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Management Accounting
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Cost and management
accounting
Provides management with costs for
products, inventories, operations or
functions and compares actual to
predetermined data
It also provides a variety of data for
many day-to-day decision as well as
essential information for long-range
decisions
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Functions of managerial
accounting
Determining the cost
Providing relevant information for better
decision-making
Providing information for planning,
control, decision-making and application
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Planning
Deals with the estimation of product
costs, setting up of costing system to
record cost data, preparation of cost
standards and budgets, planning of
materials and manpower resources,
analysing cost behavior with changes in
levels of activity
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Control
Deals with the maintenance of product
costing record, comparison of actual
performance with standards or budgets,
anlaysis of variances, recommendation
of corrective actions, controlling cost to
ensure operational efficiency and
effectiveness
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Decision-making
Deals with whether it is more profitable
to make or buy a component,
determine the economic order quantity
and production batch size, replace fixed
asset, add or drop products, decide
pricing
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Application
Cost accounting has extended from
manufacturing operations to a variety of
service industries such as hotels, bands,
airline, etc
Cost accounting system should be
flexible and adaptable to meet the new
business environment and the changing
nature of the company
Focus
Stage
Cost
Determination
Control
and Financial
Transformation
Information
for
Planning and
Control
Management
Transformation
Reduction of
Waste of
Resources in
Processes
Business
Transformation
Creation of Value
Resource Use
through Effective
Transformation
The Evolution of Management
Accounting
1990s
1980s
1950s
1910s
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Element of cost
Cost object
Cost
Cost unit
Cost centre
Profit centre
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Cost object
It is an activity or item or operation for
which a separate measurement of costs
is desired
E.g. the cost of operating the personnel
department of a company, the cost of a
repair fob, and the cost for control
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Cost
It is the amount of expenditure incurred
on a specific cost object
Total cost = quantity used * cost per
unit (unit cost)
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Cost unit
It is a quantitative unit of product or
service in which costs are ascertained,
e.g. cost per table made, cost per
metre of cloth
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Cost centre
It is a location or function of an
organisation in respect of which costs
are ascertained
E.g. the rent, rates and maintenance of
buildings; the wages and salaries of
strorekeepers
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Profit centre
It is location or function where
managers are accountable for sales
revenues and expenses
E.g. division of a company that is
responsible for the sales of products
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Cost classification
Direct cost
Indirect cost (overhead)

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Direct cost
Cost that can be identified specifically
with or traced to a given cost object
The direct costs consist of the following
three elements:
Direct materials
Direct labour
Direct expenses
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Direct materials
The cost of materials the cost of
materials used entering into and
becoming the elements of a product or
service
E.g. fabrics in garments
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Direct labour
The cost of remuneration for working
time
E.g. assembly workers wages in toy
assembly
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Direct expenses
Other costs which are incurred for a
specific product or service
E.g. royalties
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Indirect cost (overhead)
Cost that cannot be identified
specifically with or traced to a given
cost object
They are identified with cost centres as
overheads
Indirect materials
Indirect labour
Indirect expenses
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Indirect materials
Such as stationery, consumable
supplies, spare parts for machine that
assist to the production of final
products
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Indirect labour
Such as salaries of factory supervision
and office staff that do not directly
involve in production of the final
product

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Indirect expenses
Such as rent, rates, depreciation,
maintenance expenses that do not have
instant relationships with the
manufacturing processes
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Cost accumulation
Prime cost = direct materials + direct labour + direct expenses
Production cost = Prime cost + factory overhead
OR
= Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw materials into
finished product
Total cost = Prime cost + Overheads (admin, selling,distribution cost)
OR
= Production cost + period cost (administrative, selling,
distribution and finance cost)
Period cost is treated as expenses and matched against sales for calculating
profit, e.g. office rental
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Cost coding
A code is a system of symbols designed
to be applied to a classified set of items
to give a brief, accurate reference,
facilitating entry, collation and analysis
Coding is important in modern
computerised accounting systems for
catergories various composite
accounting items
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Reasons
To reducing error owing to descriptions
Enable easy recalling
Reduce computer file size as a code
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Cost behaviour
Costs can be classified into variable,
fixed, semi-variable, or step-costs
according to how they behave with
respect of changes in activity levels
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Variable cost
It increases or decreases in direct
proportion to levels of activity, but the
unit variable cost remains constant
E.g. cost of food served in a restaurant
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Fixed cost
Total fixed cost remains constant over a
relevant range of activity level but unit
fixed cost falls with an increase in
activity volume
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Semi-variable cost
It processes characteristics of both fixed
and variable cost
It increases or decreases with activity
level but not in direct proportion
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Step cost
It remains constant for a range of
activity levels, then, on further increase
in activity, the cost jumps to a new
level and remains constant over a
certain range until the next jump occurs
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Cost for stock valuation
Unexpired and expired cost
Product and period cost
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Unexpired cost
Unexpired costs are the resources that
have been acquired and are expected
to contribute to the future revenue
They will be recorded as assets in
current period
They will be charged as expenses when
they have been consumed in the
generation of revenue
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Expired costs
Expired costs are the expenses
attributable to the generation of
revenue in the current period
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Product cost
Product cost are related to the goods
purchased or produced for resale
If the products are sold, the product cost will
be included in the cost of goods sold and
recorded as expenses in current period
If the products are unsold, the product costs
will be included in the closing stock and
recorded as assets in the balance sheet
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Period cost
Period cost related to the operation of a
business
They are treated as fixed cost and
charged as expenses when they are
incurred
They should not be included in the
stock valuation
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Comparison of cost,
management and financial
accounting
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Meanings
Financial accounting
Cost accounting
Management accounting
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Financial accounting
Provides information to users who are
external to the business
It reports on past transactions to draw
up financial statements
The format are governed by law and
accounting standards established by the
professional accounting policies
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Cost accounting
Is concerned with internal users of
accounting information, such as
operation managers
The generated reports are specific to
the requirement of the management
The reporting can be in any format
which suits the user
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Management accounting
Comprises all cost accounting functions
The accounting for product and service
costs, management accounting extends
to use various internal accounting
reports for planning, control and
decision making
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Cost and management accounting
Vs.
Financial accounting
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Management
(cost)accounting
Financial accounting
Nature
Records material,
labour and overhead
costs in product or
job
Reports produced
are for internal
management and
contol
Records company
transaction events
External financial
statements are
produced
Accounting
system
Not based on the
double entry system
Follows the double
entry system
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Management
(cost)accounting
Financial accounting
Accounting
principles
No need to use
accounting principles
Adopt any
accounting techniques
that generates useful
accounting
information
Use Generally
Accepted Accounting
Principles for recording
transactions
Users of
information
Used by different
levels of management
or departments
responsible for
respective activities
Used by external
parties: shareholders,
creditors, government,
etc
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Management
(cost)accounting
Financial accounting
Operation
guidelines
or
standards
Based on
management
instructions and
requirements
Conforms to company
Ordinances, stock
exchange rules,
HKSSAPs
Time span
Reports are
prepared whenever
needed
They may be
prepared on a
weekly or daily basis
Reports are prepared
for a definite period,
usually yearly and half
yearly
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Management
(cost)accounting
Financial accounting
Time focus
Future orientation:
forecasts, estimates
and historic data for
management
actions
Past orientation: use
of historic data for
reporting and
evaluation
Perspective
Detailed analysis of
parts of the entity,
products, regions,
etc
Financial summary of
the whole orgainisation
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JOB COSTING
PROCESS COSTING
SERVICE OR OPERATING COSTING
BATCH COSTING
CONTRACT COSTING
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Job costing is suitable where work is undertaken to
customers special requirement and each order is of
comparatively short duration.
FEATURES OF JOB COSTING:
Production is undertaken after obtaining
customers order.
Identity of each order is retained from start to
finish.
Cost information is collected from each job.
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Examples of Job Costing:


Machine-tool manufacturing
Foundries
Printing
Furniture-makers
Repair-shops
Garages

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Batch costing is a specific order costing
which applies where similar articles are
manufactured in batches (either for sale or
for use within the undertaking).
FEATURES OF BATCH COSTING:
Reduces overall cost of the product if
components are manufactured in batches
of large quantity.
Costs are collected against each batch.
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SOME AREAS WHERE BATCH COSTING
IS USED:
Radio manufacturing
Television manufacturing
Watch manufacturing
Pen manufacturing
Computer manufacturing
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Contract costing is another variation of job
costing. It applies where work is undertaken
to customers special requirements and each
order is of long duration.
FEATURES OF CONTRACT COSTING:
The contract terminates on its completion.
Work is carried out at a site other than
contractors own premises.
Most items of cost are directly chargeable.
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SOME BUSINESSES WHERE
CONTRACT COSTING APPLIES-
Buildings
Dams
Bridges
Ship building
Aircraft manufacturing
And other constructional
work.

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SOME AREAS WHERE BATCH COSTING
IS USED:
Radio manufacturing
Television manufacturing
Watch manufacturing
Pen manufacturing
Computer manufacturing
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Contract costing is another variation of job
costing. It applies where work is undertaken
to customers special requirements and each
order is of long duration.
FEATURES OF CONTRACT COSTING:
The contract terminates on its completion.
Work is carried out at a site other than
contractors own premises.
Most items of cost are directly chargeable.
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SOME BUSINESSES WHERE
CONTRACT COSTING APPLIES-
Buildings
Dams
Bridges
Ship building
Aircraft manufacturing
And other constructional
work.

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Process Costing method is applicable
where goods result from a sequence of
continuous or repetitive operation or
process to which costs are charged before
being averaged over the units produced
during the period.
It is best suitable for organizations where
the work cannot be stopped and is
continuously performed throughout the
year (I.e.24 hours a day and 7 days a week)
except for stoppage for maintenance work.
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FEATURES OF PROCESS COSTING:
Production is done having a continuous flow of
identical products except where plant and
machinery is shut down for maintenance, etc.
Clearly defined process cost centres
Product of one process becomes input-material
of another process.
Avoidable and unavoidable losses arise at
different stages of manufacture for various
reasons. Abnormal gain also arises.
Continuous and Mass production, and loss
identity of production against particular order
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Unit cost is computed by dividing total
departmental cost by total departmental
production including work-in-progress.
As production is continuous, work-in-progress
shall remain in partly completed stage at the
end of each accounting period.
Process cost for the period shall be
apportioned between completed and incomplete
units considering stage of completion of units in
work-in-process.
Calculation of Effective Units.
Loss in the process due to evaporation, scrap,
spoilage, chemical reactions, etc., are added to
the good units produced.
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Production is carried out in anticipation of
demand.
Costs of completed units of a department are
transferred to the next processing department
either at total cost or at some predetermined
transfer price, just to compare with the market
price.
More than one product may emerge at the end
of a process / operation.
Depending upon the realizable value of the
product, it may be termed as either Joint
Product or By product.
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PROCESS COSTING IS USED IN THE
FOLLOWING TYPES OF INDUSTRIES:
Manufacturing industries-
Iron and steel, textiles, chemicals, cement,
paper, flour mills, food products, toy
making, milk dairies, biscuit
manufacturing,etc.
Mining industries-
Coal, Oil, etc.
Public utility services
Generation of Electricity, Gas,
Water Supply, etc.
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STEPS INVOLVED
1. Process Flowchart
2. Departmentalization
3. Input Output reconciliation
4. Equivalent production WIP
5. Accounting of process loss and scrap
6. Accounting for By products and Joint
Products
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NORMAL LOSS
When loss is due to inherent nature of the
process,which can be estimated in advance and added
to good units produced.

ABNORMAL LOSS
Loss caused by poor handling of material, bad
workmanship, carelessness, bad design, using substantial
material, etc., are not normally expected, which are
abnormal loss.
ABNORMAL GAIN
Actual Production may be more than the norms specified.
Like Abnormal Loss, Abnormal Gain has no effect on cost
of good units.
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VALUATION OF WORK-IN-PROGRESS
The semi-completed units in each process, posses
problem for valuation. It is necessary to assess the
amount of work done on these units and express them in
terms of completed units.

EQUIVALENT Units is a notional quantity of completed
units substituted for an actual quantity of incomplete
physical units in progress.

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This method applies to activities that
provide a service rather than producing
goods.
This method may be used for both services to
outside customers as well as internal use (in an
manufacturing unit, certain sections may provide
ancillary services to production department, such
as canteen, maintenance, etc.).
In this method operating costs are collected
periodically.
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MAIN FEATURES:
Composite cost units are more commonly
used than single cost unit.
Costs are usually grouped under fixed cost
or standing charges and variable costs.
THIS METHOD IS USUALLY APPLIED TO:
Transportation services road, rail, air, etc.
Utility services hospitals, canteen, etc.
Distribution services electricity, gas, etc.
Professional services courier service,
management consultants, etc.
Learning Objectives
Cost Methods & Cost Techniques

Costing Systems/Methods

Cost Classification

Cost Sheet
Cost Methods & Cost Techniques
Cost Methods
1. Job Costing
2. Contract
3. Batch
4.Process( continuous)
5. Service( Operating)
Cost Techniques
1. CVP Analysis
2. Standard Costing
3. Budgetary Control
4. ABC
5. Relevant Costing
6. Target Costing

Costing Systems/Methods

Historical
Absorption
Direct
Marginal
Standard
Uniform




COST CLASSIFICATION
Elements
Behaviour
Functions
Normality
Control
Decision Making
Elements
MATERIAL

LABOUR

EXPENSES

MATERIAL
Direct: traceable to one particular process, job or
product identified with each unit of product
Example: manufacturing an apparel
Cloth, collar, buttons, cufflinks, thread
Primary packing material (e.g., carton, wrapping,
cardboard, boxes, etc.)

Fuel, lubricating oil etc for operating & maintenance
of machine
Small tools
Materials used for repairs & maintenance

LABOUR

Inspectors
Supervisors
Internal transport staff
Storekeeper, maintenance staff
EXPENSES
Expenses leading to a job or contract
Traveling expenses for negotiation
Special pattern, design
Special tools for executing the contract

Rent
Insurance
Canteen, hospital, power , lighting,
maintenance
Behaviour
Fixed
in short run & long run

Variable
Varies with volume and constant per unit

Semi-variable
A cost could be variable for one level of activity whereas it could
be fixed for another.

Not inherently fixed or variable
Many costs are semi-variable in nature

Fixed Cost
Committed Fixed Costs consists largely of those fixed costs that arise
from the possession of planti, equipment and a basic organizational
structure. For example, once a building is constructed and plant is
installed, nothing much can be done to reduce the costs such as
depreciation, property taxes, insurance and salaries of the key
personnel, etc., without impairing the organization's competence to
meet the long-term goals.
Discretionary Fixed Costs : set at fixed amount, for specific time
periods by the management, in the budgeting process. These costs
directly reflect top management policies and have no particular
relationship with volume of output. These costs can therefore be
reduced or eliminated entirely, if the circumstances so require. Examples
of such costs are: research and development costs, advertising and
sales promotion costs, donations, management consulting fees, etc.
these costs are also termed as managed or programmed costs.
Functions
Production Cost
Administration Cost
Selling Cost
Distribution Cost


Normality
Normal
Abnormal
Control
Controllable
&
Uncontrollable

Planning & Control
Budgeted Cost: estimate of expenditure
for different business operations

Standard Cost: for prescribed set of
operating conditions, labour, material
and overheads are predetermined;
budget translated into actual operation
through standard costs
Decision Making
Marginal vs. Absorption Costing
(with fixed cost and without FC)
Sunk - irrelevant
Committed pre committed
Opportunity
Incremental / Differential
Avoidable & Unavoidable
controllable / uncontrollable

Relevance
Relevant
Irrelevant

Cont..
Irrelevant cost: not relevant for decision
making
Example: Sunk costs: Sunk cost is the cost of
abandoned plant less salvage value. Not relevant for
decision making.
Imputed (Notional cost): Actually not incurred
(interest on own capital, rent on owned building,
etc.) Taken into account in capital budgeting
decisions.
Replacement cost: Cost of replacing at current
market price.
Cont..
Avoidable and unavoidable cost:
Cost that can be avoided by eliminating
a product or department is avoidable
and that which cannot be, is
unavoidable.
Ex. Rent of factory is unavoidable if a
product is discontinued.
Other costs:
Future costs: cost to be incurred in future
Programmed cost: Cost incurred as per policy of top
management. Ex.- Donation to charity.
Joint cost: cost of joint or by-products incurred before
separation, which cannot be traced to particular products.
Conversion cost: cost of converting raw material to
finished goods = Production cost- direct material.
Discretionary cost: not essential for decision on hand.
Ex.- Training expenses of workers, R&D cost.
Committed cost: Costs incurred due to past decisions
and are not within control in the short run at present. Ex.-
Depreciation on Plant, Rent, etc.
INVENTORIABLE COSTS AND PERIOD COSTS
Inventoriable cost/ product cost is that cost which is
regarded as asset when incurred, but becomes a part
of cost of goods sold when the product is sold. For
MUL, all manufacturing cost is inventoriable cost.
(Raw material to WIP to Finished goods) For a
service sector unit, absence of inventory means all
are period costs.

Period costs (non-product cost): all costs in P&L
account except cost of goods sold. So, in a mfg.
sector unit, all non-manufacturing costs are period
costs. (Ex. Distribution cost, design cost, R&D costs,
Marketing costs, customer-service costs, etc.)