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Introduction to Cost &
Management Accounting

COST ACCOUNTING
 Cost accounting, as a tool of management, provides management with detailed records of the
costs relating to products, operations or functions.
 Cost accounting refers to the process of determining and accumulating the cost of some
particular product or activity. It also covers classification, analysis and interpretation of costs.
 The costs so determined and accumulated may be the estimated future costs for planning
purposes, or actual (historical) costs for evaluating performance.
 The Institute of Cost and Management Accountants (ICMA), London, defines cost accounting
as
“the process of accounting for cost from the point at which expenditure is incurred or
committed to the establishment of its ultimate relationship with cost centers and cost
units. In its widest usage it embraces the preparation of statistical data, the application
of cost control methods and the ascertainment of the profitability of activities carried out
or planned”.

COST ACCOUNTANCY
 Cost accounting has been differentiated from cost accountancy.
 The Institute of Cost and Management Accountants, London has defined cost accountancy as
the
“application of costing and cost accounting principles, methods and techniques to the
science, art and practice of cost control and ascertainment of profitability as well as
presentation of information for the purpose of managerial decision-making”.
COSTING
 Cost Accounting and Costing have distinctly different meanings.
 The Institute of Cost and Management Accountants, London has defined costing as the
ascertainment of costs. Costing includes the ‘
techniques and ‘
processes’of ascertaining costs.

OBJECTIVES OF COST ACCOUNTING
There is a direct relationship among information needs of management,
cost accounting objectives, and techniques and tools used for analyses in cost accounting. Cost
accounting has the following three important objectives:
1. To determine product costs.
2. To facilitate planning and control of regular business activities.
3. To supply information for short- and long-run decisions.
 Product Costing
The objective of determining the cost of products is of prime importance in cost accounting. The
total product cost and cost per unit of product are important in making inventory valuation,
deciding price of the product, and managerial decision-making. Product costing covers the entire
cycle of accumulating manufacturing and other costs and subsequently assigning them to work-in-
progress and finished goods.
 Planning and Control
Another important objective of cost accounting is the creation of useful cost data and information
for the purposes of planning and control by management. The different alternative plans are
evaluated in terms of respective cost and associated benefits.

The management control over business operations aims to establish balance between actual and
budgeted performances. A properly designed cost accounting system includes the
following steps in the control process:
1. Comparing actual business performances with budgets and standards.
2. Analyzing the variance between budget and standards and actuals by causes, and management
responsibility so that corrective action may be taken.
3. Providing managers with data and reports about their individual performances and
performance of subordinates.
 Information for Decisions
An important purpose of the cost accounting system is to provide data and special analyses for
short- and long-run decisions of a non-recurring nature. Appropriate cost information must be
accumulated to make a wide variety of short- and long-run decisions.

MANAGEMENT ACCOUNTING
Management accounting deals with providing information including financial accounting information to
managers for their use in planning, decision-making, performance evaluation, control, management of
costs and cost determination for financial reporting. Management Accounting contains reports prepared to
fulfil the needs of managements.
The National Association of Accountants (USA), in Statement No. 1A (Statements on Management
Accounting, 1982), has defined management accounting as:
“the process of identification, measurement, accumulation, analysis, preparation and
communication of financial information used by management to plan, evaluate, and control
within the organization and to assure appropriate use and accountability for its resources.”
The CIMA (UK) defines the term, management accounting in the following manner:
“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 others external to the entity 6. disclosure to employees 7. safeguarding
assets.

ROLE OF MANAGEMENT ACCOUNTANT
 A Management accountant is an accountant who participates in all accounting work within the
organization, including maintaining the accounting records, preparing financial statements,
preparing many specialized managerial reports and statements, generating information for
different levels of management, coordinating budgeting, accounting and reporting functions.
 Management accountant plays a vital role in helping managers in performing management
functions such as planning, organizing, coordination, control, decision making etc.
 However, the management accountant is a part of the management and not just a service arm to
management.
 He acts as a manager and decision-maker and exercises managerial influence and, of course, is
responsible for the management of the entire accounting, reporting and budgeting functions.

Business enterprises can derive many advantages from the cost accounting system. Some
advantages are listed below:
1. The cost accounting system provides data about profitable and unprofitable products and
activities. After investigating the causes of low profitability and unprofitability, management
can take suitable corrective measures which may lead to higher profit.
2. All items of costs can be analyzed to minimize the losses and wastage emerging from the
manufacturing process and reduce the costs associated with different activities.
3. Production/manufacturing methods may be improved or changed so that costs can be
controlled, and profit increased.
4. Cost data can be obtained and compared with standard cost within the firm or industry.
5. Cost accounting helps management in avoiding losses arising due to many factors, such as low
demand, competitive conditions, change in technology, seasonal demand for the product and
the like.
6. Cost accounting also provides cost data and information to determine the price of the product.
The cost of the product is perhaps the most important determinant of product pricing.

7. Negotiations with government and labor unions can easily be made with the information
provided by the cost accounting system.
8. Cost accounting helps management in knowing the costs of different alternatives and selecting
the most advantageous course of action. Decisions like make or buy, continue or drop a product,
buy or lease, sell or process further, operate or shut down and other short-term decisions are easily
solved with the help of cost accounting data.
9. More accurate and reliable financial accounts can be prepared promptly for use of management.
10. An adequate cost accounting system ensures maximum utilization of physical and human
resources, checks fraud and manipulations, and helps employees as well as the employers in their
basic goals of getting higher earnings and maximizing the profit of the concern.

Difference between cost accounting & management accounting
Sl. No.
Basis Cost Accounting Management Accounting
1 Objective Find out the cost of products or services. Provide information for decision-making.
2 Nature Both for past and present. For future.
3 Scope Narrow Wide
4 Concept Age Old concept Modern concept
5 Principles Principles & methods are adopted. No specific principles are adopted.

COST
Cost is the amount of expenditure, actual (incurred) or notional (attributable), relating to
a specific thing or activity. The specific thing or activity may be a product, job, service,
process or any other activity.
EXPENSES
 Expenses are expired costs, incurred and totally used up in generation of revenue. Examples of expired
costs are costs of goods sold expense, selling and administrative expenses.
 Expenses need not necessarily have to be paid in cash immediately, even a promise to pay could be
made for the benefits obtained.
LOSS
 Loss is lost cost. The term loss is used to describe mainly two accounting events.
 In traditional financial accounting it is used to denote a situation where expenses exceed revenues for an
accounting period, that is, the opposite of net income (earnings) for the accounting period.
 Secondly, a loss arises due to the cost of an asset being more than the sale proceeds when the asset is
sold. This unfavorable event does not arise from a normal business activity but from non-operating
transactions or events.
 This definition of loss is used to identify the opposite of gain. That is, if no benefit is received from the
cost incurred or it becomes definite that no benefit will accrue, the cost becomes a lost cost, that is, loss.

The management concept
 According to Mary Parker Follett, “Management is the art of getting things done through people.”
 Harold Koontz defined as, “Management is the art of getting things done through and with people in
formally organized groups. It is the art of creating an environment in which people can perform and
individuals could cooperate towards attaining of group goals.”
 In view of Joseph Massie, “Management is defined as the process by which a cooperative group directs
actions towards common goals.”
 According to this definition, management is a process a systematic way of doing things.
The four management functions included in this process are planning, organizing, directing and
controlling.
 Planning refers manager’s think of their actions in advance. Their actions are usually based on some
method, plan or logic, rather than on a hunch.
 Organizing refers manager’s coordinate the human and material resources of the organization.
 Actuating refers managers motivate and direct subordinates
 Controlling refers attempts to ensure that there is no deviation from the plan or norms.

NATURE/CHARACTERISTICS OF MANAGEMENT
1. Management is an activity.
2. Management is concerned with the efforts of a group.
3. Management is getting things done.
4. Management applies economic principles.
5. Management involves decision-making.
6. Management coordinates all activities and resources.
7. Management is a universal activity.
8. Management is an integrating process.
9. Management is concerned with direction and control.
10. Management is intangible.
11. Management is both science and an art.
12. Management is a profession.
13. Management is an inter-disciplinary approach.
14. Management is dynamic and not static.

SCOPE OF MANAGEMENT
The scope of management is very wide.
The functional areas of management may be classified into the following categories.
(i) Production Management
(ii) Marketing Management
(iii) Financial Management
(iv) Personnel Management

FUNCTIONS OF MANAGEMENT
• Henry Fayol identifies five functions of management viz, planning, organizing,
commanding, coordinating and controlling.
• Koontz and O’Donnell, divides the management functions into planning, organizing, staffing,
directing and controlling.
• Warren Haynes and Joseph Massie classifies management functions into decision-making,
planning, organizing, staffing, directing, controlling, and communicating.
• Luther Gulick, states seven such functions under the catch word “POSDCoRB” Which stand
for
 P – Planning
 O – Organizing
 S – Staffing
 D – Directing
 Co – Coordinating
 R – Reporting
 B – Budgeting

As per managers are concerned, the following five functions are essential. They are
 Planning,
 Organizing,
 Staffing,
 Directing
 Controlling.
In addition to above five functions, the two functions such as Innovations and representation are
also necessary for managers.
MANAGEMENT PROCESS
1. Planning
2. Organizing
3. Staffing
4. Directing
5. Controlling

Role of controller in Management.
 Define the project scope: This step involves defining the project’s objectives, deliverables,
and timelines.
 Identify the project stakeholders: Project controllers should identify all the stakeholders
involved in the project and their roles.
 Develop a work breakdown structure (WBS): A WBS is a hierarchical decomposition of the
project into smaller, more manageable components.
 Identify the project risks: Project controllers should identify potential risks that could impact
the project and develop a risk management plan.
 Develop a project schedule: Project controllers should develop a project schedule that outlines
the tasks, timelines, and dependencies of the project.
 Develop a project budget: Project controllers should develop a project budget that outlines the
costs associated with the project.
 Develop a quality management plan: Project controllers should develop a quality
management plan that outlines the quality standards for the project.

Functions of management accounting:
1. Provides data
2. Modifies data
3. Communication
4. Analyses and interpretation
5. Serves as a means of communication
6. Facilitates control
7. Uses quantitative and qualitative information
8. To assist in planning
9. To assist in organizing
10. Decision-Making
11. To assist in motivation
12. To coordinate
13. To control

What Is Cost Accounting?
 Cost accounting is a managerial accounting process that involves recording,
analyzing, and reporting a company's costs.
 Cost accounting is an internal process used only by a company to identify ways to reduce
spending.
 Cost accounting is helpful because it can identify where a company is spending its money, how
much it earns, and where money is being wasted or lost.
 Even though cost accounting is commonly called a costing method, the scope of cost
accounting is far broader than mere cost.
 Costing methods determine costs, while cost accounting is an analysis of the different types of
costs a company incurs.
 Cost accounting has elements of traditional book-keeping, system development, creating
measurable information, and input analysis.
 For many firms, cost accounting helps create and measure business strategy in a more organic
way.

How Cost Accounting Is Used?
Cost accounting can be applied to many areas of a business.
Here are some examples of how it is used.
• Cost Controls
Cost accounting is used to help with cost controls. Firms want to be able to spend less on their
inputs and charge more for their outputs. Cost accounting can be used to identify inefficiencies
and apply the necessary improvements needed to control costs. These controls can include
budgetary controls, standard costing, and inventory management.
• Internal Costs
Cost accounting can help with internal costs, such as transfer prices for companies that
transfer goods and services between divisions and subsidiaries.
For example, a parent company overseas might be the supplier for its U.S. subsidiary, meaning
the U.S. company would be charged by the parent for any purchases of materials.

• Expansion Plans
Companies looking to expand their product line need to understand their cost
structure. Cost accounting helps management plan for future capital
expenditures, which are large plant and equipment purchases.
• Preparing Financial Statements
Cost accounting can contribute to preparing required financial statements, an area otherwise
reserved for financial accounting.
The prices and information developed and studied through cost accounting will likely make it
easier to gather information for financial accounting purposes.
For example, raw material costs and inventory prices are shared between both accounting
methods.

Types of Costs in Cost Accounting
Businesses can incur many types of costs depending on their industry.
Here are a few of the most common costs involved in cost accounting.
• Direct Costs
A direct cost is a cost directly tied to a product's production and typically includes direct
materials, labor, and distribution costs. Inventory, raw materials, and employee wages for
factory workers are all examples of direct costs.
• Indirect Costs
Indirect costs can't be directly tied to the production of a product and might include the
electricity for a factory.
• Variable Costs
Costs that increase or decrease with production volumes tend to be classified as variable costs.
A company that produces cars might have the steel involved in production as a variable cost.

• Fixed Costs
Fixed costs are the costs that keep a company running and don't fluctuate with sales and
production volumes. A factory building or equipment lease would be classified as fixed costs.
• Operating Costs
Operating costs are the costs to run the day-to-day operations of the company. However,
operating costs—or operating expenses—are not usually traced back to the manufactured
product and can be fixed or variable.

1. Natural classifications of costs
(i) Direct material
(ii) Direct labour
(iii) Direct expenses
(iv) Factory overhead
(v) Selling and distribution/indirect
(VI) Office and administrative overheads/indirect
2. Cost behaviour (In relation to changes in output, activity or volume)
(i) Fixed cost
(ii) Variable cost
(iii) Mixed cost (Semi-variable and Semi-fixed cost)
3. Degree of Traceability to the Product
(i) Direct cost
(ii) Indirect cost
4. Degree of Association with the Product
(i) Product cost/ direct cost
(ii) Period cost/ indirect cost
5. Functional Classification of Costs
(i) Manufacturing cost (Direct and Indirect)
(ii) Selling and distribution cost
(iii) Administrative cost

6. Relationship with the Accounting Period
(i) Capital cost
(ii) Revenue cost
7. Costs for Decision Making and Planning
(i) Opportunity cost
(ii) Sunk cost (advertisement)
(iii) Relevant cost (A company decides to buy loading machinery for a factory unit. This machine can save
the wage expenses of 20 manual laborers)
(iv) Differential cost (Company A sells a skateboard for $100 while Company B sells the same skateboard
for $80)
(v) Fixed, variable and mixed cost
(vi) Shutdown cost (temporary shutdown)
8. Costs for Control
(i) Controllable and uncontrollable cost
(ii) Standard cost (actual cost)
(iii) Fixed, variable and mixed cost

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