Prof. A. Damani, FCA,MBA,Mcom,SET

1

Cost and Management Accounting

• Course = MMS/PGDM • Marks = 60+40 (2 tests+1 ppt)• Duration = 3 Hours per session• No. of Session = 15

• References: Cost and Management Accounting by:• Khan and Jain• T. Ghosh • Shukla Grewal• Horngreen

Introduction …………….

• Business Accounting System consists of three parts :

• Financial Accounting

• Cost Accounting and

• Management Accounting

• The information generated from these systems are used for

• planning

• implementation and

• control

• Accounting information- analysis

• Management Accounting-decision making

• Cost accounting – control and reduction of costs.

Tools of Management accounting– Financial Accounting– Cost Accounting– Statistical Techniques– Inflation Accounting– Taxation Tools of Financial Analysis

Cash flow and funds flow statements , Ratio analysis, Trend Analysis etc.

Methods of costing- for recording and identifying costs

– Unit / Direct costing– Absorption costing– Process costing– Job costing– Contract costing– Variable costing

Techniques of costing- for analyzing costs

• Marginal costing

• Standard costing

• Activity based costing

• Cost Volume profit Analysis

• Cost control and cost management

Classification of costs

• Costs can be classified on the following basis:• Nature of element• Functions• Identifiabiltiy• Variability• Controllability• Normality• Financial accounting treatment• Time• Association with product• Planning and control

Nature of element

• Materials

• Labour

• Overheads

Functions

• Manufacturing/Production costs – all costs from time of procuring materials to conversion into finished goods

• Administrative costs

• Selling and distribution costs

Identifiabiltiy

• Direct costs

• Indirect costs

Variability

• Fixed costs

• Variable costs

• Semi variable costs

Controllability

• Controllable costs

• Uncontrollable costs

Normality

• Normal costs

• Abnormal costs

Treatment in Financial accounting

• Capital

• Revenue

TIME

• Historical costs – can be identified only after they are incurred and recorded. They may vary from company to company. It depends on the amount recorded

• E.g. a machine purchase domestically and imported will have different costs.

• Predetermined costs: known in advance. • E.g. manufacturing costs of a shirt from a process will

remain the same.

Association with product

• Product costs – total costs associated with a single unit. Sum of direct and indirect costs

• Period costs – pertaining to a particular period than to production.

• E.g. salary of accountant, rent paid, etc.

Planning and control

• Budgeted costs - estimated

• Standard costs – as per industry

Important terms for Decision-making

• Marginal costs – costs to manufacture one additional unit

• Differential costs: change in costs due to change in level of activity/output

• Sunk cost

• Notional/Imputed costs – no third party cash outflow. E.g salary to proprietor, rent on proprietors own property, etc.

• Opportunity costs

• Replacement costs – cost of replacing an asset in its present condition

• Avoidable costs & Unavoidable costs – e.g. product is discontinued

• Future costs

• Joint costs

• Discretionary costs – whose contribution to revenue or profit cannot be conclusively identified. E.g. how much has advertisement costs contributed to sales.

• Committed costs: are those which the business has committed due to decisions and actions taken by management in past. E.g. Depreciation. Advance Income tax paid, Rent contract, etc.

• Marginal costs – costs to manufacture one additional unit• Differential costs: change in costs due to change in level of activity/output• Sunk cost• Notional/Imputed costs – no third party cash outflow. E.g salary to proprietor, rent

on proprietors own property, etc.• Opportunity costs• Replacement costs – cost of replacing an asset in its present condition• Avoidable costs & Unavoidable costs – e.g. product is discontinued• Future costs• Joint costs• Discretionary costs – whose contribution to revenue or profit cannot be

conclusively identified. E.g. how much has advertisement costs contributed to sales.

• Committed costs: are those which the business has committed due to decisions and actions taken by management in past. E.g. Depreciation. Advance Income tax paid, Rent contract, etc.

Presentation topics (from session 2) – see Guidelines on next slides

• Group 1: Transfer pricing• Group 2: Operating costing/costing of service sector• Group 3: Joint product and By-product• Group 4: Variance costing• Group 5: Target costing and life cycle costing• Group 6: Process costing• Group 7: Key factor analysis in marginal costing• Group 8: Integrated and non-integrated costing• Group 9 JIT, Material requirement planning• Group 10: Responsibility accounting

Presentation guidelines

• Total duration of presentation EXACT 25 minutes. Please rehearse for time.

• 5 minutes for Q&A• 14 slides ONLY• 1st slide – team members and title• Last slide – Academic references• ONLY 7 lines in each slide• ONLY 7-9 words in each line• Include practical examples if required (can exceed lines

and words)

Cost sheet format

• Format hyperlink

• Cost sheet format.xls

• (open hyperlink command)