Cost Accounting Basics

MAC Set 1
Prof. Sunder Ram Korivi, CMA, PhD
Presentation Structure
• Role of CFO
• Finance Function
• Control Function
• Limitations of Financial Accounting
• Caselet
• Cost Accumulation and Value Chain
Role of CFO
• Stakeholders  Shareholders  Board  CEO
• CEO-CFO-COO
• CFOs transition from the Backroom to the Boardroom
• CFO as a senior-most ally to the CEO
Finance Function
CFO
Treasury (Corporate Finance)
• Future
• External Focus
• Decision & Action
Control (Managerial Accounting)
• Past
• Internal Focus
• Recording & Reporting
Hierarchy of Accounting
• Book Keeper
• Accountant
• Financial Controller
Control Function
• Financial Accounting
• Cost Accounting
• Management Information System (MIS)
• Reporting
• Internal Audit
• External Audit
• Compliance
Responsibilities
• Accounting
• Reporting
• Governance
Limitation of Financial Accounting
• Aggregation
• Backward looking
• Period, not Cost Unit
• Valuation of Inventory
• Processes, Efficiency
• Business Model, Value Creation
• Origins of Management Accounting (ICMA, CIMA - 1919)
• S–C=P
• C+P=S
• Integrated Accounting
Caselet
• APTPL is an SME, supplying electrical equipment to several banks
across a state. The two-man owner-manager team comprises of
business and technical persons. The business partner looks after sales
(tendering), collections and bank loans. The technical partner looks
after production, orders and vendor management. At the end of each
year, the accountant reviews documents, prepares financial
statements, files tax returns, submits loan renewal application to the
bank. Business has been booming, as customer banks expand and
modernize.
• Question: All is well?
Observations
• Financial Accounting dominates
• Cost Accounting is non-existent
• Cost estimation is based on approximation
• Selling price fixation is based on instinct
• Cost control is loose
• Profits are determined ex-post
Cost Accumulation and Value Chain
• Cost + Profit = Sales (1)
• Materials + Labour + Overheads + Profit = Sales (2)
• Materials + [Labour + Overheads] + Profit = Sales (3)
• Materials + Conversion Costs + Profit = Sales (4)
• Materials + [Conversion Costs + Profit] = Sales (5)
• Materials + Value Added = Sales (6)
• Value Chain
Observations
• Sales prices under pressure
• Costs are rising
• Profit squeeze
• Calls for cost controls
• Sales prices to be balanced with volumes
Thank You