Cost Accounting PDF

COST ACCOUNTING Author’s Name Dr. Bhagyadhar Nayak Edited by: Dr.Sujit Kumar Acharya Dr.Biswo Ranjan Mishra Dr.Rashmi Ranjeeta Das UTKAL UNIVERSITY Directorate of Distance & Continuing Education Bhubaneswar ...

COST ACCOUNTING Author’s Name Dr. Bhagyadhar Nayak Edited by: Dr.Sujit Kumar Acharya Dr.Biswo Ranjan Mishra Dr.Rashmi Ranjeeta Das UTKAL UNIVERSITY Directorate of Distance & Continuing Education Bhubaneswar  SYLLABUS COST ACCOUNTING UNIT-I Accounting information and managerial Decision-making, Financial Accounting vs. Cost and Management Accounting, Role of Management Accountant, Basic Cost terms and Concepts, Relevant Cost, Statement of Cost. UNIT -2 Absorption Costing and Marginal Costing, Break Even Analysis, Cost-Volume-Profit analysis, Managerial Application of CVP Analysis. UNIT-3 Job order Cost Systems, Cost Allocation and Activity Based costing, Process Cost System, Normal Loss and Abnormal Loss, Joint Product and By Products, Equivalent Production. UNIT – 4 Segment performance Analysis, Responsibility Accounting System, Variance Analysis, Evaluation of Cost and Sales Variances. UNIT-5 Budgetary Control System, Operating and Functional Budgets, Financial Budgets, Master Budgets, Zero-Base Budgeting, Strategy and Balanced Score Card CONTENTS INTRODUCTION UNIT - 1 ACCOUNTING 7-33 2 1.0 Learning Objectives 1.1 Introduction 1.2 Accounting Information and Managerial Decision-making 1.2.1 Concept of Decision-making 1.2.2 Concept of Differential Costs 1.2.3 Steps in Decision-making 1.2.4 Make or Buy Decision 1.2.5 Operate or Shutdown 1.2.6 Expand or Reduce Capacity Decisions 1.2.7 Key Factor 1.2.8 Special orders 1.2.9 Sell or process further 1.2.10 Accept or Reject Decisions 1.3 Difference between Cost Accounting and Management Accounting 1.4 Difference between Financial Accounting and Cost Accounting 1.5 Difference between Financial Accounting and Management Accounting 1.6 Role of Management Accountant 1.7 Basic Cost Terms and Concepts 1.7.1 Need for Accounting 1.7.2 Development of Accounting 1.7.3 Definition and functions of Accounting 1.7.4 Book-keeping and Accounting 1.7.5 Is Accounting a science or an Art? 1.7.6 Accounting and other Disciplines 1.7.7 End-users of Accounting Information. 1.8 Relevant Cost 1.9 Statement of Cost 1.9.1 Meaning of Cost Sheet 1.9.2 Importance of Cost Sheet 1.10 Summary 1.11 Key Terms 1.12 Questions and Exercises UNIT - 2 ABSORPTION COSTING AND MARGINAL COSTING 34-60 2.0 Learning Objectives 2.1 Introduction 2.2 Meaning of Marginal Cost 2.3 Marginal Costing 2.4 Absorption Costing 2.5 Special Terms for Marginal Cost 2.5.1 Contribution 2.5.2 Cost Volume Profit Analysis 2.5.3 Break-Even Point 2.5.4 Angle of Incidence 2.5.5 Margin of Safety 2.5.6 Key or Limiting factor 2.5.7 Assumptions underlying CVP Analysis / Break - Even Charts 2.6 Managerial Application of CVP Analysis. 2.7 Summary 2.8 Key Terms 2.9 Questions and Exercises UNIT - 3 JOB ORDER COST SYSTEMS 61-94 3.0 Learning Objectives 3.1 Introduction 3  3.2 Job Costing 3.3 Cost Allocation and Activity - Based Costing 3.4 Process Cost System Normal Loss and Abnormal Loss 3.5 Joint product and By-products 3.6 Equivalent Production 3.7 Summary 3.8 Key Terms 3.9 Questions and Exercises UNIT - 4 SEGMENT PERFORMANCE ANALYSIS 95-126 4.0 Learning Objectives 4.1 Introduction 4.2 Responsibility Accounting System 4.3 Variance Analysis 4.3.1 Evaluation of Cost and Sales Variances 4.4 Summary 4.5 Key Terms 4.6 Questions and Exercises UNIT - 5 BUDGETARY CONTROL SYSTEM 127-153 5.0 Learning Objectives 5.1 Introduction 5.2 Meaning of Budget 5.2.1 Meaning of Budgetary Control 5.2.2 Budgetary Control as a Management Tool 5.2.3 Limitations of Budgetary Control 5.2.4 Forecasts and Budgets. 5.3. Budgetary Control System 5.3.1 Installation of Budgetary Control System. 5.3.2 Kinds of Budgets. 5.3.3 Functional Budgets. 5.3.4 Flexibility Budgets 5.3.5 Period Budgets 5.3.6 Condition Budgets 5.4 Zero-Base Budgeting Strategy 5.5 Balanced Scorecard 5.6 Summary 5.7 Key Terms 5.8 Questions and Exercises INTRODUCTION In today’s world of ours every activity is with some motive i.e. propose. In most of these cases the purpose is to earn profit while in other cases the purpose may be social welfare, providing education, health care etc., whatever may be the purpose the activity is likely to be an organised affair. 4 Every organisation has to use resources-Material, labour, services, Capital and to work effectively the people in the organisation require information. The use of Cost Accounting System was first traced in France during seventeenth Century. In eighteenth century, come iron masters and potters in England too had begun to produce Cost Accounting information. Cost Accounting provides cost information for taking effective and efficient decisions. In the present era of Cut-throat competition the need for Cost Accounting in any business organisation has increased manifold with the increase in size and complexity of business, the organizations need to work more hard to survive. But the business decisions have to be taken with the help of accounting information. On the basis of the information provided by Financial accounting alone, business decisions cannot be taken. Similarly, information provided by cost accounting is not enough for decision making, management Accounting overcomes the limitations of financial and cost accounting and is useful in taking important business decisions. Cost and management Accounting is an attempt to providing the students with a thorough grounding of relevant concepts. This book is divided into five units which deals accounting information, its relationship with managerial decision-making, the role of the management accountant, absorption Costing and marginal Costing, cost volume profit analysis, managerial application of CVP analysis and job order cost system. Cost allocation and activity-based costing, responsibility accounting system, variance analysis, budgetary control system along with zero-base budgeting have also been introduced in a Easy and Simple manner. A number of problems have been provided for practice. A list of key Terms and a summary are also provided at the end of each chapter. Attempts have been made to produce a quality text to fit students and others needs. However there is always scope for improvement. We welcome comments and suggestions to improve the text with a view to make it more useful and better for the students 5 UNIT -1 ACCOUNTING Chapter Outlines 1.0 Learning Objectives 1.1 Introduction 6  1.2 Accounting Information and Managerial Decision-making 1.2.1 Concept of Decision-making 1.2.2 Concept of Differential Costs 1.2.3 Steps in Decision-making 1.2.4 Make or Buy Decision 1.2.5 Operate or Shutdown 1.2.6 Expand or Reduce Capacity Decisions 1.2.7 Key Factor 1.2.8 Special orders 1.2.9 Sell or process further 1.2.10 Accept or Reject Decisions 1.3 Difference between Cost Accounting and Management Accounting 1.4 Difference between Financial Accounting and Cost Accounting 1.5 Difference between Financial Accounting and Management Accounting 1.6 Role of Management Accountant 1.7 Basic Cost Terms and Concepts 1.7.1 Need for Accounting 1.7.2 Development of Accounting 1.7.3 Definition and functions of Accounting 1.7.4 Book-keeping and Accounting 1.7.5 Is Accounting a science or an Art? 1.7.6 Accounting and other Disciplines 1.7.7 End-users of Accounting Information. 1.8 Relevant Cost 1.9 Statement of Cost 1.9.1 Meaning of Cost Sheet 1.9.2 Importance of Cost Sheet 1.10 Summary 1.11 Key Terms 1.12 Questions and Exercises 1.0 LEARNING OBJECTIVES After studying this chapter, you should be able to understand:  The concept of decision making.  Explain the concept of relevant cost.  Steps to be taken for decision making.  Distinction between Book keeping and Accounting.  Explain the importance and types of Cost Sheet.  Distinguish between Cost Centre and Cost Unit, Cost estimation and Cost ascertainment.  Role of a management Accountant.  Distinguish between Financial Accounting and cost Accounting.  Describe the various types of material losses.  Explain the Accounting treatment of different losses. 1.1 INTRODUCTION In the beginning the main objective of accounting was to ascertain the result of the business activities during a year and to show the financial position of the business as on a particular date. But with the lapse of time more and more is being expected from accounting. At present accounting has to meet the requirements of taxation authorities, investors, government regulations, management and owners. Accounting is a discipline which records, classifies, Summarises and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern. cost Accounting has developed due to the complexities so modern commerce and growth of factory system. This chapter attempts to shows the basic concepts of cost accounting including the elements of cost, the role of a management Accountant and Cost Sheet. 1.2 ACCOUNTING INFORMATION AND MANAGERIAL DECISION-MAKING 7 12.1 Concept of Decision-Making Decision making is associated with planning and is directed towards achieving a desired goal. It is the process of evaluating two or more alternatives leading to final selection. It is however be noted that even the best decision does not guarantee the success decision making which is the essence of management, is a reflection of responsibility in the case of an enterprise and constitutes the hall-mark distinguishing the work of the higher echelons of management from the unglamorous, though vetal, ploodings of the rank and file of the undertaking. In this connection Sir Geoffery Heyworth once remarked, “In the unilever’s world empire, there are some two hundred people who take on themselves the decisions which make or mar the success of business as a whole”. 1.2.2 Concept of Differential Cost Differential cost is the change in cost which may result from adopting an alternative course of action in the level of activity which may be due to change in fixed cost or variable cost. In other words, it is the aggregate of changes in fixed cost and variable cost which take place due to adopting of an alternative course of action in the level of output. Differential costs are affected by the decisions. They may be regarded as the difference in the total cost resulting from a change. In other words it is the increase or decrease in the total cost that result from the alternative course of action. The A. A. A. Committee defines it as “the increase or decrease in total cost or the change in specific elements of cost that result from any variation in operation”. According to the institute of cost and management Accountant, London, differential cost may be defined as “the increase or decrease in total cost or the change in specific elements of cost that result from any variation in operations”. 1.2.3 Steps in Decision-making (a) Identifying the problem: The decision making process starts with the identification of problem. The manager must take utmost care and be able to define the problem clearly because all subsequent actions depend on this if the problem at hand is not clearly defined, managers may spend considerable time and efforts in gathering information which is not relevant to the real problem. (b) Identifying the Alternative Courses of Action: Once the problem is identified all possible and feasible solutions should be identified. It is the idea phase of decision process and the experience of the concerned manager is of utmost importance. The manager must be objective in identifying different alternative courses of action and need not let his bias to enter into the decision process. (c) Accumulation of Relevant Information: Manager require a lot of information before making decisions. Depending upon whether the decision situation has long run implications or short-run implications, relevant data and information about different courses if action should be gathered. Information may be available internally or may have be collected from external sources. It is the relevance of information and the sources of information which is important. (d) Making a Decision: The information collected in respect of each of the alternative course of action should be analysed carefully to see the effect if each course of action on the objective of the firm. An economic cost benefit analysis should be make for each of the alternative course of action. Out of these different alternative the best one should be selected. The following are the rules applied in making decisions related to each of the following matters 1.2.4 Make or Buy decision The make or buy decision is made to determine the alternative which is most desirable. In case of industries, a number of spare parts, components are used in the final assembly to make final product. These accessories can be either manufactured written and organisation or can be procured from outside sources. Therefore it is necessary to decide whether all the parts are to be manufactured within or to be purchased from outside sources. The decisions taken will have the effects on production capacities, working capital, competitive position and funds. Illustration 1.1 8  An automobile manufacturing company finds that while the cost of making is its own workshop part no. 0028 is ` 6.00 each, the same is available in the market at `5.60 with no assurance of continuous supply. The cost data is as follows: ` Direct Materials 2.50 Direct wages 2.00 Other variable costs 0.50 Depreciation and other fixed costs 1.00 Total 6.00 You are required (a) To suggest to the managing director, giving your view to make or buy the part (b) To give your view in case the suppliers reduce the price from `5.60 to `4.60. Solution: In order to decide whether to make or buy the part no 0028, fixed expenses should be excluded from the cost as they will be incurred irrespective of the part not being produced. Thus, the additional cost of the part will be as follows: ` Direct Materials 2.00 Direct wages 2.50 Other variable costs 0.50 Total 5.00 (a) The Company should make the part is available in the market at Rs. 5.60 because the production of every part will give a contribution of 60 paise i.e. (5.60 –5.00) to the Company. (b) On the other hand if the part is available in the market at `4.60, the Company should not manufacture the part, because, the additional cost of producing the part is 40 paise (i.e., `5.00 – ` 4.60) more than the price at which it is available in the market. In certain cases, inspite of lower variable cost, there may be increase in fixed cost. Therefore it is necessary to find out the minimum quantity required in order to justify the making of product instead of buying. This can be calculated by the following formula: fixed cost Increase in = Contribution per unit 1.2.5 Operate or Shutdown Differential cost analysis is also used when a business is confronted with the possibility of a temporary shutdown. This type of analysis has to determine whether in the short-run a firm is better of operating then not operating. As long as the products sold recovery their variable costs and make a contribution towards the recovery of fixed costs, it may be preferable to operate and not to shutdown. Also management should consider the investment in the training of its employees which would be lost in the event of temporary shutdown. Illustration 1.2 A manufacturing company has three product lines A, B, and C the company’s management requested an income statement by product lines and received the following: Product A Product B Product C Product D ` ` ` ` Sales 4,00,000 1,00,000 3,00,000 8,00,000 Cost of goods sold 2,50,000 60,000 2,00,000 5,10,000 Gross profit 1,50,000 40,000 1,00,000 2,90,000 Operating expenses 1,30,000 70,000 80,000 2,80,000 Net Profit 20,000 30,000 20,000 10,000 The Company’s owner argued that such an analysis is misleading and he requested further information about the Company’s operating expenses. He was given the following: Product A Product B Product C Product D ` ` ` ` Variable operating expenses 1,10,000 30,000 50,000 1,90,000 9  Total Fixed Operating expenses - - - 90,000 2,80,000 You are required to prepare income statement showing the contribution by products covering the company’s fixed costs. Would you recommend discontinuance of product B? Solution: Product A Product B Product C Product D ` ` ` ` Sales 4,00,000 1,00,000 3,00,000 8,00,000 Less: Marginal Cost and Cost of goods 3,60,000 90,000 2,50,000 7,00,000 sold Contribution 40,000 10,000 50,000 1,00,000 Less: Fixed operating expenses 90,000 10,000 Note: Cost of goods sold is a variable expenses comment on the Discontinuance of product B, if product B is a discontinued, the total contribution will be (`1,00,000 - 10,000) = `90,000. But the total fixed expenses remain the same i.e. `90,000. That means there will be no profit in such a case on the other hand, if product B is not continued, the total contribution will ` 1,00,000 and the fixed expenses will be `90,000 and there will be a net profit of `10, 000 so it is not advisable to discontinue product B. 1.2.6 Expand or Reduce capacity Decisions The resources that are scarce are taken into account in order to expand or reduce that production activities. The scarce resources include raw material, labour, labour hours, space, capital, machine hours etc. These scarce resources help in decision making of alternative choices. Here, differential and profit and contribution per unit of scarce resource. Illustration 1.3 A Company engaged in plantation activities has 200 hectres of virgin land, which can be used in growing jointly or individually tea, coffee and cardamom. The yield per unit hectre of different Crops and their selling price per K.g. are as under: Particulars Yield Kgs Selling price (`) Tea 2000 20 Coffee 500 40 Cardamom 100 250 The relevant cost data are given below: Variable cost per kg Tea Coffee Cardamom ` ` ` Labour Charges 8 10 120 Packing Materials 2 2 10 Other costs 4 1 20 Total 14 13 150 Fixed Cost per annum ` Cultivation and growing cost 10,00,000 Administrative Cost 2,00,000 Land revenue 50,000 Repairs and maintenance 2,50,000 Other costs 3,00,000 The policy of the Company is to produce and sell all three kinds of commodities and the maximum and minimum area to be cultivated per commodity is as follows: Commodity Maximum Minimum Tea 160 120 Coffee 50 30 Cardamom 30 10 10 Calculate the most profitable product mix and maximum profit which can be achieved. Solution: Tea Coffee Cardamom ` ` ` Selling price 20 40 250 Less: variable cost 10 13 150 Contribution 6 27 100 Contribution per yield hectre 2,000 500 100 Total contribution 12,000 13500 10000 Key Factor 2 1 3 Hectrs Allotted 140 50 10 Total yield 16,80,000 675000 100000 Total Contribution 2455000 Less: Fixed Cost 1800000 Profit 655000 1.2.7 Key Factor Generally the product will be selected on the basis of the VP ratio which is highest, when there is no limiting or key factor. But when the resources are scarce the choice of the product is made on the basis of the contributions per unit of production. A key factor is one which generally limits the profit, output or sales many a times a business may not be in a position sell the output it produces. But in some cases, it cannot meet the market demand due to scarcity of resources like materials, labour, plant capacity etc. though it can sell all it produces. Under such circumstances, it has to take a decision regarding the choice of the product whose production is to be stopped, reduced or increased. Therefore, these scarce resources should be utilized in those directions where the contribution per unit is maximum. Illustration 1.4 Birla Equipment ltd. Manufactures four Components the cost particulars of which are given below: Element of Cost Components A B C D ` ` ` ` Material 80 120 90 100 Labour 20 30 20 25 Variable overheads 10 10 15 12 Fixed overheads 15 20 20 23 Output per machine hour (units) 4 3 3 2 125 180 145 160 The key factor is shortage of machine Capacity. You are required to advise management as to whether they should continue to produce all or some of these components (which are used in its main product) or they should buy them from a supplier who has quoted the following prices: A = `115, B = ` 185, C = `135, D = `175 Solution: Profitability Statement Components A B C D ` ` ` ` Direct Material 80 120 90 100 Direct Labour 20 30 20 25 Variable Cost 10 10 15 15 Marginal Cost per unit(a) 110 160 125 137 Purchase price per unit (b) 115 185 135 175 Excess per unit (b) over (a) 5 25 10 38 Output per machine hour (units) 4 3 3 2 11  Contribution per unit 20 75 30 76 Thus even if there is no key factor, it may not be possible to produce all the components required and that some of them must be purchased from outside. If this is so that component which result in the least loss to the company must be purchased from outside. The following statement will reveal the loss to the Company through purchases of components from outside: ` A 20 B 30 C 75 D 76 Thus it is clear from the above Statement that component A may be purchased from outside if needed, and if still the own production could not be effected C should be purchased. The profitability statement clearly shows that from the point of view of loss per machine hour if the components are purchased from outside, the ranking of four components would be A, C, B, D. 1.2.8 Special Orders All business decisions should not be evaluated in the same way. Sometimes special orders or one time orders have different characteristics from recurring orders. Therefore, each order should be evaluated based on costs relevant to the situation and the goals of the business firm. The question of special orders arises when a company has excess or idle production capacity and management considers the possibility of selling additional products at less than normal selling prices, provided that such a special order will not affect the regular sales of the some product. Illustration 1.5 Tata Company Ltd. Produce business calculators and the selling price was fixed at `400. The following are the cost particulars: ` Direct material cost 140 Direct labour Cost 40 Variable Factory overhead 20 Other variable cost 20 Fixed overhead 5,00,000 p.a. Commission 30% on selling price. The Company was producing only 10,000 units. Since the demand was only 10,0000 units. However the Company has the capacity to produce another 1,000 units without any additional fixed overheads one of the distributors offered that he will take 1,000 units in addition to his normal quota, but at a selling price of `320 per unit. He was also prepared to accept only half of his regular Commission for this transaction0 The managing Director wants you as the cost and management Accountant to prepare a statement to the Board of Directors with your specific recommendations, based on the calculations in the statement. Solution: Statement of Profitability Particulars Present Additional Total production production Production & Sales 10,000 1,000 11,000 Sales 40,00,000 3,20,000 43,20,000 Direct material at `140 14,00,000 1,40,000 15,40,000 Direct labour at `40 4,00,000 40,000 4,40,000 Variable factory overhead at ` 20 2,00,000 20,000 2,20,000 Other variable cost at `20 2,00,000 20,000 2,20,000 Commission at 30% on sales value 12,00,000 - 12,00,000 At 15% on sales value - 48,000 48,000 Total variable cost 34,00,000 2,68,000 36,68,000 Contribution 6,00,000 52,000 6,52,000 Less: Fixed overhead 5,00,000 - 5,00,000 12  Profit 1,00,000 52,000 1,52,000 Recommendation The proposal gives a contribution of ` 52 per unit (52,000/1,000). Additional profit will be `52,000. Here the proposal should be accepted. 1.2.9 Sell or process further The decision whether a product should be sold at the split off point or processed further is faced by many manufacturers. The choice between selling a product at split-off or processing it further is short-run operating decision. Additional processing adds values to a product and increases its selling price above the amount for which of could be sold at split-off. The decision to process further depends upon whether the increase in total revenues exceeds the additional costs incurred for processing beyond split-off. Illustration 1.6 A production Company is evaluating two possible processes for the manufacture of a component. The following data is made available. Process A Process B ` Per unit `Per unit Selling price 30 20 Variable cost 12 14 Total fixed cost 30,00,0000 21,00,000 Output capacity in units 4,30,000 5,00,000 Expected sales in units in next 2 years 4,00,000 4,00,000 You are required to suggest (i) Which process should be chosen? (ii) Would you change your answer as given above if you are informed that the capacities of the two process as follows: A = 6,00,000 units and B = 5,00,000 units why? Solution: Comparative Profitability Statement Particulars Process A (`) Process B(`) Selling price per unit 30 20 Variable cost per unit 12 14 Contribution per unit 8 6 Total contribution 32,00,000 24,00,000 Less: Total fixed cost 30,00,000 21,00,000 Profit 2,00,000 3,00,000 Process B can be selected as it gives higher profit 34,40,000 30,00,000 Total contribution if present capacity is utilized and sold Total Profit 4,40,000 9,00,000 Process B may be chosen Total contribution 48,00,000 30,00,000 (if capacity of A of 6,00,000 units and of B 5,00,000 units) Total profit 18,00,000 9,00,000 Process A may be chosen 1.2.10 Accept or Reject Decisions Sometimes, a firm which is selling its product in the market may get orders from some certain customers to sell the product at a slightly lesser price. This may take place in case of special orders, foreign customers, one time quantity sales etc. A decision to accept or reject has to be taken based on differential cost and the contribution if the contribution is more than the differential cost, the officer can be accepted. This is because the fixed cost is already recovered in the normal production and the contribution in excess of marginal or differential cost leads to profit. But the price should not be less than marginal cost. The question of accept or reject the special orders arises in case 13 when the manufacturer has idle production capacity makes him to think about the possibility if selling the additional products at lesser prices. Illustration 1.7 A producer is operating at 50% of its capacity due to competition. The following are the details: Per Unit (`) Raw materials 6.00 Direct wages 4.00 Variable overhead 2.00 Fixed overhead 3.00 15.00 Output 15000 units Total cost `225000 Sales value `210000 Loss `15000 A foreign customer wants to buy 6000 units of `13.50 per unit and the Company does not know whether to accept or not as it is suffering losses at the current level. Solution: Particulars Existing level New order Total (15000 units) (6000 units) (16000 units) (`) (`) (`) Sales 2,10,000 81,000 2,91,000 Variable Cost: Raw materials 90,000 36,000 1,26,000 Labour 60,000 24,000 84,000 Variable overhead 45,000 18,000 63,000 Total Variable cost 1,95,000 78,000 2,73,000 Contribution 15,000 3,000 18/,000 Less: Fixed cost 30,000 - 30,000 Profit/Loss -15,000 3,000 -12,000 The manufacturer must accept the order as his losses will comes down from `15,000 to `12,000. 1.3 DIFFERENCE BETWEEN COST ACCOUNTING AND MANAGEMENT ACCOUNTING The important differences between Cost Accounting and Management Accounting are as follows: 1. Purpose: The purpose of cost Accounting is the ascertainment of cost at each stage of production. The purpose of management Accounting is to provide information to the management for decision making. 2. Basis: Cost Accounting is prepared mainly on the basis of past and less emphasis is given for the future. Whereas management accounting purely aims at the future based on the past information. 3. Preparation: Cost Accounting is prepared on the basis of some rules and regulations prescribed by the ICWAI. Whereas management Accounting is prepared without adopting any specific and rigid rules. It may be prepared according to the will of the managerial personnels. 4. Reports: The Reports of the Cost accounting are subject to statutory audit on the other hand, The reports of the management Accounting are not subject to statutory audit. 5. Useful: The reports of the cost Accounting are useful both to the internal and external parties. On the other hand the reports of the management Accounting are useful only for the internal parties. 6. Scope: Cost Accounting does not include tax planning and tax accounting whereas management Accounting includes tax planning and tax accounting. 7. Evoluation: Cost Accounting evolves due to the limitation of financial accounting, on the other hand management accounting evolves due to the limitations of cost accounting. It is the managerial aspects of financial accounting and cost Accounting. 8. Maintenance of Records: The maintenance of records is compulsory for complying the statutory requirements in selected industries as notified by Govt. from time to time. On the other hand the maintenance of records is purely voluntary and for internal use of management of the Company. 14  9. Planning Aspect: Cost Accounting is mainly concerned with short-term planning, on the other side management Accounting is concerned with short term as well as long term planning of the organization. 10. Installation of system: Cost Accounting can be installed without the help of the management accounting in the organization on the other hand management accounting system cannot be properly installed without a proper cost accounting system. 11. Derivation of Data: Cost Accounting data are derived basically from financial accounts, on the other hand management Accounting data are derived from both Cost Accounts as well as from financial accounts. 12. Status: The status of the cost accountant in the organization comes after the management accountant. On the other hand the status of the management accountant is higher than cost accountant in the organization due to direct participation in decision making process. 1.4 DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING 1. Purpose: The main purpose of Cost Accounting is to analyse, ascertain and control costs on the other hand the purpose of financial Accounting is to record financial transactions and prepare financial statements. 2. Decision making: The Cost Accounts are basically designed to facilitate decision making in the areas of production, purchase, sales etc. but on the other hand financial accounts are of limited use in decision making. 3. Analysis of Cost and Profit: The Cost Accounting shows the detailed cost and profits for each product, process, job, contract, etc. on the other way the financial Accounting shows the overall profit/Loss of the entire organization. 4. Transactions Recorded: In Cost Accounting keep records both external and Internal transactions. On the other hand in Financial Accounts keep records external transactions with outsiders. 5. Access: In Financial Accounting anybody can have access to Financial Statements of Companies. On the other hand in cost accounting the outsiders generally have no access to cost records. 6. Control: Cost Accounting Control all elements of Costs, but on the other hand financial Accounting does not exercise adequate control over material, labour and overhead costs. 7. Profit or Loss: Cost Accounting determines the profit loss or each product, process, job and department whereas Financial Accounting determines the profit or loss of the entire business. 8. Units: Cost Accounting records both monetary and physical units such as labour hour, machine hour etc. whereas Financial Accounting records only monetary units in the books of accounts. 9. Valuation of Closing Stock: Closing Stock is valued at cost price only in Cost Accounting on the other hand. In Financial Account Closing Stock is valued at cost or market price whichever is less. 10. Audit: Cost Accounting need not be followed by a system of external audit, whereas financial Accounting needs a system of independent audit of the financial records by an external auditor. 11. Tax Assessment: Cost Accounting does not form a basis for tax assessment whereas financial Accounting forms a basis for determination tax liability of the business. 12. Parties: Cost Accounting serves the information needs of the management whereas Financial Accounting serves the information needs of owners, creditors, employees and the society as large. 13. Lack of uniformity: Installing a costing system is purely optional. A concern is free to empty any method it likes. There are no fixed rules and regulations. Therefore different cost accounting system may be followed by different firms in the same industry which makes comparison difficult. 1.5 DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING 1. Objective: Financial Accounting aims at recording business transaction systematically to ascertain profit or loss and financial position at the end of the financial year. The aims of management Accounting at preparing various statements for material planning, control and decision making. 2. Time period: In Financial Accounting the accounts are prepared for a particular period. Whereas in management accounting the reports are prepared from time to time to update with the changing business environment. 3. Audit: In Financial Accounting under Company law Financial accounts are subject to compulsory Audit. Whereas in management Accounting audit is optional. However, management is there is to ensure efficiency and productivity of the employees and system. 15  4. Principles: Financial Accounting is prepared as per Generally Accepted Accounting principles (GAP). In Management Accounting No set of standing principle are followed. However, accounting standards are followed to take managerial decisions more effective. 5. Nature: Financial Accounting is concerned with historical data. It records only those transactions which have already taken place. Thus the accounts prepared here are like postmortem report. The management Accounting is concerned with both historical data and estimated data. 6. Publication: In Financial Accounting, Financial Statements are published annually for external parties interested in the accounting information. In management Accounting the statements and reports are not published. They are meant for internal use of the management. 7. Quickness: In Financial Accounting, reporting is slow and time consuming one has to wait till the end of the accounting year. In management accounting, reporting is very quick as it is meant for decision making. 8. Nature of Information: Financial Accounting is concerned with quantitative information expressed in terms of money. Management Accounting is concerned with both qualitative and quantitative information. 9. Reporting: In Financial Accounting, Financial reports are prepared not only for the organization but for others interested in the accounting information of the business. In management Accounting the reports prepared for internal use only. 10. Legal Comparison: In Financial Accounting, preparation of financial accounts is compulsory to comply statutory requirements. In Management Accounting. It is not compulsory, it helps in the administration and smooth functioning. 1.6 ROLE OF MANAGEMENT ACCOUNTANT The management accountant, obtain referred to as controller, is the manager of accounting information used in planning, control and decision making area. He is responsible for collecting, processing and reporting information that well help managers decision makers in their planning, controlling and decision making activities. He participates in all accounting activities within the organization. The following are the Roles of Management Accountant: 1. Participating in management process: The management accountant occupies a pivotal position in the organization. He performs a staff function and also has line authority over the accountant and other employees in his office. He educates executives on the need for control information. 2. Maintaining optimum Capital Structure: Management accountant has a major role to play in raising of funds and their application. He has to decide about maintaining a proper mix between debt and equity raising of funds through debt is cheaper because of tax benefits. 3. Investment opportunities: A management accountant can assist either person or a firm regarding the investment in different ways. He can suggest how, when and where the investment should be made so that the investor or the firm will earn a maximum return. 4. Financial Investigations: A management accountant can assist the management about the financial investigations which is extremely desired to determine the financial position for the interested parties. Relating to issue of shares, amalgamation or mergers, or reconstructions etc to ascertain the reason of decreasing profit or increasing costs, it so happened. 5. Long-term and Short –term planning: Management accountant plays an important role in forecasting future business and economic events for making future plans i.e., long-term plans, strategic management accounting, formulating corporate strategy, market study etc. 6. Participating in management process: The management accountant occupies a pivotal position in the organisation. He performs a staff function and also has line over the accountant and other employees in his office. He educates executes on the need for control information and on the ways of using it. He shifts relevant information from the irrelevant and reports the same in a clear from to the management and sometime to interested external parties. 7. Decision making; Management accountant provides necessary information to management in taking short- term decision e.g. optimum product mix, make or buy, lease or buy, pricing of product discontinuing a product etc and long-term decisions e.g., capital budgeting. Investment appraisal, project financing. However, the job of management accountant is limited to provision of required information in a comprehensive as well as reliable form to the management for decision making purposes. 16  8. Control: The management accountant analysis accounts and prepares reports e.g., standard costs, budgets, variance analysis and interpretation, cash and funds flow analysis, management of liquidity, performance evaluation and responsibility accounting etc. for control. 9. Developing management information System: The routine reports as well as reports for long term decision making are forwarded to managerial personnel at all levels to take connective action at the right time and also uses these reports for taking important decisions. 10. Stewardship Accounting: Management accountant designs the framework of cost and financial accounts and prepares reports for routine financial and operational decision making. 11. Corporate planning: He can assist management for long-term planning and advise management regarding amalgamation or mergers or reconstructions, including financial planning to see whether effective utilization of resources is made or not. Thus the role of management accountants cannot be ignored. Its such, there services are primarily desired for the efficient management of an undertaking. 1.7 BASIC COST TERMS AND CONCEPTS 1.7.1 Need for Accounting Accounting is the Language of business. The oldest branch of accounting is the financial Accounting, which is concerned with recording day-to-day transactions of business and helps in preparation of financial statements like profit and loss Account and Balance Sheet. But it does not provide detailed information about costs of various products processes, services and operations which is very important for planning and controlling business activities. Due to this limitation of financial Accounting a separate branch of accounting has been developed which is known as cost Accounting. Before beginning the study of Cost Accounting one must be clean in mind that he is going to read a subject which is immensely useful in all business activities if we analysis business activities we find mainly two aspects: Firstly the cost involved in it and secondly, the benefits obtained at of it. This analysis of costs and benefits is very important in all economic activities Cost Accounting involves a study of those principles, methods and techniques which help us in ascertaining, analyzing and controlling Costs. Meaning of Cost accounting Cost Accounting is the process of Accounting for costs. It begins with the recording if income and expenditure and ends with the preparation of periodical statements for ascertaining and controlling costs. Definition of Cost Accounting ICMA London defined Cost Accounting as “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest usage, it embraces the preparation of statistics data, the application of Cost Control methods and the ascertainment of the profitability of activities carried out or planned”. Objectives of Cost Accounting The important objectives of Cost Accounting are as follows: (a) Ascertainment of cost –one of the important objectives of cost accounting is the ascertainment of cost at different stages of production. The Cost incurred for each department and activities are to be calculated. The standard cost for all types of costs are also to be calculated in order to compare the actual cost with the standard cost. (b) Internal Audit system: The objective of cost Accounting is to develop internal audit system which may help in effective working of different departments of the organization. (c) To classify Cost: Cost accounting classified total cost into different ways i.e., by element by functions, as direct or indirect, by variability, by normality, by controllability etc. (d) To control Cost: Cost Accounting aims at controlling costs by using various techniques such as Budgetary Control, Standard Costing, inventory control etc. (e) To provide information for Decision making: Cost accounting aims at providing information for various managerial decisions like, whether to make or buy a component, whether to retain or replace an existing machine, whether to process further or not etc. (f) To determine profit: Cost Accounting aims at ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of that activity. (g) To Determine Selling Price: Cost Accounting provides cost information to determine the selling price of products or services. During the period of depression, it guides the management to decide. How much reduction in selling price may be made to meet the situation. 17  (h) To provides preparation of Cost: Statements- Cost Accounting prepares Cost Statements as and when required by the management for review of costs and to plan future activities. (i) To evaluates the efficiency: Cost Accounting evaluates the relative efficiency of different departments, products, branches and plants so that necessary steps can be taken to improve their efficiency. (j) To give causes of wastage: Cost Accounting analysis and identifies the causes of wastage and helps to take necessary steps to check the wastage. (k) Minimum capital Stocks: Cost Accounting through various techniques like various levels of stock, analysis of slow moving material, continues stock taking can decide the objective to minimize the investment of capital in stocks of raw material, work-in-progress or finished goods. (l) Comparison: Cost Accounting helps in making comparisons of Cost or of profits one firm with other firm operating in the same industry. For the inter-firm comparison there should be the application of uniform costing system within that industry. (m) Report to the management: Cost Accounting reports to the management all information relating to costs and helps management to take decisions. Installation of Costing System A cost accountant will encounter the following practical difficulties at the time of installation of cost accounting system: (i) Lack of trained staff: This was no doubt a problem in olden days. Today this problem is overcome thinks to the establishment of the institute of cost and works Accountant of India in our country which offers professional course in costing and also offers training facilities through various companies to the candidates undergoing the course. (ii) Lack of Support from management: wherever costing system is installed it is essential to seek the support of various departmental managers. Very often the managers show hostile attitude towards the costing system. They feel that this system will interfere in their routine work and probably as a means of checking their efficiency under such circumstances it is better to convince them about the utility of costing system for the business as a whole. (iii) Resistance by existing accounting staff: Very often the existing accounting staff resist the installation of the cost accounting system on two grounds. Firstly they feel that the new system of accounting might lead to excess work. Secondly, they are trained of their job security. But this difficulty may be overcome by encouraging them about the usefulness of cost accounting as a supplement to financial accounts and the generation of more employment opportunities from the installation of cost accounting system. (iv) Non-Cooperation from middle and bottom level management: At times the middle and bottom level managers such as foremen, supervisors and inspectors also fail to extend their whole hearted cooperation fearing additional work which may be entrusted to them. This problem may be overcome by suggesting them about the simplicity of the system and the existence of a separate cost accounting department to look after costing matters. (v) Heavy expenses in installing and maintaining the system: The setting up of a separate costing department with staff often poses a problem. In addition to installation, the operating expenses in the form of printing and stationery, heating and lighting, depreciation and insurance, rent and rates are to be incurred. However as was mentioned earlier the system of cost accounting must be a useful investment i.e., benefits derived from it must be more than the investment mode on it. STEP TO OVERCOME PRACTICAL DIFFICULTIES To overcome the above difficulties, following steps are suggested: 1. Support from the top management: Before the installation or operation of a costing system, there must be firm commitment to the system on the part of the top management. This will create cost consciousness and interest in cost improvement among technical, production and top management. 2. Utility of system to existing staff: The existing accounting staff should be impressed about the need to supplement the existing financial accounting system. It will broaden the job of an accountant and will create new opportunities for the accounting staff. 18  3. Worker’s confidence for cooperation: The various employees must be properly educated regarding the benefits which can be obtained from such a system. Worker’s confidence should be gained in the system to get their co-operation before steps are taken to put the system in practice. 4. Training of existing accounting staff: The existing staff working in the accounts department must be properly trained in costing methods and techniques with the help of the Institute of cost and works Accountants of India Calcutta. 5. Cost System according to specific requirements of the concern: The system should be installed and operated according to the requirements if a specific case, so that it may not entail heavy cost on the concern. It should avoid additional unnecessary work as far as possible. The system when installed and operated will provide many benefits of the concern as compared to the cost and improve beneficial to the concern. 6. Proper supervision: There should be proper supervision after installation and continuous efforts on the part of the cost accountant to make the system successful and to achieve the desired goal of cost ascertainment, cost presentation and cost control. Methods of Costing The various methods of costing are as follows: 1. Job Costing: This method where costs are collected and accumulated for each job separately. This is done because each job requires different mark and has separate identity and therefore it becomes essential to analyze and segregate costs according to each job separately. 2. Costing: Contract costing is a variant of job costing. The method of contract costing is applied where the job is big and of longer duration. Each contract is treated as a separate unit for the purpose of cost ascertainment and cost control, separate accounts are kept for each contract and all direct and indirect costs relating to the contract are collected. 3. Batch Costing: under this method, factories which have to produce a large number of parts in order to make a product undertake the production of each part in batches. Products are arranged in convenient batches and each batch is treated as one job and cost is calculated accordingly. 4. Process Costing: It is a method where costs are collected and accumulated according to department or processes and cost of each department or process is divided by the quantity of production to arrive at cost per unit. This method is useful in industries such as paper, soap, textiles etc. 5. Operation Costing: This is a more refinement and more detailed application of process costing. This involves costing by every operation instead of a process. Many operations are necessary to make an article. This method has greater accuracy and control. 6. Single Costing: This method is applied where production is uniform and consists of only a single product or two or three types of similar products with variation only in size, shape or quality. The information is presented in the form of a statement known as cost sheet. 7. Operating Costing: Where a business does not produce tangible goods but renders some service, the system of costing would be known as operating costing. This is used to determine the costs of services rendered by airways, roadways, rail ways, hospitals etc. 8. Multiple costing: This method is followed where the final product consists of a number of separate parts, e.g. radio set, motor car, bicycle etc. The cost of each part has to be ascertained and then the cost of assembling the parts will be tabulated. The cost of the final product will consists of the cost all the parts plus the cost of assembling them. 9. Uniform Costing: where a number of firms in an industry agree to use the same costing principles, it is known as uniform costing. This method attempts to establish uniform costing method so that comparison of performance in various undertaking can be made to the common advantage of all the participating units. 1.7.2 Development of Accounting Accounting is as old as money itself. However, the act of accounting was not as developed as it is today because in the early stages of civilisation, the number of transactions to be recorded was so small that each businessman was able to record and check for himself all his transactions. Accounting was practiced in India twenty-three centuries ago as is clear from the book named “Arcthashastra” written by Kautilya, king Chandragupta’s minister. This book not only relates to politics and economics but also explains the art of proper keeping up Accounts in the office of Accountants’ describes records of accounts to be maintained in accountant’s office and methods of checking accounts. However the modern system of Accounting based on the principles if 19 double Entry system owes its origin to Luco pacioli who first published the principles of double Entry System in 1994 at Venice in Italy. Thus the art of accounting has been practiced for centuries but it is only in the late thirties of 20th century that the study of the subject’ Accounting has been taken up seriously. In the recent years large scale production, cut throat competition, widening of the market and changes in the technology have brought remarkable changes in the field of accounting. In the words of Gordon and Gordon shilling law. It has come to be recognized as a tool for mastering the various economic problems which a business organization may have to face. It systematically writes the economic history of the organization. It provides information that can be drawn upon by those responsible for decisions affecting the organisation’s future. This history is written mostly in quantitative terms. It Consists partly of files of data, partly of reports summarizing various portions of these data and partly of the plan established by management to guide its operations. 1.7.3 Definition and Functions of Accounting Meaning of Accounting Every person be he a salaried employee or a businessman, is involved in an economic activity. As the economic activity occurs, the person enters into various transactions and events. To derive the results of the economic activity be has to record such transactions and events and then determine its results. The process of recording transactions and events of a business in a useful manner so as to determine and analyse the financial performance and financial position is called accounting. Definition of Accounting A committee of the American Institute of Certified Public Accountants has defined Accounting as follows: “Accounting is 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 a financial character and interpreting the results thereof.” According to R.N. Anthony “Nearly every business enterprise has accounting system. It is a means of Collecting summarising analyzing and reporting in monetary terms information about business”. According to Smith and Ashburn “Accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis and interpretation of these transactions and events and communicating the results to persons who must take decisions or from judgments.” Functions of Accounting Above definition of accounting explains the main functions of Accounting. These can be summarized as under: 1. Recording: Accounting involves recording of financial transactions in a systematic manner, such recording is done through journal or subsidiary books. In it accounting transactions are recorded through supporting vouchers such as purchase bills, payment vouchers, Deposit slips etc. 2. Classification: second step in accounting is to put information regarding one type of transactions at one place. This is done by way of posting in the ledger. In it one finds different accounts relating to expenses classified us salary, Advertisement. Thus all expenses which are recorded in journal are classified under different account heads in ledger. 3. Summarising: All the transactions recorded in journal and posted in the ledger are summarized in such a manner that these are useful for the user of accounts. This is done by preparing Trial Balance and final accounts. 4. In terms of Money: Accounting records transactions in terms of money. Money represents the currency of the country where accounts are maintained money gives a common basis if measurement. 5. Transactions and Events: In business, both transactions and events are recorded. If business is involved with outsiders, it is a transaction such as buying and selling of goods, taking a loan, paying salary, rent etc. There are a number of happenings that do not concern outsiders, these are called “Events” such as loss due to fire, depreciation of assets etc. Both transactions and events are recorded in accounts. 6. Financial Character: The transaction or event to be recorded should have monetary value. If it cannot be measured in terms of money it will not be recorded in accounts. Thus, through the salary given to employee will be recorded, but how honestly and efficiently employee has worked will not be recorded. 7. Communication and Interpretation of results: Accounting also involves communication and interpretation of the results of the business. Communication implies reporting to the end users. The accounting information in desired form so as to enable them to understand the historical information e.g. 20  preparation of profit and loss Account to understand the results, Balance Sheet to understand the financial position. Interpretation involves meaningful comparison which simplifies understanding of financial reports. 1.7.4 Book keeping and Accounting Book keeping is defined as a process of recording business events in a systematic manner. It involves recording of transactions. It refers to the record making stage of accounting. This stage of accounting is mechanical and repetitive. However, maintenance of proper records help a business organization to know its health and performance. Accounting on the other hand, includes not only the maintenance of accounting records but also preparation of summary statements, their analysis and interpretation. Thus book-keeping is only a small and simple part it accounting. But the term accounting is used in a broader sense Covering all the accounting activities including preparation of final statements and their reporting to interested parties. Thus book-keeping is an aspect of the accounting process. It is a sub-field of accounting. 1.7.5 Is Accounting a science or an Art? Accounting is a science as well as an art because it contains the ingredients of both science and art. Science is a systematic body of knowledge consisting a number of principles, methods and techniques which have universal applications. Likewise, accounting has certain principles and rules that are followed all over the world. For example recording of transaction at cost is universally followed. However, accounting is not an exact science like physics and chemistry where cause and effect relationship is established. In accounting the cause and effect relationship is not studied. Thus to conclude accounting is a science but not an exact science. It is a social science. On the other hand Art refers to the application of knowledge to achieve the desired objectives. Knowing the principles and rules is not enough. These rules should be applied intelligently to solve the real life problems. Rigorous practice is necessary to achieve a desired skill. For example, the more a dancer practices the more perfect he will be. Similarly the accountant must apply the principles of accounting again and again to gain efficiency. Application of accounting knowledge is of vital importance to prepare records and summary statements. Therefore accounting is also an art. 1.7.6 Accounting and others Disciplines In order to appreciate fully the role of accounting in modern society, it is essential to consider the environment in which accounting functions. Accounting is related closely to economics and statistics. It is often greatly influenced by law and by government action, accounting is often considered to be mathematical at least arithmetical. But economics and statistics touch fundamental nature of accounting. For the subject matter, accounting is inescapably economic and its basic methodology is unquestionably statistical in character. 1. Accounting and Statistics: Accounting method is statistical in character because its central mechanism consists of accounts, and accounts are classification categories used for compressing and simplifying amass of enterprise transactions. The chief function of statistical method is to classify, compress and simplify masses of data so that their significance may setter be understood. Accounting has the same functions. Accounting has some statistical peculiarities of its own. Every ledger account is a dual category. Items on the debit are of one class, items on the credit are of an opposite class, yet both are related to the single class of data indicated by the account name. Internal transactions reallocate expenses and revenues among fiscal periods. Accounting is the connecting link, it ties the mass of activity data to the need for understanding activities. Accounting is a service that records, classifies, compresses, simplifies a mass of detail into a few understandable related totals and sub-totals. 2. Accounting and Economics: From the definition of accounting quoted earlier it can be seen that the setting in which accounting serves, is an economic one because accounting is concerned with business transactions. Accounting is oriented most closely to economics. It is an economic purpose of accounting to produce data helpful to business management and investors. Accounting contributes factual materials to the formation of business policies. Expenses and revenues result from buying policies, spanding policies, pricing policies, selling policies, employment policies. The result of accounting, therefore can be clues to good and bad policies. According to Wheeler the mutuality of interests of the two fields is so great that it is often difficult to fall where accounting leaves off and economics begin. 21 3. Accounting and law: According to Kester the influence of law on accounting “In as much as business must be carried on within the provisions of the law, principles or rules of law have exerted a powerful influence on the principles of accounting, they may well be said to have established. Some of the principles of accounting, obviously, accounting principles and rules dare run counter to established legal principles. All economic activities of a business are effected by governing laws e.g. all transactions of purchase and sale are effected by contract act, transactions of Bills of exchange and Banking transactions are effected by negotiable instrument Act. Entry sometimes is itself created/governed by laws e.g. partnerships are governed by partnership Act, Companies by Companies Act, Banking Companies by Banking Regulation Act etc. governing laws provide strict compliance with stated provisions relating to book keeping, accounting and except the reporting be done in laid-down manner. However in current scenario the accounting is not just effecting law. But laws are also been effected by accounting. 4. Accounting and Management: Obviously the environment of accounting is one of business while accounting provides useful services to individual and fraternal, religious, government, and educational organizations, its principal service deals with the business enterprise. Kester has stated that accounting is primarily and basically a service tool of management. The growth and development of accounting is closely parallel to that of business enterprise. With the growth of the large corporation come a corresponding growth of accounting services. Consequently the recognition of the public aspects of corporate administration brought a realization that accounting responsibilities transcend service to the owners and the management of corporations. Today accounting while serving the business enterprise, serves society. 5. Accounting and Mathematics: Double entry book-keeping is based on an algebraic equation i.e. liabilities + capital = asset. Arithmetical and algebraic calculations are required for making accounting computations. Therefore knowledge of arithmetic and algebra is necessary for accounting proficiency. Examples are calculation of interest, lease rent, depreciation creation of sinking fund etc. with the increasing use of computer accounting, knowledge of mathematics has been more essential. Further, statistical models are used for constructing various accounting models for the use of management. 1.7.7 End-users of Accounting Information Accounting information is used by various persons. In addition to proprietors, such information is used by creditors, Government, financial institutions and others. 1. Proprietor: Proprietor is the main user of accounting, through accounts he ascertains operating result of his business. Further he knows his financial position. He uses accounting information to know amounts due to others and due from others. 2. Management: In large business organization, ownership and management are separate functions management has to plan, control and execute. Accounting information is used for fulfilling various management functions. Accounting data is useful in decision making at various stages. 3. Suppliers of Goods and Services: Persons who supply goods and services to business on credit are interested in knowing liquidity position of the business. They have to ensure repayment capacity of the business. They use accounting information for this purpose. 4. Banks and Financial Institutions: Banks and other financial Institutions who provide loan to the business are interested to know credit worthiness of the business. At the time of granting loan they are keen to know past performance of the firm, study profit and loss Account and Balance Sheet of the firm of previous years to know capacity of the firm to repay interest and principal amount. 5. Prospective Investors: Persons who are interested to make investments in some Company, may study annual reports of the Company before making final decision of investments. They may select the company in which investment is to be made by comparing past performance of these companies. 6. Government: Government uses accounting information for levying various taxes. In the absence of accounting data it is difficult to assess proper tax. 7. Customers: Customers who place orders and are dependent on a specific business organization for their supplies have to ensure the capability of the firm to execute the orders. This can be done by studying accounts of that business organisation. 22  8. Employees: Employees use accounting information for various purposes. They can assess their salary increase and bonus by studying profitability of the business. If business is constantly incurring Losses, they may decide to leave the organization and if business is constantly earning they may be more settled and expect carrier promotion in some enterprise. 9. Regulatory Agencies: Various regulatory agencies such as ROC, REI, IRDA, SEBI, require information to be filed with them under law. By examining these accounting information they ensure that concerned companies are following the rules and regulations. 10. Courts: In case of disputs regarding indebtedness insolvency etc. Courts use accounting information and other related data as evidence. 11. Researchers and statisticians: Research scholars who undertake research on any aspect of business activity, may use accounting information for the purpose of analysis. Accounting reports of various companies and of various years may be compared for this purpose. 1.8 RELEVANT COST A cost may be said to be relevant, if it influences the decisions of the management. It is influenced by the decision to be taken or the decision under the consideration of management. It is a cost whose magnitude will be affected by a decisions being made. While taking decisions, the management should consider only future costs and revenues that will differs under each alternative. Management is concerned with things it can fetch. The following are the two main characteristics of relevant costs. (i) Different Alternatives Relevant cost differ in amount among two alternatives. In case some alternatives do not differ among themselves, they are not considered relevant. So only those costs that differ among decision alternatives are relevant to a decision. (ii) Expected Future Costs Relevant costs are future costs as they are expected to occur during the period covered by the decision. Decisions are must based on the future expectations of cost and revenue. Selection of one alternative over another does not affect the past cash flows. Expected future costs are predicted from the available historical cost data. Historical cost may be irrelevant for decisions making as they represent the cost that have already been incurred. 1.9 STATEMENT OF COST 1.9.1Meaning of Cost Sheet A Cost Sheet is a statement showing various components of total cost of output of a particular product or service produced during a particular period. It may be prepared on actual basis or estimated basis. 1.9.2 Importance of Cost sheet The following are the advantages: 1. It discloses the cost per unit as well as total cost of output. 2. It discloses the various elements of cost which to make up total cost. 3. By fixing selling price in advance it facilitates preparation of tender price. 4. It facilitates comparison of total cost with previous year’s cost and standard cost and thereby help management in locating inefficiency in production. 5. It facilitates calculation of sales price when profit is taken as a fixed percentage on cost. 6. It helps an undertaking to submit quotation for an order with reasonable degree of accuracy. 7. It guides the management in formulating proper production policy. 8. Cost reduction can be made by analyzing and calculating the percentage of different overheads on total cost. Proforma of Cost Sheet Cost Sheet for the period ……………….. Total Cost ` Cost per Unit (`) 23  Direct Material xxx Add: Direct labour xxx Add: Direct Expenses xxx Prime Cost xxx Add: Factory overheads Factory Rent Xxx Foreman salary and wages xxx Drawing office salary xxx Consumables stores xxx Wages of watchman xxx Motive power xxx Factory Cost xxx Add: Administrative overhead Office Rent xxx Depreciation office building xxx Manager or director salary xxx Counting house salary xxx Audit fees xxx Cost of production xxx Add: Selling and distribution overhead Sales office expenses xxx Sales man salary xxx Showroom expenses xxx Advertisement charges xxx Warehouse Rent xxx Delivery van expenses xxx Rent of godown xxx Cost of sales xxx Total cost xxx Profit/Loss xxx Sales xxx Illustration 1.8 Prepare a cost sheet form the following data relating to A ltd for the year ending 31.3.2015. ` Raw material purchased 35,000 Direct wages 32,000 Factory wages 8,000 Power, fuel and haulage 12,000 Carriage inward 2,700 Carriage outward 3,000 Drawing expenses 2,200 Printing and stationery 3,300 Factory manager salary 6,000 Office manager salary 6,400 Factory Rent 1,600 Warehouse expenses 4,200 Office rent and taxes 3,800 Traveler’s salary 5,200 Depreciation on plant 2,500 Income tax 3,200 Advertisement 6,200 Donation 11,000 Profit 20% on cost of Sales. 24 Solution: Cost Sheet For the year ending 31.3.2015 Details (`) Total (`) Raw material purchased 35,000 Add: Carriage inward 2,700 37,700 Add: Direct wages 32,000 Add: Direct Expenses Prime Cost 69,700 Add: Factory overheads Factory wages 8,000 Power, fuel and haulage 12,000 Draining expenses 2,200 Factory manager’s salary 6,000 Factory Rent 1,600 Depreciation on plant 2,500 32,300 Factory Cost 1,02,000 Add: Administration overheads Printing and stationery 3,300 Office manager salary 6,400 Office Rent and taxes 3,800 13,500 Cost of Production 1,15,500 Add: Selling and distribution overhead Carriage outward 3,000 Warehouse expenses 4,200 Traveler’s Salary 5,200 Advertisement 6,200 18,600 Total Cost or Profit 1,34,100  20  26,820   34,100   100  Sales 1,60,920 Specimen of Cost Sheet with stock Treatment Cost Sheet of __________ For the year ___________ 25  Total Cost ` Cost per Unit (`) Opening stock of Raw material xxx Add: Purchase of raw material xxx Less: Closing stock of raw material xxx Value of raw material consumed xxx Add: Direct Labour xxx Add: Direct Expenses xxx Prime cost xxx Add: Factory overhead xxx Add: Opening work-in-progress xxx Less: Closing work-in-progress xxx Factory Cost xxx Add: Administrative overhead xxx Add: Opening stock of finished goods xxx Less: Closing stock of finished goods xxx Cost of production xxx Add: Selling and distribution overhead xxx Total Cost or Cost of Sales xxx Profit/Loss xxx Sales xxx Illustration 1.9 ` Opening Stock of Raw material 18,000 Closing Stock of Raw material 20, 000 Opening work-in-progress 12, 000 Closing work-in-progress 10,000 Opening stock of Finished goods 25,000 Closing Stock of finished goods 16,000 Purchase of Raw materials 1,35, 000 Productive wages 70,000 Factory overhead 50,000 Administrative overhead 36,000 Selling and distribution overhead 46,000 If profit is 25% on cost find profit with cost sheet. Solution: Cost Sheet Total Cost ` Opening stock of Raw material 18,000 Add: Purchase of raw material 1,35,000 1,53,000 Less: Closing stock of raw material 20,000 1,33,000 Value of raw material consumed Add: Direct Labour/productive wages 70,000 Prime cost 2,03,000 Add: Factory overhead 50,000 Add: Opening work-in-progress 12,000 62,000 Less: Closing work-in-progress 10,500 51,500 Factory Cost 2,54,500 Add: Administrative overhead 36,000 26  Add: Opening stock of finished goods 25,000 61,000 Less: Closing stock of finished goods 16,000 45,000 Cost of production 2,99,500 Add: Selling and distribution overhead 46,000 Total Cost 3,45,500 Profit (1/43,45,500) 86,375 Sales 4,31,875 Illustration 1.10 From the following data you are required to prepare the Statement of profit under marginal costing system Production units 10,000 Sales units 8,000 Raw material consumed (`) 50,000 Direct wages (`) 30,000 Factory Overheads: Variable overheads (`) 20,000 Fixed overheads (`) 20,000 Selling price (`) 15 Solution: Profitability Statement under marginal Costing Particulars ` Raw material consumed 50,000 Add: Direct wages 30,000 Add: Variable Factory overheads 20,000 1,00,000 Total variable Cost Less: Value of closing stock (1,00,00/10,0002,000) 20,000 Variable cost of goods Sold 80,000 Sales (8,00015) 1,20,000 Contribution 40,000 Less: Fixed overheads 20,000 Profit 20,000 1.10 SUMMARY  The make or buy decision is made to determine the alternatives which is most desirable.  Differential Cost Analysis is also used when a business is confronted with the possibility of a Temporary shutdown.  A key factor is one which generally limits the profit, output or sales.  Book-keeping as a process of recording business events in a systematic manner.  Contract costing is a variant of job costing. 1.11 KEY TERMS  Buy decision: the make or buy decision is made to determine the alternative which is most desirable.  Cost sheet: A cost sheet is a statement showing various components of total cost of output of a particular product or service produced during a particular period.  Multiple costing: This method is followed where the final product consists of a number of separate parts.  Single Costing: This method is applied where production is uniform and consists of only a single product.  Process Costing: It is a method where costs are collected and accumulated according to department or process.  Cost Accounting: Cost Accounting is the process of accounting for costs. 27   Financial Accounting: Financial Accounting aims at recording business transaction systematically to ascertain profit or loss and financial position of the business.  Management Accounting: Management Accounting is provide information to the management for decision making. 1.12 QUESTIONS AND EXERCISES 1. Explain the meaning of ‘relevant costs’. What are the characteristics of such costs ? 2. Explain the steps that are to be taken for rational decision-making. 3. What factors would you take into consideration in closing or suspending the business activity 4. A company has to decide whether to ‘Make or Buy’. Through differential cost analysis, how you will ascertain the net difference between the two alternatives so as to assist the management in their decision-making? Use hypothetical figures to illustrate. 5. ‘The role of managerial accountant in deciding among alternative courses of action is crucial’. Examine this statement with special reference to special order acceptance. 6. Cost benefit analysis is needed for resolving many managerial problems. List the various items of cost and benefit that will quantify in respect of managerial decisions concerning (a) Change versus status quo. (b) Retain or replace, (c) Shut down or continue. 7. Define (i) Differential cost, and (ii) Marginal cost. 8. Briefly explain the relevant considerations involved in respect of : (a) Make or Buy;