What is cost accounting PDF

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What is cost accounting? Write shore notes. Cost accounting is a process of systematic recording of cost or expenses that provides information to the users in a meaningful way. According to R.N. carter, “cost accounting is a system of recording in accounts the material used and labor employed in the manufacture of certain commodities or on a particular job” Objectives/Importance of cost accounting (2069)  Determining costs and profit for an accounting period. The main objective of cost account is to find out different types of cost incurred for producing goods and services. Similarly cost account also helps in determining the profit for accounting period.  Preparing data to aid in the control, reduction or improvement of cost. Cost account also helps in the control, reduction or improvement of cost.  Fix selling price Fixing selling price is another main objective of cost account. Without information of cost one cannot determine selling price.  Disclosing unit cost. Cost account help to disclose the cost of production on per unit basis. It also shows the cost of material per unit as well as total cost per unit.  Assisting the management Cost accounting helps to management for proper planning policy formulation and other decision making.

Cost accounting is a tool of managerial planning and control. Explain? Cost accounting is very important for estimating of total cost of product of service, analysis of efficiency of manager and analysis of cost. It provides information for managerial direction or control. It also classified and allocate the cost to achieve the managerial decision making. Management can take important decision on the basis if cist account like make or buy decision, accept or reject decision, investment decision, replacement decision etc. therefore business planning, policy formulation as well as cost control can be made with the help of cost accounting. So we can say that cost accounting is a tool of managerial planning and control. Limitation of cost accounting  No Uniform Procedures and methods The procedures and methods of cost accounting followed by different organizations are not uniform and therefore, they provide different results from the same information.

 Dependent It is not an independent system of accounting. It depends on other accounting systems  Not suitable for small scale units One of the limitations faced by the cost accounting in installing it in all types of business is that it is not applicable to small scale units. Through the traditional accounting, small scale units can control the cost effectively.  Expensive Introduction of this system is costly affair and can be used by big concerns only. Smaller concerns can’t afford to use this system because of heavy cost.  Not an exact science Like other accounting system, it is not an exact science but an art that has developed through theories and practices. Main distinction between Cost Accounting and Management Accounting is as follows. Cost accounting

Management accounting

Cost accounting deals with ascertainment, allocation, apportionment accounting aspect of cost.

Management accounting deals with the eff impact of costs on the business.

Cost accounting provides a base for management accounting

Management accounting is derived from co accounting and financial accounting

Cost accounting does not include financial accounting, Management accounting includes financial tax planning and tax accounting. accounting, tax accounting and tax plannin Cost accounting is concerned with short term planning

Management accounting is concerned with and long range planning.

Cost accounting can be installed with management accounting

Management accounting cannot be installe cost and financial accounting.

Cost accounting merely (only as specified) assists the management with functioning

Management accounting assists and evalu management performance.

Differences between cost accounting and financial accounting The main differences between cost accounting and financial accounting are given as under. Cost accounting

Financial accounting

Cost accounting provides information to the Financial accounting provides information o management for proper planning, control and decision loss and financial position of the business.

making. Cost accounting records the expenditure in an objective manner or according to the purposes for which the cost are incurred.

Financial accounting classifies records and the transactions in subjective manner or ac the nature of expenses.

Cost accounting is only a part of financial accounts.

Financial accounts are the accounts of the business

Cost accounts are related to transactions connected with the manufacture of goods and services.

Financial accounts are relate to commercia transactions of the business

Cost accounts disclose profit or loss of each product, job or service.

Financial accounts disclose the net profit o business as a whole

The main objectives or roles of management accounting are as follows. (2069) 1. Assistance in planning and formulation of future policies. 2. Helps in controlling performance. 3. Helps in interpretation of financial information. 4. Helps in coordinating operations. 5. Helps in organizing. 6. Helps in evaluating the efficiency and effectiveness of policies. 7. Helps in motivating employees. 8. Helps in the solution of business problems.

Explain briefly the reasons for gaining popularity by management accounting in modern business world? Concept of management accounting is needed because of the limitation of financial accounting and costing accounting. Information needed for management cannot me provided by financial and cost accounting. So separate accounting system “management accounting “is needed to help management. Therefore the reasons for gaining popularity by management accounting in modern business world are as follow:

 It cover wide scope than financial and cost accounting,  It provides both monetary as well as non-monetary information,  It also helps in controlling the different activity of business company and  Helps in planning, decision making and planning. Scope of Management Accounting The scope of management accounting can be studied as follows: 1. Financial Accounting Financial accounting forms the basis for analysis and interpretation for furnishing meaningful data to the management. The control aspect is based on financial data and performance evaluation, on recorded facts and figures. So, management accounting is closely related to financial accounting in many respects. 2. Cost Accounting Cost accounting is the process and techniques of ascertaining cost. Planning, decision making and control are the basic managerial functions. The cost accounting system provides the necessary tool for carrying out such functions efficiently. The tools include standard costing, inventory management, variable costing etc. 3. Budgeting and Forecasting Budgeting means expressing the plans, policies and goals of the firm for a definite period in future. Forecasting on the other hand, is a prediction of what will happen as a result of a given set of circumstances. Forecasting is a judgment whereas the budgeting is an organizational object. These are useful for management accounting in planning. 4. Inventory Control Inventory is necessary to control from the time it is acquire till its final disposal as it involves large sum. For controlling inventory, management should determine different level of stock. The inventory control technique will be helpful for taking managerial decisions. Limitations of Management Accounting  Based On Accounting Information Management accounting is based on data and information provided by financial accounting and cost accounting. So, effectiveness of management account is limited to the reliability of sources of information.  Management Accounting Is Only A Tool The tools and techniques of management accounting provide only information and not decisions. Decisions are to be taken by the management and implementation of decisions is also done by management.  Lack Of Knowledge The use of management accounting requires the knowledge of number of related subjects. Deficiency in knowledge in related subjects like accounting principles, statistics, economics, principle of management etc. will limit the use of management accounting. 

Expensive

Introduction of this system is costly affair and can be used by big concerns only. Smaller concerns can’t afford to use this system because of heavy cost.  Evolutionary Stage Management accounting is still in a development stage and has not yet reached a final stage. The techniques and tools used by this system give varying and differing results. It is still named as internal accounting and/or operational accounting. “Management accounting provides information for decision making, planning, controlling “justify the statements precisely “Management accounting is concerned with accounting information” justify

or,

Management accounting information is focused at internal managerial planning, decision making and controlling. Its intended use is to provide financial data relevant to a manager’s operations in an effort to make sound business decisions. Management accounting information comes in the form of financial ratios, budget forecasts, variance analysis and cost accounting. Without management accounting practices, making these decisions would be more like gambling and less of a science.

“Management accounting provides both monetary and non-monetary information” comment briefly Management account provides information not only monetary information but also provides nonmonitory information as per need. Management account collects the monetary information and modified, analyze and present to the manager for planning and decision making. Management account collects necessary data and converts into meaningful way and present in form of performance, in form of percentage, high, low, better, worst, etc. “Management accounting is more than a shift from recording keeping.” Comment “The objectives of management accounting is wider than that of the financial accounting” justify It is true that management accounting is different system than recording keeping/financial accounting because there are different scopes of management accounting. Management accounting covers the area of cost accounting, financial accounting, economics, statistics, budgeting, auditing, tax planning etc. Therefore management accounting covers wide scope and is not limited on congested area. It not only covers the recording or transaction, but is concern to provide information to management collected from other sector. It mainly covers task of planning, policy formulation, decision making and cost control. “Business planning is one of the basic functions of management accounting.” Comment Management accounting provides adequate data tools and techniques needed for future planning and policy formation of a business. Proper plan and policy helps to bring the desired result in future. Sales plan, production plan, cash plan, expense plan, can be prepared by the help of management accounting.

Planning is the main objective as well as function of the management accounting. Management needs to achieve goals in future. Without planning it is which is impossible to achieve. So we can say that business planning is one of the basic functions of management accounting. “Management account better solves management in decision making”. Justify Decision making is most important function and objective of management accounting. Relevant and basic information about cost price revenue expenses profited, provide the management account which help in managerial decision about make or buy, drop or continue, accept or reject the proposal etc. Decision should be taken by the management on the basic of information provided by management accounting. It means management account itself cannot tale the decision but, it serves the manager for taking quick and efficient decisions. ”financials accounting is historical in nature and management accounting is futuristic in its approach.” Justify Financial accounting provides information of profit and loss and financial position of the business in monetary term which are historical or actual data because it is prepared on the basis of historical data… so financial account cannot provide future data or information. Whereas management accounting, is newly developed accounting concept. It is mainly develop to assist the management. The main functions of management are planning, organizing, staffing, decision making etc. is related to the future. So we can say that management account is future oriented. Therefore financial accounting is historical in nature and management accounting is futuristic in its approach. 2-cost concept and classification What is cost? Differentiate between direct and indirect cost. (2069) An expense for receiving or producing something is called cost which can be measured in monetary terms.in another word resources introduced for production of goods and services is called cost. The following are the difference between direct and indirect cost Direct cost

Indirect cost

Direct cost is the cost that is directly related in production of the good.

Indirect cost is the cost that not directly rel production of the good.

Production is not possible without direct cost.

Some goods can be produced without indir

Direct cost needed for production proportionately.

Indirect cost is not needed proportionately

Behavior cost

Fixed Costs: These are those costs which remain fixed up to certain range of work capacity no matter how much product you produce within that capacity range. Like factory building rent. You pay the rent no matter that did you use that building for making the products or not. Variable Costs: These are those costs which change with the change in the number of product units you produce. Like Material, Labor etc. Mixed Cost/Semi Variable Costs: These are those cost the part of which is remain fixed and some part of the cost is variable. Fixed cost

Variable cost

Semi-variable

Cost per unit changes with the cost per unit is constant in all level change in level of output and Cost of output is constant within a limit of capacity.

Cost per unit changes w change in level of outpu

Total is constant in all level of output

Total is not constant in all level of output.

Total is not constant in a output.

Fixed cost incurred on the basic of time.

Variable cost incurred on the basic of volume of output. It changes directly with change in output.

it doesn’t changes direc change in output

Briefly write about controllable and uncontrollable cost. (a) Controllable costs These are the costs which can be influenced by the action of a specified member of an undertaking. A business organization is usually divided into a number of responsibility centers and an executive head each such center. Controllable costs incurred in a particular responsibility center can be influenced by the action of the executive heading that responsibility center. For example, direct costs comprising direct labor, direct material, direct expenses and some of the overheads are generally controllable by the shop level management. (b) Uncontrollable costs Costs which cannot be influenced by the action of a specified member of an undertaking are known as uncontrollable costs. Most of the fixed cost is uncontrollable. Cost which is incurred by one department and is appointed to another department which required the services is also uncontrollable cost.

Make notes on relevant and irrelevant cost. Give few cost of each type.

Relevant cost: Relevant cost is those cost which are affected by the managerial decisions. Or cost incurred or reduced in future due to the present managerial decisions is relevant cost. For example, in a decision on whether to replace an existing business with a new one, the cost to be paid for the new vendor is relevant. However, the initial cost of the old business is not relevant because it is a sunk cost.

Irrelevant cost Irrelevant cost are those cost which are not affected by ta managerial decisions. For example factory rents, factory manager’s salary, depreciation, insurance of asses are incurred continue or in these case cost are not affected by managerial decisions. So these (fixed) costs are irrelevant cost. Importance of relevant cost and irrelevant cost  it helps in make or buy decision,  it helps in cost reduction and cost control,  it helps in accept or reject the offer decision,  It provides the information of effect of total cost due to managerial decisions.  It helps to select profitable alternatives out of different alternatives. What is mixed cost/semi-variable cost? State less complicated tool you know to segregate mixed cost with suitable illustration. These are those cost, the part of which is remain fixed and some part of the cost is variable. These costs are the combination of fixed and variable cost. Telephone bill, electricity bill etc. are some example of mixed cost. Mixed cost can be segregate into fixed and variable cost using following methods:  High low method  Least square method  High low method Under high low method cost can be classified as follow: 1. Variable cost per unit = high cost-low cost High unit-low unit 1. Fixed cost = total cost – variable cost per unit x level of activity Or fixed cost = Y –bX Where, Y= total cost,

b= variable cost per unit and X= level of activity (output unit, DHL/DHM) Segregation of cost Separation of mixed cost into fixed and variable cost is called segregation of cost. Management can control variable cost with the help segregation of cost but fixed cost cannot be controlled. Inventory management

What is inventory management? What is the Objective of inventory management? (2069) Optimum purchase, proper use, and carefully preservation of stock are called inventory management. Proper investment in inventory, cost reduction and regular supply of the goods is the main them of inventory management. Objectives of inventory management      

Regular supply of goods, To reduce the losses, To inform about the stock in hand, Optimum investment in investment, Economy, profit maximization What is perpetual inventory system?

It is a technique of maintaining records of materials by the controlling department, which reflects the physical movement of stock of material and their current balance. A recording of every received, issue and determination of balance and inspection of inventory is called perpetual inventory system. Advantages:  reduce the cost of verification,  reduce the cost of verification time,  helps in valuation of closing stock,  develop the internal checking system,  increase the habit of regular checking What do you mean by ABC control system /selective control system? The ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control. Policies based on ABC analysis:

A- ITEMS: very tight control and accurate records B- ITEMS: LESS TIGHTLY CONTROLLED and good records C- ITEMS: simplest controls possible and minimal records

Advantages:  Better Control of High-Priority Inventory  More Efficient Cycle Counts  Saves time,  Minimize abnormal loss  Reduce cost with the help of economic ordered quantity. Bin card and advantages An inventory control system used to monitor the quantity of an item left behind. The two-bin inventory control method is mainly used for small or low value items. For example, when items in the first bin have finis...