Cost and Management Accounting (PGDM 2023-25) PDF

Cost and Management Accounting (PGDM: 2023-25) Session -1: Introduction Sriranga Vishnu Faculty (F&A Area)  Cost and Management Accounting – Topics Introduction to Cost and Management Accounting Cost and their classification Cost-Volume-Profit (CV...

Cost and Management Accounting (PGDM: 2023-25) Session -1: Introduction Sriranga Vishnu Faculty (F&A Area)  Cost and Management Accounting – Topics Introduction to Cost and Management Accounting Cost and their classification Cost-Volume-Profit (CVP) Analysis Job Costing and Process Costing ABC Costing Standard Costing Budgetary Control and Variance Analysis  CMA – Course Evaluation Class Participation - 20% Quiz - 20% End-term Examination - 60%  CMA - Introduction Cost and Management Accounting involves presentation of accounting information in a manner that facilitates sound planning, decision-making and effectively controlling routine operations While Cost Accounting deals mainly with cost data, Management Accounting is concerned with both, cost and revenue CMA draws concepts from both these branches of Accounting  CMA - Introduction Features:- – Accounting Information – Financial Accounting is the basis – Qualitative and Quantitative Information are required – Future Orientation- historical information for planning – Tools and Techniques – Budgetary control, Standard Costing, Cash Flow Statement Analysis, etc. – Flexibility – No set rules or formats are used – Information generated for decision making  CMA - Introduction Significance:- – Helps in systematic planning of the activities of the enterprise – Budgeting and Forecasting can be done – Helps in effective control of business operations – Aims to control cost of production and simultaneously increase the efficiency of employees – Helps in reduction or elimination of wastages/ production defects  CMA - Introduction Significance:- – Facilitates effective and concurrent communication to the interested parties for better business operations – Increases efficiency of various departments – target setting and responsibility centers Limitations:- – Basic Records – depends on the historical records created – Cost of installation of this system is high  Difference between FA and MA  Necessity: FA must be done. And in accordance with standards or regulations. Whereas CMA is optional.  Purpose: FA aims to report financial performance of the firm to outsiders; CMA is a means to the end (decision making)  Users: External persons-unknown; Known people (internal)  Underlying Structure: FA revolves around one basic equation; CMA is done for three basic purposes- Measurement, Control and Decision making (alternatives). Each has its own set of concepts  Difference between FA and MA  Source of Principles: FA follows GAAP; CMA may follow any accounting rule that leads to useful information (Fixed assets valuation, revenue recognition, etc.)  Time Orientation: FA shows accounting information that are historical; CMA includes past info. as well as future estimates.  Information Content: FA captures few characteristics (date, account, amount, etc.) ; CMA captures monetary as well as non-monetary info. like no. of employees, product failure rates, market share, etc.  Information Precision: The precision of information is higher in FA  Difference between FA and MA  Reporting Frequency: FA reports are prepared annually, Less detail info. is shared quarterly as well; CMA creates more frequent reports.  Reporting Timelines: Reports prepared for external parties are shared several weeks after their preparation; Reports prepared under CMA are shared much early  Report entity: Reports prepared for external parties present organization as a whole while reporting under CMA may be done at department and divisional level or even product-wise  Liability: In FA, the firm may be sued for misleading info. in Annual report; under CMA, a manager may by held guilty for his actions  Introduction to Cost Cost is defined as the amount of expenditure incurred on, or attributable to, a specified thing or activity (CIMA) Cost is a measurement, in monetary terms, the amount of resources used for the purpose of production of goods or rendering services (ICAI) Cost Object :- Cost object is an entity or a part of entity for which separate measurement of cost is desired. Examples of cost object include a product, a group of products, a plant, a territory, an order, an activity, a program, etc.  Introduction to Cost Frequently used types of costs:- Historical Cost- Cost incurred at the time of acquition Estimated Cost- It is a predetermined cost Standard Cost- Most scientific predetermined cost Total Cost – Sum of all cost attributable to a given volume Average Cost – It is the unit cost computed by dividing the total cost by volume under consideration  Introduction to Cost Marginal Cost- Measured by change in cost due to change in output by one unit Differential Cost- Change in total cost at a particular level of activity with respect to another; It is also the difference between the costs of two alternative decisions Sunk Cost- Historical cost which is irrecoverable Relevant Cost – Future costs that will differ with alternatives  Classification of Costs Cost classification is grouping of costs according to their common features Costs can be classified according to:- – Elements or nature of expenses – Functions or activities – Behaviour- variability or fixity – Time or periodicity – Expiry – Product or Period  Classification of Costs Classification on the basis of elements:- Costs are classified primarily according to the factors upon which they are incurred Material cost – Cost of raw material consumed for production Labour cost – wages, salaries, commission, bonus, etc. paid to employees Expenses – cost of services provided to an undertaking and the notional costs of use of owned assets (Depreciation)  Classification of Costs Direct materials – materials that enter into and form part of the product – materials purchased, materials from stores, components, primary packing materials Indirect materials – fuel, lubricants, small tools for general use, repair and maintenance materials, etc. Direct Labour cost - employees, supervisors, officers, etc. Indirect Labour costs- Inspectors, supervisors, general maintenance workers, misc. allowances, wages to storekeeper, clerical staff, watch and ward  Classification of Costs Direct expenses – not directly attributed to any labour or material costs – hire charges for a spl. concrete mixer; cost of spl. Patterns, prints; royalties for a product Indirect expenses – expenses which cannot be charged to a product directly and which are neither indirect materials nor indirect wages Examples:- Rent, Taxes, Insurance, Canteen expenses, Hospital and dispensary, Power, lighting and heating  Classification of Costs Function-wise classification – Production costs, Marketing costs, Administrative costs, R&D costs, Behaviour-wise classification – Fixed Costs – These costs remain constant (within a certain range) for all levels of activity. (Rent, Insurance, etc.) Variable Costs – They vary in proportion to the output Semi-variable Costs – They remain partly fixed and partly variable (normal maintenance, telephone exp., depreciation, electricity bill)  Classification of Costs Classification on the basis of periodicity:- Historical Costs – Costs that have incurred during acquisition and there is a verifiable evidence to support Future Costs – Costs that are expected to be incurred in future. They are measured in the form of estimates and are amenable. Examples are- – Estimated costs: Costs prepared in advance (Tenders) – Standard Costs: These costs are computed in advance of the production process and the actual performance is assessed against the standard. Helps in variance analysis and cost control  Classification of Costs Classification on the basis of Expiry:- Historical costs can be classified as expired or unexpired costs. – Expired Costs are the resources that have been already used up for generation of revenue – Unexpired Costs are the resources that have acquired and have got the capacity to generate revenue in future Classification on the basis of Product or Period:- – Product Costs: Costs that are identified with goods manufactured or those purchased for resale – Period Costs: Costs that are not included in stock valuation and as a result, treated as expense in the period in which they incur Thank You