Cost and Managerial

Accounting-I

Chapter 1
Introduction

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 Cost Definition
• Cost:
• refers to resources sacrificed/spent to acquire certain
goods or services
• Cost can also be the expenditure incurred in producing a
product or in rendering a service.
• Cost is expense if it is incurred for past benefit
• Cost can also be asset if it is incurred for future benefit
• Costing: The technique and process of ascertaining/
determining cost.

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Cost Accounting:
Cost Accounting:
• Is the process of identifying, measuring recording,
summarizing and reporting costs for determination of
costs of products or services
• It also deals with cost controlling and cost minimization
• It provides cost information to management for decision
making

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 Why Cost Accounting? Objectives
1) Determination of selling price: prices cannot be fixed below cost .
Hence, cost accounting is required for determination of correct
selling price.
2) Determine inventory of WIIP and finished goods to be reported
on balance sheet.
3) Cost Control and Cost Reduction: In the long run, higher profits
can be achieved only through Cost Reduction and Cost Control.
4) Assisting management in decision-making:
Business decisions are taken after conducting Cost-Benefit Analysis.
• Determines the profitability of each
activity/product/department by comparing its revenue with
appropriate cost.
• To make decisions like: make or buy, shutdown a business unit,
accept or reject special customer order..etc 4
Management Functions and Use of Accounting

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Cost Accounting, Management Accounting and
Financial Accounting
a. Management accounting:
 Specializes in providing information that is useful for
managers for internal decision making.
 Focus on the needs of managers within the
organization, rather than interested parties outside the
organization.
• Management accountants perform three important roles:
1. Problem-solving,
2. Score-keeping, and
3. Attention directing. 6
Cost Accounting, Management Accounting and
Financial Accounting
b. Financial accounting:
 focuses on reporting financial information to external
parties such as investors, governmental agencies, banks,
and suppliers

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Comparing Managerial and Financial
Feature Financial Accounting
Primary Users External users: stockholders,
of Reports creditors, and regulators.
Types of report and
Financial statements.
Frequency
Quarterly and annually.
General-purpose. Assist external
Purpose of Reports users in making investment, credit,
and other decisions.
Pertains to business as a whole.
Highly aggregated (condensed).
Content of Reports Limited to double-entry accounting
and cost data. Evaluated based on
IFRS
Managerial Accounting
Internal users: officers and
managers.
Internal reports.
As frequently as needed.
Special-purpose for
specific decisions. Assist
managers in making planning
and controlling decisions
Pertains to subunits of the
business. Very detailed.
Extends beyond double-entry
accounting to any relevant
data. Evaluated based on
relevance to decisions. 8
Comparing Managerial and Financial
Feature Financial Accounting Managerial Accounting
Timeliness of Often available only after an audit is Available quickly without the
information complete. need to wait for an audit.
Time dimension Historical information with minimum Many projections and
predictions. estimates; historical
information also presented.
Nature of information Monetary information. Mostly monetary; some
nonmonetary information.

Not subject independent

Verification Process Audited by CPA.( external auditor)
audits.

• Cost Accounting provides cost information for both management

accounting and financial accounting
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Business Ethics
• All employees are expected to act ethically
• Many organizations have codes of business ethics
Creating Proper Incentives
• Systems and controls sometimes create incentives for
managers to take unethical actions
• Controls need to be effective and realistic

LO 4 Copyright ©2018 John Wiley & Sons, Inc. 10

Ethical Considerations in Management Accounting
•Management accountants:
• have an obligation to the organizations they serve, their
profession, the public, and themselves to maintain the highest
standards of ethical conduct.
• are responsible to ensure that the accounting systems,
procedures, and compilations are reli­able and free manipulation.
• shall not commit acts contrary to these standards nor shall they
condone the commission of such acts by others within their
organizations.
The code of conducts are:
• Competence
• Integrity
• Confidentiality
• Objectivity
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End of Chapter One

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