INTRODUCTION TO

MANAGEMENT ACCOUNTING

GROUP-1
MODULE -1 TEAM MEMBERS
Aparna
Ashik matthew
Aswathy pp
Chinju M
Shahin ahammed
Siva shankar s
Suragi
Vineeth
DEFINITION
According to The Charted Institute Of Management
Accounting(CIMA), London “ Management Accounting is the
application of professional knowledge and skill in the preparation of
accounting information in such a way as to assist management in the
formation of policies and in the planning and control of the
operations of the undertaking”
NATURE OF MANAGEMENT
ACCOUNTING
❑ Helpful In Decision Making
❑ Provides data, not the decision
❑ Selective in nature
❑ Assist in achieving objectives
❑ Related to future
❑ Increase in Efficiency
❑ Use of special Techniques
SCOPE OF MANAGEMENT ACCOUNTING
❑ Financial accounting
❑ Cost accounting
❑ Budgeting and forecasting
❑ Revaluation accounting
❑ Cost control procedures
❑ Statistical methods
❑ Inventory control
❑ Reporting
❑ Taxation
❑ Internal audit
LIMITATIONS OF FINANCIAL
ACCOUNTING
❑ Shows Only Overall Performance
❑ Historical In Nature
❑ No Performance Appraisal
❑ No Meterial Control System
❑ No Labour Cost Contol
❑ No Proper Classification Of Cost
❑ No Analysis Of Losses
❑ Inadequate Information For Fixing Of Prices
❑ No Cost Comparison
❑ Fail To Supply Useful Data To Management
NATURE OF COST ACCOUNTING
❑ 1. Cost accounting is a branch of knowledge
Though considered as a branch of financial accounts, cost
accounting is one of the important branch of knowledge, i.e., a
discipline by itself.

❑ 2. Cost accounting is a science

Cost accounting is a science as it is a body of systematic
knowledge relating to not only cost accounting but relating to a
wide variety of subjects such as law, office practice and procedure,
data processing, production and material control, etc.
❑ 3. Cost accounting is an art
Cost accounting is an art in the sense it requires the ability
and skill on the part of cost accountant in applying the
principles, methods and techniques of cost accountancy to
various management problems.
❑ 4. Cost accounting is a profession
In recent years cost accounting has become one of the
important professions which has become more challenging.
SCOPE OF COST ACCOUNTING
❑ Cost Ascertainment: The main function of cost accounting is the
ascertainment of cost of product or services rendered. It includes
collection, analysis of expenses and measurement of production at
different stages of manufacture.
It can be done in two ways, namely
▪ Post Costing
▪ Continuous Costing
❑ Control of Costs
❑ Proper matching of cost with revenue
❑ Aids to Management Decision-making
❑ Cost Reduction
ADVANTAGES OF COST ACCOUNTING

❑ Disclosure of activities
❑ Measure , maintain and improve efficiency
❑ Guides future production policies
❑ Increasing profits
❑ Reliable data for comparison
❑ Judgement of financial strength
❑ Helpful to the Government
❑ Helpful to customers
 FA v/s CA
POINT OF FINANCIAL COST
DISTINCTION ACCOUNTING ACCOUNTING
PURPOSE Provides information about Provides information to
the financial position of the the management
business
FORM OF To meet requirements of Kept voluntarily
ACCOUNTS Companies Act and Income
Tax Act
CONTROL No emphasis on the Gives budgetary
importance of control control
 POINT OF FINANCIAL COST
DISTINCTION ACCOUNTING ACCOUNTING
Periodicity of Year end As and when
reporting desired

Reporting of Aggregate manner Broken down into

cost unit basis

Information Monetary Non monetary

information information

Figures Actual facts and Estimates

figures
Terminology of Cost Accounting
❑Cost Concept
❑Cost Object
❑Cost Unit
❑ Cost Centre
❑CostAllocation
 Concept of Cost
❑ Cost is a measurement, in monetary terms, of the amount of
resources used for some purposes. Thus cost represents the
amount of resources given up to obtain a given object or
objective.

❑ In management accounting, cost data which are relevant and

useful in one situation may be quite irrelevant and useless in
another. Developing the data on the required lines can be
designated as “the concept of cost relevancy”.The concept
implies the need of different sets of cost data for different
objectives, purposes and situations.
 Cost Object
• A cost object is an activity, a product or a service, a customer, a
project, a contract, a process or a department of an organization for
which cost measurement is made.

• Eg: cost of a Maruti swift Dzire, cost towards building a hostel,

etc.
 Cost Unit
❑ It is a device for the purpose of breaking up or separating cost
into smaller sub-divisions attributable to products or services.
It is the unit of product, service or time in relation to which
cost may be ascertained.

❑ Eg: Tonne in the case of coal, 1000 bricks in case of bricks

manufacturing, in case of goods transport, the unit will be
tonne – km (the effort involved in carrying one tonne of goods
for a distance of one kilometre.
 Cost Centre
❑ A cost centre is the smallest segment of activity or area or
responsibility for which costs are accumulated. Typically cost
centres are departments, but in some instances, a department
may contain several cost centres.
❑ These cost centres are the departments or sub- departments
of an organisation with reference to which cost is collected
for cost ascertainment and cost control.

❑ Eg: An assembly department may be supervised by one

foreman, it may contain several assembly lines. Sometimes
each assembly line is regarded as a separate cost centre with its
own assistant foreman.
 Cost Accumulation
❑ Cost accumulation refers to a systematic process engaged by
the organizations to collect cost data of its operations by using
an accounting system.

❑ Eg: Job Costing, Process costing

 Cost Allocation
❑ It is the process of charging the entire amount of cost object to cost
unit or cost centre.

❑ Eg: The charges of repairing a photocopier can be exclusively charged

to the photocopying section of the organization.
 CLASSIFICATION OF COST

COST

BEHAVIOR/VA IDENTIFIABILITY TIME AND MANAGERIAL

FUNCTION RIABILITY /TRACEABILITY PERIOD DECISION
 FUNCTION
1. PRODUCTION/MANUFACTURING COST
2. ADMINISTRATION
3. SELLING COST
4. DISTRIBUTION
5. FINANCING COST
 BEHAVIOR OR VARIABILITY
1. FIXED COST

2. VARIABLE COST
3. Semi Variable

4.Step Cost
 Identifiability or Traceability

1. Direct Cost
2. In Direct Cost
 Time and Period
1. Historical Cost
2. Product cost
3. Period Cost
4. Pre Determined Cost
 MANAGERIAL DECISION
1. Sunk Cost
2. Opportunity Cost
3. Differential Cost
4. Inputted cost
5. Out of pocket cost
6. Shut down cost
7. Marginal cost
8. Conversion cost
9. Relevant cost
 ELEMENTS OF COST
▪ Elements of cost are broad heads of cost involved in a
product or service
❑There are three elements of cost.
1)Materials
2)Labour
3)Expenses
1) MATERIAL
The matter or substance from which the product is made
is called material. It may be in raw or processed form.
a)Direct material
Materials that become a part of the finished products.
b) Indirect material
Those materials which cannot conveniently be
identified with a particular product, job or process.
2)Labour
For the conversion of raw materials ino finished goods,
human efforts is required. Such human efforts is called labour.
Remuneration on labour is called wages.
A) Direct labour
Direct labour is directly engaged on production. It
represents the wages paid to workers directly engaged in
converting the raw materials into finished products.

B) Indirect labour
Indirect labour cost includes the wages paid to
cleaners, inspetors, foremen, storekeeper etc.
3) EXPENSES
All cost other than material and labour are termed as expenses.

A)Direct expenses
Those expenses which are neither direct material nor direct labour
but are directly charged to product or job or process.
Examples of direct expense are experimental cost of patents and
royalties, travelling expenses to the site, etc.

B)Indirect expenses
They include all the indirect costs other than indirect material and
indirect labour.
Examples are rent, rates, taxes, etc.
 OVERHEADS
→ Overheads are indirect charges which are the operating
expenses.

→ Overheads cannot be conveniently and directly charged to specific

cost centre or cost unit.

→ According to function overheads can be classified into four ,

namely,
• Factory overhead
• Office overhead
• Selling overhead
• Distribution overhead
 Cost Sheet
Cost sheet is a statement showing the total cost under proper
classification in a logical order. It is prepared for a particular
period of time monthly, quarterly, yearly etc.
Objects of preparation
• Total cost and cost per unit of the product can be ascertained.
• Helps management to fix selling price, on the basis of cost per
unit of the product after charging certain percentage of profit
on cost.
• Helps in presenting the comparative study of current cost
with existing cost per unit.
Continuation..

❑ Corrective measures
❑ Helps management while formulating production policy.
❑ Helpful to submit a price quotation for tenders.
❑ Supply suitable information for management control.
Method of Preparation

❑ Prime cost = Direct materials + Direct labour +

Direct expense.
❑ Work cost / Factory Cost = Prime cost + Factory OH.
❑ Cost of production = Work cost + Administration OH.
❑ Cost of goods sold = Cost of production + Opening
stock – Closing stock.
❑ Total cost / cost of sales = cost of production + Selling
& Distribution OH.
❑ Sales = Cost of sales + Profit.