INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING
Cost and management accounting is basically a form of accounting having objective to maximizing the profit by managing revenues and expenses by providing data and reports that are used by managers to inform their strategies and plans for long-term profit and growth.
Let’s start with understanding:
WHAT IS COST?
Cost can be defined as the monetary value of the utility which is yet to be attained from the resources used by the business to earnincome.In simple words we can say that cost is the benefit that we are expecting to have in future from the asset or assets by using them for business purposes or by selling these asset in an arm’s length transaction.
WHAT IS COST ACCOUNTING?
Basically, Cost accounting is a process of monetizing outflow of funds or loss of benefits in relation to certain aspect of the business for which user demands an information which is mostly used in the process of decision making. It is cost accounting that bridges three layers of time i.e. past, present and future.It helps in handling the past information well and also it can be of great help for future planning with budgeting and different analysis.
Cost accounting deals with the computation and assessment of costs and expenses to purchase or produce something. It relates to calculation cost per unit by using different costing techniques.
Cost Accounting is regarded as the process which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.
The main objectives of Cost Accounting are:
- To ascertain cost: It is the process of determining costs after they have been incurred. Mainly there are two methods of cost ascertainment – Job costing and Process costing. Costs are accumulated, allocated and ascertained for each cost object.
- To ascertain selling price and profitability: Cost accounting aims at determining the profit or loss of any cost activity on an objective basis by matching cost with the revenue of that activity. Cost accounting system provides a basis for price fixation and rate negotiation in tough market conditions or in slump periods.Also it acts as a guide for estimating prices for tender and quotations.
- Cost control: Cost accounting aims at controlling costs by using various techniques such as budgetary control, standard costing, Inventory control etc. It keeps a check on the expenses made by the company, against the set standards and the deviations are noted and reported continuously. A good cost accounting system focuses on maintaining discipline in expenditure.
- Cost reduction: It implies the actual and permanent reduction in the cost of production without compromising with the quality and the suitability of its desired use. Cost reduction is an approach of management where cost of an object is believed to be further reduced. No cost is termed as lowest and every possibility of cost reduction is explored.
- To assist management: Due to cost accounting, management comes to know about the inefficiencies of the workers and eliminates wastes like material, expenses, equipment, tools etc. It also ensures maximum utilization of resources of the organization by making sure that no machines are left idle, the workers get incentives for their performance, proper utilization of by-products and so on.
Difference between Cost Control and Cost Reduction:
|BASIS||COST CONTROL||COST REDUCTION|
|1.||Focuses||It focuses on decreasing the total cost of production.||It focuses on decreasing per unit cost of a product.|
|2.||Nature||Temporary process||Permanent process|
|3.||Type of function||Preventive function because it ascertains the cost before its occurrence.||It is a corrective function.|
|4.||Ends when||The process of cost control will be completed when the specified target is achieved||The process of cost reduction is a continuous process. It has no visible end. It targets for eliminating wasteful expenses.|
|5.||Emphasis||Emphasis is on past and present.||Emphasis is on present and future.|
WHAT IS MANAGEMENT ACCOUNTING?
Management accounting relates to the provision of relevant information for decision-making, planning, cost control and performance evaluation. Management accounting is one step further than cost accounting. It works to know the reasons of profit or loss and studies the factors which influence efficiency to help in decision making. Management accounting is open ended discipline which enables managers to take better and accurate decisions.
The main characteristics of management accounting are:
- Helps in decision making
- Future oriented
- No set format for disclosure of the information
- It is discretionary activity and not compulsory activity
- Provides both quantitative and qualitative information
In short, cost accounting supports management accounting and in turn management accounts pushes cost accounting further as per the needs of the management.
Difference between cost and management accounting:
|BASIS||COST ACCOUNTING||MANAGEMENT ACCOUNTING|
|1.||Nature||It provides quantitative information only.||It provides both quantitative and qualitative information.|
|2.||Main Objective||It is the ascertainment of cost of producing a product or providing a service.||Is to provide information to managers for setting goals and future activity.|
|3.||Rules and procedures||There are specific rules and procedure for preparing cost accounting information||There is no specific rules and procedures in case of management accounting information.|
|4.||Scope||Much narrow. It is limited to cost data.||Much broader. It has a wider area of operation like tax, budgeting, planning and forecasting, analysis, etc.|
|5.||Basis of decision making||Historic information is its basis||Historic and predictive information are its basis.|
|6.||Dependence||Cost accounting isn’t dependent on management accounting to be successfully implemented.It can be installed without management accounting.||While management accounting can’t be installed without cost accounting. It is dependent on both cost and financial accounting for successful implementation.|
|7.||Used for||Management, shareholders and vendors.||Only for management.|
|8.||Development||Its development is related to Industrial revolution.||It develops as per the needs of global business.|
Difference between Financial and cost accounting:
|BASIS||FINANCIAL ACCOUNTING||COST ACCOUNTING|
|1.||Nature||Records information which is financial in nature alone||Records the information regarding the cost incurred in the production activities including labour, overheads and material cost|
|2.||Estimation||The recording is always done on the actual transaction only. There’s no place for estimation.||It is based on the comparison between the actual transaction and the estimation of cost of the transaction.|
|3.||Objective||To assess the profitability and financial position of the company||To find out per unit cost of a project, fixing the selling price of a product|
|4.||End-users||Financial accounting is used by the external parties including shareholders, lenders and prospective investors, credit rating agencies in the market||Cost accounting is used by the management including employees, directors, managers for their internal assessment and management|
|5.||Information||Only monetary transactions are recorded||Monetary as well as non-monetary transactions are recorded such as units|
|6.||Coverage||Analyses the operations of a company as a whole||Analyses operations divided by segments (operational or geographical), division, contracts, etc.|
|7.||Measurement of efficiency||It shows the big picture of a company, as a result, financial accounting isn’t able to improve the efficiency of the inputs.||It tries to find out the pixel view of operations. It is able to provide information regarding the loopholes of labors and other inputs and also offers valuable feedback to improve the efficiency of inputs.|
|8.||Forecasting||It is not possible to forecast financial accounting||Cost accounting is forecasted using budgeting technique|
|9.||Format||There are formalized principles such as GAAP and IFRS, designed and controlled by independent agencies||No specific format is used, the intention is to record all the important information|
|10.||Period||It is prepared at the end of the accounting period, which is usually one year.||It is prepared and reported to the management as and when required.|
|11.||Reports||Profit & loss, Balance sheet, cash flow statement||Variance analysis, marginal cost, break-even analysis|
Difference between Financial and management accounting:
|BASIS||FINANCIAL ACCOUNTING||MANAGEMENT ACCOUNTING|
|1.||Used for||For external reporting to various stakeholders and mandatory by law in most cases||Only used for internal purposes of the company|
|2.||Rules or regulations||Is governed by Standards, Laws, regulations, etc.||Is not under the regulation of any law or regulations|
|3.||Purpose||Helps investors, creditors, etc. take investment decisions||The main purpose is to help internal management take decisions|
|4.||Nature||Is only concerned with financial information||Includes both financial and non-financial information|
|5.||Audit||Financial records are audited as per the norms||Not subject to any audits or investigation|
Hence, Cost Accounting and management accounting is an application of financial management.
The Role of Cost and Management Accounting is as follows:
- To provide material information to management for decision making.
- To assist management in planning, measurement, evaluating and controlling of business activities.
- To help in allocation of cost to products and inventories for both external users (e.g. auditors, shareholders, creditors, regulatory authorities etc.) and internal users (e.g. managers, employees etc.)
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