Cost & Management

Accounting
MMS –II.
RPIMS
Mumbai University
Prof Anil Yadavrao Gaikwad.
 Course Content
Cost & Management Accounting
1. Terminology of cost- cost classification by elements, variability, cash flow etc
2. Preparation of cost sheet

3. Methods of costing- with special reference to job costing, process costing, services costing

4. Direction and relationship among financial accounting, cost accounting and management accounting

5. Marginal costing  (Break-even analysis)

           a) Computation of break even point, margin of safety
           b) Application of Break even analysis to export pricing profit planning, Make v/s buy, operate v/s
shut down

6. Budgetary Control- Function Budgets, Cash Budgets, Master Budgets- Flexible

    Budgeting- Zero based Budgeting- Responsibility and Performance Budgeting 

7. Responsibility  Accounting- Cost Centers. Profit centers and investment centers Transfer pricing, Use
of responsibility    accounting in performance evaluation.

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 Project Work
1. Costing Methodology in a Software Company – A Case Study

2. Costing Methodology in a Construction Company – A Case

Study

3. Costing Methodology in a BPO / Call Centre – A Case Study

4. Costing Methodology in a Consulting Company– A Case

Study

5. Costing Methods and ISO Certification

6. Costing Methodology in Entertainment Company – Case

Study

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 Reference Books
1. Principles and Practice of Cost Accounting
By
N K Prasad & A K Prasad

2. Cost Accounting – A Managerial Emphasis

By
Charles T Horngren

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 Cost Centre Concept
Cost Centre is defined as a location, person or item of equipment ( or group
of these) for which cost may be ascertained and used for the purpose of
cost control.

A cost center is part of an organization that does not produce direct profit
and adds to the cost of running a company. Examples of cost centers
include research and development departments, marketing departments,
help desks and customer service.

Although not always demonstrably profitable, a cost center typically adds

to revenue indirectly or fulfills some other corporate mandate. Money
spent on research and development, for example, may yield innovations
that will be profitable in the future. Investments in public relations and
customer service may result in more customers and increased customer
loyalty.

Because the cost center has a negative impact on profit (at least on the
surface) it is a likely target for rollbacks and layoffs when budgets are cut.
Operational decisions in a contact center, for example, are typically driven
by cost considerations. Financial investments in new equipment, technology
and staff are often difficult to justify to management because indirect
profitability is hard to translate to bottom-line figures.
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 Cost Centre Concept
Cost Centers are of two types :-
A. Impersonal &
B. Personal Cost Centers

A. Impersonal Cost Centre consists of a location or item

of equipment ( or Group of these)
B. A personal cost centre consists of a person or group of
persons

In manufacturing concerns, cost centers

follow the pattern of layout of Dept or
Section of the Factory.
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 Profit Centre Concept
Profit Centre is a segment of business that is
responsible for all activities involved in the production
and sales of products, system and services. Thus a
profit centre encompasses both costs that it incurs and
revenue that is generated.

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 Cost Objective
Many Accountants use the term cost objective to
denote any activity for which costs are required to be
determined separately.

A Standard definition specifies cost objective as “a

function, organizational sub-division, contract or other
work unit for which cost data are required and for
which provision is made to accumulate and measure
the cost of processes, products, jobs, capitalized
projects and so forth.

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 Cost & Management Accounting –MMS IInd Semester -RPIMS

What is Cost Sheet?

 Cost sheet is a statement of cost. In other words, when costing information are set
out in the form of a statement, it is called cost sheet. It is usually adopted when
there is only one product is produced and all costs are incurred for that product
only. Cost sheet may be prepared for a week, monthly, quarterly or yearly
indicating various components of cost as prime cost, works cost, cost of
production, cost of goods sold, total cost and also profitability on a production.
 The preparation of cost sheet depends on the cost data available. Due to
differences in the nature of cost data there  are three different cost sheet Performa
may be used.
(a) Cost sheet with break up cost: These types of cost sheet contains two column
as total cost, cost per unit of out put.

(b) Cost Sheet with treatment of Stock: This type of cost sheet is maintained in
case of manufacturing concern. Generally there are three types of stock as (1)
Stock of Raw material, (2) Stock of work in progress and (3) Stock of finished
goods. The treatment of stock in cost sheet has been given in a separate
Performa.

(c) Estimated cost sheet or price quotation: Price quotation means quoting the
minimum Price for obtaining a specific order. The quotation is send in the form or
estimated cost sheet having one column. In estimated cost sheet all elements of
cost and overhead expenses are calculated in the following manner.
1. Estimated Direct Material
2. Estimated Labor Cost
3. Estimated Overheads

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 Cost & Management Accounting –MMS IInd Semester -RPIMS

What is Cost Sheet?

Direct Cost and Indirect Cost

Direct Material Direct Cost

Direct Labour or
Direct Expenses
Prime Cost

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 Cost & Management Accounting –MMS IInd Semester -RPIMS

What is Cost Sheet?

Direct Cost and Indirect Cost

Indirect Material
indirect Labour Indirect Cost
Indirect Expenses

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 Cost & Management Accounting –MMS IInd Semester -RPIMS

Direct Cost and Indirect Cost

Direct Cost OR Prime Cost

+
Indirect Cost
+
Factory (Works, Production OR
Manufacturing) Overheads
=
Total Factory Cost OR Cost of Production

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 Cost & Management Accounting –MMS IInd Semester -RPIMS

Direct Cost and Indirect Cost

Total Factory Cost
OR
Cost of Production
+
Administrative Overheads
+
Selling & Distribution Overheads
=
Cost of Sales
+
Profit
=
Sales

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 Cost & Management Accounting –MMS IInd Semester -RPIMS

Direct Cost and Indirect Cost

Direct Cost OR Prime Cost
+
Indirect Cost
+
Factory (Works, Production OR Manufacturing) Overheads
=
Total Factory Cost OR Cost of Production
+
Administrative Overheads
+
Selling & Distribution Overheads
=
Cost of Sales
+
Profit
=
Sales
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 Cost & Management Accounting –MMS IInd Semester -RPIMS

Direct Cost and Indirect Cost

Direct Material +
Direct Labour + Know as Prime Cost
Direct Expenses +
Indirect Material +
Indirect Labour +
Indirect Expenses +
Factory Overheads + = Production Cost or Total Factory Cost
Administrative Overheads +
= Cost of Sales
Selling & Distribution Overheads +
Profit = Sales

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Methods of Costing and Types of Costs

Several methods or types of costing have been designed to suit

the needs of individual business conditions.

The basic principles underlying all these methods are the same
viz. to collect and analyze the expenditure according to the
elements of costs and to determine the cost for each cost centre
and / or cost unit.

The main consideration that applies to the choice of a particular

method of costing is the nature of the manufacturing or business
operations carried out or the service rendered by the concern.

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Methods of Costing and Types of Costs

Basically, there are two main systems of

costing viz.
1. Job Costing and
2. Process Costing

All other types are either variants of these two

systems of costing or are just techniques used for
particular purpose, under specific conditions and on
specific occasions.

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 Methods of Costing and Types of Costs

1. Classification of cost methods on the basis of nature of

production or manufacturing process:-
A. Job Costing
Variation of job costing are :-
i. Batch Costing
ii. Terminal or Contract Costing
iii. Multiple or Composite Costing

B. Process Costing
Variations of Process Costing are :-
i. Operation Costing
ii. Single or Output Costing
iii. Operating Cost

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 Methods of Costing and Types of Costs

2. Classification of cost methods on the basis of Time:-

A. Historical Cost

B. Pre-Determined Costs
i. Estimated Costing
ii. Standard Costing

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 Methods of Costing and Types of Costs

3. Costs for Managerial Decision Making :-

i. Marginal Costing
ii. Incremental ( or Differential ) Cost
iii. Uniform Costing
iv. Opportunity Cost
v. Replacement Cost
vi. Sunk Cost
vii. Relevant Cost

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 Methods of Costing and Types of Costs

4. Costs According to Functions (Manufacturing & Non-

Manufacturing Cost):-

i. Manufacturing or Production Cost

ii. Administrative Cost
iii. Selling and Distribution Cost
iv. Research & Development Cost
v. Pre-Production Cost

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 Methods of Costing and Types of Costs

5. Classification of Costs on the basis of their

variability in relation to output:-

i. Fixed Cost
ii. Variable Cost
iii. Semi-Variable and Semi-Fixed Cost

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 Methods of Costing and Types of Costs

6. Classification of Costs based on establishment

of relationship between input and output:-

i. Engineering Cost
ii. Managed Cost, discretionary or programmed Cost

7. Controllable and Uncontrollable costs

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 Methods of Costing and Types of Costs

8. Other Types of Costs

Costs which arises in a particular contests and which are used for
particular purposes are :-

i. Conversion Cost
ii. Common Cost
iii. Traceable Cost or Directly Attributable Cost
iv. Joint Cost
v. Avoidable Cost
vi. Unavoidable Cost
vii. Total Cost

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 Cost Control
 The essential features of cost accounting are : Determination of
costs, planning and control of costs, cost analysis and furnishing
of information to managements for decision making, and cost
reduction. Cost Control and determination of costs and cost
reporting are just tools or means to achieve effective control.

 Cost control is defined as the regulation by executive action of

the costs of operating an undertaking, particularly where such
action is guided by cost accounting.

 Cost control is exercised through numerous techniques some of

which are standard costing, budgetary control, Estimated
Costing, Inventory Control, Quality Control and Performance
evolution, analysis and reporting.

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 Cost Control
 Cost Control involves the Following Steps :

1. Establish the Plan

2. Inform the persons who are involved directly in
the Cost Centre
3. The plan is implemented and performance is
recognized
4. The actual performance is measured with the
pre-determined plan and variances
5. The variances re-reviewed and decision taken.

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 Cost Control
 The Advantages of Cost Control
1. Achieving the expected return on capital employed by
maximizing or optimizing profit
2. Increase in productivity of the available resources
3. Reasonable Price for the Customers
4. Continued employment and job opportunity for the workers
5. Economic use of limited resources of production
6. Increased Credit-worthiness
7. Prosperity and Economic Stability of the Industry

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 Cost Control
 Advantages of Cost Accounting
i. A cost system reveals unprofitable activities, losses or inefficiencies occurred in any form such as :-
a. Wastage of Man Power, Idle Time and Lost Time
b. Wastage of Material in the form of spoilage, excessive scrap etc. and
c. Wastage of resources
ii. Cost Accounting locates the causes for decrease or increase in the profit or loss of the business.
iii. Cost Accounts furnish suitable data information to the management to serve as guides in making
decisions involved financial consideration.
iv. Cost Accounting is useful for price fixation purpose.
v. With the application of standard costing and budgetary control methods, the optimum level of
efficiency is set.
vi. Cost comparison helps in cost control.
vii. A cost system provides ready figures for use by the Government, Wage Tribunal Boards and Labour
and Trade Unions for application to problems like Price Fixation, Administered Price Determination,
Price Control, Tariff Protection, Wage Level Fixation, Payment of Dividends, or Settlement of
Disputes.

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 Cost Control
 Advantages of Cost Accounting …continue
viii. When a concern is not working to full capacity due to various reasons such as shortage of demands or bottlenecks in
production, the cost of idle capacity can be readily worked out and revealed to the management
ix. Introduction of cost reduction program combined with operations research and value analysis techniques leads to
economy. There is a continuous all around effort towards finding out new and improved methods in order to reduce costs.
x. Marginal Costing is employed for suggesting courses of action to be taken; it is a useful tool for the management for
making short-term decisions. The effectiveness of marginal cost technique becomes more apparent in times of trade
depression when orders may have to be accepted at a price lower than the total cost.
xi. Determination of cost centers or responsibility centers to meet the needs of a cost accounting systems ensures that the
organizational structure of the concern has been properly laid out. Responsibilities can be properly defined and fixed on
individuals.
xii. A perpetual inventory system which includes a procedure for continuous stock taking is an essential features of a cost
system. This is of importance for exercising inventory control and at the same time it facilitates the preparation of
periodical profit and loss accounts.
xiii. The Operation of a system of cost audit in an organization not only prevents manipulation and fraud but also assists in
furnishing correct and reliable cost data to the management as well as outside parties like the shareholders, the
consumers and the Govt. It also highlights weak areas that need to be taken care of to improve performance.
xiv. Cost of the closing stock of raw materials, WIP, FG can be easily obtained from cost records to arrive at the profit or loss
of the business on realistic basis.

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 Installation of a Cost System
 There cannot be a readymade Cost System for a business. Such system has to be specifically designed for a
particular business to meet the specific needs.
 Following points should be looked into & prerequisites satisfied before installing a cost system:-
i. The nature, method and stages of production, number of varieties and the quantity of each product and such other technical
aspects should be examined.
ii. The Size, layout and organization of the factory should be studied.
iii. The methods of purchase, receipt, storage and issue of materials should be examined and modified wherever considered
necessary
iv. The wage payment methods should be studied.
v. The requirement of the management and policy adopted by them towards cost control should be kept in view.
vi. The cost of the system to be installed should be considered. It is needless to emphasize that the instillation and operations of the
system should be economic.
vii. The system should be simple and easy to operate.
viii. The system can be effectively run if it is appropriate and properly suited to the organization.
ix. Forms & records or original entry should be so designed as to involve minimum clerical work and expenditure
x. The system should be so designed that cost control can be effectively exercised.
xi. The system should incorporate suitable procedure for report to the various. Levels of management.
xii. The system should be easy to integrate with ERP / SAP System available in the organization .

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 Limitations of Cost Accounting
 Like any other system of accounting Cost Accountancy is nor an exact science but and art developed
through theories and accounting practices based on reasoning and keen common sense.
 No cost cane be said to be exact as they incorporate a large number of conventions, estimations and
flexible factors such as :-

i. Classification of cost into its elements.

ii. Materials issue pricing based on average or standard costs
iii. Allocation of direct Labour and direct materials costs in the absence of correct and complete
data
iv. Division of overhead into fixed and variable
v. Apportionment of overhead expenses and their allocation to cost centers or cost units
vi. Arbitrary allocation of joint costs, and
vii. Adoption of standard costs and marginal costs.

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Job Order Costing

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Job Order Costing

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