Allocate costs between cost of goods sold and inventories
for internal and external profit reporting
2. Provide relevant information to help managers make better
3. Provide information for planning, control and performance
Limitations of Financial Accounting

 It does not provide detailed cost information for different
departments, processes, products, jobs, different services and
 It does not set up a proper system of controlling materials,
 It is difficult to know the behaviour of costs in financial
accounting as expenses are not classified into fixed and variable,
direct and indirect costs.
 It does not proved cost data to determine the price of the product
being manufactured or the service being rendered to the
 It does not provide necessary information to management in
taking important decisions about expansion of business,
dropping of a product line, alternative method of production,
buy or make etc.
Financial Accounting Vs. Cost
 A firm manufactures three products A, B and C whose
costs and revenue figures are given below:
product A Product B Product C Total
Materials 8000 7000 8000 23000

Labour 5000 6000 4000 15000
Expenses 3000 4000 3000 10000
Sales 20000 21000 12000 53000
Under Financial Accounting
Materials 23000
Wages 15000
Other expenes 10000
Total cost 48000
Sales 53000
Profit 5000
Under Cost Accounting
product A Product B Product C Total
Material 8000 7000 8000 23000
Wages 5000 6000 4000 15000
Other exp. 3000 4000 3000 10000
Total cost 16000 17000 15000 48000
Sales 20000 21000 12000 53000
Profit(loss) 4000 4000 (3000) 5000
Cost Accountancy
 Chartered Institute of Management Accountants,
London(CIMA) defines Cost Accountancy as “ 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 as well
as presentation of information for the purpose of
managerial decision making”
 Costing may be defined as “the techniques and process of
ascertaining costs”
 Cost may be defined as (i) the amount of expenditure
(actual or notional) incurred on or attributable to a given
thing; or (ii) to ascertain the cost of a given thing.
Assignment -1
 Lily Shultz is a junior majoring in hotel and restaurant
management. She wants to work for a large hotel chain
with the goal of eventually managing a hotel. She is
considering the possibility of taking a course in either
financial accounting or cost management. Before choosing,
however she has asked your to provide her with some
information about the advantages that each course offers.
Prepare a letter advising Lily about the differences and
similarities between financial accounting and cost
management. Describe the advantages each might offer the
manager of a hotel.
Financial Accounting and Cost
Management information system
 Classify each of the following actions as either being associated with the
financial accounting information system(FS) or the cost management
information system:
 Determining the future cash flows of a public corporation
 Filing a corporate income tax report
 Determining the cost of a product
 Issuing annual financial statements
 Reducing costs by improving quality
 Preparing a performance report that compares actual costs with the budgeted
 Preparing financial statement that conform to GAAP
 Determining the cost of a customer
 Using cost information to decide whether to keep of drop or product
 Using future expected earnings to estimate the price of a share of common
 Using cost information to decide whether to make or buy a component.
Information for planning, controlling, continuous
improvement and Decision making
 The cost and management accountant is responsible
for generating financial information required by the
firm for internal and external reporting. This involves
responsibility for collecting, processing and reporting
information that will help management in their :
 Planning
 Controlling
 Continuous improvement
 Decision Making
Flexibility of the cost information
 A member of the board of directors for Stillwater’s Mission
of Hope a non profit shelter for the homeless, asked his
accountant how to value the building used as the shelter. In
other words, what did it cost?
The accountant’s answer was: why do you want to
know? If you need to know the value for insurance
purposes– to determine how much insurance to buy—then
perhaps replacement cost would be the answer. If you are
trying to set a price to sell the building (and build another
elsewhere), then current market value of the real estate
would be the answer. If you need the cost for the balance
sheet, then historical cost is required by GAAP.”
Cost Centre
 Cost centre is a location, person or item of equipment
for which cost may be ascertained and used for the
purpose of cost control. In other words any unit of the
organisation to which cost can be separately attributed
is called a cost centre.
 Types of cost centres:
 Personal cost centre: person or group of persons
 Impersonal cost centre:location or item of equipment,
department, a machine
Production cost centre: production departments
Service cost Centre: maintenance, canteen deptt.

Classification of cost
 On the basis of nature:
 Material
 Labour
 Overhead or expenses
 On the basis of functions:
 Production cost
 Administration cost
 Selling cost
 Distribution cost
 Research and Development cost
 On the basis of behaviour:
 Fixed cost
 Variable cost
 Mixed or Semi-Variable or Semi-Fixed cost

On the basis of Management Decision
 Marginal Cost
 Differential Cost
 Opportunity Cost
 Imputed Cost
 Sunk Cost
 Relevant Cost
 Irrelevant Cost
 Explicit Cost
 Implicit Cost
 Avoidable cost
 Unavoidable Cost
Degree of Traceability
 Direct cost
 Indirect Cost
Association with the product
 Product Cost
 Period Cost

Basic cost terms:
 Following are the descriptions of costs for a small-town café (column
A) and cost types (column B). The cost object is each meal served.
A– Costs B—Cost Types
1. Cost of part-time workers(seasonal a. Variable cost
fluctuations in breakfast and lunch trade) b. Semi-variable
2. Rent of the café building c. Fixed cost
3. Cost of full-time workers
4. Cost of utilities (telephone, gas, electric)
5. Cost of a leased gas-powered grill
6. Cost of cooking ingredients
Marginal Cost
 The increase in the total cost due to the production of
one additional unit in the total output is called the
marginal cost. It comes basically due to the variable
component of the cost of production or sales.
Differential Cost
 It is the difference of total cost between two
alternatives. For the production of a particular product
any one of these two machines can be used:
Machine 1 machine 2 Differential
Fixed Cost 20000 18000 2000
V.Cost(5 x 5000) 25000 25000 0
Total Cost 45000 43000 2000
Opportunity Cost
 It is the value of benefit sacrificed for accepting an
alternative course of action. In other words, it is the
benefit lost when one course of action is selected
against the other course of action. For example, one person
has 100 cubic feet wood, which can sold for Rs.50000, but if furniture is
made of it by spending another Rs.30000 then it can be sold for
Rs.100000. Therefore here Rs.50000 is the opportunity cost (i.e., the
loss of benefit from first alternative if we go for the second alternative.
Imputed Cost
The imputed costs are such hypothetical costs for which
the actual cash outlay does not take place but for the
purpose of decision making it is taken into consideration.
For example interest on owner’s capital, Rent of own
building, notional salary of owner.

Sunk Cost
 The cost which has taken place in the past and
alternative decision will not affect the cost, such costs
are called sunk or historical cost. This type of cost
cannot be changed by any decision in future. Examples
of sunk costs are the book values of existing assets,
such as plant and machineries, inventory etc.
Relevant Cost
A relevant cost is that cost which is relevant for
decision making. It is a future cost which differs under
different options or alternatives.
Fixed, variable and Mixed costs
 Adams Ltd. has five manufacturing departments. The following
operating and cost information for the two most recent months of
activities are given below:
May 2005 June 2005
Units produced 10000 10000
Cost in each department
Deptt.A Rs.10000 Rs.10000
Deptt.B 25000 50000
Deptt.C 35000 45000
Deptt.D 18000 64000
Deptt.E 22000 44000
Identify whether the cost in each department is fixed, variable, or mixed.

Relevant, Differential cost
 Jackson Farm Tools has two options for repairing its
office space, which received extensive wind damage in
a recent storm.
option 1 option 2
Cost 1 Rs.8000 Rs. 8000
Cost 2 6420 2500
Cost 3 16000 0
Cost 4 20400 40800
Total cost 50820 51300

Ill.1. Following data has been extracted from the records of a
manufacturing company, whose operations are varying from month to
level of activity Maximum Minimum
machine hours 800000 300000
Manufacturing exp.(Rs. Lakhs) 52 32
Determine the fixed and variable components of manufacturing
overheads and hence compute the total manufacturing overhead for an
activity level of 500000 machine hours.
ILL.2. B&Co. has recorded the following data in the two most recent
Volume of production(units) 800 1200
Total cost of production (Rs.) 14,600 19,400
What is the best estimate of the firm’s fixed costs per period ?

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