Introduction to Cost

Accounting

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 Ground Questions:
• Objectives in life
• Why “COST”?
• Why CMA?
• Was reading of FA not sufficient?
• What’s new in CMA?

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 The Five Generic
Competitive Strategies
Type of Advantage Sought
Lower Differentiatio
Cost n
Broad Range
Market Target

Overall Low-Cost Broad

of Buyers Leadership Differentiation
Strategy Strategy

Best-Cost
Provider
Strategy
Narrow
Focused Focused
Buyer
Low-Cost Differentiation
Segmen Strategy Strategy
t
or Niche
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 Emerging Concepts In Cost
Accounting…

Traditional New
Approach Approach

Business
Process -A
Paradigm
SALES COST

Continuous Innovation for Cost Reduction

to survive in the competitive environment
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 The art of Recording,
Classifying,
And Summarizing in terms
of money ,transactions and
Accounting events
which are of financial
Nature,
and interpreting the results
thereof

Cost Management
Financial
Accounting Accounting
Accounting

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 Manufacturing &
Marketing Cars

What Would Be The Role Of Financial

Accounting ?
What Would Be The role Of Cost Accounting
?

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 Manufacturing &
Marketing Cars

Reducing Cost of the car by INR 10,000

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Financial Accounting-
meaning & limitations Fundamental
s

FA is concerned with Journal

§RECORDING,
§CLASSIFYING AND
§SUMMARISING Ledger

Financial transactions in accordanceTrial

with the Generally Accepted Balance
Accounting Principles (GAAP)
Final
Statements
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Financial Fundamental
Statements s

PROFIT &
BALANCE-
LOSS SHEET
ACCOUNT

STATEMENT OF
SOURCES &
APPLICATIONS
OF
FUNDS

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Financial Accounting- Fundamental
Limitations s

ONLY NET No Analysis

HISTORICAL RESULTS of
LOSSES

NO CONTROL
NO
ON COST DISTINCTION
Direct &
Inadequate NO COMPARISON
Information OF
For
COSTS
PRICE FIXATION

NO STANDARDS
TO
Assess
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 FA vs. CA Fundamental
s

• Under Financial Accounting:

– Materials 150000
– Wages 70000
– Other exp 50000
– Total Cost 270000
– Sales 300000
– Profit 30000 (10% on sales)

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 Ma na ge me nt
Ac co unt ing

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Management Accounting
• A field of accounting that
provides economic and financial
information for managers and
other internal users.
• It measures, analyzes and
reports financial and non-
financial information that help
the managers make decisions to
fulfill the goals of an
organization.
• Managers use the information to
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 MANAGEMENT ACCOUNTING
BASICS

Activities include (continued):

• Assisting management in profit
planning and budgeting.
• Providing a basis for controlling
costs and expenses by comparing
actual results with planned
objectives and standard costs.
• Accumulating and presenting
relevant data for management
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 COMPARING MANAGEMENT
AND FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Internal Users: Managers

External Users;
Directors
Stockholders, Creditors Primary users
Regulators Of Reports

Financial Statements Types & Internal Reports

Quarterly & Annually Frequency
As Frequently Required

General Purpose
Of Reports
Special Purpose for
Purpose of Specific Decisions
Pertains to Business as
Whole Reports Pertains To some sub unit of
Limited to Double Entry Business
Acct, Contents of Very Detailed
Cost Data Reports Extend beyond DE Accounting
GAAP/IAS Standard is relevance to Decision

No independent Audits
Audit By CA

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Few Terms - Fundamental
clarification s

vCOST
ACCOUNTANCY
vCOSTING
vCOST ACCOUNTING

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 Few Terms - Fundamental
clarification s

vCOST
ACCOUNTANCY
s the application of Costing and Cost Accounting
nciples, Methods and Techniques to the science,
and practice of Cost Control and the ascertainment
profitability. It includes the presentation of informatio
rived there from for the purpose of Managerial
cision Making

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COST ACCOUNTING- Fundamental
introduction s

The Process of accounting for costs from the point at

which expenditure
is incurred or committed to the establishment of its
ultimate relationship
with cost centers and cost units. It provides information
for MA and FA.
It measures, analyzes and reports financial and non-
financial information

Books Cost
Of Cost
Accounts
Centers

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 Few Terms - Fundamental
clarification s

vCOSTIN
G•Technique and process of ascertaining costs
•Classifying, recording and appropriate allocation of
Expenditure
for determination of costs of products ( Watch, TV,
Computers)
or services (Electricity, telephone, Transport Etc)

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 CO ST A CC OU NTI NG
BASICS
Activities include:
• Explaining manufacturing and non
manufacturing costs and how they
are reported in the financial
statements
• Computing the cost of providing a
service or manufacturing a product
• Determining the behavior of costs
and expenses as activity levels
change
• Analyzing cost-volume profit
relationships within a company
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 §Costing Objectives

AscertainingSetting Cost Cost

cost Price Control Review

Operating
Decisions

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 FA vs. CA Fundamental
s

• Under Cost Accounting:

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Cost/Financial Accounting-
Fundamental
differences
s

Facto FA C
r A
Need Compulsory Obligatory

Final Results to stake

Purpose Holders Cost Information

Recordin Subjective Recording Objective Recording

g

Profit Product wise

Analysis
Total Profit/Loss

Contents External Transactions Internal

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Cost/Financial Accounting-
Fundamental
differences
s

Facto FA C
r Once/twice A
Daily/weekly/monthly
Periodic

Control Inadequate System at Place

Nature Historical Historical/Predetermined

Valuatio Cost Price

n
Cost or market

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Management/Cost Accounting- Fundamental
differences s
fact M CA
or
Derivation Of •Cost/Financial Acct
A §Data From CA
Data
•Cost/Fin.
§Only Cost Inf.
üInformation Information
Provided CVP/Fin Ratios
§Cost Ascertainment
•Decision Making & Control
Emphasis §Reporting Cost
•Planning, Decision
M §Short Term
Purpose & Control
•Short/Long Term §Variable Costing,
Planning Budgetary Control
•RA,FF, C Flow etc
Techniques §Can Be Installed
•Not possible
Without CA
Installation without
CA system
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Cost Accounting- Fundamental
advantages s

§ Supplies Detailed Cost

Information
§ Helps in Price Fixation
§ Reveals UN (Profitable)
Activities
§ Reveals idle capacity
§ Assist in Controlling Costs
§ Helps in decision Making
§ Facilitates Cost Comparison
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Cost Accounting- Fundamental
Objections s

§ It is Unnecessary
§ It is Inapplicable
§ It is a failure
§ Mere matter of
Forms and Ruling
§ It is Expensive

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 Three Features of Cost
Accounting
• Calculating the cost of products,
services and other cost objects.
• Obtaining information for planning
and control and performance
evaluation.
• Analyzing the relevant information
for making decisions

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Costing Fundamental
s
Methods

vJob Costing
vBatch Costing
vContract Costing
vProcess Costing
vUnit Costing
vOperation Costing
vOperating Costing
vMultiple Costing
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 Costing Fundamental
Techniques s

vHistorical Costing
vStandard Costing
vMarginal Costing
vAbsorption
Costing
vDirect Costing
vUniform Costing

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Decision Making Fundamental
s

MAKE OR
BUY SALES
CAPACITY VOLUME

PROFIT
PRICE

OPERATE
EXPORT
NEW OR
PRICE
MODE SHUT
L
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 MA in Strategy
• Value chain refers to
the sequence of
business functions in
which the customer
usefulness is added to
products and services.
• Management
Accountants track the
costs incurred in each
value chain category.
Their goal is to reduce
the costs in each
category and to
improve efficiency .
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 MA in Strategy
• Supply chain describes
the flow of goods,
services and information
from the initial sources
of materials and services
to the delivery of
products to consumers
regardless of whether
those activities occur in
the same organization or
not.
• MA recommends
integrating and
coordinating activities
across all companies in
the supply chain as well
as across each business
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