• COST AND MANAGEMENT ACCOUNTING

• Financial Accounting
• It is largely concern with financial statements for external use by investors, creditors,
financial analysts, government Agencies and other interest groups. It deals with
historical data & it involves recording, classifying, and analysis of financial transaction.
It is the published financial statement, which are useful for the investment decision by the
shareholders, lending decision by the banks & FIs and credit decision by the vendors.
Advantages of Financial Accounting are up to date accounts, preparation of interim reports and
making comparison of financial statements
• Cost Accounting
It is defined as the process of accounting for costs from the point of which expenditure is
incurred or committed. It involves classification, allocation, absorption, and control of costs. It
also evaluates the total costs and cost per unit of a product, service and operation. Cost
Accounting helps in cost reduction and cost control .
• Management Accounting
• It provides information for management activities such as decision making, planning
and controlling. It is a system of accounting which is concern with internal reporting of
information to management for (a) planning, controlling, operating (b) Decision
making in special matter (c) Formulating long range planning.
Cost-
The price paid for something.
Cost is a measurement ,in monetary terms,of the amount of resources used for the purpose of
production of goods or rendering of services.
• Costing
It is the techniques and processes of ascertaining costs .
• Cost Unit
• It is a unit of product or service in relation to which costs are ascertained
• Cost Centre
• For the purpose of ascertaining Cost, the whole organisation is divided into small parts
or sections . Each small section is treated as a Cost center of which cost is ascertained .
It may be a location (a department, a sales area), an item of equipment (a machine, a
delivery van), a person ( a salesman, a machine operator) or a group of these (two
automatic machines operated by one workman) .

Cost centres are primarily of 2 types .

(a) Personal Cost Centre .
(b) Impersonal cost centre
From a functional point of view :

(a) Production cost Centre

(b) Service Cost Centre

• Cost Object
Cost Object may be defined as “anything for which a separate measurement of cost may be
desired . Object may be a product, service, activity or process etc.
Product – Car , Computers
Service – Telephone hotline, medical
service
Process – Melting process in a steel mill
weaving process in a textile mill
Activity – Developing a website
• Profit Centers
• When a responsibility center’s financial performance is measured in terms of profit (i.e.
by the difference between the revenues & expenses), the center is called a profit center
• Objectives of Cost accounting
1.Ascertainment of Cost : In cost accounting, Cost of each unit of production, job, process or
department etc. is ascertained . Not only actual Costs incurred are ascertained but costs are also
predetermined for various purposes .
• Cost Control and Cost reduction
• 2. It aims at improving profitability by controlling and reducing costs. For this purpose,
various specialized techniques like standard costing, budgetary Control, inventory
control are used
• Guide to business Policy
3. Cost data provide guidelines for various managerial decisions like make or buy, selling
below cost, utilization of idle plant capacity, introduction of a new product etc.
• Determination of Selling Price
It provides Cost information on the basis of which selling prices of products or services may be
fixed .
• Disclose Sources of Wastage
It discloses sources of wastage whether of material, time or expense or in the use of
machinery , equipment and tools and to prepare such reports which may be necessary to
control such wastage .
• To provide specialized services of cost audit
• It organizes the internal audit system to ensure effective working of different
departments. It prevents the errors and frauds and facilitates prompt and reliable
information to management
• Advantages
• Profitable and unprofitable activities are disclosed.
• It enables a concern to measure the efficiency and then to maintain and improve it .
• It provides information upon which estimates and tenders are based .
• It guides future production policies .
• It helps in increasing profits.
It furnishes reliable data for comparing costs .
7. The exact cause of a decrease or an increase in profit or loss .
8. It discloses the relative efficiencies of different workers.
9 . Helpful to the government.
10. Helpful to consumers.

• Difference between financial accounting & Cost accounting

• FA provides information about the profit and loss and financial position of the
business .
 • CA provides information to management for proper planning, operation, control &
decision making .
• Control
• FA does not give emphasis on control .
CA gives emphasis on control by using standard costing & budgetary control .

• Reporting of Cost
• In FA the costs are reported in aggregate But in CA the costs are broken down as a unit
basis .
• Information
• FA uses only monetary information .
• CA uses monetary as well as non monetary information like units .
• Nature
• FA deals with historical data. CA deals with both past and predetermined figure.
• Usefulness
• FA is useful for both external and internal purpose .
• CA is useful, mainly for the internal purpose .
• Format
• FA has a single uniform format of presenting information. CA has varied forms of
presenting cost information .
• Period
• Financial reports are prepared periodically, usually on an annual basis. But cost
reporting is a continuous process and may be daily, weekly , monthly , etc.
• Essentials of a good cost Accounting System
• Suitability : The method of costing adopted, i.e. job or process costing, should be
suitable to the industry and serve the objectives of installing the system .
• Support of executives
• If a costing system is to be successful, it must be supported by executives of various
departments .
• Cost of the System
• The cost of installing and operating the system should be justified by the results
produced .
• Clearly defined cost centres In order to derive maximum benefits from a costing
system, well defined cost centre and responsibility centre should be identified within
the organisation .
• Controllable costs
• Controllable and non-controllable costs of each responsibility centre should be
separately shown .
• Integration with financial accounts
• There should be cooperation & coordination between cost accounting & financial
accounting departments .
• Continuous education
• Well trained and educated staff should be employed to operate the system .In order to
educate the costing staff, written manuals and meetings etc. should be arranged on a
continuous basis .
• Practical Difficulties in installing a costing system
• Lack of support from top management :
• In most of the cases, the cost accounting system is introduced without the support of
the top management .
• Resistance from the existing accounting staff
• Whenever a new system is introduced resistance is natural, as the existing staff may
feel that they would lose their importance and may be unsure of their position in the
organisation .
• Shortage of trained Staff
• There may be shortage of cost accountants to handle the work of Cost analysis, cost
control and cost reduction .
• Heavy cost of operating the system
• The cost of operating a system will be high unless the costing system is properly
designed according to the requirements of each case specially .
• Steps to overcome practical difficulties
• Support from the top management
• Utility of system to existing Staff .
• Workers’ confidence for cooperation .
• Training of existing accounting staff .
• Cost system according to specific requirements of the concern .
• Proper supervision
• Methods of costing
• Specific order costing
• Operation costing
• Specific order costing
• It is the category of basic costing methods applicable where the work consist of
separate jobs ,batches or contracts each of which is authorised by a specific order or
contract. Job costing,batch costing, contract costing are included in this category
• Operation costing
• It is the category of basic costing method applicable where standardized goods or
services result from a sequence of repetitive and continuous operation or process .
• Job costing
• Under this method costs are collected for each job or project seperately
• Ex-printers,machines,engineering workshops
• Contract costing
• When the job is big and spread over long periods of time this method is used.
• Ex-Builders,contractors,mechanical engineering firms etc.
• Batch costing
• A batch may represent a number of small orders passed through the factory in batch.
• Ex-Biscuits manufacture ,garments manufacture,and spare parts.
• Process costing
• This is suitable for industries where production is continuous ,manufacturing is carried
on by distinct and well defined processes ,the finished product of one process becomes
the raw material of the subsequent process.
• Ex-Textile industries,paper manufacture etc.
• Single output or unit costing
• This is suitable for industries where manufacture is continous and units are identical.
• Ex-mines,quarries,cement,bricks etc.
• Service or operating costing
• This is used in service industries.
• Ex-power supply companies, hospital,hotels etc.
• Farm costing
• It helps in calculation of total cost and per unit cost of various activities covered under
farming.
• Ex-Agriculture,poultry farming,pisciculture etc.
• Multiple or composite costing
• It is an application of more than one method of cost ascertainment with respect to the
same product.
• Ex-Television,cars,refrigerators etc.
• Techniques or types of costing
• Standard costing-
• Comparision is made of the actual cost with standard cost and the cost of any
deviation is analysed by causes.This permits management to investigate the reasons for
these variances and to take suitable corrective action.
• Budgetary control
• It is a technique applied to the control of total expenditure ,by comparing actual
performance with planned performance.
• Marginal costing
• Marginal cost is the amount at any given volume of output; by which aggregate costs
are changed , if volume of output increased by one unit.
• Marginal costing is the ascertainment of marginal costs and of the effect on the profit
of changes in volume of output by differentiating between fixed cost and variable cost.
• Absorption costing
• Absorption costing is a total cost technique under which total cost (fixed& variable) is
charged as production cost. It is the traditional approach and is also known as
conventional costing or full costing.
• Uniform costing
• It is a situation in which a number of firms adopt a uniform set of costing principles.
• CLASSIFICATION OF COSTS
• By nature or element
• By activities
• By time
• For managerial decisions

• By nature or element
• According to this classification costs are divided into three categories
i.e.material,labour,expences.
• By activities
• Cost can be classified into different categories depending upon the purpose for which
information is required. The costs can broadly be classified into Fixed, Variable, and
Semi-variable Costs.
• Fixed Costs: These are the costs, which remain constants irrespective of the quantum of
output within and up to the capacity that has been built up. Examples of such costs are:
rent, insurance charges, management salary, etc.
• Fixed costs sometimes are also referred to as period costs. They can further be divided
into i) committed fixed costs and ii) discretionary fixed costs.
• Variable Costs are the cost, which fluctuate in total in direct proportion to the volume
of output. It increases in aggregate as the output increase & decrease in the same
proportion when out put falls.
• Semi variable cost is the combination of the fixed & variable cost. These cost are
partly variable and partly fixed, it is neither perfectly variable nor fixed in relation to
the change in volume of output
• By time
• Cost can be classified as (i) Historical cost (ii) Predetermined cost.
• The cost which are ascertained after being incurred are called historical cost.
• Predetermined cost are estimated cost i.e. computed in advance of production, taking
into consideration the previous periods costs and the factors affecting such cost.
• Shut Down Costs: these represent the fixed costs which have to be incurred even
during the period when a factory is shut down on account of some temporary
difficulties, viz., shortage of raw materials, non-availability of requisite labour force,
etc. During this period, though no work is done, the fixed costs, such as rent, insurance,
depreciation, maintenance, etc. for the entire plant have still to be incurred. Such costs
of the idle plant are known as shut down costs.
• Sunk costs: these are historical or past cost, that is, costs which have been incurred
as a result of a decision-made in the past. Such costs cannot be reversed or revised
by subsequent decisions. Investments in plant and machinery, building, etc. are
some prominent examples of such costs.
• Controllable Costs: these are costs which can be influenced by the action of a
specified member of an organization. For example, the foreman of a production
department can control the utilization of power or raw materials in his department.
These are, therefore, controllable costs as far as he is concerned.
• Uncontrollable Costs: These are costs, which cannot be influenced by the action of a
specified member of an undertaking. For example, the foreman of a production
department can control the wastage of power in his department, but he cannot control
the power, which is being wasted in 0ther department. Similarly, he cannot control the
increase in the cost of materials consumed in his department if the purchase
department, which is the supplying department, buys the materials at higher prices due
to its own inefficiency. Such costs are controllable at a particular level of management
while they are uncontrollable at some other level of management
• Imputed or notional Costs: these are costs, which do not involve cash outlay. They
are not included in cost but are important for making management decisions. For
example- interest on capital invested,rental value of own building
• Differential, Incremental or Decremental Costs: The difference in total costs
between two alternatives is termed as differential cost. In case the choice of an
alternative results increase in the total cost, such increased costs are known as
incremental costs. If the choice results decrease in total costs, the resulting decrease is
known as decremental costs.
 • Out - of–Pocket Costs: Out-of-Pocket cost means the present or future cash
expenditure regarding a certain decision, which may vary, depending upon the nature of
the decision made. For example, a company has its own trucks for transporting raw
materials and finished products from one place to another. It seeks to replace these
trucks by employing public carriers of goods. In making this decision, of course, the
depreciation of the trucks is not to be considered, but the management must take into
account the present expenditure on fuel, salary to drivers and maintenance which have
to b e incurred in cash. Such costs for arriving at a decision are termed as out-of-pocket
costs.
• Opportunity costs: An Opportunity cost refers to the advantage, in measurable terms,
which has been foregone on account of not using the facilities in the manner originally
planned. For example, if an owned building is proposed to be utilized for housing a new
project plant, the likely revenue, which the building could fetch, if rented out, is the
opportunity cost, which should be taken into account while evaluating the profitability
of the project.
• Traceable, Untraceable and Joint Costs
• Traceable Cost: These are costs, which can be easily identified or traced to specific
products, services or units of the company such as raw material and labour, etc.
• Untraceable costs: These are costs, which cannot be identified with a department,
process or product. Such costs are also termed as common costs, as they are incurred
collectively for a number of products or cost centers e.g. overheads incurred for the
factory as a whole. As such they are apportioned among various products or cost
centers using suitable criterion.
• Joint Costs: Whenever two or more products reproduced out of one and the same raw
material or process, the cost of material purchased and the processing are called joint
costs. Take the example of an oil refinery where a range of products such as petrol,
Kerosene, diesel, etc. is derived in the process of refining crude oil. All these products
have joint costs comprising the cost of crude and the cost incurred in the course of
refining. These joint costs are then apportioned to various products on some basis
• Conversion Cost: The cost of transforming direct materials into finished products,
exclusive of direct material cost, is known as conversion cost. It is usually taken as the
aggregate of the cost of direct labour, direct expenses and factory overheads
• The above classification concepts of costs help the management in the decision making
process. For example, segregation of cost into fixed and variable elements will help the
management in analyzing the total cost. Similarly, segregation of cost into controllable
and uncontrollable categories will help the management in fixing responsibilities of
different executives for unfavorable cost variances. Numerous other examples can be
given highlighting the usefulness of the above classification of costs.
•