Amity School of Business

Amity School of Business

BBA
II SEMESTER
COST AND MANAGEMENT ACCOUNTING

1
 Amity School of Business

MEANING
• Cost Accounting is accounting for costs.
Institute of Cost and Works Accountants of
India, defines cost as “measurement, in
monetary terms, of the amount of resources
used for the purpose of production of goods
or rendering services”.

2
 Amity School of Business

DEFINITION
• According to CIMA, London, Cost
Accountancy is- “the application of costing
and cost accounting principles, methods
and techniques to the science, arts and
practice of cost control. It includes the
presentation of information derived
therefrom for the purpose of managerial
decision making.”

3
 Amity School of Business

SCOPE
Cost accountancy consists of several areas-
• COSTING
Costing is “ the technique and process of
ascertaining costs”. Techniques consists of
principles and rules for determining the
costs for product and services. Its dynamic
& changes with the change of time.

4
 Amity School of Business

• COST CONTROL
Cost accountancy is not only concerned with
i. the ascertainment of costs and
ii. fixing selling prices, but also
iii. furnishing information that enable the
management to control costs of operating
the business.
Cost control is exercised by techniques such
as standard costing, budgetary control and
quality control etc.
5
 Amity School of Business

• COST REDUCTION
Reduction in the unit cost of product without
impairing their quality.
i. In current scenario only those business
will survive that can deliver quality product
and services, at the least cost.
ii. This needs constant research and
development in the area of product design,
production procedures etc.
6
 Functions of Cost Accounting Amity School of Business

 1) To Ascertain the Cost : To ascertain the cost of product or a services rendered and
enable measurement of profit by proper valuation of inventory.
 2) To Analyse Costs : To analysis costs or to classify the expenses under different heads of
accounts viz. material, labour, direct expenses etc.
 3) To Allocate and Apportion the Costs : To allocate or charge the direct expenses or
specific costs such as Raw Material, Labour to particular product, contract or process and
to distribute common expenses to each product, contract or process on a suitable basis.
 4) Cost Reporting : Cost Reporting includes :
a) What to report i.e. what is the nature of information to be presented?
b) Whom to Report i.e. to whom the report is to be addressed.
c) When to Report i.e. when the report is to be presented i.e. Daily weekly monthly yearly etc.
d) How to Report i.e. in what format the report is to be presented.
 5) To Assist the Management : Cost Accounting assist the management in:
a) Indicating to the management any inefficiencies and extent of various forms of waste of Raw
Material, Time, Expenses etc.
b) Fixing of selling price.
c) Controlling Inventory of Raw Material, goods in process, finished goods, spares and
consumables etc.
 Amity School of Business

COST ACCOUNTING
COMPARED
Accounting can be broadly classified into
two categories-
1.Financial accounting
2.Management accounting

8
 Amity School of Business

• Financial accounting is concerned with

recording, classifying and summarizing
financial transactions and preparing
statements relating to the business in
accordance with generally accepted
accounting concepts and conventions.
• It is meant to serve all parties external to
the business such as creditors,
shareholders etc

9
 Management accounting Amity School of Business

• Management accounting is the process of

measuring and reporting information about
economic activity within organizations, for use by
managers in planning, performance evaluation,
and operational control
• Thus, Management accounting is concerned
with generating accounting information for
managers and other employees to assist them in
performing their jobs
 Amity School of Business

• Costing differs from financial accounting in

following respects:
i. Purpose
FA prepares P/L account & B/S for reporting
to outsiders whereas CA provides detailed
cost information to managers for planning
& control
ii. Scope
FA reveals profit & loss of a business as a
whole
11
 Amity School of Business

whereas CA measures the profitability of

each product, job, process, department and
operations.
iii.Analysis of costs
In FA no distinction is made between direct
and indirect costs, fixed and variable costs
and controllable and uncontrollable costs. In
CA such distinctions are made.

12
 Amity School of Business

iv. GAAP vs. flexibility

FA are prepared in accordance with
generally accepted accounting principles
(GAAP). CA is presented in a more
flexible manner.
v. Report frequency
FA is generally published annually whereas
CA supply qtrly, monthly or even weekly
& daily reports needed for planning &
control
13
 Amity School of Business

vi. Legal requirements

FA are kept according to the provisions of
Companies Act and IT Act.
Maintenance of cost accounts is not
compulsory except where cost
accounting record rules have been
framed for its preparation.

14
 Amity School of Business

Cost accounting differs from Management

accounting in following ways-
• Historical vs. predetermined costs
Costs in CA is determined on the basis of
past data whereas in MA predicted or future
cost data is taken for decisions
• Decision making vs. Control
MA aids management in its primary function
of decision making whereas CA focuses on
cost control as its objective
15
 Amity School of Business

• Use of financial accounting

MA uses certain FA techniques like ratio
analysis, fund flow statements etc., whereas
CA do not use such techniques, but only
analyses costs.
• Scope
MA is wider in scope as it employs statistics,
Operations Research techniques and
computers. CA is much less sophisticated &
use of such techniques is limited.
16
 Amity School of Business

COST CONCEPTS
• Cost
Cost means “ the amount of expenditure
incurred on, or attributable to, a given thing”
• Cost object
Cost object can be anything for which a
separate measurement of cost is desired.
Eg: Product, Services, Project

17
 Amity School of Business

• Cost unit
It refers to the unit with which expenditure
may be identified or conveniently allocated.
Eg: per unit of electricity, per 1000 bricks
made

18
 Amity School of Business

• Cost centre
It is a location, person or item of equipment
for which cost may be ascertained and used
for the purpose of cost control. The main
purpose of ascertainment of cost is to
control the cost and fill up the responsibility
of the person who is in charge of the cost
centre.Such unit may consists of a
department or sub-department or equipment
or machinery etc. 19
 Amity School of Business

• Types of cost centers :

• I. Personal Cost Centre : It consists of a
person or group of persons. e.g. machine
operator, salesmen, etc.
• II. Impersonal Cost Centre : It consists of a
location or an item of equipment or group
of these. E.g. Factory, Machine etc.
• III. Operational Cost Centre : This consists
of machines or persons carrying on similar
operations.
 Amity School of Business

• IV. Process Cost Centre : This consists of a

continuous sequence of operation or specific
operations.
• V. Production Cost Centre : This is the centre where
actual production takes place or these include, those
departments that are directly engaged in
manufacturing activity.
• e.g. Cutting, Assembly and Finishing Departments etc.
• VI. Service Cost Centre : This is the Centre which
renders services to production centres..
• e.g. Stores department, Repairs and Maintenance
department, H.R. Department, Purchase Department
etc.
 Amity School of Business

ELEMENTS OF COSTS
• Material
The substance from which product is made,
is known as material. It is of two types-
Direct material- It comprises of integral part
of finished goods & can be assigned to
specific physical unit.
Indirect Material- It is used for purpose
ancillary to the business & cannot be
assigned to specific unit.
22
 Amity School of Business

• Labour
Human efforts required to convert raw
material into finished goods. It is of two
types-
Direct labour- Eg; process labour, direct
wages,
Indirect labour- Eg; Wages of time keeper,
foremen, director’s fees, salaries of
salesmen etc.
23
 Amity School of Business

Indirect Expenses
• Overheads
It includes costs of indirect material, indirect
labour & indirect expenses.
Classified into following categories:
a)Factory expenses- these are incurred in a
factory & are concerned with the running
of a factory.
Eg; Rent, Insurance of factory, power,
lighting
24
 Amity School of Business

b) Office & administrative Expenses

They pertain to the management and
administration of business.
Eg;- Office rent, telephone charges,
depreciation of building
c) Selling & distribution Expenses
It includes expenses incurred for marketing
a commodity & making it available to the
customers.
Eg;- Adv. expenses, warehousing charges 25
 Amity School of Business

CLASSIFICATION OF COSTS
• Fixed, Variable & Semi Variable costs-
The cost which increases or decreases exactly
in the same proportion as the volume of output
produced, are variable costs.
The cost which remains constant irrespective
of change in output, are fixed costs.
The costs which neither vary proportionately
nor remain stationery are semi variable costs.
Eg;- Depreciation, repairs, supervision costs.
26
 Amity School of Business

• Product & period costs

Costs which become part of the cost of the
product and are included in the inventory, are
Product costs. Eg; cost of raw material,
labour etc
Costs which are not associated with
production & are treated as the expense of
the period in which they are incurred, are
called Period costs. Eg: Depreciation, salaries
& commission etc
27
 Amity School of Business

• Relevant & irrelevant costs

Relevant costs are those which would be
changed by the managerial decisions, while
irrelevant costs are those which would not
be affected by the decision.

28