Welcome To

Cost & Management Accounting

By
Purna Narayan Maharjan
 Introduction
Accounting
– Accounting is a wider term and includes
recording, classifying and summarizing of
business transactions in terms of money,
preparation of financial reports and analysis and
interpretation of these reports for the
information and guidance of management.

– The business accounting system consists of three

parts:
i. Financial Accounting
ii.Cost Accounting
iii.Management Accounting
Financial Accounting:
Financial accounting may be defined as the science and
art of systematically recording, classifying and
summarizing business transactions of financial
character and finally interpreting the results
communicating the financial information to the various
group of users.

It also shows the financial position of the firm, and thus,

records and reports financial statements – Balance
sheet, income statement and statement of cash flows,
generally at the end of an year.
Limitations of Financial Accounting
1. Shows only overall performance
2. Historical in nature
3. No performance appraisal
4. No material control system
5. No labour cost control
6. No proper classification of costs
7. No analysis of losses
8. Inadequate information of price fixation
9. No cost comparison
10. Fails to provide useful data to management
 Cost
• Cost is a measurement, in monetary terms, of the
amount of resources used for the purpose of
production of goods or rendering services.

• Cost is the amount of actual or notional expenditure

relating to a product, job, service, process or
activity.

• Cost is often used as a generic term to describe

various types of costs.
 Costing and Cost Accounting
• The Chartered Institute of Management Accountants,
U.K. (CIMA) has defined Costing as “the techniques
• and processes of ascertaining costs”
Wheldon has defined Costing as “the proper
allocation of expenditure and involves the collection
• of costs for every order, job, process, service or unit”
Thus it simply means cost finding by any process or
technique
• It consists of principles and rules which are used for
determining:
The cost of manufacturing a product or the cost of
providing a service
 Introduction
• Cost Accounting is the process of accounting from the point
at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centers
and cost units. It includes:
– Collecting, classifying, recording, allocating and analyzing costs
– Preparation of periodical statements and reports for ascertaining and
controlling costs
– Application of cost control methods
– Ascertainment of profitability of activities carried out or planned.

• Cost Accounting is the processing and evaluation of monetary

and non-monetary data to provide information for internal
planning, control of business operations, managerial
decisions and special analysis.
 Features of Cost Accounting
1. It is a process of accounting for costs;
2. It records all expenditure relating to production of goods and
services ;
3. It provide statistical data on the basis of which future estimates
are prepared and quotations are submitted;
4. It is concerned with cost ascertainment, cost control, and
cost reduction;
5. It establishes budgets and standards;
6. It gives right information to right person at the right time;
7. It is concerned with classification, accumulation, distribution
and control of costs.
 Objectives and Functions of Cost Accounting
• To ascertain the cost per unit.
• To provide a correct analysis of cost.
• To disclose sources of wastage of time, material ,
machine etc.
• To fix price.
• To ascertain the profitability.
• To exercise effective control of stocks.
• To advice management on future expansion
• To determine the selling price
• To present interpret for management planning.
• To helps in preparation of budgets
• To provide information to right person at right
time.
• To organize internal audit system.
• To formulate & implement incentive bonus plans.
• To organize cost reduction programmes
• To find out costing & profit and loss .
 Advantages of Cost Accounting
• Helps in ascertainment of cost
• Helps in control of cost
• Helps in decision making (make or buy, retain or replace, continue or shut
down, accept or reject orders, etc)
• Helps in fixing selling prices
• Helps in inventory control
• Helps in cost reduction
• Helps in measurement of efficiency
• Helps in preparation of budgets
• Helps in identifying unprofitable activities
• Helps in identifying material losses
• Helps in identifying idle time, idle capacity
• Helps in improving productivity
• Helps in cost comparison
 Introduction
• Cost Accountancy is the application of costing
and cost accounting principles, methods and
techniques to the science, art and practice of
cost control and the ascertainment of
profitability. It includes the presentation of
information derived there from for the
purpose of managerial decision making.

• Cost Accountancy includes costing, cost

accounting, cost control and cost audit
 Financial & Cost Accounting
No. Basis Financial Accounting Cost Accounting
Financial performance and
1. Objective Ascertain cost and cost control
position
Shows overall costs and profit / Shows details for each product,
2. Costs and profits
loss process, job, contract, etc
Emphasis on control and
3. Control / Report Emphasis on reporting
reporting
4. Decision making Limited use Designed for decision making
5. Responsibility Does not fix responsibility C an effectively fix responsibility
6. Time frame Focus on historical data Focus o n present and future
General reports like P&L
Can generate special reports
7. Type of reports Account, Balance Sheet, Cas h
and analysis
Flow Statement
Voluntary, except for some
8. Legal need Statutory requirement
cases
Records internal and external
9. Transactions Records external transactions
transactions
10. Reader Everybody Internal management
11. Formats Standard, as per law Tailor m a d e
12. Access Everybody, except for s o m e Very limited access
13. Unit of value Monetary Monetary a n d physical
 Management Accounting
According to CIMA, “management accounting is an
integral part of management concerned with
identifying, presenting and interpreting
information used for-

i) Formulating strategy

ii) Planning and controlling activities

iii) Decision making

iv) Optimizing the use of resources

 Characteristics/ Nature of Management
Accounting
• Useful in decision making

• Derived from Financial and Cost Accounting

information

• Exclusively for internal use

• Purely optional

• Concerned with future

• Flexibility in presentation of information

 Functions/ Objectives of Management
Accounting
• Planning
• Coordinating
• Controlling
• Communication
• Financial analysis and interpretation
• Qualitative information
• Tax policies
• Decision making
Financial Accounting vs Management Accounting
Basis Financial Accounting Management Accounting
External and internal Mainly for external users Mainly meant for internal
users user i.e. management
Accounting method Double entry system Not based on Double entry
system
Statutory As per company law and tax It is optional
requirement laws
Analysis of cost and It shows loss/profit of business It provides detailed
profit as a whole. It does not show the information about individual
cost and profit for individual product, plant, process or
product, process or deptt. deptt.
Past and future data It represents past/historical It uses past data for future
records projections
Periodic and Usually on an year to year basis These are prepared
Continuous reporting frequently
Accounting standards As per accounting standards It is not bound by accounting
issued by ICAI standards
 Financial Accounting vs Management Accounting
Basis Financial Accounting Management Accounting

Types of P & L Account and Balance Special purpose reports like

statements Sheet performance report of a
prepared manager, department,
product etc.

Publication and Financial statements are These statements are for

audit published for general public internal use and thus neither
use and also sent to published nor are required to
shareholders.These are be audited by the Chartered
required to be audited by the accountants
Chartered accountants
Monetary and It provides information in May apply monetary or non-
Non – monetary terms of money only monetary units of
measurement measurement. For e.g.
quantity, machine hour,
labour hour etc.
 Cost Accounting vs Management Accounting
Basis Cost Accounting Management Accounting
Scope Limited to providing cost Broader scope as it provides all types of
information for managerial uses information
Emphasis Mainly on cost ascertainment and Mainly on planning, controlling and
cost control to ensure maximum decision making to maximize profit
profit
Techniques Standard costing and variance All the techniques of cost accounting
employed analysis, marginal costing and cost but in addition it also uses ratio
volume profit analysis, budgetary analysis, fund flow statement,
control, uniform costing etc. statistical analysis, operation research,
mathematics, economics etc.,
whatsoever help management in tasks
Evolution Its evolution is mainly due to the Its evolution is due to the limitations of
limitations of financial accounting cost accounting

Statutory Maintenance of cost records has It is purely voluntary and its use
requirement been made compulsory in selected depends upon the utility of
industries as notified by the govt. management
from time to time
Thank You