Cost accounting

In cost accounting establishes budget and actual cost of operations, processes,

departments or product and the analysis of variances, profitability or social use of funds.

Managers use cost accounting to support decision-making to cut a company's costs and

improve profitability. As a form of management accounting, cost accounting need not to

follow standards such as GAAP, because its primary use is for internal managers, rather

than outside users, and what to compute is instead decided pragmatically.

Costs are measured in units of nominal currency by convention. Cost accounting can be

viewed as translating the supply chain (the series of events in the production process that,

in concert, result in a product) into financial values.

Classical cost elements are:

1. raw materials

2. labor

3. indirect expenses/overhead

Cost accounting has long been used to help managers understand the costs of running a

business. Modern cost accounting originated during the industrial revolution, when the

complexities of running a large scale business led to the development of systems for

recording and tracking costs to help business owners and managers make decisions.

In the early industrial age, most of the costs incurred by a business were what modern

accountants call "variable costs" because they varied directly with the amount of

production. Money was spent on labor, raw materials, power to run a factory, etc. in

direct proportion to production. Managers could simply total the variable costs for a

product and use this as a rough guide for decision-making processes.

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Some costs tend to remain the same even during busy periods, unlike variable costs,

which rise and fall with volume of work. Over time, the importance of these "fixed costs"

has become more important to managers. Examples of fixed costs include the

depreciation of plant and equipment, and the cost of departments such as maintenance,

tooling, production control, purchasing, quality control, storage and handling, plant

supervision and engineering. In the early twentieth century, these costs were of little

importance to most businesses. However, in the twenty-first century, these costs are often

more important than the variable cost of a product, and allocating them to a broad range

of products can lead to bad decision making. Managers must understand fixed costs in

order to make decisions about products and pricing.

For example: A company produced railway coaches and had only one product. To make

each coach, the company needed to purchase Rs.60 of raw materials and components, and

pay 6 laborers Rs.40 each. Therefore, total variable cost for each coach was Rs.300.

Knowing that making a coach required spending Rs.300, managers knew they couldn't

sell below that price without losing money on each coach. Any price above Rs.300

became a contribution to the fixed costs of the company. If the fixed costs were, say,

Rs.1000 per month for rent, insurance and owner's salary, the company could therefore

sell 5 coaches per month for a total of Rs.3000 (priced at Rs.600 each), or 10 coaches for

a total of Rs.4500 (priced at Rs.450 each), and make a profit of Rs.500 in both cases.

Elements of cost

1. Material(Material is a very important part of business)

o A. Direct material

o B. Indirect material

2. Labor

o A. Direct labor

o B. Indirect labor

3. Overhead

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o A. Indirect material

o B. Indirect labor

(In some companies, machine cost is segregated form overhead and reported as a separate

element)

They are grouped further based on their functions as,

1. Production or works overheads

2. Administration overheads

3. Selling overheads

4. Distribution overheads

Classification of costs

Classification of cost means, the grouping of costs according to their common

characteristics. The important ways of classification of costs are:

By nature or element: materials, labor, expenses

By functions: production, selling, distribution, administration, R&D, development,

As direct and indirect

By variability: fixed, variable, semi-variable

By controllability: controllable, uncontrollable

By normality: normal, abnormal

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Management accounting

Management accounting or managerial accounting is concerned with the provisions

and use of accounting information to managers within organizations, to provide them

with the basis to make informed business decisions that will allow them to be better

equipped in their management and control functions.

In contrast to financial accountancy information, management accounting information is:

designed and intended for use by managers within the organization, instead of

being intended for use by shareholders, creditors, and public regulators;

usually confidential and used by management, instead of publicly reported;

forward-looking, instead of historical;

computed by reference to the needs of managers, often using management

information systems, instead of by reference to general financial accounting

standards.

Definition

According to the Chartered Institute of Management Accountants (CIMA), Management

Accounting is "the process of identification, measurement, accumulation, analysis,

preparation, interpretation and communication of information used by management to

plan, evaluate and control within an entity and to assure appropriate use of and

accountability for its resources. Management accounting also comprises the preparation

of financial reports for non-management groups such as shareholders, creditors,

regulatory agencies and tax authorities" (CIMA Official Terminology).

The American Institute of Certified Public Accountants(AICPA) states that management

accounting as practice extends to the following three areas:

Strategic Management—Advancing the role of the management accountant as a

strategic partner in the organization.4

Performance Management—Developing the practice of business decision-making

and managing the performance of the organization.

Risk Management—Contributing to frameworks and practices for identifying,

measuring, managing and reporting risks to the achievement of the objectives of

the organization.

The Institute of Certified Management Accountants(ICMA), states "A management

accountant applies his or her professional knowledge and skill in the preparation and

presentation of financial and other decision oriented information in such a way as to

assist management in the formulation of policies and in the planning and control of the

operation of the undertaking." Management Accountants therefore are seen as the "value-

creators" amongst the accountants. They are much more interested in forward looking

and taking decisions that will affect the future of the organization, than in the historical

recording and compliance (scorekeeping) aspects of the profession. Management

accounting knowledge and experience can therefore be obtained from varied fields and

functions within an organization, such as information management, treasury, efficiency

auditing, marketing, valuation, pricing, logistics, etc

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DISTINCTION BETWEEEN COST ACCOUNTING AND MANAGEMENT ACCOUNTING

Cost accounting and management accounting both have the same objectives of helping the management in planning, control and decision making. Both are internal to the organization and use common tools and techniques like standard costing, variable costing, budgetary control...Etc Inspite of these similarities there are certain differences between these two.

Category Cost Accounting Management Accounting Deals with It deals with ascertainment ,

allocation and accounting aspect of costs

It deals with the effect and impact of cost on the business.

Base It provides a base for management accounting

It is derived from both cost accounting and financial accounting

Role It help in collecting costing data for the management

It has a greater degree of relevance and objectivity as the management accountant has a clear idea of the types of costs and items requiring analysis and states the specific problems of business.

Status The status of cost accountant comes after the management accountant

Management accountant is senior in position to cost accountant.

Outlook Cost accountant has a narrow approach. He has to refer to economic and statistical data for analyzing cost effects.

Management accountant reports the effect of cost on the business along with cost analysis

Tools & Techniques

It has standard costing, variable costing, break even analysis etc as the basic tools and techniques.

Along with tools & techniques of cost accounting the management accountant has fund & cash flow statements, ration analysis..etc as his accounting tools & techniques

Scope It does not include financial accounting, tax planning and tax accounting.

It includes financial accounting cost accounting, tax planning and tax accounting

Period of planning

It is concerned with short term planning

It is concerned with short range and long range planning and uses techniques.

Assistance It merely assists the management in its functions

It assists and evaluates the management performance

Approach It is historical in its approach It is futuristic in its approachInstallation It cab be installed without

management accountingIt needs financial & cost accounting as its base for its installation

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BIBLIOGRAPHY

S.no Name of the Book/Magazine/Article Author Publisher/Source1

Cost & Management Accounting (5e)S.P Jain & K.L Narang

Kalyani Publishers

Web sites Referred:

en.wikipedia.org/wiki/Costen.wikipedia.org/wiki/Management_accountingwww.kesdee.com/pdf/managementaccounting.pdftutor2u.net/business/.../costmanagementaccounting/default.html -

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INDEX

S.NO Contents Page No

1Cost accounting

1-3

2 Management accounting 4-53

Distinction between Cost & Management Accounting6

4BIBLIOGRAPHY

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MINI PROJECT

ACADEMIC YEAR : 2009-2011

SEMISTER : 3rd SEMESTER MID : 1st MID SUBJECT : COST & MANAGEMENT ACCOUNTING TOPIC : DISTINCTION BETWEEN COST & MANAGEMENT ACCOUNTING

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SUBMITEDBY

BALAMURALI BHASKARAN09331E0004

SCHOOL OF MANAGEMENT STUDIESMVGR COLLEGE OF ENGINEERING

ACCERDITED BY NBA & NAAC ‘A’ GRADED(APPROVED BY AICTE & PERMANENTLYAFFILIATED TO JNTU KAKINADA)

VIZIANAGARAM – 535005

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