Introduction To Cost Accounting: 07/09/09 Chandrakant@som,kiit University 1

Introduction to Cost Accounting

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Chandrakant@SOM,KIIT University

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Ground Questions: • • • • •

Objectives in life Why “COST”? Why CMA? Was reading of FA not sufficient? What’s new in CMA?

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The Five Generic Competitive Strategies Type of Advantage Sought Market Target

Lower Cost

Broad Range of Buyers

Differentiatio n

Overall Low-Cost Leadership Strategy

Broad Differentiation Strategy Best-Cost Provider Strategy

Narrow Buyer Segmen t or Niche

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Focused Low-Cost Strategy

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Focused Differentiation Strategy

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Emerging Concepts In Cost Accounting… Traditional Approach

SALES

New Approach

Business Process -A Paradigm

COST

Continuous Innovation for Cost Reduction to survive in the competitive environment 07/09/09

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Accounting

Financial Accounting 07/09/09

Cost Accounting

The art of Recording, Classifying, And Summarizing in terms of money ,transactions and events which are of financial Nature, and interpreting the results thereof

Management Accounting

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Manufacturing & Marketing Cars

What Would Be The Role Of Financial Accounting ? What Would Be The role Of Cost Accounting ?

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Manufacturing & Marketing Cars

Reducing Cost of the car by INR 10,000

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Financial Accountingmeaning & limitations

Fundamental s

FA is concerned with

Journal

§RECORDING, §CLASSIFYING AND §SUMMARISING

Ledger

Financial transactions in accordanceTrial with the Generally Accepted Balance Accounting Principles (GAAP)

Final Statements

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Financial Statements PROFIT & LOSS ACCOUNT

Fundamental s

BALANCESHEET

STATEMENT OF SOURCES & APPLICATIONS OF FUNDS 07/09/09

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Financial AccountingLimitations

Fundamental s

ONLY NET RESULTS

HISTORICAL

NO CONTROL ON COST

NO DISTINCTION Direct &

Inadequate Information For PRICE FIXATION

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No Analysis of LOSSES

NO COMPARISON OF COSTS

NO STANDARDS TO Assess

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FA vs. CA

Fundamental s

• Under Financial Accounting: – Materials 150000 – Wages 70000 – Other exp 50000 – Total Cost 270000 – Sales 300000 – Profit 30000 (10% on sales)

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Ma na ge me nt Ac co unt ing

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Management Accounting • A field of accounting that provides economic and financial information for managers and other internal users. • It measures, analyzes and reports financial and nonfinancial information that help the managers make decisions to fulfill the goals of an organization. • Managers use the information to

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MANAGEMENT ACCOUNTING BASICS Activities include (continued):

Assisting management in profit planning and budgeting. • Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard costs. • Accumulating and presenting relevant data for management •

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COMPARING MANAGEMENT AND FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING

MANAGEMENT ACCOUNTING

External Users; Stockholders, Creditors Regulators

Internal Users: Managers Directors

Primary users Of Reports

Financial Statements Quarterly & Annually

Types & Frequency Of Reports

General Purpose Pertains to Business as Whole Limited to Double Entry Acct, Cost Data GAAP/IAS

Purpose of Reports Contents of Reports

Internal Reports As Frequently Required Special Purpose for Specific Decisions

Pertains To some sub unit of Business Very Detailed Extend beyond DE Accounting Standard is relevance to Decision

No independent Audits Audit By CA 07/09/09

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Few Terms clarification

Fundamental s

vCOST ACCOUNTANCY vCOSTING vCOST ACCOUNTING

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Few Terms clarification

Fundamental s

vCOST ACCOUNTANCY

s the application of Costing and Cost Accounting nciples, Methods and Techniques to the science, and practice of Cost Control and the ascertainment profitability. It includes the presentation of informatio rived there from for the purpose of Managerial cision Making

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COST ACCOUNTINGintroduction

Fundamental s

The Process of accounting for costs from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. It provides information for MA and FA. It measures, analyzes and reports financial and nonfinancial information

Books Of Cost Accounts 07/09/09

Cost Centers Chandrakant@SOM,KIIT University

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Few Terms clarification

Fundamental s

vCOSTIN G•Technique and process of ascertaining costs •Classifying, recording and appropriate allocation of Expenditure for determination of costs of products ( Watch, TV, Computers) or services (Electricity, telephone, Transport Etc)

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CO ST A CC OU NTI NG BASICS Activities include:

•

• • • 07/09/09

Explaining manufacturing and non manufacturing costs and how they are reported in the financial statements Computing the cost of providing a service or manufacturing a product Determining the behavior of costs and expenses as activity levels change Analyzing cost-volume profit relationships within a company Chandrakant@SOM,KIIT University

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§Costing Objectives

AscertainingSetting cost Price

Cost Control

Cost Review

Operating Decisions

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FA vs. CA

Fundamental s

• Under Cost Accounting:

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Cost/Financial Accountingdifferences

Fundamental s

Facto r Need

Compulsory

C A Obligatory

Purpose

Final Results to stake Holders

Cost Information

Recordin g

Subjective Recording

Objective Recording

Profit Analysis

Total Profit/Loss

Product wise

Contents

External Transactions

Internal

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FA

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Cost/Financial Accountingdifferences

Fundamental s

Once/twice

C A Daily/weekly/monthly

Control

Inadequate

System at Place

Nature

Historical

Historical/Predetermined

Valuatio n

Cost or market

Cost Price

Facto r Periodic

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FA

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Management/Cost Accountingdifferences

fact Derivation Of or

Data

üInformation Provided

Emphasis Purpose Planning

M •Cost/Financial Acct A •Cost/Fin. Information CVP/Fin Ratios •Decision Making •Planning, Decision M & Control •Short/Long Term •RA,FF, C Flow

Techniques Installation 07/09/09

•Not possible without CA system Chandrakant@SOM,KIIT University

Fundamental s

CA §Data From CA §Only Cost Inf. §Cost Ascertainment & Control

§Reporting Cost §Short Term

§Variable Costing, Budgetary Control etc §Can Be Installed Without CA

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Cost Accountingadvantages

Fundamental s

§ Supplies Detailed Cost Information § Helps in Price Fixation § Reveals UN (Profitable) Activities § Reveals idle capacity § Assist in Controlling Costs § Helps in decision Making § Facilitates Cost Comparison 07/09/09

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Cost AccountingObjections

Fundamental s

§ It is Unnecessary § It is Inapplicable § It is a failure § Mere matter of Forms and Ruling § It is Expensive

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Three Features of Cost Accounting • Calculating the cost of products, services and other cost objects. • Obtaining information for planning and control and performance evaluation. • Analyzing the relevant information for making decisions

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Costing Methods

Fundamental s

vJob Costing vBatch Costing vContract Costing vProcess Costing vUnit Costing vOperation Costing vOperating Costing vMultiple Costing 07/09/09

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Costing Techniques

Fundamental s

vHistorical Costing vStandard Costing vMarginal Costing vAbsorption Costing vDirect Costing vUniform Costing 07/09/09

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Decision Making

CAPACITY

Fundamental s

MAKE OR BUY

SALES VOLUME

PROFIT

PRICE

EXPORT PRICE 07/09/09

NEW MODE L

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OPERATE OR SHUT 31

MA in Strategy • Value chain refers to the sequence of business functions in which the customer usefulness is added to products and services. • Management Accountants track the costs incurred in each value chain category. Their goal is to reduce the costs in each category and to improve efficiency . 07/09/09

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MA in Strategy • Supply chain describes the flow of goods, services and information from the initial sources of materials and services to the delivery of products to consumers regardless of whether those activities occur in the same organization or not. • MA recommends integrating and coordinating activities across all companies in the supply chain as well as across each business 07/09/09

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