COST ACCOUTING

(1) ICMA : The Institute of Cost and Management Accounting , England (ICMA) has defined cost Accounting as the process of accounting for the point at which expenditure is incurred, to the establishment of its ultimate relationship with cost centers and cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control method and the ascertainment of the profitability of activities of carried out or planned (2) Wheldon : wheldon has defined Cost Accounting as classifying, recording and appropriate allocation of expenditure for determination of cost of products or services and for the presentation of suitably arranged data for the purpose of control and guidance management. Cost Accounting is a term broader then costing. It covers costing plus the Reporting and control of cost. Thus Accounting = costing +cost Reporting +cost control. Cost accounting can be defined as the technique of Recording, Classification, Allocation , and control of cost.

BASIC OBJECTIVES Cost Accounting has the following basic objectives : (1) Cost Repoting and (2) Cost control. These are explained in detail below :

Costing
Costing has the following basic objective (or 5As) : Ascertain, Analyses, Allocate, Apportion and Absorb. (1) Ascertain costs : Ascertain or collect all the expenses relating to a particular period. (2) Analyses or classify the expenses under different heads of account such as Material, Labor, Expenses etc. (3) Allocate costs : allocate or charge in full the specific cost such as Raw Materials, Labor to relevant product process. (4) Apportion costs : Apportion or distribute Common expenses to each product, contract or process on suitable basis. (5) Absorb cost : Absorb the total expenses of a department over its products. So, in this final step, the individual cost of each of each product is determined. This product is then reported to management. Cost Reporting Cost reporting or Presentation has the following objectives : (1) What to Report : What is the nature of information to be presented ? the information should be relevant and precise. (2) Whom to Report :Whom is the report to be presented ? this will determine the scope of report. The report to be submitted to the Top management will be short, while the report to the Cost Account will be detailed. (3) When to Report : When is the report to be presented whether Daily ,Weekly, Monthly, Quarterly or yearly etc. The scope and format of the report will depend upon the frequency of reporting.

(4) How to Report : How or in what format is the report to be presented ? The format will depend upon the factors mentioned above. Once the cost report is received, management can take action to control the costs.

Cost Control Cost control has been defined by ICMA London as the guidance and regulation by executive action of the costs of operating an undertaking . Thus, cost control means the control of costs by management. Following are the aspects or stages of cost control: (1) Set Targets : set up targets for Cost, Production, Profits etc. for each period. (2) Measure Actual performance : Measure the actual figures of performance relating to cost, production, profits etc. for the period concerned. (3) Quantitative Reconciliation : the figures of actual performance are to be compared with the figures of targets to find out the variations. (4) Analyses variation : The cause for variation whether favorable or adverse are to be investigated. While adverse variations wastages and losses favorable variations may indicate that the targets fixed are very low . In both the cases it is important to know the exact reason for the variations. (5) Take Action : Once the causes are known, immediate action has to be taken to eliminate avoidable losses etc.

OTHER OBJECTIVES The other objectives of cost Accounting are as follows : (1) Provide required data for Fixing Sales Price, for submitting Tenders, Quotations etc. (2) Assist the management in controlling inventory of raw materials, goods in process, finished good , spares and consumables etc. (3) Advise management on future polices regarding expansion . growth, capital investment etc. (4) Install Labor Incentive System for getting maximum productivity from Labor at optimum cost. (5) Advice management in deciding optimum product-mix, merits and demerits of alternative courses of actions (make or buy etc.) introduction of automation, mechanization, rationalization of system of production etc.

FINANCIAL ACCOUNTING American Institute of Certified Public Accounting has defined financial

accounting as the art of recording, classifying and summarizing in a significant manner and in terms of money transaction and events which are in part at least of a financial character and interpreting the result thereof. Accounting is often referred of business. Financial Accounting records business transactions taking place during the accounting period with view to prepare financial statements. One of the important objectives of accounting is to measure the profit of the business and to ascertain the financial position of the business. Thus Income and expenditure or Profit and Loss Account is prepared for a particular period to determine the profitability of the concern and Balance Sheet is prepared on a particular date and it determines the financial position of concern.

Functions of Financial Accounting The progress and reputation of any business is built upon sound financial footing. There are a number of parties who are interested in the accruing information relating to business Accounting is the language employed to communicate financial information of a concern to parties Owners, Management , Creditors, Employees, Investors, Government, consumers etc. The final accounting providing information regarding the status of the business and results of its operation . The following are main functions, in brief :

1. Record Keeping Function : The primary function of accounting relates to recoding, classification and summary of financial transaction journalisation, posting, and preparation of final statements. These facilitate to know operating results and financial positions. The purpose of this function is to report regularly to the interested parties by means of financial statements. Thus accounting performs historical function i.e., attention on the past performance of a business; and this facilitates decision making programmers for future activities.

2. Managerial Function :Decision-making programmer is greatly assisted by accounting. The managerial and decion-making programmers, without accounting, may misled. The day-to-day operations are compared with some predetermined standard. The variation of actual operations with per-determined standards and their analysis are possible only with the help of accounting.

3. Legal Requirement function : Auditing is compulsory in case of registered firms. Auditing is not possible without accounting thus accounting becomes compulsory to comply with legal requirements. Accounting is abase and with its help various returns, documents, statements etc., are prepared.

4. Language of Business : accounting is the language of business. Various transactions are communicated through accounting There are many parties--owners creditors, government employees etc., who are interested in knowing the results of the firm and this can be communicated only though cough accounting shows the accounting shows a real and true position of the firm or the business.

5. Interpretation Function : This aspect helps in unfolding the total financial picture of an undertaking and investing the same with more meaning Interpretation part is very important for decision making . The recorded financial data is interpreted in a manner that the end-users can make a

meaningful judgments about the financial condition and profitability of the business operations .

LIMIT ATIONS OF FINANCIAL ACCOUNTING 1. It is historical in nature 2. It tells what has happened but not What will happen. 3. Non-monetary transaction are not considered. 4. It fails to record price level changes. 5. It cannot supply information in fixing price of output. 6. Immaterial pieces of information are not recorded. 7. There is a lack of unanimity on the use of accounting principles.. 8. It is subjective factor, that prevails in Accounting : [objective factor is ignored.] 9. It fail to convey the impact of qualitative factors-Management reputations, Employee morale etc. 10.Specific information is not usually available, say product-wise, departmentwise etc. 11.Appraisal of policies not possible.

Function of Cost Accounting The main functions of cost accounting can be summarized as follows: 1. It enables the management to ascertain the cost of product, job, contract, service or unit of production so as to develop cost standard. 2. Cost data are useful in the determination of selling price or quotation. 3. The object is to minimize the cost of manufacturing. Comparison of actual cost with standards reveals the discrepancies - variances. 4. The determination of profitability of each product, process, department etc. is the main object. 5. The central theme is to provide information, largely in the area of costs, which will be useful in controlling the operations of a business in a broad sense. Limitation of Cost Accounting Cost accounting like other branches of accountancy is not an exact science but is an art Which has developed through theories and accounting practices based on reasoning and common sense. The practices are not static but changing of time . cost accounting lacks a uniform procedure. There is no stereotyped system of cost accounting applicable to all industries. There are widely recognized cost concepts but understood and applied differently by different industries. Cost accounting can be used only by big concerns. MANAGEMENT ACCOUNTING Evolution Accounting refers to the discipline of recording and classifying the monetary effects of business transaction and events of an enterprise for the purpose of analyzing, and finally reporting the result to a variety of interested

parties . Since financial accounting has to meet the aims and objectives of the person ( share holders, creditors etc.) outside the concern, it was being considered that Accounts primary duty was to record and to prepare final accounts. Though financial accounting conveys meaningful information to the outsider. It fails to communicate valuable and varied information to the management. The evolution of joint stock company form of organization has resulted in large-scale production and separation and management. Thus with the increase in the size and complexity of business due to a variety of factors like large-scale operation, application of sophisticated modern technology,

management has become more complex and cumbersome. To cope up with the increasing need of large scale business, the modern managers need meaningful and timely data for making decisions. Decisions making, in any business organization, is a primary function of management. The financial accounts by accountant are important treasure house of facts and information but in their traditional form, profit and loss account, Balance sheet etc., they are unable to convey any meaningful information. Financial accounting furnishes a good deal of factual information which in there are unable to prove to be of significant use to the busy management of a large scale organization. At present, the tempo of our thinking and way of life in general having become faster, technological changes taking place day by day, Economic and social values being obsolete over the night. Under these circumstances , management can no wait up to the year to know the relation and problems arising from the day to day transaction. The correct information regarding the effect of each business transaction must be gathered from week or month to month. This has changed the accounting form a mere device of recording to a powerful tool of forecasting, budgeting, control etc. thus financial accounting has been supplemented with financial and cost control, budgeting and budgetary control and also production , planning and control besides

reporting on business performance. Probably, it has led to the development of the technique which is now commonly known as Management Accounting or Management Accountancy. In fact, when accounting assumes of providing adequate information for managements needs, it is called Accounting. Meaning In ordinary language any system of Accounting which assists management in carrying out its function more efficiently may be Management Accounting. The term Management Accounting management i.e., refers to accounting for the Management

accounting which provides necessary information to the

management for discharging its functions. Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and in the day - to day operation of undertaking. The function of management are planning, Organizing, directing and controlling. thus management accounting provides information to management so that planning, organizing , directing and controlling of business operation can be done in orderly manner. Definition Management accounting is also known as Management Oriented Accounting or Accounting for Management . In common Management

Accounting refers to the modern concept of accounts as an effective tool in the hands of the management as against the traditional package of accounts. Robert N. Anthony:

 Managements Accounting is concerned with accounting information that is useful to management. The Institute of Chartered Accountants of India: such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting. The American Accounting Association: Management accounting is accounting for effective management. necessary for

Management Accounting includes the methods and concepts through the evaluation and interpretation of performances.

effective planning, for choosing among alternative business action and for control

Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for : 1. Formulating Strategy 2. Planning and controlling activities 3. Decision taking 4. Optimizing the use of resources 5. Disclosure to shareholders and other external to the entity 6. Disclosure to employees 7. Safeguarding assets

Nature or Characteristic of Management Accounting It is concerned with accounting information which is useful to management in maximizing profits or minimizing losses. The following are the main

characteristics of management accounting. 1. Forecasting : It is concerned with future. It is not confined only to the collection of historical data or facts but also attempts to highlight upon What should have been. That is it helps in planning for the future decisions are always taken for future course of action. All techniques of it are concerned with future. 2. Supply Information : It provides information to the management and not decisions. It can inform but it cannot prescribe. The way in which the data is used depends upon the efficiency of the management. 3. Increase in Efficiency : It is basically concerned with the problem of choice . A comparative study of various related alternative plans have to be undertaken and only that alternative is normally selected which seems to be more attractive and profitable. 4. Techniques and Concepts : It uses special techniques and concepts to make accounting data more useful. It makes a study of costs by dividing the total costs into fixed, semi variable and variable components. The techniques usually used includes marginal costing, break even analysis, uniform costing etc. 5. Cause and Effect Analysis : It attempts to examine the Cause and Effect of different variables. For instance, is a loss, the reasons for the loss are probed. Similarly, if there is a profit, the factors directly influencing the profitability are also studies . this may be the reason that management accounting is called as science.

6. No Fixed Norms : it has no set of rules and formats like double entry system of bookkeeping. Though the tool of management accounting are the same but their use differs from concern to concern. The analysis of data depends upon the person using it. 7. Assist Management : It assists management in several ways in its function but does not replace it . It an integral part of business management. It provides all assistance to management in all of its function. By providing information in the required form and at the required time, it enables management to perform its function effectively. 8. Achieving of Objectives : the principal objective of management accounting is to serve the needs of management or to enable manager to manager better. To take more intelligent decision he able to get the necessary data through accounting procedures by responsibility

accounting, direct costing and other approaches. Management accounting provides means for bringing meaningful knowledge promptly to the management for their use.

Scope of Management Accounting : The scope or management accounting is very wide and broad based and it includes within its fold, a variety of aspects of business operation. The main aim is to help management in its function of planning, directing and controlling. The following are some of the areas of specialization included within the ambit of management accounting. 1. Financial Accounting : Financial accounting is the general accounting which relates to the recording of business transaction in the books of

prime entry, posting them into respective ledger accounts, balancing them and preparing a trial balance. Then a profit and loss Account showing the results of the business and also a Balance Sheet depicting assets and liabilities of the business concern are prepared. Thus in turn forms the basis for analysis and interpretation for furnishing meaningful data you the management. Hence management accounting cannot obtain full control and coordination of operations a well designed financial accounting system. 2. Cost Accounting : Costing is a branch of accounting. It is the process and technique of ascertaining costs. Planning, decision making and control are the basic managerial functions. The cost accounting system the necessary tools such as standard costing, budgetary control, marginal costing etc. for carrying out such function efficiently. 3. Budgeting and Forecasting : Budgeting means expressing the plans, policies and goals of the of the enterprise for a definite period in future. Forecasting ,on the other hand, is a prediction of what will happen as a result of a given set of circumstances. Targets are set for different department and responsibility is fixed for achieving these targets. The comparison of actual performance with budgeted figures will give an idea about the performance of departments. 4. Statistical Methods : statistical tool such as graphs, charts, diagrams, pictorial presentation, index , numbers etc. make the information more impressive, comprehensive and intelligible: other tools such as time series, regression analysis, sampling technique etc. are highly useful for planning and forecasting. 5. Inventory Control : It includes control over inventory from the time it is acquired till its final deposal. Inventory control is significant as it involves

large sums. The management should determine different levels of stocks Minimum stock level, Maximum Stock level, Re-ordering stock level, for inventory control. The study of inventory control will be helpful for taking managerial decisions. 6. Interpretation of Data : Analysis and interrelation of financial

statements are important part of management accounting. Financial statements may be studied in comparison to statements of earlier periods or in comparison with the statements of similar other firms. After analyzing, the interpretation is made and the reports drawn form these analysis are presented to the management in a simple language. 7. Reporting : The interpreted information in the form of quantitative expression must be communicated to those who are interested in it or to whom it carries vital importance. At the same time these data should be communicated within reasonable time . Delay in passing on the data makes the data useless and obsolete. the reports may cover Profit and Loss Account, Cash and Fund Flow Statement, Stock Reports etc. Reports may be sent monthly, quarterly, half, yearly etc. 8. Internal Audit : It needs devising a system of internal control by establishing internal audit coverage for all operating units, Internal audit helps the management in fixing responsibility of different individuals. 9. Tax Accounting : income statements are prepared amd tax liabilities are calculated. The management is informed about tax burden from Central Government and Local Authorities. The includes the computation of taxable income as per tax able income as per tax law , filing of returns etc. Apart form this, some of the Acts which have their influence on management decisions are the Companies Act, the Controller of capital Issues Act, MRTP Act etc.

10.Methods and Procedures : This includes maintenance of proper data processing and other office management services, reporting on best use of mechanical and electronic devices. It provides statically data to the various departments of the organisation.It undertakes special cost studies and estimations, reports on cost-volume profit relationships, under changing conditions.

OBJECTIVE ( PURPOSES) OF MANAGEMENT ACCOUNTING The objective of management accounting is to enable the management to maximize profits or minimize of management losses. The fundamental object of management accounting is to assist management in their functions of formulating policies, making decisions, planning activities and controlling business operations. The evolution of management accounting has given a new approach to the function of accounting. The main objectives or purposes of management accounting can be summarized as follows: 1. Planning and Policy Formulation : The planning is one of the primary function of management. It involves father basis of available information, setting goals , framing policies, determining the alternative courses of action and deciding on the program me of activities to be undertaken Management accounting can help greatly in these processes. Management accounting facilitates for the preparation of statement in the light of past results and gives estimation for the future. 2. Helps in the Interpretation Process : The main object of management accounting is to present financial information to the management. Financial information is of technical nature. Therefore, the financial information must

be presented in such a way that it is easily understood, apart form simple language. The management accounting ore sent accounting information in an intelligible manner and explains with the help of statically devices like charts, diagrams, graphs, index numbers etc. 3. Helps In Decision-Making : management accounting makes decision making process more modern and scientific ant information relating to various alternatives in terns of cost and revenue. With the help techniques provided by management accounting, data relating to cost, price, profit and saving for each of the available alternatives are collected and analyzed provides a base for taking sound decisions. 4. Controlling : management accounting is a useful device of managerial control. Management accounting devices like standard costing and budgetary control are helpful in controlling performance. The actual result are compared with pre-determined objectives. Cost control is effected through the use of standard costing and departmental control is made possible through the use of budgets. The management is able to control performance of each and every individual with the help of management accounting devices. 5. Reporting : one of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This facilitates management to the proper and timely decisions. The object of management accounting is to provide data. It present the different alternative plans before the management in a comparative manner. The performance of various departments is also regularly communicated to the top management. 6. Motivating : Delegation increases the job satisfaction of employees and encourage them to look forward. So it serves as a motivational device targets

are laid down for employees. The setting of goals, planning the best and economical course of action, measuring the results etc.increase the effectiveness of the organization and motivate the workers. 7. Coordination Operations : management accounting helps in overall

control and coordination of business operations. It provides tools which are helpful in coordinating the activities of different sections are or department s. Budgets are impartment means of coordination 8. Helps of Organizing : Return on Capital Employed is one of the tools of management accounting. Since management accounting stresses more on budget centers, investments centers, cost centers and profit centres,with a view to control costs and responsibilities, it also contributes, to principal of decentralization to a greater extent. All this aspects are helpful in setting up effective and efficient organization framework.

LIMITATION OF MANAGEMENT ACCOUNTING : Management Accounting is a recent discipline and therefore, it is in the process of development. Hence, it suffers from all the limitation of a new discipline . some of these limitation are : Limitations of Basic records : management accounting is mainly concerned with the rearrangement or modification of data. It derives its information from financial accounting, cost accounting and other records. The correctness of the management accounting depend upon the correctness of records: that is, their limitations are also the limitations of managements accounting.

Resistance efforts : the conclusions and decisions drawn by the management account are not executed automatically. Thus, there is need for continuous and coordinated efforts of each . 1. Management Accounting is only a Tool : Management Accounting should never be considered as an alternate or substitute for management. This is a mere tool for management . Ultimate decisions and corrective step or measures are being taken by management and not by management Accounting. 2. Costly Installation : It is very costly. The installation of management Accounting system needs very elaborate organizing and numerous rules and regulation. This results in heavy investment which only big concerns can afford. 3. Personal Bias : The interpretation depends upon the capacity of interpreter as one has to make a personal judgments. Personal prejudices and baize affect the objectivity of designs. 4. Provides Only Data : The main function of management accounting is to provide data and not decisions. It can only inform. Not prescribe. This limitation should also be kept in mind while using the techniques of management accounting.

Management Accountant: The officer who is entrusted with management accounting function in an organisation is known as management accountant. He plays a significant role in the decision making process of an organisation. The organisational status or position of management accountant varies from concern to concern depending upon the

pattern of management system in that concern. He may be considered as executive in some concern, while he may be a member of board of directors in case of some other concern. Normally he occupies a key position in the organisation heading the accounting department. In large concerns, his designation may be that of a controller, management accountant, chief accountant, chief accounts officer, finance controller etc. He is responsible for the installation, development and efficient functioning of the management accounting system. He plays an important role in gathering, compiling, reporting and interpreting internal accounting information. He designs the frame work of the financial and cost control reports that provide each management level with the most useful data at the most appropriate time. The management accountant , sometimes described as chief intelligence officer because apart from top management, no one in the organisation perhaps knows more about the various functions of the organisation than him. Tendon has explained beautifully the position of management accountant in the following line: The management accountant is exactly like the spokes in a wheel, connecting the rim of the wheel and the hub receiving the information. He processes the information and then returns the processed information back to where it came from. A controller or management accountant can exercise better influence and control more by his personality, mental equipment, industrial background, competence and integrity that by virtue of his holding the office. FUNCTIONS OF MANAGEMENT ACCOUNTANT Management accountant is considered to be a part of the management team since he has the responsibility for collecting vital information, both from within and

outside the company. The functions of the controller have been laid down by the controllers institute of America. They are typical of the functions of any management accountant by whatever name he is called. These functions are: 1. To establish, coordinate and administer, as an integral part of management, an adequate plan for the control of operation. Such a plan would provide, to the extent required in the business cost standards, expense budgets, sales forecast, profit planning, and programme for capital investment and financing, together with necessary procedures to effectuate the plan. 2. To compare performance with operating plan and standards and to report and interpret the results of operations to all levels of management, and to the owners of the business. The functions includes the formulation and

administration of accounting policy and the compilation of statistical record and special report as required. 3. To consult with all segments of management responsible for policy or action concerning any phase of the operations of business as it relates to the attainment of objectives and the effectiveness of policy, organisation structure, procedures. 4. To administer tax policies and procedure . 5. To supervise and coordinate preparation of reports to government agencies. 6. To assure fiscal protection for the assets of the business through adequate internal control and proper insurance coverage. 7. To continuously appraise economic and social forces and government influences, and interpret their effect upon business. It may be noted that these seven functions of a controller are broad enough to include all phases of policy and organisation within the controllers jurisdiction.

Duties Of Management Accountant The primary duty of management accountant is to help management in taking correct policy decisions and improving the efficiency of entrepreneurial operations. He performs a staff function and also has line authority over the accountants. If management accountant feels that a decision likely to be taken by the management based on the information tendered by him shall be detrimental to the interest of the concern, he should point out this fact to the concerned management, of course, with tact, patience, firmness and politeness. On the other hand, if the decision taken happens to be wrong one on account of inaccuracy, biased and fabricated data furnished by the management accountant, he shall be held responsible for wrong decision taken by the management. Controllers institute of America has defined the following duties of management accountant or controller: 1. The installation and interpretation of all accounting records of the corporation. 2. The preparation and interpretation of the financial statements and reports of the corporation. 3. Continuous audit of all accounts and records of the corporation wherever located. 4. The compilation of costs of distribution. 5. The compilation of production costs. 6. The taking and costing of all physical inventories. 7. The preparation and filing of tax returns and to the supervision of all matters relating to taxes.

8. The preparation and interpretation of all statistical records and reports of the corporation. 9. The preparation as budget director, in conjunction with other officers and department heads, of an annual budget covering all activities of the corporation for submission to the board of directors prior to the beginning of the fiscal year. The authority of the controller, with respect to the veto of commitments of expenditures not authorised by the budget shall, from time to time, be fixed by the board of directors. 10.The ascertainment currently that the properties of the corporation are properly and adequately insured. 11.The initiation, preparation and issuance of standard practices relating to all accounting matters and procedures and the coordination of system throughout the corporation including clerical and office methods, records, reports and procedures. 12.The maintenance of adequate records of authorised appropriations and the determination that all sums expended pursuant thereto are properly accounted for. 13.The ascertainment currently that financial transactions covered by minutes of the board of directors and/or the executive committee are properly executed and recorded. 14.The maintenance of adequate records of all contracts and leases. 15.The approval for payment (and/or countersigning) of all cheques, promissory notes and other negotiable instruments of the corporation which have been signed by the treasurer or such other officers as shall have been authorised by the by-laws of the corporation or from time to time designated by the board of directors.

16.The examination of all warrants for the withdrawal of securities from the vaults of the corporation and the determination that such withdrawals are made in conformity with the by-laws and/or regulations established from time to time by the board of directors. 17.The preparation or approval of the regulations or standard practices, required to assure compliance with orders of regulations issued by duly constituted governmental agencies.