2. Course Contents
Course Contents
Overview of Cost and Management
Overview of Cost and Management
Accounting
Accounting
• Objectives of Cost & Management Accounting
Objectives of Cost & Management Accounting
• Cost and Management Accounting in Comparison with
Cost and Management Accounting in Comparison with
Financial Accounting
Financial Accounting
• Cost Benefit Philosophy & Behavioral
Cost Benefit Philosophy & Behavioral
Considerations in Management Accounting
Considerations in Management Accounting
System
System
• Management Accounting in Service Organizations
Management Accounting in Service Organizations
• Ethical Considerations in Management
Ethical Considerations in Management
Accounting
Accounting
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3. Cont…
Cont…
Cost Classification Concepts and Terms
Cost Classification Concepts and Terms
• Direct and indirect costs,
Direct and indirect costs,
• Fixed and variable costs,
Fixed and variable costs,
• Period and product costs,
Period and product costs,
• Controllable and uncontrollable costs,
Controllable and uncontrollable costs,
• Avoidable and unavoidable costs,
Avoidable and unavoidable costs,
• “
“Sunk” costs,
Sunk” costs,
• Budgeted, standard and actual costs and their
Budgeted, standard and actual costs and their
comparisons and analyses
comparisons and analyses
• The concepts of cost units, cost centers and profit
The concepts of cost units, cost centers and profit
centers
centers
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4. Cont…
Cont…
Costing Methods
Costing Methods
Job Order, Batch and Contract Costing
Job Order, Batch and Contract Costing
Methods
Methods
• Concepts: Costing System, Cost Pool, Cost Allocation Bases
Concepts: Costing System, Cost Pool, Cost Allocation Bases
• Job Order Costing System Features
Job Order Costing System Features
• Accounting Procedures for Job Order Costing System
Accounting Procedures for Job Order Costing System
• Process Costing System Features
Process Costing System Features
• Job Order Costing System – Illustration
Job Order Costing System – Illustration
• Process Costing System
Process Costing System
• Illustration(FIFO Methods)
Illustration(FIFO Methods)
• Spread Sheet Application of Process Costing
Spread Sheet Application of Process Costing
• Problems of Overhead Application
Problems of Overhead Application
• Operations Costing
Operations Costing
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5. Cont…
Cont…
Spoilage, Reworked Units and Scrap
Spoilage, Reworked Units and Scrap
• Spoilage, Rework and Scrap in General
Spoilage, Rework and Scrap in General
• Process Costing and Spoilage
Process Costing and Spoilage
• Job Order Costing and Spoilage
Job Order Costing and Spoilage
• Reworked Units
Reworked Units
• Accounting for Scrap
Accounting for Scrap
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6. Cont…
Cont…
Cost Allocation
Cost Allocation
• Cost Allocation in General
Cost Allocation in General
• General Purpose of Cost Allocation
General Purpose of Cost Allocation
• Allocation for Economic Decisions and
Allocation for Economic Decisions and
Motivations
Motivations
• Cost Allocation Methods
Cost Allocation Methods
• The Contribution Approach to Cost
The Contribution Approach to Cost
Allocation
Allocation
• Joint Products and by Products
Joint Products and by Products
• Concepts – Joint, by Products Joint Costs
Concepts – Joint, by Products Joint Costs
• Allocation of Joint Cost
Allocation of Joint Cost
• Accounting for by Products
Accounting for by Products
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7. Cont…
Cont…
• Activity-Based Costing and Management
Activity-Based Costing and Management
– Activity-based costing; use of cost drivers and activities
Activity-based costing; use of cost drivers and activities
– Activity Based Costing for Customer Profitability
Activity Based Costing for Customer Profitability
– Activity Based Management
Activity Based Management
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8. Chapter One
Chapter One
Overview of Cost and Management
Overview of Cost and Management
Accounting
Accounting
Contents
Contents
• Introduction
Introduction
• Objectives of Cost & Management Accounting
Objectives of Cost & Management Accounting
• Cost and Management Accounting in Comparison with
Cost and Management Accounting in Comparison with
Financial Accounting
Financial Accounting
• Cost Benefit Philosophy & Behavioral Considerations in
Cost Benefit Philosophy & Behavioral Considerations in
Management Accounting System
Management Accounting System
• Ethical Considerations in Management Accounting
Ethical Considerations in Management Accounting
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9. Introduction
Introduction
Cost and management accounting is a form of accounting
that aims to maximize profit
maximize profit by managing revenues
revenues and
expenses
expenses.
It provides data
data and reports
reports used by managers to inform
their strategies around long-term profit
profit and growth
growth.
Every organization large and small
small has managers that
responsible for formulating strategy, making plans,
organizing resources, directing personnel, and
controlling operations.
Managers at everywhere, carry out five major activities
planning, organizing, staffing, leading (directing and
motivating), and controlling.
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10. Cont…
Cont…
Management accounting information plays a
vital role in these basic management activities
but most particularly in the planning
planning and
control
control functions.
Planning is the communication of a company’s
goals.
Because ultimately a company’s results are
translated into dollars, planning is achieved
through the budgeting process as a basis for
decisions made by managers.
Budgets are the financial plans of a company.
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11. Definition Management Accounting
Definition Management Accounting
• “Management accounting is an integral part of
management concerned with identifying,
presenting and interpreting information used for:
– Formulating strategy
– Planning and controlling activities
– Decision making
– Optimizing the use of resources
– Disclosures to shareholders and others external to the
entity
– Disclosure to employees
– Safeguarding assets.”
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12. Scope of Management Accounting
Scope of Management Accounting
• The important techniques and systems used by
management accounting are:-
– Historical Cost Accounting: Maintenance of books of
cost accounting enables to know the actual costs
incurred by the firm.
– Standard Costing: The standard costs laid down by
experts are compared with the natural costs in order to
know the deviations
– Marginal Costing: The costs are divided into fixed
and variable costs which help is making vital decisions.
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13. Cont…
Cont…
– Decision Accounting: Decisions are made after
studying the impact of decisions in terms of costs,
resource, profits, growth etc.
– Budgetary Control: It is a system of controlling the
cost with the help of budgets.
– Control Accounting: It includes the techniques such
as standard costing, budgetary control, control
reports, internal check, internal audit and reports.
– Revaluation Accounting: It is based on current costs
to ensure that the investment is intact and profits
from investment are kept in mind.
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14. Cont…
Cont…
– Financial Planning & Policies: It consists of raising
the long term and short term finance and invest it on
optimum basis and enhance the profitability of the
firm.
– Capital Expenditure: The large amounts of future
capital expenditure and future profits are analyzed to
take important decisions.
– Break Even Analysis: This is an important technique
which is used to analyze the behavior of costs viz.,
fixed and marginal costs, indicating the level of
activity at which the total costs would equal the total
revenue and also the margin of safety.
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15. Cont…
Cont…
– Inter-period Comparison: It is a technique of
comparing the present performance with the past
performance.
– Techniques of Forecasting: Some techniques like
decision tree, probability and sensitivity analysis are used
by management accountants for forecasting which forms
a base for planning.
– Operations Research: It consists of statistical and
mathematical techniques that are increasingly used in
decision making process.
– Statistics: The statistical techniques used by
management accountant are correlation, regression,
probability, time series, standard deviation, linear
programming, control charts etc. 15
16. Functions of a Management Accountant
Functions of a Management Accountant
• Collection of Data: The management accountant has to
collect data about the problems faced by the management
through primary and secondary sources.
• Analysis of Data: After the collection of data, the
management accountant has to analyses it for the purpose
of interpretation using various tools and techniques.
• Presentation of Data: The management accountant is
required to present the data to the management in columns
and rows to facilitate proper understanding.
• Planning: The management accountant assists the
management in long range planning as well as in
formulation of policies of the organization.
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17. Cont…
Cont…
• Controlling: The management accountant follows
different techniques like standard costing, budgetary
control etc. to ensure adequate control for implementation
of plans and achievement of objectives.
• Reporting: Reporting being a very important function of a
management accountant, he has to prepare different types
of reports periodically and communicated to the concerned
departments to meet the requirements at different levels of
management for necessary action.
• Coordinating: The management accountant has to co-
ordinate the various activities of the organization for the
preparation of master budget and other such activities.
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18. Cont…
Cont…
• Decision Making: The management accountant has to
assist the management in taking realistic decisions through
analysis and interpretation of data that suggests a particular
course of action with the help of various tools of
management accounting.
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19. Goals of Managerial Accounting
Goals of Managerial Accounting
• The goal of managerial accounting is to provide
information for internal decision making, primarily
for planning and control purposes.
• The two primary functions of managerial accounting are
planning and controlling.
– Both of these help managers accomplish decision making.
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20. Cost and Management Accounting in Comparison
Cost and Management Accounting in Comparison
with Financial Accounting
with Financial Accounting
Comparison of Financial and Managerial Accounting
Comparison of Financial and Managerial Accounting
• Financial accounting and management accounting are two
interrelated facets of the accounting system.
• They are not independent of each other but they are
interdependent.
• Financial Accounting
Financial Accounting provides the basic data which are
analyzed and interpreted suitably and in the required manner
by management accounting.
• Although there exists close relationships between financial
accounting and management accounting, distinction is always
drawn between financial and management accounting.
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21. Comparison of Financial and Managerial Accounting
Comparison of Financial and Managerial Accounting
Dimension
Dimension Management Accounting
Management Accounting Financial Accounting
Financial Accounting
1. Meaning The accounting system which
provides relevant information
to the managers to make
policies, plans and strategies
for running the business
effectively.
Focuses on the
preparation of financial
statement of an
organization to provide
the financial
information to the
interested parties.
2. Objective To provide information for
internal management
To make periodical
reports to shareholders,
creditors, debenture
holders and the
Government.
3. Structure Varies according to use of the
information
Unified structure
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22. Cont…
Cont…
Dimension
Dimension Management Accounting
Management Accounting Financial Accounting
Financial Accounting
4. Sources of
Principles
Whatever is useful to
management
Generally accepted
accounting principles
(GAAPs)
5. Time-frame The reports are prepared as
per the need and requirements
of the organization.
Financial Statements
are prepared at the end
of the accounting
period which is usually
one year.
6. Purpose A means to the end of
assisting management
External reporting /
statements for outside users
7. Users Only internal management. Internal and external
parties
8. Report
frequency
Varies with purpose, monthly
and weekly.
Quarterly and annual
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24. Comparison of Management and Cost Accounting
Comparison of Management and Cost Accounting
• Costing
Costing has been defined as classifying
classifying, recording
recording and
appropriate allocation
appropriate allocation of expenditure for the
determination of the costs of products or services.
• Cost accounting
Cost accounting will tell the management as to how the
business has fared at each stage of operation.
– But cost accounting will not tell them anything about the future
policy to be adopted.
– It is here that management accounting differs from cost
accounting.
• The aim of management accounting is not to collect
information as such but to utilize the information collected
in order to help the management to formulate their future
policy and to make important policy decisions.
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25. Comparison of Cost and Management Accounting
Comparison of Cost and Management Accounting
Dimension
Dimension Cost Accounting
Cost Accounting Management Accounting
Management Accounting
1. Purpose The ascertainment of cost at
each stage of production.
To provide information to
the management of for
decision making.
2. Basis Prepared mainly on the basis
of past and less emphasis is
given for the future.
Purely aims at the future
based on the past
information.
3. preparation On the basis of some rules
and regulations adopting by
accounting.
According to the will of
the managerial personels.
4. Reports Subject to statutory audit Not Subject to statutory
audit
5. Useful Both to internal and external
parties.
only to the internal parties.
6. Scope Does not include tax include tax planning and
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26. Comparison of Financial and Cost Accounting
Comparison of Financial and Cost Accounting
Dimension
Dimension Cost Accounting
Cost Accounting Financial Accounting
Financial Accounting
1. Purpose To analyse, ascertain and
control costs
To record financial
transaction and prepare
financial statement.
2. Decision
making
Designed to facilitate
decision making in the area of
production, purchasing, sales
Are limited use in
decision making.
3. Access The outsiders generally have
no access to cost records
Anybody can have
access to financial
statement of companies
4. Control Control all elements of costs Does not exercise
adequate control over
material, labour &
overhead costs.
5.Tax
assessment
Does not form a basis for tax
assessment
Forms a basis for
determination tax liability
of the business
26
27. Cost Benefit Philosophy & Behavioral
Cost Benefit Philosophy & Behavioral
Considerations in Management Accounting
Considerations in Management Accounting
System
System
Managers keep the following ideas in mind
when designing accounting systems:
Simplicity
Simplicity
The cost-benefit balance
The cost-benefit balance:
• Primary consideration in choosing among
accounting systems and methods.
• Comparing estimated costs with probable benefits.
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28. Cont…
Behavioral Implications
Behavioral Implications:
• the accounting system's effect on the
behavior (decisions) of managers (The
system must provide accurate, timely
budgets and performance reports in a form
useful to managers.
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29. Behavioral Considerations in Management
Behavioral Considerations in Management
Accounting System
Accounting System
Behavioral Assumptions of "Traditional" Management
Behavioral Assumptions of "Traditional" Management
Accounting
Accounting
Assumptions with Respect of Organization Goals
Assumptions with Respect to the behavior of
Participants
Assumptions With Respect to the Behavior of
Management
Assumptions with Respect to the Role of
Management Accounting
It assumes that people are motivated almost entirely by the promise
of economic rewards and threats of economic sanctions. Further, the
traditional model conceives of the role of management as primarily
one of applying stringent control over the performance of others.
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30. Cont…
Behavioral Assumptions from Modern Organization
Behavioral Assumptions from Modern Organization
Theory
Theory
Assumptions with Respect to Organization Goals
Assumptions with Respect to the Behavior of
Participants
Assumptions with Respect to the Behavior of
Management
Assumptions with Respect to the Role of Accounting
The modern view of management emphasizes the
importance of creating a favorable organizational climate
favorable organizational climate
through the use of participative
participative, supportive
supportive, and democratic
democratic
management processes
management processes which are designed to permit
each member of the organization to realize his own
potential to the greatest possible degree.
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31. Ethical Considerations in Management Accounting
Ethical Considerations in Management Accounting
Ethics in accounting is of utmost importance to
accounting professionals and those who rely on
their services.
Certified Public Accountants (CPAs) and other
accounting professionals know that people who
use their services, especially decision makers using
financial statements, expect them to be highly
competent, reliable, and objective.
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32. Cont…
The Institute of Management Accountants (IMA)
Statement of Ethical Professional Practice for
Management Accounting Members
Requires members to adhere to a code of conduct
regarding:
Professional Competence,
Confidentiality,
Integrity, and
Credibility.
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