Amity Business School Amity School of Business BBA, II SEMESTER COST AND MANAGEMENT ACCOUNTING

MEANING Cost Accounting is accounting for costs. Costs are resources sacrificed or foregone to achieve a specific objective. These are the benefits given up to acquire goods and services Accounting provides financial information that measures and communicates effects of transactions & events.

DEFINITION According to CIMA, London, Cost Accountancy is- “the application of costing and cost accounting principles, methods and techniques to the science, arts and practice of cost control. It includes the presentation of information derived therefrom for the purpose of managerial decision making.”

SCOPE Cost accountancy consists of several areas- COSTING Costing is “ the technique and process of ascertaining costs”. Techniques consists of principles and rules for determining the costs for product and services. Its dynamic & changes with the change of time.

COST CONTROL Cost accountancy is not only concerned with the ascertainment of costs and fixing selling prices, but also furnishing information that enable the management to control costs of operating the business. Cost control is exercised by techniques such as standard costing, budgetary control and quality control etc.

COST REDUCTION Reduction in the unit cost of product without impairing their quality. In current scenario only those business will survive that can deliver quality product and services, at the least cost. This needs constant research and development in the area of product design, production procedures etc.

COST ACCOUNTING COMPARED Accounting can be broadly classified into two categories- Financial accounting Management accounting

Financial accounting is concerned with recording, classifying and summarizing financial transactions and preparing statements relating to the business in accordance with generally accepted accounting concepts and conventions. It is meant to serve all parties external to the business such as creditors, shareholders etc

Management accounting is concerned with accounting information which is useful for the management. It includes the methods and concepts necessary for planning, controlling and interpreting the performance of the concern.

Costing differs from financial accounting in following respects: Purpose FA prepares P/L account & B/S for reporting to outsiders whereas CA provides detailed cost information to managers for planning & control Scope FA reveals profit & loss of a business as a whole

whereas CA measures the profitability of each product, job, process, department and operations. Analysis of costs In FA no distinction is made between direct and indirect costs, fixed and variable costs and controllable and uncontrollable costs. In CA such distinctions are made.

GAAP vs. flexibility FA are prepared in accordance with generally accepted accounting principles (GAAP). CA is presented in a more flexible manner. Report frequency FA is generally published annually whereas CA supply qtrly, monthly or even weekly & daily reports needed for planning & control

Legal requirements FA are kept according to the provisions of Companies Act and IT Act. Maintenance of cost accounts is not compulsory except where cost accounting record rules have been framed for its preparation.

Cost accounting differs from Management accounting in following ways- Historical vs. predetermined costs Costs in CA is determined on the basis of past data whereas in MA predicted or future cost data is taken for decisions Decision making vs. Control MA aids management in its primary function of decision making whereas CA focuses on cost control as its objective

Use of financial accounting MA uses certain FA techniques like ratio analysis, fund flow statements etc., whereas CA do not use such techniques, but only analyses costs. Scope MA is wider in scope as it employs statistics, OR and computers. CA is much less sophisticated & use of such techniques is limited.

COST CONCEPTS Cost Cost means “ the amount of expenditure incurred on, or attributable to, a given thing” Cost object Cost object can be anything for which a separate measurement of cost is desired. Eg: Product, Services, Project

Cost unit It refers to the unit with which expenditure may be identified or conveniently allocated. Eg: per unit of electricity, per 1000 bricks made

Cost centre According to CIMA, “a location, person or item of equipment or group of these for which costs may be ascertained and used for the purpose of cost control”. Such unit may consists of a department or sub-department or equipment or machinery etc.

ELEMENTS OF COSTS Material The substance from which product is made, is known as material. It is of two types- Direct material- It comprises of integral part of finished goods & can be assigned to specific physical unit. Indirect Material- It is used for purpose ancillary to the business & cannot be assigned to specific unit.

Labour Human efforts required to convert raw material into finished goods. It is of two types- Direct labour- Eg; process labour, direct wages, productive labour Indirect labour- Eg; Wages of time keeper, foremen, director’s fees, salaries of salesmen etc.

Expenses Direct & Indirect Expenses Overheads It includes costs of indirect material, indirect labour & indirect expenses. Expences can be classified into following categories: Factory expenses- these are incurred in a factory & are concerned with the running of a factory. Eg; Rent, Insurance of factory, power, lighting

Office & administrative Expenses They pertain to the management and administration of business. Eg;- Office rent, telephone charges, depreciation of building Selling & distribution Expenses It includes expenses incurred for marketing a commodity & making it available to the customers. Eg;- Adv. expenses, warehousing charges

CLASSIFICATION OF COSTS Fixed, Variable & Semi Variable costs- The cost which increases or decreases exactly in the same proportion as the volume of output produced, are variable costs. The cost which remains constant irrespective of change in output, are fixed costs. The costs which neither vary proportionately nor remain stationery are semi variable costs. Eg;- Depreciation, repairs, supervision costs.

Product & period costs Costs which become part of the cost of the product and are included in the inventory, are Product costs. Eg; cost of raw material, labour etc Costs which are not associated with production & are treated as the expense of the period in which they are incurred, are called Period costs. Eg: Depreciation, salaries & commission etc

Relevant & irrelevant costs Relevant costs are those which would be changed by the managerial decisions, while irrelevant costs are those which would not be affected by the decision.