Unit 1

Nature and Scope of

Cost & Management
Accounting
 Cost Accounting
Cost Accounting is concerned with
recording, classifying and
summarizing costs for
determination of costs of products
or services; planning, controlling
and reducing such costs and
furnishing of information to
management for decision making.
According to Morse, “cost
accounting is the processing and
evaluation of monetary and non-
monetary data to provide
information for external reporting,
internal planning and control of
business operations and special
analysis and decisions”
 Distinction between Financial Accounting
and Cost Accounting
 Financial Accounting aims at safeguarding
the interest of the business and its proprietors
and others connected with it. Cost
Accounting renders information for the
guidance of the management for proper
planning, operational control and decision
making.

 Financial accounts are prepared according to

some accepted accounting concepts and
conventions. Maintenance of cost records is
purely voluntary and therefore there are no
statutory forms regarding their presentation.
 In case of financial accounts the emphasis is on
the ascertainment and exhibition of profits
earned or losses incurred in the business. In cost
accounts the emphasis is more on aspects of
planning and control and therefore transactions
are recorded in an objective manner.

 financial Accounting reveals the profit of the

business as a whole, while cost accounting
shows the profit made on each product, job or
process.

 Financial Accounting provides information

useful to the outsiders, cost accounting provides
information to the insiders i.e. the management.
 Cost
 The term cost refers to the amount of
resources given up in exchange for
some of goods or services.

 The term cost in general means “the

amount of expenditure incurred on or
attributable to a given thing or
activity.”
 Cost Centre
 Cost centre means ,” a location, person
or item of equipment for which costs
may be ascertained and used for the
purpose of cost control. ”
 Thus cost centre refers to one of those
convenient units into which the whole
factory organization has been
appropriately divided for costing
purposes.
 Cost Unit
 In preparing cost accounts it becomes
necessary to select a unit with which
expenditure may be identified. The
quantity upon which cost can be
conveniently allocated is known as a
unit of cost or cost unit.
Bricks kilns : per 1000 bricks made
Steel mills: per tonne of steel made
 Scope of Cost Accounting
 Aids in price fixation:- though economic law
of supply and demand and activities of the
competitors to a great extent, determine the
price of the article, cost to the producer does
play an important part. The producer can take
necessary guidance from his costing records.

 Helps in estimates:- Adequate costing records

provide a reliable basis upon which tenders and
estimates may prepared. Ascertained costs
provide a measure for estimates, a guide to
policy and a control over current production.
 Scope of Cost Accounting
 Wastages are eliminated:- As it is possible to
know the cost of the article at every stage, it
becomes possible to check various forms of
waste, such as of time, expenses etc. or in the use
of machinery, equipment and tools.

 Costing makes comparison possible:- If the

costing records are regularly kept, comparative
costs data for different periods and various
volumes of production will be available. It will
help the management in forming future lines of
action.
 Scope of Cost Accounting
 Provides data for periodical profit and loss
accounts:- Adequate costing records supply to
the management such data as may be necessary
for preparation of profit and loss accounts and
balance sheets, at such intervals as may be
desired by the management.

 Helps in determining the level of output for a

desired profit:- A firm must earn sufficient
profits to pay dividends to its shareholders or
provide sufficient return to its proprietors. Cost
accounting helps in determining this level.
 Scope of Cost Accounting
 Aids in determining and enhancing
efficiency:- Losses due to wastage of materials,
idle time of workers, poor supervision etc. will
be disclosed if the various operations involved in
manufacturing a product are studied by a cost
accountant. The efficiency can be measured and
costs controlled and through it various devices
can be formed to increase the efficiency.

 Helps in inventory control:- Costing furnishes

control which management requires in respect of
stock of materials, work-in-progress and finished
goods.
 Use of Cost Accounting
 To ascertain and analyze costs:- the primary use of
cost accounting is to ascertain and analyze costs
incurred on the production of various products, jobs and
services etc.

 To control costs:- cost accounting has developed

various techniques such as standard costing and
budgetary control for controlling costs.

 To reduce costs:- the use of cost accounting have been

extended to cost reduction. Under the cost reduction
plan, products, processes, procedures, organization and
methods are continuously scrutinized to improve
efficiency and reduce costs.
 Use of Cost Accounting
 To prepare periodic statements:- Under cost
accounting system monthly or quarterly cost statements
are prepared for periodic review of operating results.

 To fix the selling price:- cost accounting provides

reliable data on the basis of which selling prices can be
fixed.

 To provide information:- Cost accounting provides

useful information for planning and control and for
taking various decisions regarding increase in
production, installation or replacement of a machine,
making or buying of a component, continuing or closing
down of a business etc.
 Cost Concepts
Cost accounting procedure is different in different
circumstances. This procedure is in accordance with
certain accepted cost concept and conventions. In
relation to cost accounting, cost concepts and
conventions are as follows:-

 Relevant Cost:- costs which is different for

different objectives or alternatives is a relevant cost.
It may be different in various alternates.

 Irrelevant Cost/ Sunk cost:- costs which remain

constant in each alternate or cost of investment in
fixed assets which do not affect the future decisions
is known as sunk cost.
 Cost Concepts
 Opportunity cost:- Incomes receivable on use of a
factor of production in other alternatives, is known as
opportunity cost of present alternate.

 Imputed or National cost:- This is also known as

implicit cost or implied cost. This type of costs are
not real cost but it is included in total cost for
decision making purpose, e.g. rent of own building
and interest on own capital etc.

 Out of pocket cost/ cash cost:- these are the costs

which are payable in cash. A manufacturer needs
fund at least equal to such cash costs to run business
smoothly.
 Cost Concepts
 Conversion cost:- conversion cost means total cost
less cost of material consumed. In other words, cost of
converting raw materials into finished goods is known
as conversion cost.

 Shut down cost:- Such costs are incurred even if the

production is stopped for some time due to shortage
of demand, break down of machinery etc. for
example, rent of building, insurance, maintenance etc.

 Differential cost:- Differential cost is difference in

cost between two lines of action. If for same level of
production factory overhead of two different
machines are different then difference in overhead
will be known as differential cost.
 Classification of Costs
 Fixed, Variable, Semi-variable and Step cost:-
The cost which varies directly in proportion to every increase or
decrease in the volume of output or production is known as
variable cost. E.g. Material cost, power etc.
The cost which does not vary but remains constant within a
given period of time and range of activity in spite of the
fluctuations in production, is known as fixed cost. E.g. Rent,
Salary etc.
The cost which does not vary proportionately but
simultaneously cannot remain stationery at all times is known
as semi-variable cost. E.g. Depreciation, Repairs etc.
Certain costs remain fixed over a range of activity and then
jump to a new level as activity changes. Such costs are
treated as “Step costs” . For eg. A foreman is in a position to
supervise a given number of employees. Beyond this number
it will be necessary to hire a second then a third and so on.
 Classification of Costs
 Product costs and period costs:-

Cost which become part of the cost of the product

rather than an expenses of the period in which they
are incurred are called as “Product Costs”. E.g. cost
of raw material and direct wages.

Costs which are not associated with production are

called “Period Costs”. E.g. administration cost,
salesman salary and commission.
 Classification of Costs
 Direct and Indirect costs:-

The expenses on material and labour economically and

easily traceable to a product, service or job are
considered as direct costs.

The expenses incurred on those items which are not

directly chargeable to production are known as
indirect costs. E.g. salaries of storekeepers and
foremen.
 Classification of Costs
 Controllable and Uncontrollable Costs:-

Controllable costs are those costs which can be

influenced by the action of a specified member of an
undertaking.

Costs which cannot be so influenced are termed as

uncontrollable costs.

For e.g. the expenditure incurred by the Tool Room is

controllable by the Foreman-in-charge of that section
but the share of the tool room expenditure which is
apportioned to a machine shop cannot be controlled by
a machine shop foreman.
 Management Process and
Accounting
Word “Management Accounting” is formed by joining two
words management + accounting. Management has been
defined differently by various scholars but planning,
organizing, directing and controlling are included in it
whereas accounting means recording of facts. This way
we can say that Management Accounting is a process
which increases the managerial efficiency.

“Management Accounting is the presentation of accounting

information in such a way as to assist management in the
action of policy and day-to-day operation of
undertaking.”
Anglo-American council of productivity.
 Managerial Planning & Control
Presently management tries to take the decision on the
basis of statistical facts and quantitative techniques and
not on intuitions. Management accounting provides
information to the various levels of management to
fulfill their responsibilities properly and effectively.
Planning includes the decision taken regarding “what to
do” in future and then formulating plans and policies to
activate it. Through management accounting forecasts
regarding the sales, purchases, production etc. can be
obtained, which helps in making justifiable plans.

On the basis of cost, price, income and production level the

alternative plans can be compared and best is chosen.
The tools of management accounting like standard
costing, managerial costing, cost volume profit analysis
etc. are of great help in planning.
 Managerial Planning & Control
To see that all the activities in the organisation are heading
according to plans or not and if any deviation found then
correcting it is called controlling.

In this way for controlling anything first the standards are

to be set, then actual performance is compared with
standards and on finding any deviation, the reasons for it
are enquired and corrective action is taken.

Here, it is important to maintain that controlling is most

important function of management because without it all
other functions like planning, directing, organizing etc.
are of no use And this process of controlling is mainly
governed by the tools provided in the management
accounting.