TAKE A LOOK OF BUSINESS

Cost & Management Accounting

(CMA)
Accounting for Managers

Financial Accounting

Cost Accounting

Management Accounting
Financial Accounting: The art of recording, classifying and summarizing
in a significant manner and in terms of money, transactions and events,
which are in part at least, of financial character and interpreting the
results thereof.
- According to American Institute of Certified Public Accountants (AICPA)


Cost Accounting: The technique and process of ascertaining the costs.
- The Chartered Institute of Management Accountants (CIMA), London


Management Accounting: The application of professional knowledge and
skill in the preparation of accounting information in such a away to assist
management in the formulation of policies and in the planning and control
of operations of the undertaking.
- Institute of Cost & Management Accountants (ICMA), London
Basis Financial Accounting Management Accounting
User of
information
Mainly used by investors, shareholders,
creditors etc
Used by Management &
employees
Method of
Accounting
Based on double entry system No specific method of
accounting
Statutory
requirements
Required as per Companies Act, Income
Tax Act etc
Optional but highly desirable
Analysis of Cost &
Profit
Shows Profit or Loss of business but
does not shows the cost and profit for
individual products, processes or
departments etc
Provides detailed information
about individual products
Past & Future
Data
Concerned with transactions which have
already taken place and which are
historical in nature
Concentrates on what is likely
to happen in future with the
help of past data
Accounting
Standards
Follow AS No such standards
Types of
statements
prepared
General purpose statements, used by
external users
For specific purposes ex-
performance report of sales
manager
Basis Cost Accounting Management Accounting
Scope Limited scope for Managerial Uses Broader scope as it deals with
Cost Accounting & Financial
Accounting both
Statutory
requirements
Becoming compulsory in selected
industries
Optional but highly desirable
Purpose To ascertain the cost and ensure
maximum profit
For Planning, Controlling &
decision making purposes
Techniques Uses techniques like budgetary
control, marginal costing, standard
costing etc
Uses all techniques of cost
accounting in addition to some
techniques like ratio-analysis,
fund flow statement, analysis of
financial statement etc
Installation Can be installed without proper
system of management accounting
Cant be installed without proper
system of cost accounting
Data base Mainly derived from financial
accounting
Derived from Financial A/c, cost
A/c and other relevant sources
Usage Used generally at middle level and
lower level
Used generally at higher level
Syllabus
Unit I (8 Sessions)
Introduction: Accounting for Management, Role of Cost in decision making,
Comparison of Management Accounting and Cost Accounting, types of cost,
cost concepts, Elements of cost - Materials, Labour and overheads and their
Allocation and Apportionment, preparation of Cost Sheet, Methods of
Costing, Reconciliation of Cost and Financial Accounting.

Unit II (8 Sessions)
Marginal Costing: Marginal Costing versus Absorption Costing, Cost-Volume-
Profit Analysis and P/V Ratio Analysis and their implications, Concept and
uses of Contribution & Breakeven Point and their analysis for various types of
decision-making like single product pricing, multi product pricing,
replacement, sales etc.

Unit III (10 Sessions)
Differential Costing and Incremental Costing: Concept, uses and applications,
Methods of calculation of these costs and their role in management decision
making like sales, replacement, buying etc.
Budgeting: Concept of Budget, Budgeting and Budgetary Control, Types of
Budget, Static and Flexible Budgeting, Preparation of Cash Budget, Sales
Budget, Production Budget, Materials Budget, Capital Expenditure Budget and
Master Budget, Advantages and Limitations of Budgetary Control.

Unit IV (8 Sessions)
Standard Costing: Concept of standard costs, establishing various cost
standards, calculation of Material Variance, Labour Variance, and Overhead
Variance, and its applications and implications.
Neo Concepts for Decision Making: Activity Based Costing, Cost Management,
Value Chain Analysis, Target Costing & Life Cycle Costing : concept, strategies
and applications of each.

Unit V (6 Sessions)
Responsibility Accounting & Transfer Pricing: Concept and various approaches
to Responsibility Accounting, concept of investment center, cost center, profit
center and responsibility center and its managerial implications, Absorption
Costing.

Old Question Paper
Todays Discussion
Cost Sheet
Elements of Cost
Overheads
Factory/
Works
Overheads
Office/
Administrative
Overheads
Selling &
Distribution
Overheads
Direct Material
Cloth Used
Direct Wages
Payment to tailor
Indirect Material
Stitching thread

Indirect Wages
Helper to Tailor
Direct Expenses
Shirts sent to a third party
for finishing touch
Indirect Expenses
Light, rent etc
Direct Material- Material which can be identified in the
finished product and can be conveniently measured
and directly charged to the product.
Ease and feasibility is necessity for identification of
expenditure for Direct material
For Ex: Cloth used in shirt, bricks uses in building, tyres used
in automobile etc

Indirect Material- Material which cant be conveniently
measured and charged to the finished product.
Generally of low value in comparison to direct material
Direct Labour- Labour expenses which can
be conveniently identified and measured
against a particular job or finished
product.
Labour who assembles one unit of finished
product in a certain time period his payment
will be Direct Wages against such finished
product

Indirect Labour- Labour expenses which
cant be conveniently identified and
measured against a particular job or
finished product.
Payment to support staff, trainees, supervisor,
director can examples of Indirect Labour

Direct Expenses- All those expenses
(except material and labour) which are
incurred specifically for a job or product
are termed as Direct Expenses.
For Ex: Excise Duty, Hire Charges paid to a
third party

Indirect Expenses- All those expenses
(except material and labour) which are
not incurred specifically for a job or
product are termed as Indirect
Expenses.
For Ex: Electricity, light, fan and all those
expenses which can not be allocated to a
certain product or job

Expenses excluded from
cost: Expenses relating
to Capital Asset, Capital
Losses, distribution of
profit should not form
part of cost.
For Ex: Income tax,
dividend, Interest on
capital etc.
Cost Sheet
Cost sheet is a statement which shows the
break-up and build-up of cost. It is a
document which provides for the assembly of
the detailed cost of a cost center or cost unit.


Performa of Cost Sheet
Total Cost Cost per
unit
Direct Material ..
Direct Labour ..
Direct expenses ..
Prime Cost ..
Add: Factory Overheads ..
Factory Cost/ Works Cost ..
Add: Office/ Administrative Cost ..
Cost of Production ..
Add: Selling & distribution Cost ..
Cost of Sales ..
Add: Profit ..
Sales ..
Numerical: XYZ ltd. Manufactured and sold 1000 refrigerators for the year
ending 31
st
march, 2013. The summarized Trading and Profit & Loss
Account is given below:

Particulars Amount Particulars Amount
To cost of material 80,000 By sales 4,00,000
To direct wages 1,20,000
To manufacturing expenses 50,000
To gross profit c/d 1,50,000
4,00,000 4,00,000
To management & staff salaries 60,000 By gross profit b/d 1,50,000
To rent, rates, insurance 10,000
To selling expenses 30,000
To general expenses 20,000
To net profit 30,000
1,50,000
For the year ending 31
st
March, 2014 it is estimated that-
Output and sales will be 1,200 refrigerators.
Price of raw materials will rise by 20% on the previous years level.
Wages rates will increase by 5%.
Manufacturing cost will rise in proportion to the combined cost of
materials and wages.
Selling cost per unit will remain unchanged.
Other expenses will remain unaffected by the rise in output.

You are required to submit a statement for the board of
directors showing the price at which the refrigerators should
be market so as to show a profit of 10% on selling price.
Classification/ Types of Cost
By Nature of expenses
Material, Labour, Expenses

By Relation to Cost Centre/ Cost
Object
Direct cost- Material, Labour,
Expenses;
Indirect cost- Material, Labour,
Expenses

By Functions/ Activities
Production, Administration, Selling,
Distribution, Research &
Development expenditure

By Behaviour
Fixed, Variable, Semi-variable
For Management Decision Making
Marginal Cost
Differential Cost
Opportunity Cost
Replacement Cost
Relevant Cost
Imputed cost
Sunk cost
Normal cost
Abnormal cost
Avoidable Cost
Un-avoidable cost
Classification/ Types of Cost
By Nature of Production Process
Batch Cost
Process cost
Operation cost
Operating Cost
Contract cost
Joint Cost

By Time of cost
Historical Cost
Pre-determined Cost
Estimated Cost
Standard Cost

Allocation and Apportionment of Cost
Cost Allocation refers to the allotment of
whole items of cost to cost centre or cost
unit while cost apportionment refers to the
allotment of proportion of items of cost to
the cost centre or cost unit.

Therefore the former involves the process
of charging direct expenditure to cost
centre while the later involves the process
of charging indirect expenditure to cost
centre.
Cost Concepts
Cost: It is monetary value of resources given up in exchange for some goods or
services. Cost is a generic term and it can be used in different ways like prime
cost, factory cost etc.

Expenses: these are costs applied against revenue of particular accounting
period in accordance with the principle of matching cost to revenue.

Loss: It represents diminution in ownership equity other than from withdrawal
of capital for which no compensating value has been received like destruction of
property by fire.

Cost centre: A cost centre is the smallest segment of activity or responsibility for
which costs are accumulated. Typically cost centres are departments but in
some instances, a department may contain several cost centres.
Types of cost centres: Personal & Impersonal Cost centres; Operation and
Process cost centres; Product & Service cost centres


Profit Centre: A profit segment is that segment of activity of a business
which is responsible for both revenue and expenses and discloses the
profit of a particular segment of activity. Profit centres are created to
delegate responsibility to individuals and measure their performance.

Cost Driver: A cost driver is any factor that influences cost. A change in
cost driver will lead to a change in the total cost of related cost object. For
example- number of units manufactured, number of customers served,
number of advertisements, number of sale personals etc.

Conversion cost: conversion cost refers to works cost less cost of direct
material. Therefore conversion cost equals direct wages, direct expenses
and overhead cost at factory level.

Contribution margin: This is excess of sales price over variable cost.

Carrying cost: (also known as holding cost)This refers to cost incurred on
maintenance of inventory and includes cost of the money locked up in the
inventory, inventory obsolescence, storage space rent and cost of stores
operation.






Out-of-stock cost: This cost takes place when a stock shortage occurs and
includes loss of sales, loss of goodwill on account of not served customers
and cost of idle machines.

Ordering cost: These costs are incurred each time an order for the
purchase of material is placed and expressed as rupee cost per order.

Development cost: It is the cost of the process which begins with the
decision to produce a product with the new or improved method and ends
with the commencement of formal making of the product by that method.

Idle facilities cost: it is cost of abnormal idleness of fixed assets or
available services.

Incremental Revenue: This reflects the difference in revenue between two
alternatives. While making an assessment of profitability of a proposed
alternative, incremental revenues are compared with incremental cost.
Added value: It is the change in market value resulting from an alteration
in the form, location or availability of product or service excluding the cost
of bought-out materials or services.

Urgent cost: These costs are incurred immediately in order to avoid the
hampering of production line.

Postponable cost: Cost which can be shifted to the future period generally
without any effect on the efficiency of current operations.
Role of cost in Decision Making
Classification and sub-division of cost helps in
transparent understanding of costs at various levels

Control on materials, labour and overhead cost
helps in proper utilization of resources

Needed while framing business policies

Required for budgeting purposes

Setting standards for measuring efficiency

Cost audit helps in ascertaining right cost which
helps in price determination

Required during expansion plans
Economic Ordering Quantity
EOQ is the amount of inventory to be ordered
at one time for purposes of minimizing annual
inventory cost.

Formula for Economic Ordering Quantity :



Ordering Cost: Cost of placing single order.
Holding Cost (Storage/ carrying cost): Cost to hold
one unit inventory for a year



Find out economic order quantity from the following particulars:
Annual Usage: 6000 units
Cost of placing one order: Rs 60
Annual carrying cost of material: 10% of inventory value
Cost of material per unit: Rs 20