COMA & Its Importance

 · Identifies unprofitable activities.

· Improves efficiency / Facilitates cost control.
· Helps in planning & preparation of budgets.
· Helps in inventory control.
· Facilitates decision making.
· Helps in achieving the main objective of the
organization

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 MANAGEMENT AND COMA
 · Provides management adequate, timely and reliable
information.
· Helps management in managing and controlling costs.
· Provides cost-benefit approach for resource allocation.
· Helps in decision making:
- Pricing
- Product-mix
- Profit-volume decisions
· Helps in making special studies and investigations.
 . Assists and participates in the formulation and execution of
budgets and standards.

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THE MANAGEMENT ACCOUNTANT AND
STRATEGIC DECISIONS
The management accountant helps to formulate
strategy by answering questions such as :
· Who are our most important customers ?
· How sensitive are their purchases to prices, quality,
and service ?
· Who are our most important suppliers ?
· What substitute products exist in the market place, and
how do they differ from our product in term of price
and quality ?
· Is the industry demand growing or shrinking ?
· Is their over capacity ?
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 Interface of Financial Accounting with Cost
Accounting

Financial Accounting COMA

It provides information about the overall It provides information to the management
performance of the business to the for proper planning, operation and
owners of the business and outsiders. control.

Financial accounts are kept to the fulfill Cost Accounts are kept voluntarily to
the requirement of law meet the requirements of the
management
In Financial accounting, classification of In Cost accounting, classification of costs
costs is subjective is objective
Financial accounts are prepared on a Cost accounts are prepared on a need
periodic basis. basis.
Financial statements give an idea about Cost statements provide idea about each
the overall performance of the enterprise. and every product, job or service.
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 Interface of Financial Accounting with Cost
Financial Accounting Accounting Cost Accounting
Financial statements report the total Cost accounts report the cost per unit.
costs.
Financial accounts relate to the cost accounts relate to the transactions
commercial transactions. with in the enterprise like manufacture of
the product, provision of service etc.

Financial accounting deals only with
monetary transactions.
Financial accounting data is meant to
report the profits or losses of the
enterprises.
Cost accounting also deals with non-
monetary information.
Cost accounting provides data for fixation
of selling prices.

Financial accounting is based purely on Cost accounting is also based on

facts and figures. estimates.
In Financial accounting, stocks are In Cost accounting, the stock is always
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valued at cost or market value, which valued at cost.
 Why Costing………..

 Different cost concepts and terms are

often used in accounting reports.
 Managers who understand these
concepts and terms are able to...
– best use the information provided, and

– avoid misuse of that information.

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 Cost

 Cost is a resource sacrificed or forgone

to achieve a specific objective.
 It is usually measured as the monetary
amount that must be paid to acquire
goods and services.
 An actual cost is the cost incurred (a
historical cost) as distinguished from
budgeted costs.
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 Cost Object
 A cost object is anything for which a
separate measurement of costs is desired.
 Product
 Service
 Project
 Brand
 Activity
 Department

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 Basic
Basic Cost Cost

Concepts
Concepts
Cost is the cash or cash equivalent value sacrificed
for goods and services that are expected to bring a
current or future benefit to the organization.

 Costs are incurred to produce future benefits.

 Expired costs are called expenses.

 Unexpired costs are classified as assets and appear

on the balance sheet.
 Assigning cost accurately to cost objects is crucial.
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 Basic
Basic CostCost
Concepts
Concepts
A cost object is any item, such as products,
customers, departments, projects, activities, and
so on, for which costs are measured and assigned.
Example: A bicycle is a cost object when you are
determining the cost to produce a bicycle.
An activity is a basic unit of work performed
within an organization.
Example: Setting up equipment, moving materials,
maintaining equipment, designing products, etc.

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 Basic
Basic CostCost
Concepts
Concepts
Traceability is the ability to assign a cost to a
cost object in an economically feasible way by
means of a causal relationship.
Direct costs are those costs that can be easily
and accurately traced to a cost object.
Example: The salary of a supervisor of a department, where
the department is defined as the cost object.

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 Basic
Basic Cost
Cost Concepts
Concepts
Indirect costs are those costs that cannot be traced
easily and accurately to a cost object.
Example: The cost of heating and cooling a plant that
manufactures five products.

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 Classification of Cost Concepts
COST CONCEPTS

D E S C R IP T IV E T S T A T IS T IC A L T B E H A V IO U R T CONCEPTUAL T

T r a c e b ility C S e p a r a b ility C C o m p u ta tio n C F u n c tio n C A ve ra g e C G ro u p C V a r ia b ility C O p p o r tu n ity

D ir e c t S e p a r a te H is to r ic a l M a n u fa c tu r in g T o ta l P r im e F ix e d M a r g in a l

In d ir e c t Com m on R e p la c e m e n t O ffic e & A d m in A v e r a g e o r U n it C o n v e r s io n V a r ia b le Sunk

J o in t S ta n d a r d S a le s & D is t S e m i-F ix e d P e r io d

B y -p r o d u c t S e m i-V a r ia b le
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 Descriptive Terms
Tracebility Criterion
Direct Costs
 Direct costs of a cost object are those
that are related to a given cost
object (product, department, etc.) and
that can be traced to it in an
economically feasible way.
 Cost-Tracing describes the
assignment of direct costs to the
particular cost object.
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 Descriptive Terms
Tracebility Criterion
Indirect Costs

IDC are related to the particular

cost object but cannot be traced to
it
in an economically feasible way.

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 Direct & Indirect Costs

 Several factors affect the classification of a

cost as direct or indirect:
– The materiality of the cost in question
– Available information-gathering technology
– Design of operations
– Contractual arrangements
 The direct/indirect classification depends on
the choice of the cost object.
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 Descriptive Terms
Separability Criterion
 Separate Cost
 which can be traced to each
particular unit of batch of production
 Common Cost
 which are common for 2 or more
products / product lines which can be
produced separately
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 Descriptive Terms
Separability Criterion
 Joint Cost
 which are incurred in producing
products which must necessarily be
produced together
 By-Product Cost
 is variation of Joint Cost
 BP & JP cost depends upon significance
and importance
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 Descriptive Terms
Computation Criterion
 Historical Cost
 is on past figures

 Replacement Cost
 is present replacement value

 Standard Cost or Budgeted

 is based on standards
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 Descriptive Terms
Function Criterion
 Manufacturing Cost
 is total of consumption of raw materials,
direct labour and manufacturing
overheads
 Selling & Distribution Cost
 is cost incurred to sell & distribute

 Administrative Cost
 is incurred in office administration
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 Statistical Terms
Average Criterion
 Total Cost
 sum total of all costs

 Unit Cost
 is Total Cost divided by number of
units produced
– Hours worked
– Packages delivered
– No. of units assembled 21
 Statistical Terms
Grouping Criterion
 Prime Cost
 total of Cost of RM consumed & Direct
Labour
 Here Cost of RM consumed = Op. Stock RM
+ Purchases RM – Closing Stock RM
 Conversion Cost
 total of Direct Labour and Manufacturing OH
RM DL MOH

PC CC 22
 Behavioural Terms
Variability Criterion
 Fixed Cost
 which do not vary with cost object/no. of
units produced
 Variable Cost
 which varies with no. of units produced

 Semi-Fixed
 Semi-Variable

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 Conceptual Terms
 Marginal Cost
 is cost of producing one more unit

 Sunk Cost
 is cost which cannot be recovered

even if the course of action is not made

 Period Cost
 is for a particular period

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 Statement of Cost or Cost Sheet

 Total cost is made up of cost of production and cost of

distribution. Total cost is also called as selling cost, which
consists of:
 Prime cost

 Factory cost or work cost

 Administration cost or Office Overheads

 Selling and Distribution Cost.

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 Proforma of Cost Sheet

 Cost sheet is a statement designed to show the output of a

particular accounting period along with break up of costs.

 According to CIMA, London, the cost sheet is ‘a statement

which provides for the assembly of the detailed cost of a
cost center or a cost unit’.

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 Cost sheet of ---- for the year ended ----
Particulars Rs. Per Unit
Opening Stock of Raw Material xxxx
Add: Purchase of Raw Material xxx

Xxxx
Less: Closing Stock of Raw Material xxx
xxx xxx
Raw Material Consumed
Add: Direct Labor xxx xxx
Direct Expenses xxx xxx
Prime Cost xxxx xxx
Add: Factory of Works Over heads xxx xxx
Add: Opening Stock of Work-in-Progress xxx xxx
Less Closing Stock of Work-in-progress xxx xxx
Less: Sale of Scrap xx xx
Factory or Works Cost xxxx xxx
Add: Office and Administration Over heads xxx xxx
Cost of Production xxxx xxx 27
Add: Opening Stock of Finished Goods xxx xxx
Less: Closing stock of Finished Goods xxx xxx
Cost of Goods Sold xxxx xxxx
Add: Selling and Distribution Overheads xxx xxx
Cost of Sales xxxx xxx
Profit xxx xxx
Sales xxxxx xxxx

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 Cost Drivers
 A cost driver is a factor, such as the
level of activity or volume, that
causally affects costs (over a given
time span).
 The cost driver of variable costs is
the level of activity or volume
whose change causes the (variable)
costs to change proportionately.
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