cost account.ppt

Management Accounting- Nature And Scope

Classification of Accounting

Fin. Accounting Cost Accounting Management Accounting

Financial Accounting – Fin. Acc is concerned with recording, classifying and summarising the business transaction so that at the end of the year profit or loss can be calculated and its effect on owned capital, assets and liabilities can be ascertained.

Principles of Financial Accounting – A. Accounting Concepts Business Entity Concept Going Concern Concept Money Measurement Concept Cost Concept Dual Aspect Concept Accounting Period Concept

B. Accounting Conventions :- Convention of Consistency Convention of Materiality and Disclosure Convention of Conservatism

Limitations of Financial Accountingo Provision of Historical Informationo Fails to meet the information needs of Different levels of

Managemento Consideration of only Monetary informationo Less Importance of Budgeting and Planning

Cost AccountingCost Accounting is the next stage in the development of accounting. Under cost accounting total cost of goods and the elements of total cost are studied.Definition :- ICWA London :- “Cost Accounting is the technique and process

of ascertainment of costs.”Objectives of Cost Accounting(1) Cost Determination(2) To help Management in Cost Control(3) To determine Selling Price (4) To facilitate Management Decision Making

Management AccountingManagement needs detailed information on different aspects to arrive

at meaningful decisions. Financial accounting provides some informations but these are not adequate. Management accounting removes these limitations of financial accounting. Thus, management accounting means- “Accounting for Management to discharge its functions including organising, planning, directing and controlling.

Definition :- According to American Accountng Association, “Management 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 performance.”

R.N. Anthony :- “Management accounting is concerned with accounting information that is useful to management

Functions of Management Accounting1) Provides data2) Modifies Data3) Analysis and interpretation of data4) Use of Qualitative Information also5) To help in Planning6) To help in Organising7) To help in Co-ordination8) Communication9) To help in Control10) To help in Decision Making

Scope of Management Accounting

Cost Acc

Interim Reporting

Internal Audit

Revaluation Acc

Taxation

Statistical

Inventory

Budgetary

Fin. Acc

Scope of Mgt Acc

Distinction Between Management Accounting and Financial Accounting

Mgt Accounting• Objectives :- To help mgt in

planning & decision-making. It is an Internal reporting system.

2. Subject Matter :- It reveals the profitability or performance or different departments products etc in detail.

3. Nature of Data used :- Mgt Acc uses detailed, statistical, relative, past and future data and information.

4. Accuracy :- Need not to be completely accurate.

Fin. Accounting1. Provides information to creditors,

shareholders, banks, investors, govt. It is an external reporting system.

2. Fin acc deals with the overall position of business because fin. Statements explain the position the position of business in totality.

3. Fin acc presents monetary information of historic events and transactions.

4. Completely accurate.

Mgt. Accounting6. Compulsion : Mgt

Accounting is voluntary and has no legal compulsion.

7. Legal Formalities :- There is no legal form or rules for the statements or reports under mgt accounting.

8. Monetary Transactions :- Mgt acc. Records financial and non-financial information.

Fin. Accounting6. Fin. Acc is necessary for

every business due to legal provisions.

7. Fin. Accounts are prepared under the provisions of Company act, 1956.

8. Fin. Acc records only those transactions which can e expressed in money form

Distinction between Cost Accounting and Management Accounting

Cost Accounting1. Objective : to determine the

cost and control it.

2. Subject Matter :- Cost accounting deals mainly with cost data

3. Scope :- Cost accounting provides information relating to cost of products only , so its scope is narrow.

Mgt Accounting1. Mgt Acc helps the management

in decision making through cost and financial information.

2. Mgt acc considers both cost and income aspects.

3. Mgt acc has a wide scope as it collects information from fin. Acc, cost acc and busine4ss finance.

Utility of Management Accounting 1. It helps the mgt in effective planning and decision-making.2. Mgt accounting helps the mgt in control through budgetary

control, standard costing, marginal costing.3. Reporting system of management accounting helps in

establishing co-ordination.4. Management accounting helps in creating cost centre and

profit centres and establishing internal audit and internal control systems for these centres.

5. Communication plays most important role in decision making and management accounting helps in this regard through its reporting system.

Limitations of Management Accounting

1. Limitations of Cost and Financial Accounting System

2. Wider Scope3. Costly System

Techniques of Management Accounting

i. Analysis of Financial Statementsii. Ratio Analysisiii. Fund Flow Statementiv. Cash Flow Statementv. Marginal Costing and Cost-volume Profit Analysisvi. Budgetary Control and standard costingvii. Management Reportingviii. Statistical Techniquesix. Value Added Statement x. Accounting Price Level Changesxi. Human Resource Accounting

COST ACCOUNTING

• Features-• Process of accounting for costs• Records income & expenditure relating to

production of goods and services• Concerned with cost ascertainment, cost

control and cost reduction• Established budgets and standards so that

actual cost may be compared to find out variances

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Scope of cost accountancy

• Cost ascertainment• Cost accounting• Cost control

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Advantage of cost accounting

• Profitable and unprofitable activities are disclosed

• Guides future production policies• Help in increasing profit• Provides reliable data for comparing• Disclose the relative efficiencies of different

workers

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cost concept

• Cost object• Cost • Cost unit• Cost centre• Profit centre

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Cost object

• It is an activity or item or operation for which a separate measurement of costs is desired

• E.g. the cost of operating the personnel department of a company,

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Cost

• It is the amount of expenditure incurred on a specific cost object

• Total cost = quantity used * cost per unit (unit cost)

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Cost unit

• It is a quantitative unit of product or service in which costs are ascertained, e.g. cost per table made, cost per metre of cloth

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Cost centre

• It is a location or function of an organisation in respect of which costs are ascertained

• E.g. the rent, rates and maintenance of buildings; the wages and salaries of strorekeepers

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Profit centre

• It is location or function where managers are accountable for sales revenues and expenses

• E.g. division of a company that is responsible for the sales of products

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Cost classification

• Direct cost• Indirect cost (overhead)

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Direct cost

• Cost that can be identified specifically with or traced to a given cost object

• The direct costs consist of the following three elements:– Direct materials– Direct labour– Direct expenses

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Direct materials

• The cost of materials – the cost of materials used entering into and becoming the elements of a product or service

• E.g. fabrics in garments

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Direct labour

• The cost of remuneration for working time• E.g. assembly workers’ wages in toy assembly

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Direct expenses

• Other costs which are incurred for a specific product or service

• E.g. royalties

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Indirect cost (overhead)

• Cost that cannot be identified specifically with or traced to a given cost object

• They are identified with cost centres as overheads– Indirect materials– Indirect labour– Indirect expenses

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Indirect materials

• Such as stationery, consumable supplies, spare parts for machine that assist to the production of final products

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Indirect labour

• Such as salaries of factory supervision and office staff that do not directly involve in production of the final product

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Indirect expenses

• Such as rent, rates, depreciation, maintenance expenses that do not have instant relationships with the manufacturing processes

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Cost accumulation

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•Prime cost = direct materials + direct labour + direct expenses

•Works or factory cost = Prime cost+ works or factory overheads

• cost of production = work cost + administration overheads

• total cost or cost of sales = cost of production + selling and distribution overheads

Cost behaviour

• Costs can be classified into variable, fixed, semi-variable, or step-costs according to how they behave with respect of changes in activity levels

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Variable cost

• It increases or decreases in direct proportion to levels of activity, but the unit variable cost remains constant

• E.g. cost of food served in a restaurant

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Fixed cost

• Total fixed cost remains constant over a relevant range of activity level but unit fixed cost falls with an increase in activity volume

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Semi-variable cost

• It processes characteristics of both fixed and variable cost

• It increases or decreases with activity level but not in direct proportion

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Comparison of cost, management and financial accounting

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Meanings

• Financial accounting• Cost accounting• Management accounting

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Financial accounting

• Provides information to users who are external to the business

• It reports on past transactions to draw up financial statements

• The format are governed by law and accounting standards established by the professional accounting policies

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Cost accounting

• Is concerned with internal users of accounting information, such as operation managers

• The generated reports are specific to the requirement of the management

• The reporting can be in any format which suits the user

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Management accounting

• Comprises all cost accounting functions• The accounting for product and service costs,

management accounting extends to use various internal accounting reports for planning, control and decision making

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Cost and management accountingVs.

Financial accounting

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Management (cost)accounting

Financial accounting

Nature Records material, labour and overhead costs in product or jobReports produced are for internal management and contol

Records company transaction eventsExternal financial statements are produced

Accounting system

Not based on the double entry system

Follows the double entry system

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Management (cost)accounting

Financial accounting

Accounting principles

No need to use accounting principlesAdopt any accounting techniques that generates useful accounting information

Use Generally Accepted Accounting Principles for recording transactions

Users of information

Used by different levels of management or departments responsible for respective activities

Used by external parties: shareholders, creditors, government, etc

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Management (cost)accounting

Financial accounting

Operation guidelines or standards

Based on management instructions and requirements

Conforms to company Ordinances, stock exchange rules, HKSSAPs

Time span

Reports are prepared whenever neededThey may be prepared on a weekly or daily basis

Reports are prepared for a definite period, usually yearly and half yearly

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Management (cost)accounting

Financial accounting

Time focus

Future orientation: forecasts, estimates and historic data for management actions

Past orientation: use of historic data for reporting and evaluation

Perspective

Detailed analysis of parts of the entity, products, regions, etc

Financial summary of the whole orgainisation

Cost accountingvs.

Management accounting

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Management accounting

Cost accounting

Objective To provide information for planning and decision making by the management

To ascertain and control cost

Basic of recording

Concerned with transactions related to the future

Based on both present and future transactions for cost ascertainment

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Management accounting

Cost accounting

Coverage Covers a wider area: financial accounts, cost accounts, taxation, etc.

Covers matters relating to ascertainment and control of cost of product or service

Utility Only the needs of internal management

The needs of both internal and external interested groups

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Management accounting

Cost accounting

Types of transactions

Deals with both monetary any non-monetary transactions, covering both quantitative and qualitative aspects

Deals only with monetary transactions, covering only quantitative aspect

Cost Components

No. Cost Component Description

1. Prime Cost Direct Material Cost + Direct Labour Cost + Direct Expenses

(Direct Material Cost = Opg. Stock of RM + Net Purchase Cost – Clg. Stock of RM)

2. Works or Factory Cost

Prime Cost + Factory Overheads + Opg. Stock of WIP – Clg. Stock of WIP

3. Cost of Production or Cost of Goods Produced

Factory Cost + Admin Overheads

4. Cost of Goods Sold Cost of Production + Opg. Stock of FG – Clg. Stock of FG

5. Cost of Sales Cost of Goods Sold + Selling & Distribution Overheads

Costing P&L AccountNo. Particulars Amount Per Unit

G Office and Admin Expenses (on number of units produced)

H Cost of Goods Produced = (F + G) (on number of units produced)

IFG Stock Adjustment+ Opening Stock of FG- Closing Stock of FG

J Cost of Goods Sold = (H + I) (on number of units sold)

K Selling & Distribution Expenses (on number of units sold)

L Cost of Sales = (J + K) (on number of units sold)

M Profit (on number of units sold)

N Sales = (L + M) (on number of units sold)

Costing P&L AccountNo. Particulars Amount Per Unit

G Office and Admin Expenses (on number of units produced)

H Cost of Goods Produced = (F + G) (on number of units produced)

IFG Stock Adjustment+ Opening Stock of FG- Closing Stock of FG

J Cost of Goods Sold = (H + I) (on number of units sold)

K Selling & Distribution Expenses (on number of units sold)

L Cost of Sales = (J + K) (on number of units sold)

M Profit (on number of units sold)

N Sales = (L + M) (on number of units sold)