Management Accounting

AN OVERVIEW
CMA Dr R Jayaram – Adjunct Professor IFMR
Scope of Presentation

 Introduction
 Definitions
 Evolution of Cost & Management Accounting
 Basic Cost – Terms & Concepts
 Classification of Costs
 Costing System
 Accounting for Overheads
 Introduction
Why Knowledge of Cost and its Measurement is an absolute Imperative?

s
uirieresent t
q
RReequureemmen
as ur
MMeeas

o mmicic
n o ionn t)
EEccoon at i o f i )
v aaluluaBt eenneefit
EEv s. B
.
ioionn o sst tVVs
i s (C
(Co
ec i s
o f fddec
si s o
BBaasigs??
kinng
mmaaki

n
c i ssioion
DDeeciingg
k
MMaakin
Relationship between finance and
cost accounting
 Profits are measured at multiple levels
– Company level
– Division level
– Product level
– Customer level
 Financial accounting measures profit at macro level or aggregate level while cost
accounting measures profit at micro level or product level
Definitions

 Cost: “ Measurement in monetary terms of resources used for some purpose”.

 Costing: “The process of ascertainment of cost.”
 Cost Accounting: “Process of classifying, identifying and recording of
expenditure with the intention of ascertaining cost of a cost centre/unit for
purpose of cost control.
 Management Accountancy: “It is an integral part of management that is
concerned with identifying, presenting and interpreting information for
formulating strategy, planning and controlling activities, decision-making,
optimizing use of resources and reporting to external and internal stakeholders.
Management Accounting - Facets

 Focus is on analysis of info

 Use of Qualitative as well as Quantitative data
 Thrust is on measuring performance of various facets of business & comparison
with targets to enable management to initiate corrective action
 Equips management for strategy formulation
 Helps in optimizing Resource mobilization & utilization
Evolution

Management Acctng. tools as

Decision support system
21st
Century
Paradigm

Era of ABC

Late 80’s & early 90’s

CVP Analysis & Dir. Costing

Post Second World War Use of QT in acctng.
(1940-1980)

Pdt. Cost &

Era of Industrial Engineering Operating eff.
Early 20th Century (1900-1940)

Financial Accounting Platform

(15th-19th Century)
Concepts

 Cost Object – Anything for which separate measurement of cost is desired

 Cost Centre – “Location, person or an item of equipment in or connected with an
undertaking in relation to which costs are ascertained and used for the purpose of cost
control”.
 Cost Unit – “A unit of product or service in relation to which costs are ascertained”.
 Cost Control – “Evaluating what level of cost is the most ideal for a given activity. Provides
a mechanism to keep costs within predetermined limits”
 Cost Analysis – “ Link costs with its determinants or drivers & also provides tools to
measure reasons of why they are out of sync & fix responsibility there for”
Classification of costs

Basis Cost Types

Material Costs
Nature of Expenses Labour Costs
Other Expenses

•Direct Costs
Traceability to object
• Indirect Costs

Production Costs
Administration Costs
Functional
Selling & Distribution Costs
R&D Costs

Fixed Costs
Behavioural Variable Costs
SVC or SFC Costs

Relevant Costs
Target Costs
Decision - Making Opportunity Costs
Standard Costs
Marginal Costs