COST ACCOUNTING VS MANAGEMENT ACCOUNTING(Sub. Cost Accounting)

Project Submitted to

Kets V.G.Vaze College of Arts, Science & Commerce

Mumbai University

For the Degree of Master in Commerce

By

CHINMAY .R. JADHAV

M.COM PART 1

2936A015

Under the Guidance of

Prof. Rajani UdaykumarProf. Kiran Pawar ACKNOWLEDGEMENT

Firstly, I would like to thank the University of Mumbai to provide us such a platform to prove our creativity through this project of Cost Accounting.

I am also very grateful to our Principal Dr. B. B. Sharma for giving us such a great opportunity to prove our self and to show our creativity by this project.

I am also thankful to our Co-ordinator and my project guide Prof. Prof. Rajani Udaykumar and Prof. Kiran Pawar for allotting me such a project and also to guide me on the project which enhanced the quality of my project work.

I also thank my family and friends who helped me in preparing my project and co-operating with me during preparation of my project.

DECLARATION

I hereby declare that the Project titled A Study of COST ACCOUNTING VS MANAGEMENT ACCOUNTING Submitted by me is based on actual work carried out by me under the guidance and supervision of Prof. Kiran Pawar and Prof. Rajani Udaykumar The contents of project are not copied from any other source such as internet, earlier projects, text book etc. It is further to state that this work has not been submitted for any other degree of this or any other university.

Date: ______ CHINMAY. R. JADHAVPlace: Mumbai Roll No.2936A015 .

Prof. Rajani Udaykumar

Prof. Kiran PawarGuide

Guide CERTIFICATEThis is to certify that the project titled A Study of COST ACCOUNTING VS MANAGEMENT ACCOUNTING is a bonafide Project work done by Mr. CHINMAY.R.JADHAV under my guidance and supervision for the degree of Master in Commerce Mumbai University.I confirm that, this project work has not been previously submitted to any other University for examination under my supervision.I hereby authenticate and approve this project work.

Date: Place: MumbaiREMARKS Guiding Teacher: Signature:

External Examiner: Signature:INDEX

SR.NOCONTENTSPAGE NO

1INTRODUCTION TO COST ACCOUNTING

6

2INTRODUCTION TO MANAGEMENT ACCOUNTING

7

3INTRODUCTION TO STANDARD COSTING

10

4HISTORY OF STANDARD COSTING

11

5INTRODUCTION TO BUDGETORY CONTROL

18

6OBJECTIVES OF BUDGETORY CONTROL

22

7STANDARD COSTING AND BUDGETORY CONTROL

31

INTRODUCTION TO COST ACCOUNTING

COST ACCOUNTING IS A TREM BROADER THAN COSTING.IT COVERS COSTING PLUS REPORTING AND CONTROL OF COSTS.THUS COST ACCOUNTING =COSTING+COST REPORTING+COST CONTROL.

COST ACCOUNTING CAN BE DEFINED AS THE TECHNIQUE OF RECORDING ,CLASSIFICATION,ALLOCATION,REPORTING AND THE CONTROL OF COSTS.

DEFFINATIONICMA:THE INSTITUTION OF COST AND MANAGEMENT ACCOUNTANT,ENGLAND(ICMA)HAS DEFINED COST ACCOUNTING AS-THE PROCESS FOR ACCOUNTING FOR THE COSTS FROM THE POINT AT WHICH THE EXPENDITURE IS INCURRED,TO THE ESTABLISHMENT OF ITS ULTIMATE RELATIONSHIP WITH COST CENTRES AND COST UNITS.INTRODUCTION TO MANAGEMENT ACCOUNTINGToday economic activities are complex and diverse. The market is wide and competition becomes cut-throat. Hence the mere ascertainment of cost is of little use, as provided by cost accounting. Besides, the modern management is interested in not only knowing the cost of production, but also in controlling the costs. It is possible only if the management is in a position to determine financial cost, managerial performance, planning etc., and this gave birth to Management Accounting. Hence, new techniques were invented to present the accounts periodically, not necessarily at the end of the year, before the management. Such accounts should be prepared in such a way that the results could be easily compared with the budgeted data and efforts be made to exercise control. Such new techniques were termed as Management Accounting

Accounting Definitions:

There is no unanimity among the management accountants to define this subject. There are various definitions on the concept given by different experts. Some of them are:

Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting The Institute of Chartered Accountants of England and Wales. Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking The Anglo American Council on Productivity Report.

Management Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business performances The American Association.

SCOPE OF MANAGEMENT ACCOUNTING

The scope of Management Accounting is very wide. Some of the areas included within the ambit of Management Accounting are:

1. General Accounting (Financial accounting)

2. Cost Accounting 3. Budgeting and forecasting 4. Cost control procedure 5. Cost and statistics

6. Taxation

7. Methods and procedures

8. Audit

9. Office services 10. Legal Provisions

INTRODUCTION TO STANDARD COSTINGStandard costing and activity based costing (ABC) are simple yet powerful techniques used

to manage and improve the performance of an organisation. The two are very similar in

their approach yet proponents of ABC have often criticised standard costing as outdated

and lost its relevance. The truth is probably that each technique is suited to solving a

different problem but the best technique for cost control and routine performance

management is to combine the two and use the ABC approach to definition standards.

What I have tried to do in this paper is introduce the reader to the both techniques

describing their history, explaining the techniques and their benefits and showing how an

ABC approach to standard costing gives managers a practical and valuable tool for performance management

HISTORY OF STANDARD COSTINGStandard costing has been used for over a 100 years. Early last century financial

accountants were interested in finding a better way of valuing stocks and work-inprogress,

important elements the calculation of profit and the concept of standard costing

was born. Some historians say the origins of standard costing go back even further and

have found evidence it was used in the American Civil War by quarter masters as a means

of controlling costs. It doesnt really matter when the technique was invented what is more

relevant is that it is still in use today.

A survey conducted in 1989 reported that standard costing was being used by more than

75% of British industrial companies and in a range of different industries e.g. brewing,

textiles, electronics and pharmaceuticals. The survey was conducted because many

articles and books had started to criticise the technique as being inappropriate as capital

intensive industries with high levels of fixed overheads. The survey in fact reported that

only a handful of respondents had abandoned their standard costing systems whereas the

majority had either introduced or enhanced their systems in the previous ten years.

Another survey of Australian and Japanese firms conducted in 1997 reported that 56% of

large firms use if for production costing.

Unfortunately there appear to be no more recent surveys but journal articles from the US in the last couple of years indicate that the

technique is still very much in use and although a 100 years old has definitely survived th

test of time.

A simple example of standard costing

A standard cost is a pre-determined cost of a product, product part, operational activity or service. An example of a standard cost for product P is given in Figure 1a and for vehicle

mileage costs in Figure 1b.

In both these examples the standard costs are expressed as a cost per unit. In Figure 1a it

is the standard cost of one unit of product P. In Figure 1b it is the standard mileage cost for vehicle V to travel one mile.Figure 1a: Standard cost of product P

PER UNIT PER UNIT

Raw material A 5.00

Raw material B 1.75

6.75

Process I 1.50

Process II 2.25

Process III 7.00

10.75

17.50

Figure 1b: Standard mileage cost of vehicle V

per mile Fuel 0.15

Oil 0.01

Tyres 0.03

Maintenance 0.04

0.23

In fact it is more common for the standards to be developed in terms of physical units and

standard cost calculated from the individual unit costs of each element. Figure 2

illustrates this for product P.

Figure 2: Standard cost of product P

Physical unit unit cost

Raw material A 2.50 kg @ 2.00 per kg 3.00

Raw material B .25 kg @ 7.00 per kg 1.75

6.75

Process I 0.10 hr 15.00 per hr 1.50

Process II 0.05 hr @ 45.00 per hr 2.25

Process II I 0.75 hr @ 9.33 per hr 7.00 10.75

17.50

FINDINGS AND RECOMMENDATIONSThere are quite a few misconceptions about standard costing that need to be refuted.

These are:

1. It is old fashioned and not suited to factories using advanced manufacturing

techniques or where the emphasis is on quality rather than costs.

False: Standard costing system is very flexible and can be designed to measure

any KPIs. An innovative variance for just-in-time manufacturing is a raw materials inventory variance that measures the financial impact or purchasing more (or less) raw materials than was actually used in production. A quality variance might be defined as the standard cost of units produced that did not meet the quality specifications.

2. It has been overtaken by activity based costing.

False: Standards can be derived using activity based costing techniques. The two

types of costing are totally compatible.

3. It cant be implemented because actual costs arent recorded to the same degree of

detail as the standards.

False: See section 10. As long as both the cost and a physical measure of an activity are collected a full variance analysis can be produced. Even if only the cost of an activity is recorded there is the possibility of calculating a volume variance and then showing the residual variance as either an efficiency or rate variance, whichever is deemed to be more appropriate.4. Standard costing require additional book-keeping entries to record all the standards and variances.

False: Only if standard costing is being used to value stocks and work in progress do some book-keeping entries need to be made. Using standard costing for management reporting and variance analysis does not necessitate any entries into he books of account.

SUMMARYStandard costing is not a fad. Its use has stood the test of time and as a technique it is

over 100 years old.

It can be used in all types of industries. Although it is best suited to organisations that

have many repetitive operations is not limited to manufacturing. Large organisations in

transportation, retailing, banking, healthcare, mining and service industries are all suitabl

candidates and indeed already use it.

The benefits it brings are varied ranging from the improved cost control and performance

management, more effective use of accountants and planners time to better dialogue and understanding between accountants and operational mangers.

BUDGETARY CONTROL

Budget is a plan which is expressed in terms of definite members:

Eg. of a plan Production has to be increased in the next quarter

Eg. of a budget Production has to improve by 10000 units from the last quarter to the next quarter.

Definitions:

According to ICMA budget is a financial & / quantitative statements, prepared & approved prior to a defined period of time of the policy to be pursued during that period for the purpose of attaining a given objective. They may include income, expenditure & the employment of capital.

Budgetary Control It is the process of utilizing the various budgets like production budget, sales budget, etc,. for the purpose of internal control. This is done with intention of minimizing the wastage & maximizing the efficiency of various departments.

According to ICMA terminology budgetary control as the establishment of budgets relating the responsibilities of executives to the requirements of the policy & the continuous comparison of actual with the budgeted results either to secure by individual actions the objective of that policy to provide basis for its revision.

Steps involved in the Budgetary Control Techniques:

1. Fise the objectives clearly.

2. Formulating the necessary plans to ensure that the desired objectives are achieved.

3. Translating the plans into budgets.

4. Relating the responsibilities of executives to the budgets.

5. Continuous comparison of the actual results with that of the budget & the ascertainment of deviations (Positive/negative).

6. Investigating into the deviations & establishing the causes.

7. Presentation of information to the management relating the variances to individual responsibilities.

8. Corrective action of the management to present recurrence of variance

BUDGETARY CONTROL

Meaning of Budget:

According to Brown and Howard, A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the results actually achieved.

Budgeting:

The act of preparing budgets is called budgeting. In the words of Batty, the entire process of preparing the budgets is known as budgeting.

Meaning of Budgetary Control:

Budgetary control is a system of controlling costs through preparation of budgets. Budgeting is thus only a part of budgetary control. According to CIMA, Budgetary control is the establishment of budgets relating the responsibilities of executives of a policy & the continuous comparison of the actual with the budgeted results, either to secure by individual actions the objective of that policy to provide basis for its revision.

Forecast & Budget:

It is important to note carefully the distinction between a forecast and a budget.

A forecast is a prediction of what may happen as a result of a given set of circumstances. It is an assessment of probable future events. A budget, on other hand, is a planned exercise to achieve a target. It is based on the pros and Cons of a forecast. Forecasting thus precedes the preparation of a budget.

Thus the main point of distinction between the two is that forecast is concerned with probable events while budget relates to planned events. Furthermore, forecast can be made by anybody, whereas a budget, being an enterprise objective, can be set only by the authorized management.

Objectives of Budgetary Control

The following are the objectives of a budgetary control system:

1. Planning: A budget provides a detailed plan of action for a business over definite period of time. Detailed plans relating to production, sales, raw material requirements, labour needs, advertising and sales promotion performance, research and development activities, capital additions etc., are drawn up. By planning many problems are anticipated long before they arise and solutions can be sought through careful study. Thus most business emergencies can be avoided by planning. In brief, budgeting forces the management to think ahead, to anticipate and prepare for the anticipated conditions.

2. Co-ordination: Budgeting aids managers in co-ordinating their efforts so that objectives of the organisation as a whole harmonise with the objectives of its divisions. Effective planning and organisation contributes a lot in achieving coordination. There should be coordination in the budgets of various departments. For example, the budget of sales should be in coordination with the budget of production. Similarly, production budget should be prepared in co-ordination with the purchase budget, and so on.

3. Communication: A budget is a communication device. The approved budget copies are distributed to all management personnel which provides not only adequate understanding and knowledge of the programmes and policies to be followed but also gives knowledge about the restrictions to be adhered to. It is not the budget itself that facilitates communication, but the vital information is communicated in the act of preparing budgets and participation of all responsible individuals in this act.

4. Motivation: A budget is a useful device for motivating managers to perform in line with the company objectives. If individuals have actively participated in the preparation of budgets, it act as a strong motivating force to achieve the targets.

5. Control: Control is necessary to ensure that plans and objectives as laid down in the budgets are being achieved. Control, as applied to budgeting, is a systematized effort to keep the management informed of whether planned performance is being achieved or not. For this purpose, a comparison is made between plans and actual performance. The difference between the two is reported to the management for taking corrective action.

6. Performance Evaluation: A budget provides a useful means of informing managers how well they are performing in meeting targets they have previously helped to set. In many companies, there is a practice of rewarding employees on the basis of their achieving the budget targets or promotion of a manager may be linked to his budget achievement record.

\

Advantages of Budgetary Control:

Budgetary control provides the following advantages:

1. Budgeting compels managers to think ahead i.e. to anticipate and prepare for changing conditions.

2. Budgeting co-ordinates the activities of various departments and functions of the business.

3. It increase production efficiency, eliminates waste and controls the costs.

4. It pinpoints efficiency or lack of it.

5. Budgetary control aims at maximization of profits through careful planning and control.

6. It provides a yardstick against which actual results can be compared.

7. It shows management where action is needed to remedy a situation.

8. It ensures that working capital is available for the efficient operation of the business.

9. It directs capital expenditure in the most profitable direction.

10. It instills into all levels of management a timely, careful and adequate consideration of all factors before reaching important decisions.

11. A budget motivates executives to attain the given goals.

12. Budgetary also aids in obtaining bank credit.

13. Budgeting also aids in obtaining bank credit.

14. A budgetary control system assists in delegation of authority and assignment of responsibility.

15. Budgeting creates cost consciousness and introduces an attitude of mind in which waste and efficiency cannot thrive.16. Limitations of Budgetary ControlThe list of advantages given above is impressive, but a budget is not a cure all for organisational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them.

1. The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.

2. Danger of rigidity: A budget programme must be dynamic and continuously deal with the changing business conditions. Budgets will lose much of their usefulness if they acquire rigidity and are not revised with the changing circumstances.

3. Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. The budget should be regarded not as a master, but as a servant. Sometimes it is believed that introduction of a budget programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals.

4. Expensive Technique: The installation and operation of a budgetary control system is a costly affair as it requires the employment of specialised staff and involves other expenditure which small concerns may find difficult to incur. However, it is essential that the cost of introducing and operating a budgetary control system should not exceed the benefits derived therefrom.

Essentials of Effective Budgeting:

A budgetary control system can prove successful only when certain conditions and attitudes exist, absence of which will negate to a large extent the value of a budget system in any business. Such conditions and attitudes which are essential for effective budgeting are as follows:

1. Support of Top Management: If the budget system is to be successful, it must be fully supported by every member of the management and the impetus and direction must come from the very top management. No control system can be effective unless the organisation is convinced that the top management considers the system to be import.

2. Participation by Responsible Executives: Those entrusted with the performance of the budgets should participate in the process of setting the budget figures. This will ensure proper implementation of budget programmes.

3. Reasonable Goals: The budget figures should be realistic and represent reasonably attainable goals. The responsible executives should agree that the budget goals are reasonable and attainable.

4. Clearly Defined Organisation: In order to derive maximum benefits from the budget system, well defined responsibility centres should be built up within the organisation. The controllable costs for each responsibility centres should be separately shown.

5. Continuous Budget Education: The best way to ensure the active interest of the responsible supervisors is continuous budget education in respect of objectives, potentials & techniques of budgeting. This may be accomplished through written manuals, meetings etc., whereby preparation of budgets, actual results achieved etc., may be discussed.

6. Adequate Accounting System: There is close relationship between budgeting and accounting. For the preparation of budgets, one has to depend on the accounting department for reliable historical data which primarily forms the basis for many estimates. The accounting system should be so designed so as to set up accounts in terms of areas of managerial responsibility. In other words, responsibility accounting is essential for successful budgetary control.

7. Constant Vigilance: Reports comparing budget and actual results should be promptly prepared and special attention focused on significant exceptions i.e. figures that are significantly different from those expected.

8. Maximum Profit: The ultimate object of realizing the maximum profit should always be kept uppermost.

9. Cost of the System: The budget system should not cost more than it is worth. Since it is not practicable to calculate exactly what a budget system is worth, it only implies a caution against adding expensive refinements unless their value clearly justifies them.

10. Integration with Standard Costing System: Where standard costing system is also used, it should be completely integrated with the budget programme, in respect of both budget preparation and variance analysis.

Standard costing and budgetary controlStandard costing and budgetary control have the common objective of cost control by establishing pre-determined targets. The actual performances are measured and compared with the pre-determined targets for control purposes. Both the techniques are of importance in their respective fields and are complementary to each other.

Points of Similarity:

There are certain basic principles which are common to both standard costing and budgetary control. These are:

1. The establishment of pre-determined targets of performance

2. The measurement of actual performance

3. The comparison of actual performance with the pre-determined targets.

4. The analysis of variances between the actual and the standard performance

5. To take corrective measures, where necessary.

Similarities:

1.Both the tools available to the management for the purpose of controlling the costs

2.Both based on setting standard, comparison with actual and study the variance

3. If standard costing prevails in the company then budgetary control is effective.

difference1.Budgetory control can be operated without standard costing

2.Budgets gives the limits on expenses but standard costs are minimum targets to be attained.

3.Budget can be prepared for various areas of activities but standard is used for production and manufacturing cost

4.Budgetary variances may point out efficiency or inefficiency.But standard costing goes beyond

The efficiency or inefficiency and find out the root cause for the variance.

5.Standard is always for improvement.

Budgets are based upon the future or estimated costs.But standard costs are ideal costs under ideal situation.

Standard Costing and Budgetary Control

The systems of standard costing and budgetary control have the common objectives of controlling business operations by establishment of pre-determined targets, measuring the actual performances and comparing it with the targets, for the purpose of having better efficiency and of reducing costs. The two systems are said to be inter-related but they are not inter-dependent. Standard costing is introduced primarily to ascertain efficiency and effectiveness of cost performance. Budgetary control is introduced to state in figures an approved plan of action relating to a particular period. Both standard costing and budgetary control have the following common features: Both have a common objective of improving managerial control. Both techniques are based on the presumption that cost is controllable. In both the techniques, results of comparison are analysed and reported to management.

STANDARD COSTING

VS

BUDGETORY CONTROL

Standard Costing is revealed with the control of expenses and hence it is more intensive.

Budgetary control is concerned with the operation of the business as a whole and hence it is more extensive.

Standard costs are based on technical assessments.

Budgets are based on past actuals, adjusted to future trends.

To establish standard costs, some form of budgeting is essential as there is the need to forecast the level of output and prescribed set of working conditions in the periods in which the standard costs are to be used.

Budgetary control can be applied even without the help of standard costing. (Standards are set mainly for production and production expenses.

Budgets are compiled for all items of income and expenditure.

Standard cost is the projection of cost accounts.

Budget is a projection of financial Accounts..

Standards set up targets that are to be attained by actual performance.

Budgets set up maximum limits of expenses above which the actual expenditure should not normally exceed. :

In standard costing, variances are analysed in detail according to their originating causes. It reveals variances through different accounts, such as, material price variance, usage variance, etc.

In budgetary control, variances are not related through the related accounts but are revealed in total.

Standard costs do not tell what the costs are expected to be, but rather what the costs should be under specific conditions of production performance and as such cannot be used for the purpose of forecasting.

Budgets are anticipated or expected costs meant to be used for forecasting requirements of material, labour, cash, etc. Standard costs are used in various management decisions, price fixing, value analysis, valuation of closing stock, etc.

It aims in policy determination, co-ordination of activities in different divisions and delegation of authority.

POINTS OF DIFFERENCEIn spite of so much similarity between standard costing and budgetary control, there are some important differences between the two, which are as follows:

Standard CostingBudgetary Control

ScopeStandard costs are developed mainly for the manufacturing function and sometimes also for making and administration functionsBudgets are compiled functions of the business such as sales, purchase, production, cash, capital expenditure, research & development, etc.,

IntensityStandard costing is intensive in application as it calls for detailed analysis of variancesBudgetary control is extensive in nature and the intensity of analysis tends to be much less than that in standard costing.

Relation to accountsIn standard costing, variances are usually revealed through accountsIn budgetary control, variances are normally not revealed through accounts and control is exercised by statistically putting budgets and actuals side by side.

UsefulnessStandard costs represent realistic yardsticks and, are therefore, more useful for controlling and reducing costs.Budgets usually represent an upper limit on spending without considering the effectiveness of the expenditure in terms for output.

BasisStandard cost are usually established after considering such vital matters as production capacity, methods employed and other factors which require attention when determining an acceptable level of efficiency.Budgets may be based on previous years costs without any attention being paid to efficiency.

ProjectionStandard cost is a projection of cost accountsBudget is a projection of financial accounts.

CONCLUSIONA PROJECT REPORT STATES THAT STANDARD COSTING AND BUDGETORY CONTROL HAVE THE COMMON OBJECTIVE OF COST CONTROL BY ESTABLISHING PRE DETERMINED TARGETS.THE ACTUAL PERFORMANCE IS COMPARED WITH THE PREDETERMINED TARGETS FOR CONTROL PURPOSES.BOTH THE TECHNIQES ARE OF IMPORTANCE IN THEIR RESPECTIVE FIELDS.ALSO BOTH TECHNIQUES POSSESS THE DIFFERENCES IN THEIR SCOPE ,INTENSITY AND USEFULNESS.BIBLIOGRAPHYWWW.GOOGLE.COMWWW.WIKIPEDIA.COM

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