.

 Contract costing: Contract costing is performed for big jobs involving heavy
expenditure, long periods of time, and often different work sites. Each contract is
treated as a separate unit for costing. This is also known as terminal costing. Projects
requiring contract costing include construction of bridges, roads, and buildings.

 Batch costing: This method of costing is used where units produced in a batch are
uniform in nature and design. For the purpose of costing, each batch is treated as an
individual job or separate unit. Industries like bakeries and pharmaceuticals usually
use the batch costing method.
  Operating costing or service costing: Operating or service costing is used to ascertain
the cost of particular service-oriented units, such as nursing homes, busses, or
railways. Each particular service is treated as a separate unit in operating costing. In
the case of a nursing home, a unit is treated as the cost of a bed per day, while, for
busses, operating cost for a kilometer is treated as a unit.

 Process costing: This kind of costing is used for products that go through different
processes. For example, the manufacturing of clothes involves several processes. The
first process is spinning. The output of that spinning process, yarn, is a finished
product which can either be sold on the market to weavers, or used as a raw
material for a weaving process in the same manufacturing unit. To find out the cost
of the yarn, one needs to determine the cost of the spinning process. In the second
step, the output of the weaving process, cloth, can also can be sold as a finished
product in the market. In this case, the cost of cloth needs to be evaluated. The third
process is converting the cloth to a finished product, for example a shirt or pair of
trousers. Each process that can result in either a finished good or a raw material for
the next process must be evaluated separately. In such multi-process industries,
process costing is used to ascertain the cost at each stage of production.

 Multiple costing or composite costing: When the output is comprised of many

assembled parts or components, as with television, motor cars, or electronic
gadgets, costs have to be ascertained for each component, as well as with the
finished product. Such costing may involve different methods of costing for different
components. Therefore, this type of costing is known as composite costing or
multiple costing.

Techniques of Cost Accounting

The main techniques of cost accounting are:

1. Marginal Costing
Marginal costing is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of production, e.g.,
materials, labor, direct expenses and variable overheads. Fixed overheads are
excluded in cases where production varies because it may give misleading results.
The technique is useful in manufacturing industries with varying levels of output.

2. Direct Costing
The practice of charging all direct costs to operations, processes or products and
leaving all indirect costs to be written off against profits in the period in which they
 arise is termed as direct costing. The technique differs from marginal costing
because some fixed costs can be considered as direct costs in appropriate
circumstances.

3. Absorption or Full Costing

The practice of charging all costs both variable and fixed to operations, products or
processes is termed as absorption costing.

4. Uniform Costing
A technique where standardized principles and methods of cost accounting are
employed by a number of different companies and firms is termed as uniform
costing. Standardization may extend to the methods of costing, accounting
classification including codes, methods of defining costs and charging depreciation,
methods of allocating or apportioning overheads to cost centers or cost units. The
system, thus, facilitates inter- firm comparisons, establishment of realistic pricing
policies, etc.

5. Standard Costing
Standard costing is a system under which the cost of a product is determined in
advance on certain pre-determined standards. With reference to the example given
in post costing, the cost of product A can be calculated in advance if one is in a
position to estimate in advance the material labor and overheads that should be
incurred over the product. All this requires an efficient system of cost accounting.
However, this system will not be useful if a vigorous system of controlling costs and
standard costs are not in force. Standard costing is becoming more and more
popular nowadays.

Role of Cost Accountants in the Organization

The role of Cost Accountants as they interpret results, report them to management and
provide analysis that assist decision-making in the following departments:

 Manufacturing
Cost accountants work closely with production personnel to measure and
report manufacturing costs. The efficiency of the production departments in
scheduling and transforming materials into finished units is evaluated for
improvements.

 Engineering
Cost accountants and engineers translate specifications for new products into
estimated costs; by comparing estimated costs with projected sales prices,
 they help management decide whether manufacturing a product will be
profitable.

 Systems design
Cost accountants are becoming more involved in designing computer
integrated manufacturing (CIM) systems and databases corresponding to cost
accounting needs. The idea is for cost accountants, engineers and system
designers to develop a flexible production process responding swiftly to
market needs
 Treasury
The treasurer uses budgets and related accounting reports developed by cost
accountants to forecast cash and working capital requirements. Detailed cash
reports indicate where there are excess funds to invest or where cash deficits
exist and need to be financed.

 Financial accounting
Cost accountants work closely with financial accountants who use cost
information in valuing inventory for external reporting and income
determination purposes.

 Marketing
Marketing involves the cost accountant during the product innovation stage,
the manufacturing planning stage and the sales process. The marketing
department develops sales forecast to facilitate preparing a products
manufacturing schedule. Cost estimates, competition, supply, demand,
environmental influences and the state of technology determines the sales
price that the product will be offered and will command in the market.

 Personnel
Personnel department administers the wage rate and pay methods used in
calculating each employees pay. This department maintains adequate labour
records for legal and cost analysis purposes.

How is Cost Accounting useful for Decision-Making?

 Fixed, variable, and mixed costs.
A fixed cost, such as rent, does not change in lock step with the level of
activity. Conversely, a variable cost, such as direct materials, will change as
the level of activity changes. Those few costs that change somewhat with
activity are considered mixed costs. It is important to understand the
distinction, since a decision to alter an activity may or may not alter costs. For
example, shuttering a facility may not terminate the associated building lease
payments, which are fixed for the duration of the lease.
 By-product costs.
A product may be an incidental by-product of a production process (such as
sawdust at a lumber mill). If so, it does not really have any cost, since its cost
would have been incurred anyways as a result of the production of the main
product. Thus, selling a by-product at any price is profitable; no price is too
low.

 Allocated costs.
Overhead costs are allocated to manufactured goods only because it is
required by the accounting standards (for the production of financial
statements). There is no cause-and-effect between the creation of one
additional unit of production and the incurrence of additional overhead.
Thus, there is no reason to include allocated overhead in the decision to set a
price for one additional unit.

 Discretionary costs.
Only a few costs can actually be dropped without causing any short-term
harm to an organization. Examples are employee training and maintenance.
Over the long-term, delaying these expenditures will eventually have a
negative effect. Thus, managers need to understand the impact of their
decisions over a period of time when determining which costs to cut back.

 Step costs.
Though some costs are essentially fixed, it may be necessary to make a large
investment in them when the activity level increases past a certain point.
Adding a production shift is an example of a step cost. Management should
understand the activity volumes at which step costs can be incurred, so that
it can manage around them - perhaps delaying sales or outsourcing work,
rather than incurring step costs.
Ford’s Costing Methods
Ford Motor Co. announced it implemented a new manufacturing operating system, called
“One Manufacturing,” that will help the company improve efficiency, increase
manufacturing capacity utilization, and reduce overall production costs.

This new manufacturing system largely involves the use of common manufacturing
processes and standard systems for tracking material, delivery, maintenance, and
environmental costs. It also involves more use of virtual tools that allow Ford to reduce the
cost of new plants and improve model changeover efficiencies.

Ford reported that last year, 55% of its operations had flexible body shops. This figure will
increase to 65% in 2012, and that as the automaker opens new plants, each one will have a
flexible body shop. By 2015, Ford will be able to produce 25% more derivatives of existing
vehicles per plant than in 2011.

Next, these process improvements will allow Ford to take advantage of global economies of
scale and improve its capacity utilization. By 2016, Ford’s global capacity utilization on a
two-shift basis will increase 27% when compared with 2011.
Virtual tools allow Ford to simulate how vehicles can be assembled in order to design
assembly lines that reduce the potential for injuries and accidents while improving quality.
Since 2006, the automaker reported it has reduced the number of manufacturing build
issues when it first produces a vehicle by more than 90%. In addition, virtual tools have
reduced the investment required to assemble a vehicle by more than 20% since 2009, and
the company has reduced the investment to produce a vehicle derivative by 60%. Ford said
that greater use of virtual tools and standard processes will reduce total vehicle investment
costs by 8% per year going forward.

The company noted it is expanding in its Asia Pacific Africa (APA) region, adding nine new
plants in countries in that region. Ford stated this will increase APA’s capacity to produce 2.9
million vehicles a year. All of these changes are in line with the company's "One Ford" plan
to streamline production leverage the company's global manufacturing capabilities.

“It is critical that all of our assembly operations, wherever they are located, speak the same
language when it comes to producing high-quality vehicles in a safe and efficient way,” said
John Fleming, Ford executive vice president, Global Manufacturing.
There are two conventional costing approaches used in manufacturing. The first, and more
common, is process costing. Used in most mass-production settings, a process cost system
analyzes the net cost of a manufacturing process, say filling bottles with soda, over a
specified period of time. The unit cost for filling bottles is simply the net costs incurred while
filling all the bottles during the period divided by the number of bottles filled. Since most
manufacturing processes involve more than one step, a similar calculation is made for each
step to arrive at a unit cost average for the entire production system. By contrast, the
second major costing method, job-order costing, is concerned with tracking all the costs on
an individual product basis. This is useful in settings where each unit of production is
customized or where there are very few units produced, such as in building pianos, ships, or
airplanes. Under job order costing, the exact costs incurred in the production of a particular
unit are recorded and are not necessarily averaged with those of any other unit, since every
unit may be different. Job-order costing is also widely used outside manufacturing. A single
manufacturer may use both process and job-order costing for different parts of its
operations.

Ford is an automobile manufacturing company so it uses manufacturing costs and Ford cars
are highly popular all around the world. It is getting popular day-by-day and their designing
structure of the cars is also unique. Each year their sales is also increasing and they are
becoming more global as a brand.
 Conclusion
Cost accounting involves the recordation, analysis, and reporting of costs to management.
The intent behind this type of accounting is to provide insights into the cost structure of a
business that can be used to better manage it. As opposed to financial accounting, cost
accounting is primarily intended for internal operational activities.

Cost accounting is also used to compile asset costs and expenses that are to be reported in
the financial statements. For example, a cost accountant calculates the cost of ending
inventory, which appears in the balance sheet. Similarly, the accountant compiles the cost
of goods sold, which appears in the income statement. These are not simple calculations,
since the cost accountant may need to deal with cost layering systems, overhead allocation,
and byproduct costing splits.
 References

http://www.yourarticlelibrary.com/cost-accounting/cost-accounting-meaning-objectives-
principles-and-objections/55218
http://www.yourarticlelibrary.com/cost-accounting/cost-accounting-meaning-objectives-
principles-and-objections/55218
https://toughnickel.com/business/Methods-of-Costing
http://learncostaccounting.blogspot.ae/2010/03/techniques-of-costing.html
https://www.businesswritingservices.org/cost-accounting-sp-962412722/903-the-role-of-a-
cost-accounting-department-in-an-organization
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