SCHOOL OF MANAGEMENT STUDIES

DEPARTMENT OF MBA
STRATEGIC COST AND MANAGEMENT
ACCOUNTING(22FM1MB03)
Unit I
Introduction to Cost and Management
Accounting, Cost Analysis and Control
II YEAR I SEM (2023-24)

GNITC - MBA 1
• Syllabus:
• Unit – I: Introduction to Cost and Management
Accounting, Cost Analysis and Control: Management
Accounting Vs. Cost Accounting Vs. Financial Accounting,
Role of Accounting Information Planning and Control,
Strategic Decisions and the Management Accountant.
Enhancing the value of Management Accounting Systems.
Cost Concepts and Managerial use of Classification of Costs,
Cost Analysis and Control: Direct and Indirect Expenses,
Allocation and Apportionment of Overheads, Calculation of
Machine Hour rate.
• Course Objective:
• To provide understanding of various aspects in strategic cost
and management accounting.
• Introduction to Cost and Management Accounting,
Cost Analysis and Control:
• Cost and management accounting is a branch of accounting
that focuses on providing crucial financial information and
analysis to help businesses make informed decisions, control
costs, and achieve their strategic objectives. Cost analysis
and control are integral components of cost and management
accounting, aimed at optimizing the allocation of resources
and improving overall organizational performance.
• Cost and Management Accounting:
Cost and management accounting is concerned with the following key
aspects:
 Cost Determination:
 Budgeting and Planning:
 Performance Measurement:
 Product and Service Costing:
 Cost Control:
 Decision Support:
 Risk Management:
 Cost Analysis and Control:
Cost analysis and control are subsets of cost and management accounting:
 Cost Analysis:
 Variance Analysis:
 Cost-Volume-Profit (CVP) Analysis:
 Contribution Margin Analysis:
 Activity-Based Costing (ABC):
 Cost Control:
 Standard Costing:
 Cost Reduction Initiatives:
 Process Improvement:
 Benchmarking:
 Management Accounting Vs. Cost Accounting Vs. Financial Accounting:
Particulars Financial Accounting: Cost Accounting: Management Accounting:
Purpose: Financial accounting focuses on Cost accounting is primarily Management accounting is broader
providing external stakeholders, such as focused on internal than cost accounting and
investors, creditors, regulators, and the management. Its primary goal is encompasses the provision of
general public, with accurate and to track and allocate costs to financial and non-financial
standardized financial information various products, services, information to aid internal
about a company's performance. departments, or projects within decision-making, planning, and
an organization. control.
Reporting: It involves preparing financial It involves creating cost reports, It includes various reports and
statements, including the income cost allocation methods, and analyses, such as budgeting,
statement, balance sheet, and cash flow cost control systems to help forecasting, variance analysis,
statement, which summarize a management make informed performance measurement, and
company's financial results and position decisions about pricing, strategic planning, to help
over a specific period, typically for one production, budgeting, and cost managers make informed
fiscal year. reduction. decisions.
Users: External stakeholders, including Internal managers, particularly Internal managers at all levels of
investors, creditors, analysts, those responsible for an organization, including top
government agencies, and the public. controlling costs and improving executives, middle managers, and
operational efficiency. operational staff.

Other Compliance: Financial accounting must Flexibility: Cost accounting Forward-Looking: Management
things: adhere to Generally Accepted methods can vary widely accounting often focuses on
Accounting Principles (GAAP) or among organizations and can be predicting future trends and
International Financial Reporting tailored to suit specific business outcomes, providing insights into
Standards (IFRS) to ensure consistency needs and objectives. long-term strategies and resource
and transparency in financial reporting. allocation.
Role of Accounting Information Planning and Control:
Accounting information plays a crucial role in the planning and control processes of an organization.
Here's how accounting information contributes to these functions:
1. Planning:
 Strategic Planning: Accounting information helps in the formulation of long-term strategic plans.
It provides historical financial data and trend analysis, which can be used to set financial goals,
identify growth opportunities, and assess the feasibility of strategic initiatives.
 Budgeting: Accounting information is essential for creating budgets, which are detailed financial
plans outlining expected revenues, expenses, and resource allocation for a specific period.
Budgets serve as roadmaps for achieving financial objectives.
 Resource Allocation: Accounting information helps in allocating resources efficiently. It provides
insights into past spending patterns and helps organizations make informed decisions about how
to allocate funds and resources among different projects or departments.
 Risk Assessment: Through financial analysis, accounting information aids in identifying and
assessing financial risks. This enables organizations to develop risk management strategies and
contingencies.
2. Control:
 Performance Evaluation: Accounting information is used to evaluate the performance of
various organizational units, projects, and individuals. By comparing actual results with
budgeted or expected results, organizations can identify variances and take corrective
actions as needed.
 Cost Control: Accounting information, particularly cost accounting data, is critical for
monitoring and controlling costs within an organization. Managers can analyze cost
structures and identify areas where cost reductions or process improvements are necessary.
 Financial Reporting: Regular financial reporting ensures transparency and accountability
within an organization. It helps stakeholders, including management, shareholders, and
regulators, to monitor financial performance and compliance with financial policies and
regulations.
 Decision-Making: Accounting information provides the basis for informed decision-
making. Managers use financial data to assess the financial implications of various options
and choose the most financially viable course of action.
 Compliance: Accounting information helps organizations ensure compliance with
accounting standards, tax regulations, and other financial reporting requirements. Failure to
comply can lead to legal and financial consequences.

GNITC - EEE 7
Strategic Decisions and the Management Accountant:
Management accountants play a significant role in supporting strategic decisions within an
organization. They provide valuable financial and non-financial information that helps top management
make informed choices to achieve long-term goals. Here are ways management accountants contribute
to strategic decision-making:
1. Financial Analysis: Management accountants analyze financial data, such as income statements,
balance sheets, and cash flow statements, to assess the financial health of the organization. They
identify trends, assess liquidity, profitability, and solvency, and highlight areas that need attention or
improvement.
2. Budgeting and Forecasting: Management accountants are responsible for creating budgets and
financial forecasts. These tools provide a roadmap for achieving strategic goals, allowing
organizations to allocate resources effectively and monitor performance against planned targets.
3. Cost Analysis: Management accountants conduct detailed cost analysis, including product and
service costing. This information helps in pricing decisions, cost reduction strategies, and assessing
the profitability of different business units or product lines.
4. Performance Measurement: They develop key performance indicators (KPIs) and performance
dashboards that track the progress of strategic initiatives. These metrics enable management to
identify areas where goals are not being met and make necessary adjustments.
5. Capital Budgeting: Management accountants assist in capital budgeting decisions by evaluating the
financial feasibility of long-term investments and projects. They use techniques like net present
value (NPV) and internal rate of return (IRR) to assess the potential returns and risks associated
with investments.
Strategic Decisions and the Management Accountant:
6.Risk Management: They identify and assess financial risks associated with strategic
decisions. By conducting risk analysis, management accountants help management
understand the potential impact of uncertainties and develop risk mitigation strategies.
7.Scenario Analysis: Management accountants create financial models that simulate
different scenarios to assess the potential outcomes of various strategic choices. This
allows management to make more informed decisions considering different possible
futures.
8.Resource Allocation: They help in allocating resources effectively to support strategic
initiatives. This involves determining the allocation of funds, manpower, and other
resources to maximize the chances of successful strategy implementation.
9. Strategic Cost Management: Management accountants work on cost management
strategies that align with the organization's long-term objectives. They help identify cost
drivers and find ways to control and reduce costs while maintaining or enhancing value.
10.Sustainability and ESG Reporting: With the increasing focus on environmental,
social, and governance (ESG) factors, management accountants may play a role in
assessing and reporting on sustainability initiatives that align with the organization's
strategic goals.

GNITC - EEE 9
Enhancing the value of Management Accounting Systems:
Enhancing the value of management accounting systems is essential for organizations to improve
decision-making, optimize performance, and achieve their strategic goals. Here are several strategies to
enhance the value of these systems:
1. Align with Strategic Objectives:
 Ensure that your management accounting system is aligned with the organization's strategic
objectives. It should provide information and analysis that directly supports the achievement of
these goals.
2. Implement Advanced Technology:
 Invest in modern accounting software and data analytics tools. Automation, data visualization, and
artificial intelligence can help streamline processes, improve data accuracy, and provide real-time
insights.
3. Integrated Data Sources:
 Integrate data from various sources within the organization, such as financial data, operational
data, customer data, and external market data. A comprehensive dataset allows for a more holistic
view of performance.
4. Data Quality and Accuracy:
 Ensure data integrity and accuracy. Regularly audit and validate data to minimize errors and
discrepancies, which can lead to flawed decision-making.
5. Customized Reporting:
 Tailor management reports to the specific needs of different departments and levels of
management. Provide relevant information in a format that is easy to understand and act upon.
Enhancing the value of Management Accounting Systems:
1. Scenario Planning:
 Develop scenario analysis capabilities to evaluate the potential outcomes of different strategic decisions. This
allows for better risk assessment and contingency planning.
2. Key Performance Indicators (KPIs):
 Define and track KPIs that are directly linked to strategic objectives. Regularly update and communicate these
KPIs throughout the organization to keep everyone aligned with strategic goals.
3. Continuous Improvement:
 Regularly review and improve the management accounting system. Seek feedback from users and adjust the
system to meet evolving business needs and changing market conditions.
4. Training and Skill Development:
 Invest in training and skill development for finance and accounting staff. Ensure that they have the expertise to
use the system effectively and provide valuable insights.
5. Communication:
 Foster a culture of communication and collaboration between finance/accounting teams and other departments.
Ensure that finance professionals understand the operational aspects of the business.
6. Ethical and Legal Compliance:
 Ensure that the management accounting system complies with ethical standards and legal regulations. Data
privacy, security, and compliance are crucial aspects of a robust system.
7. Cost-Benefit Analysis:
 Continuously assess the cost-effectiveness of the management accounting system. The value it provides should
outweigh the costs of maintaining and operating it.
8. Benchmarking:
GNITC - EEE 11
 Compare your organization's performance and financial metrics with industry benchmarks. This can help identify
Cost Concepts:
1. Fixed Costs:
 Definition: Fixed costs are expenses that do not change with changes in production or sales levels.
They remain constant within a specific time period.
 Managerial Use: Managers can rely on fixed costs when making short-term decisions. Since these
costs do not fluctuate, they are predictable and can help in budgeting and cost control. Managers often
aim to cover fixed costs with their sales revenue to achieve a break-even point.
2. Variable Costs:
 Definition: Variable costs are expenses that vary directly with changes in production or sales. As
production increases, variable costs increase, and vice versa.
 Managerial Use: Managers consider variable costs when assessing the cost structure of a product or
service. They are important for pricing decisions and calculating contribution margins (sales revenue
minus variable costs).
3. Total Costs:
 Definition: Total costs represent the sum of both fixed and variable costs incurred by a business.
 Managerial Use: Total costs are essential for analyzing the overall financial impact of decisions.
Managers use them to calculate profitability, break-even points, and to assess the financial feasibility
of various initiatives.
4. Marginal Costs:
 Definition: Marginal costs are the additional costs incurred when producing one more unit of a
product or providing one more unit of service.
 Managerial Use: Managers use marginal costs to make decisions about production levels. If marginal
Managerial Use of Cost Classification:
1. Cost Behavior Analysis:
 Managers classify costs into fixed and variable categories to understand how costs behave in
response to changes in production, sales, or other factors. This information helps in forecasting,
budgeting, and pricing decisions.
2. Break-Even Analysis:
 By classifying costs and determining the contribution margin (selling price minus variable costs),
managers can calculate the break-even point—the level of sales at which the company covers all
its costs. This helps assess the risk associated with different business strategies.
3. Cost Allocation:
 In situations where multiple products or services are produced, managers allocate indirect costs
(e.g., overhead) to different products or services based on cost drivers or other allocation methods.
This helps in pricing decisions and assessing the profitability of individual product lines.
4. Performance Evaluation:
 Managers use cost classifications to evaluate the performance of different business segments,
departments, or product lines. By comparing the actual costs to budgeted or standard costs, they
can identify areas where cost control measures are needed.
5. Decision-Making:
 Cost classifications are instrumental in various decision-making processes, such as make-or-buy
decisions, pricing decisions, product discontinuation decisions, and resource allocation.
Understanding the cost structure is essential for assessing the financial implications of these
choices.
Cost Analysis:
Cost analysis involves the examination and evaluation of costs to gain a deeper understanding of how
resources are utilized and how expenses impact the organization. Key aspects of cost analysis include:
1. Variance Analysis:
• Variances are the differences between actual costs and budgeted or standard costs. Variance
analysis helps identify areas where costs deviate from expectations, allowing management to take corrective
action.
2. Cost-Volume-Profit (CVP) Analysis:
• CVP analysis explores the relationship between costs, volume of production or sales, and profits.
It helps in determining the breakeven point, assessing the impact of pricing changes, and evaluating
different production levels.
3. Contribution Margin Analysis:
• Contribution margin is the difference between total revenue and variable costs. This metric helps
assess the profitability of individual products, services, or business segments.
4. Activity-Based Costing (ABC):
• ABC assigns costs to specific activities and processes within an organization. It provides a more
accurate view of cost allocation and helps identify activities that drive costs.
5. Cost Behavior Analysis:
• Understanding how costs behave (fixed, variable, semi-variable) is crucial. It allows
organizations to forecast expenses, optimize resource allocation, and make pricing decisions.
6. Cost Allocation:
• In situations where indirect costs (e.g., overhead) need to be allocated to different products or
Cost Control:
Cost control focuses on managing and reducing costs to improve efficiency and profitability. Key aspects of
cost control include:
1. Budgeting and Forecasting: Creating budgets and financial forecasts helps set targets and
monitor actual costs against planned expenses. It facilitates cost control by identifying deviations early.
2. Standard Costing: Standard costing involves establishing predetermined cost standards for
materials, labor, and overhead. Deviations from these standards can be monitored and addressed promptly.
3. Cost Reduction Initiatives: Identifying waste, inefficiencies, and opportunities for cost savings
is a fundamental aspect of cost control. Organizations continually seek ways to reduce expenses without
compromising quality.
4. Process Improvement: Analyzing costs often leads to process improvements. Streamlining
operations, eliminating redundancies, and optimizing workflows can result in cost savings.
5. Benchmarking: Benchmarking involves comparing an organization's costs and performance
with industry standards or competitors. It helps identify areas where improvements are needed.
6. Inventory Control: Managing inventory levels efficiently can reduce holding costs and ensure
that working capital is used effectively.
7. Resource Allocation: Proper allocation of resources, such as labor, equipment, and materials, is
essential for cost control. Ensuring that resources are used optimally minimizes waste.
Direct Expenses:
1. Definition: Direct expenses are costs that can be traced directly and specifically to a
particular product, project, department, or cost center. They are incurred as a result of producing a
specific product or providing a specific service.
2. Examples of Direct Expenses:
• Direct Materials: These are raw materials or components directly used in the
production of a product. For example, the cost of wood in manufacturing furniture.
• Direct Labor: Wages and salaries paid to employees directly involved in the
production or service delivery. For instance, assembly line workers in a manufacturing plant.
• Direct Supplies: Supplies or materials consumed in a specific project or department,
such as paint used for a specific painting job.
3. Characteristics:
• Direct expenses are variable in nature, meaning they vary with the level of production
or the specific project being undertaken.
• They can be easily attributed to a specific product, project, or cost center.
• Direct expenses are considered part of the cost of goods sold (COGS) for
manufacturing companies.
Indirect Expenses:
1. Definition: Indirect expenses, also known as overhead expenses, are costs that cannot be
directly traced to a specific product, project, or department. Instead, they are incurred to support the
overall operations of the organization.
2. Examples of Indirect Expenses:
• Rent: The cost of renting a facility or office space is an indirect expense because it
benefits the entire organization, not just one specific project or product.
• Utilities: Expenses like electricity, water, and heating are typically considered indirect
because they are incurred to maintain the overall business operations.
• Administrative Salaries: Salaries of employees in administrative roles, such as HR,
finance, and management, are indirect expenses as they support various departments.
• Depreciation: The allocation of the cost of assets (e.g., machinery, buildings) over their
useful life is an indirect expense, as it spreads the cost across the organization.
3. Characteristics:
• Indirect expenses are typically fixed or semi-variable in nature, meaning they do not
fluctuate directly with production levels.
• They are allocated to different products, projects, or cost centers using allocation methods
like overhead rates.
• Indirect expenses are usually considered operating expenses (OPEX) on the income
statement.
GNITC - EEE 17
Allocation of Overheads:
Allocation involves assigning a portion of indirect costs to specific cost centers, projects, products, or
services based on a reasonable and systematic method. The goal is to distribute these costs in a way that
reflects the actual consumption or usage by each cost center or activity. Common methods of allocation
include:
• Direct Labor Hours: Overheads are allocated based on the number of labor hours worked in
each cost center or on each project. This method is suitable when labor is a significant driver of indirect
costs.
• Machine Hours: Overheads are allocated based on the number of hours machines are used in
different areas of the organization. This method is relevant for manufacturing or production-oriented
businesses.
• Square Footage: Overheads are allocated based on the square footage of space occupied by each
cost center or department. This method is often used for allocating rent, utilities, and facility maintenance
costs.
• Production Volume: Overheads are allocated based on the quantity of units produced or the
number of services rendered by each cost center or product line. This method is common in manufacturing
and service industries.
• Number of Employees: Overheads are allocated based on the number of employees in each
department or cost center. This method is useful when employee-related costs are a significant portion of
indirect expenses.
Apportionment of Overheads:
Apportionment involves distributing indirect costs that cannot be traced directly to specific cost centers or
activities among multiple departments or cost centers. This is done based on a fair and equitable basis.
Common methods of apportionment include:
• Area-Based Apportionment: Costs like rent, security, and housekeeping are apportioned
based on the proportion of floor space occupied by each department.
• Time-Based Apportionment: Costs related to shared resources, such as utilities and office
supplies, can be apportioned based on the time each department or cost center uses those resources.
• Revenue-Based Apportionment: Indirect costs, like administrative salaries or advertising
expenses, can be apportioned based on the revenue generated by each department or product line.
• Number of Transactions: If transaction volume varies across departments, costs like bank
charges or postage can be apportioned based on the number of transactions processed by each department.
Example: Suppose a company has a total overhead cost of $100,000, which includes rent, utilities, and
administrative salaries. They have three departments: Production, Sales, and Administration. To allocate
and apportion these costs:
• Rent ($30,000) may be allocated based on square footage, with Production using 60%, Sales
using 30%, and Administration using 10% of the space.
• Utilities ($40,000) may be apportioned based on the number of employees in each department,
as it benefits all departments.
• Administrative salaries ($30,000) could be apportioned based on the revenue generated by each
department.
GNITC - EEE 19
Calculation of Machine Hour rate:
The machine hour rate is a method used to allocate and calculate the overhead costs associated with operating and
maintaining a machine or a group of machines in a manufacturing or production setting. This rate helps businesses
determine the cost of using machinery per hour, which is essential for pricing products, project cost estimation, and
internal cost control. Here's how to calculate the machine hour rate:
Machine Hour Rate (MHR) = (Total Annual Machine-Related Costs) / (Total Annual Machine Hours)
Follow these steps to calculate the machine hour rate:
1. Determine Total Annual Machine-Related Costs:
Start by identifying all the direct and indirect costs associated with the machine or group of machines. These costs may
include:
• Direct costs:
• Depreciation: The annual depreciation expense of the machine, calculated based on its purchase price, useful
life, and salvage value.
• Maintenance and repairs: Costs incurred for routine maintenance, repairs, and servicing of the machine.
• Power and electricity: The cost of electricity required to operate the machine.
• Consumable supplies: Costs of supplies like lubricants, coolant, and other materials necessary for machine
operation.
• Indirect costs:
• Rent or lease expenses for the space housing the machine.
• Insurance premiums for the machine.
• Property taxes or other applicable taxes.
• Indirect labor costs (e.g., wages of machine operators and maintenance personnel).
• Any other overhead costs associated with the machine.
Follow these steps to calculate the machine hour rate:
2. Determine Total Annual Machine Hours:
Calculate the total number of hours that the machine or group of machines is expected to
operate over the course of a year. This figure should be based on historical usage data or
estimates.
3. Calculate the Machine Hour Rate:
Divide the total annual machine-related costs (step 1) by the total annual machine hours
(step 2) to obtain the machine hour rate:
Machine Hour Rate (MHR) = Total Annual Machine-Related Costs / Total Annual Machine
Hours
For example, if the total annual machine-related costs are $100,000, and the total annual
machine hours are 5,000 hours, the machine hour rate would be:
MHR = $100,000 / 5,000 hours = $20 per machine hour
This calculated machine hour rate represents the cost incurred for using the machine for one
hour of operation. It can be used to allocate machine-related costs to specific products or
projects based on the number of machine hours they require. Additionally, it helps in setting
competitive pricing for products and services while ensuring that the costs associated with
machine usage are covered.

GNITC - EEE 21