1. Cost and
Management
Accounting
Semester II
MBA
RKU

2. 1. Financial Accounting
2. Cost Accounting
3. Management Accounting
Business Accounting
System 2
Dr. DS Raval, RKU

3. • Recording the transactions.
• Legal and Formal Accounting.
• For outsiders to know about the firm and its financial
position.
• Basic three financial statements
• Trading Account
• Profit and Loss Account
• Balance Sheet
Financial Accounting 3
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4. • Historical Nature.
• Provides information about the concern as a whole.
• Not helpful in price fixation.
• Cost control not possible.
• Chances for manipulations.
Limitations of Financial
Accounting 4
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5. • CIMA London has defined Management Accounting
as, “ the presentation of accounting information in such a
way as to assist management in the creation of policy and
in the day to day operation of an undertaking.”
Management Accounting 5
Dr. DS Raval, RKU

6. Management Accounting
• In the words of Board and
Carmichael, Management
accounting, “covers all those services by
which the accounting department can
assist the top management and other
departments in the formation of
policy, control of execution and
appreciation of effectiveness.” 6
Dr. DS Raval, RKU

7. • In the words of Horngren and Charles, “Management
Accounting is concerned with the
accumulation, classification and interpretation of
information that assists individual executives to fulfill
organizational objectives.”
Management Accounting 7
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8. Management Accounting
• Management accounting includes all those accounting services
by means of which assistance is rendered to management at all
levels in formulation of policy, fixation of plan, and control of
their execution and measurement of performance
• The accounting information should be recorded and presented
in the form of reports at such frequent intervals as the
management may want.
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9. • Management Accounting is management oriented
• Is concerned with the supply of operative data to management
at all levels in planning and administration.
• Its basic objective is to enhance the managerial understanding
regarding the concerned organization in terms of
environment, activities and people.
Objectives of management
accounting 9
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10. Tasks of Management Accounting
1. Replace “management by hunch” with “management by
information”.
2. Professionalize management
3. Organize a systematic flow of intelligence within the
organization.
4. Apply an objective approach to management
5. Increase managerial effectiveness by viable decision
making.
6. Cost Determination
7. Cost Control
8. Performance Evaluation
9. Supplying information for planning and decision making10
Dr. DS Raval, RKU

11. • Viewpoint of Market / Customer
• Viewpoint of Business / Seller
“The amount of expenditure incurred
on or attributable to a given thing.”
• Thus cost refers to something that must be sacrificed to
obtain a particular thing.
Cost 11
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12. • Costing is the technique and process of ascertaining costs.
• It consists of the principles and rules which are used for
ascertaining the costs of products and services.
Costing 12
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13. • It includes the preparation of statistical data, the
application of cost control methods and the ascertainment
of the profitability of activities carried out or planned.
• Cost accounting lays down the principles to be followed
in evolving different methods by which expenses are
analyzed and related to the product produced.
Cost Accounting 13
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14. Purposes of Cost Accounting
1. Cost Ascertainment
• Recording ( classification and reclassification)
• Allocation and apportionment amongst the respective
products, process or department, etc
2. Fixation of Selling Price
3. Basis for estimating
• For quotations
• For estimates
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15. 4. Matching costs with revenue
5. Cost control
6. Decision making
7. Presentation of comparative cost data
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16. • Cost accounting lays down the principles to be followed
in evolving different methods by which expenses are
analyzed and related to the product produced.
• One of the primary purpose of cost accounting is the
ascertainment of cost per unit of production and also the
cost of each element of expenditure.
Cost Accounting 16
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17. • A manufacturing organization is concerned with conversion of
raw materials into finished products with the help of labour and
certain other services.
• Elements of costs are the primary classification of costs
according to the factors upon which expenditure is incurred.
Elements of cost 17
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18. 1. Material Cost : Cost of commodities supplied to the
undertaking
2. Wages or labour cost: Cost of remuneration of the
employees of the undertaking
3. Expenses: The cost of services provided to the
undertaking and the notional cost of the use of owned
asset.
Elements of cost 18
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19. Further classification of elements of cost
1. Materials
1. Direct materials (timber in furniture, cloth in garments)
2. Indirect materials (lubricating oil, nuts and bolts)
2. Labour
1. Direct Labour (machine operator, carpenter, tailor)
2. Indirect Labour (supervisor, inspector, clerk)
3. Expenses
1. Direct expenses (traveling ,cost of patent rights, experiment)
2. Indirect expense (rent,lighting,adv.,insurance,repairs)19
Dr. DS Raval, RKU

20. • Cost unit is the unit of output for which a separate cost is
ascertained.
• Cost unit is defined as unit of quantity of output in
relation to which cost are ascertained or expressed.
• The forms of measurement used as cost units are usually
the units of physical measurements like number, weight,
area, length, value, time, etc.
Cost Unit… 20
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21. Simple Cost Unit
• When any single criteria is chosen for measurement of output.
This cost unit is referred to as a Simple Cost unit.
• For example cost per ton of steel, per ton of transport
service, per kilometer of a transport service or cost per machine
hour, etc.
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22. • When two criterion are chosen for measurement of
output. This cost unit is referred to as a Composite Cost
unit.
• For example cost per ton kilometer in transport services,
cost per passenger kilometer in transport services, cost
per bed day in hospitals, etc
Composite Cost Unit 22
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23. Examples
Industry/ Product Cost Unit
Automobile Number
Brick works 1000 bricks
Cement Ton
Transport Ton – kilometer
Passenger kilometer
Chemicals Liter, gallon, kg., ton
Steel Ton
Medicine One batch
Dr. DS Raval, RKU 23

24. Industry/ Product Cost Unit
Furniture Article
Hospital Per bed or per day
Bridge construction Each contract
Power Kilowatt hour
Gas Cubic foot or cubic
meter
Interior decoration Each job
Advertising Each job
Carpets Square foot
Hotel Room per day
Dr. DS Raval, RKU 24

25. Cost Centre
• “A production or service location, function, activity or
item of equipment whose costs may be attributed to
cost units.”
• A location, person, equipment, operation, process for
which cost may be ascertained and used for the
purpose of cost control.
• Cost centre refers to one of the convenient unit into
which the whole factory organization has been
appropriately divided for costing purposes.
• Cost centre is the organizational sub unit for cost
collection. 25
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26. Classification of cost centres
1. Productive and unproductive cost centres:
Examples:
Productive: Machine shops, welding shops and
assembly shops in a factory.
Unproductive/Service: Administration, repairs and
maintenance, canteen, etc.
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27. 2. Personal and impersonal cost centres:
• Personal cost centre which consists of a person or a
group of persons
• Impersonal cost centre which consists of a location or
item of equipment (dept., equip)
3. Operation and Process cost centres:
• Cost centre consists of those machines and/or persons
which carry out the same operation is operation cost
centre.
• Cost centre consisting continuous sequence of operations
is called process cost centre.
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28. Example
• A cost accountant sets up cost centres to enable him to
ascertain the costs he needs to know. A cost centre is charged
with all the costs that relate to it; if a cost centre is machine, it
will be charged with the cost of power, light, depreciation and
its share of rent, etc.
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29. • In a laundry, activities such as
collecting, sorting, marketing and washing of clothes are
performed. Each activity may be considered as a separate
cost centre and all costs relating to a particular cost centre
may be found out separately.
Example 29
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30. Purposes of cost centres
• Cost centres are created for ascertainment of the cost of that
cost centre.
• Cost ascertainment is required for cost control for that cost
centre.
• The manager in charge of a cost centre is assigned the
responsibility for the control of costs of that centre.
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31. 1. Supplies detailed cost information
2. Enable price fixation
3. Discloses operating efficiency
4. Helps reveal idle capacity
5. Facilitates planning
6. Guides decision making
7. Assists managerial control of costs
Advantages of cost
accounting 31
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32. 8. Facilitates cost comparison
9. Facilitates cost plus contracting
10. Facilitates inter period comparison
11. Identifies the areas requiring corrective action.
12. Negotiations with government and labour unions can be
easily made with the information provided by the cost
accounting system.
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33. 1. Absence of readymade system
2. Cost accounting provides base for taking decisions, it
does not give outright solution of the problems.
3. Conclusions from the results can be subjective.
Limitation of cost
accounting 33
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34. Different Methods of Costing
• Cost ascertainment is
accomplished by adopting a
method of cost accumulation and
measurement of
production, depending upon the
nature of the undertaking and
nature of the product produced.
Dr. DS Raval, RKU 34

35. Methods of costing
1. Unit or Single Output Costing
1. Homogeneous units
2. As the units of output are identical, the cost per unit is found
by dividing the total cost by the no. of units produced.
3. Per unit cost
4. Examples: Production of
radios, cameras, typewriters, pencils, cigarettes, etc
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36. 2. Job costing
1. Production as per customers’ specification.
2. Each job is separate and distinct.
3. Cost unit is a job or work order.
4. Examples :Printing press, interior decorators, painters, etc
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37. 3. Contract costing or Terminal costing
1. Variation of job costing.
2. A contract is a “Big” job.
3. Cost unit here is a contract itself.
4. Contract can be of long duration and may continue for more
than one accounting year.
5. Examples: Construction of buildings, dams, bridges and
roads, etc
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38. 4. Batch costing
1. Cost of group of identical products is ascertained.
2. Production consists of group and not individual units.
3. Each batch of product is cost unit.
4. Examples: Readymade garments, toys, shoes, etc
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39. 5. Process costing
1. Used in mass production industries.
2. Costs are accumulated for each process.
3. Raw material passes through a number of processes in a
particular sequence.
4. The finished product of one process is passed on to the next
process as raw material.
5. Examples: Textile mills, chemical works, sugar mills, soap
manufacturing, etc
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40. 6. Operating or service costing
1. Used in undertakings which provides services.
2. Examples: Transport undertakings, Electricity companies,
hotels, hospitals, cinemas, etc.
3. Cost units are passenger km., a room per day in hotel, a seat
per show in cinema, etc
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Dr. DS Raval, RKU

41. 7. Operation costing
1. Refinement and more detailed application of process costing.
2. A process may consist of a number of operations.
3. Operation costing involves cost ascertainment for each
operation instead of a process.
4. This method provides minute analysis of costs and ensures
greater accuracy and better control.
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Dr. DS Raval, RKU

42. 8. Multiple or composite costing
1. Application of more than one method of cost ascertainment in
respect of the same product.
2. Used in industries where a number of components are
separately manufactured and then assembled into a final
product.
3. Examples: air-conditioners, refrigerators, scooters, cars, etc.
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43. Cost accounting techniques
In order to produce useful information for
managerial purposes, cost data collected
should be processed according to costing
principles, using one or more costing
techniques.
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44. Marginal costing
• CIMA has defined marginal cost as, “ the cost of one unit of
product or service which would be avoided if that unit were not
produced or provided.”
• Functions of marginal costing
• Cost control
• Profit planning
• Performance evaluation
• Decision making
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45. • Marginal costing is the ascertainment of marginal costs and of
the effect on profit of changes in volume or type of output by
differentiating between fixed costs and variable costs.
• It is a technique applying the existing methods in a particular
manner in order to bring out the relationship between profit and
volume of output.
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46. • Break Even Point.
• Required sales for expected profit.
• Entering into new market.
• Accepting the export order.
• Make or buy.
• etc
Example 46
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47. Uniform costing
• This is not a separate technique of costing, it simply
denotes a situation in which a number of firms adopt a
uniform set of costing principles.
• The use by several undertakings of the same costing
systems, i.e., the same basic costing
methods, principles and techniques.
• This helps to compare the performance of one firm
with that of other firms and thus to derive the benefit
of anyone’s better experience and performance. 47
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48. Standard costing
• One of the most important techniques of cost control.
• Standard cost is predetermined as target of performance and
actual performance is measured against the standard.
• The difference between standard and actual costs are analyzed
to know the reasons for the difference so that corrective actions
may be taken.
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49. • The difference in total cost between alternatives
calculated to assist decision making.
Differential costing 49
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50. • Classification is the process of grouping costs according
to their common characteristics.
• It is a systematic placement of like items together
according to their common features.
Classification of costs 50
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51. • Costs are classified into direct costs and indirect costs on
the basis of their identifiability / traceability with cost
units or jobs or processes or cost centres.
• Examples: Direct Material is a direct cost while indirect
material is the indirect cost.
1. Direct & Indirect Costs 51
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52. 2. Fixed & Variable Costs
• Costs behave differently when level of
production rises or falls.
• Certain costs change in sympathy with
production level while other costs remain
unchanged.
• Factory rent and salary to office staff is a fixed
cost. While raw material is a variable cost.
Dr. DS Raval, RKU 52

53. • A capital expenditure provides benefit to future benefits and is
classified as an asset.
• A revenue expenditure is assumed to benefit the current period
and is classified as an expense.
• Purchasing machine is a capital expenditure while it would be
revenue expenditure if the raw materials are purchased.
3. Capital & Revenue Cost 53
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54. • Controllable cost is a cost which can be influenced by the
action of a specified member of an undertaking.
• A non-controllable cost is a cost which cannot be
influenced by the action of a specified number of an
undertaking.
• Normal loss is a non-controllable cost while abnormal
loss is a controllable cost.
4. Controllable & Uncontrollable
Costs 54
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55. • Historical costs refers to costs that are already incurred
and are of past.
• Budgeted refers to the costs of future or which are
estimated in advance.
5. Historical and Budgeted
Costs 55
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56. • The sum of all the costs refers to total cost.
• When the total cost is divided by total output the unit cost
is available.
Total cost & Unit cost 56
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57. • This classification is as per function
• Total cost can be divided as per function.
• Manufacturing costs include Raw Material, Direct Labour, and
other manufacturing costs.
• Administration costs include all the office expenses.
• Selling and Distribution cost include all the
marketing, distribution and selling expenses.
Manufacturing, Administration
& S&D Costs 57
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58. 1. Nature of business
2. Nature of organization
3. Methods and procedures
4. Technical aspects
5. Management’s expectations and policies
6. Simplicity
7. Co-operation and support of personnel
8. Standardization of forms
Installation of cost
accounting 58
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59. M.A. v/s F.A.
1. Structure or format of presenting information
2. Primary objective
3. Legal requirements
4. Orientation
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60. M.A. v/s C.A.
1. When costs are used by outsiders it is said to be used for
financial accounting purpose.
2. When cost data are used inside the organization it is said to
be used for management accounting purpose.
3. CA is confined to cost ascertaining and related information
processing, while MA provides data which includes any and
all information that management may need.
4. CA largely uses data about production, sales, wages ,etc
while MA utilizes the same and more data to prepare
budgets, performance reports, control reports, etc.
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