Cost & Management Accounting

Prof. Shilpa Peswani

Associate Cost Accountant, MCom (Banking & Finance), Post Graduate Diploma in Financial Management

Evaluation Criteria
End Term Examination: 60 marks Mid Term Examination: 40 marks Total: 100 marks

Text Books
Cost Accounting A Managerial Approach by Horngren, Datar, Foster, Rajan, Ittner Costing Accounting by M N Arora Costing Accounting by Dutta Management Accounting by M A Sahaf

Introduction to Management Accounting

The Functions of Management

Planning Acting Controlling

Feedback

Objective 1
Distinguish between financial accounting and management accounting.

Primary Users
Financial Investors Creditors Government authorities Management Internal managers of the business

Purpose of Information
Financial Help investors, creditors, and others make investment, credit, and other decisions Management Help managers plan and control business operations

Focus and Time Dimension

Financial Reliability, objectivity, and focus on the past Management Relevance

Type of Report
Financial Management Financial Internal reports statements not restricted by restricted by IAS; determined Indian by cost-benefit Accounting analysis Standards (IAS)

Verification
Financial Annual independent audit by Chartered Accountants Management No independent audit

Scope of Information
Financial Management Summary Detailed reports reports primarily on parts of the on the company company as a whole

Behavioral Implications
Financial Concern about adequacy of disclosure Management Concern about how reports will affect employees behavior

Service, Merchandising, and Manufacturing Companies

Service Provides intangible services, rather than tangible products Merchandising resells products previously bought from suppliers

Service, Merchandising, and Manufacturing Companies

Manufacturing Company: uses labor, plant, and equipment to convert raw materials into finished products Materials inventory Work in process inventory Finished goods inventory

Objective 2

Describe the value chain and classify costs by value-chain functions.

Value Chain

Research & Development

Design

Production or Purchases

Marketing

Distribution

Customer Services

Objective 3

Distinguish direct costs from indirect costs.

Cost Objects, Direct Costs, and Indirect Costs

Cost objects are anything for which a separate measurement of costs is desired. Cost drivers are any factors that affect cost.

Cost Objects, Direct Costs, and Indirect Costs

What are examples of cost objects? individual products alternative marketing strategies geographic segments of the business departments

Cost Objects, Direct Costs, and Indirect Costs

What are direct costs? Direct costs are those costs that can be specifically traced to the cost object. What are indirect costs? Indirect costs are costs that cannot be specifically traced to the cost object.

Objective 4

Distinguish among full product costs, inventoriable product costs, and period costs.

Product Costs
What are product costs? They are the costs to produce (or purchase) tangible products intended for sale.

Product Costs
There are two types of product costs:
Full product costs Inventoriable product costs

External Reporting

Inventoriable product costs

Period costs

Inventoriable Product Costs

For external reporting, merchandisers inventoriable product costs include only costs that are incurred in the purchase of goods. Inventoriable costs are an asset. Period costs flow as expenses directly to the income statement.

Inventoriable Product Costs

For external reporting, manufacturers inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process.

Inventoriable Product Costs

Direct Materials Direct Labor Indirect Indirect Labor Materials Other

Manufacturing Overhead

Inventoriable Product Costs

Direct Materials Direct Labor

Prime Costs = Direct Materials + Direct Labor

Inventoriable Product Costs

Direct Labor Indirect Labor Indirect Materials Other

Conversion Costs = Direct Labor + Manufacturing Overhead

Objective 5 Prepare the financial statements of a manufacturing company.

Financial Statements for Service Companies

There is no inventory and thus no inventoriable costs. The income statement does not include cost of goods sold.
Revenues Expenses = Operating income

Financial Statements for Merchandising Companies

BALANCE SHEET
Inventoriable Costs

INCOME STATEMENT Sales Revenue

when sales occur deduct

Purchases of Inventory plus Freight-In

Inventory

Cost of Goods Sold

equals Gross Margin deduct

Operating Period Costs Expenses equals Operating Income

Financial Statements for Manufacturing Companies

BALANCE SHEET
Inventoriable Costs

INCOME STATEMENT Sales Revenue

Materials Inventory

Finished Goods Inventory

when sales occur

deduct

Cost of Goods Sold

equals Gross Margin deduct

Work in Process Inventory

Operating Period Costs Expenses equals Operating Income

Manufacturing Company Example

Kendall Manufacturing Company: Beginning and ending work-in-process inventories were $20,000 and $18,000. Direct materials used were $70,000. Direct labor was $100,000. Manufacturing overhead incurred was $150,000.

Manufacturing Company Example What is the cost of goods manufactured?

Beginning work in process Direct labor $100,000 Direct materials 70,000 Mfg. overhead 150,000 Ending work in process Cost of goods manufactured $ 20,000

320,000 (18,000) $322,000

Manufacturing Company Example Kendall Manufacturing Companys beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000. How much is the cost of goods sold?

Manufacturing Company Example

Beg. finished goods inventory + Cost of goods manufactured = Cost of goods available for sale Ending finished goods = Cost of goods sold

$ 60,000 322,000 $382,000 55,000 $327,000

Manufacturing Company Example Kendall Manufacturing Company had sales of $627,000 for the period. How much is the gross margin?
Sales Cost of goods sold = Gross margin $627,000 327,000 $300,000

Manufacturing Company Example Kendall Manufacturing Company had operating expenses as follows:
$80,000 Sales salaries 10,000 Delivery expense 30,000 Administrative expenses $120,000 Total What is Kendalls operating income?

Manufacturing Company Example

Gross margin Operating expenses = Operating income

$300,000 120,000 $180,000

Objective 6

Identify major trends in the business environment, and use cost-benefit analysis to make business decisions.

Objective 7

Use reasonable standards to make ethical judgments.

Professional Ethics for Management Accountants

In many situations the ethical path is not so clear. The Institute of Management Accountants (IMA) has developed standards to help management accountants deal with these situations.

Standards of Ethical Conduct for Management Accountants

Competence Integrity

Confidentiality

Objectivity