Cost and Management Accounting –unit 1 BBA Law II Sem
Unit 1:
INTRODUCTION ON ACCOUNTING:
Accounting is a very old science which aims at keeping records
of various transactions. The accounting is considered to be
essential for keeping records of all receipts and payments as
well as that of the income and expenditures. Accounting can be
broadly divided into three categories. Financial Accounting,
aims at finding out profit or losses of an accounting year as well
as the assets and liabilities position, by recording various
transactions in a systematic manner. Cost Accounting helps the
business to ascertain the cost of production/services offered by
the organization and also provides valuable information for
taking various decisions and also for cost control and cost
reduction. Management Accounting helps the management to
conduct the business in a more efficient manner. The scope of
management accounting is broader than that of cost
accounting.
In other words, it can be said that the management accounting
can-be-considered-as-an-extension-of-cost-accounting.
As compared to the financial accounting, the focus of cost
accounting is different. Hence it has become essential to study
the basic principles and concepts of cost accounting.
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Cost and Management Accounting –unit 1 BBA Law II Sem
Meaning and concepts of Cost accounting
Costing: - Costing may be defined as ‘the technique and process
of ascertaining costs’. According to Wheldon, ‘Costing is
classifying, recording, allocation and appropriation of expenses
for the determination of cost of products or services and for the
presentation of suitably arranged data for the purpose of
control and guidance of management. It includes the
ascertainment of every order, job, contract, process, service
units as may be appropriate. It deals with the cost of
production, selling and distribution.
Cost Accounting: - Cost Accounting primarily deals with
collection, analysis of relevant of cost data for interpretation
and presentation for various problems of management. Cost
accounting accounts for the cost of products, service or an
operation.
Cost Accountancy: - Cost Accountancy is a broader term and is
defined as, ‘the application of costing and cost accounting
principles, methods and techniques to the science and art and
practice of cost control and the ascertainment of profitability as
well as presentation of information for the purpose of
managerial decision making.’
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Cost and Management Accounting –unit 1 BBA Law II Sem
Objectives of Cost Accounting: - Objectives of Cost
Accounting can be summarized as under
1. To ascertain the cost of production on per unit basis, for
example, cost per kg, cost per meter, cost per liter, cost per ton
etc.
2. Cost accounting helps in cost control and cost reduction.
3. Ascertainment of division wise, activity wise and unit wise
profitability becomes possible through cost accounting.
4. Cost accounting also helps in locating wastages, inefficiencies
and other loopholes in the production processes/services
offered.
5. Cost accounting helps in presentation of relevant data to the
management which helps in decision making. Decision making
is one of the important functions of Management and it
requires presentation of relevant data. Cost accounting enables
presentation of relevant data in a systematic manner so that
decision making becomes possible.
6. To reveal sources of economy by installing and implementing
a system of cost control for materials, labour and overheads
7. To advise management on future expansion policies and
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Cost and Management Accounting –unit 1 BBA Law II Sem
proposed capital projects
8. To help in the preparation of budgets and implementation of
budgetary control
9. Cost accounting helps in the determination of selling price.
Cost accounting enables to determine the cost of production on
a scientific basis and it helps to fi x the selling price.
10. To organize the internal audit system to ensure effective
working of different departments
11. To provide specialized services of cost audit in order to
prevent the errors and frauds and to facilitate prompt and
reliable information to management
Management accounting:
Management accounting involves preparing and providing
timely financial and statistical information to business
managers so that they can make day-to-day and short-term
managerial decisions.
The Institute of Management Accountants (IMA) describes
management accounting, "Management accounting is a
profession that involves partnering in management decision
making, devising planning and performance management
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Cost and Management Accounting –unit 1 BBA Law II Sem
systems, and providing expertise in financial reporting and
control to assist management in the formulation and
implementation of an organization's strategy".
Features of Management Accounting
The features of Management Accounting are given below.
1. The Management Accounting data are derived from both,
the financial accounting and cost accounting.
2. The main thrust in management accounting is towards
determining policy and formulating plans to achieve desired
objectives of management.
3. Management Accounting makes corporate planning and
strategy effective and meaningful.
4. It is concerned with short and long range planning and uses
highly sophisticated techniques like Cost and Management
Accounting 20 sensitivity analysis, probability techniques,
decision tree, ratio analysis etc. for planning, control and
evaluation.
5. It is futuristic in approach and predictive in nature.
6. Management accounting system cannot be installed without
proper cost accounting system.
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Cost and Management Accounting –unit 1 BBA Law II Sem
7. Management Accounting systems generate various reports
which are extremely useful from the Management point of
view.
DIFFERENCES BETWEEN FINANCIAL ACCOUNTING,
MANAGEMENT ACCOUNTING AND COST ACCOUNTING
BASIS FINANCIAL MANAGEMENT
ACCOUNTING ACCOUNTING
PRIMARY USERS External( Investors, Internal(Manage
government rs of business,
authorities, creditors) employees)
PURPOSE Help-investors, Help managers
OF INFORMATION creditors, and others plan and control
make-investment, business
credit-and-other operations
decisions
TIMELINES Delayed or historical Current and
future oriented
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Cost and Management Accounting –unit 1 BBA Law II Sem
RESTRICTIONS GAAP FASB AND SEC GAAP does not
apply, but
information
should be
restricted to
strategic and
operational
needs
NATURE-OF Objective, auditable, More subjective
INFORMATION reliable, consistent and judgmental,
and precise valid, relevant
and accurate
SCOPE Highly-aggregated Disaggregated
information about the information to
overall organization support-local
decisions
BEHAVIOURAL IMPLI Concern-about Concern about
CATIONS adequacy-of how reports will
disclosure affect
employees
behavior
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Cost and Management Accounting –unit 1 BBA Law II Sem
FEATURES Must be accurate Usually
and-timely.- approximate but
Compulsory-under relevant-and
company law flexible Except
for few
companies, it is-
not-mandatory
SEGMENTS It-is-primarily Segment
OF ORGANISATION concerned-with reporting is not
reporting for the the-primary
company as a whole. emphasis.
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Cost and Management Accounting –unit 1 BBA Law II Sem
BASIS FINANCIAL COST ACCOUNTING
ACCOUNTING
OBJECTIVE It-provides It-provides
information-about information-of
financial ascertainments-of
performance and costs to control
financial position of costs and for
the business. decision making
about the costs.
NATURE It classifies records, It classifies records,
presents-and presents-and
interprets interprets-in
transactions in significant-manner
terms of money. materials,-labour
and overhead costs.
RECORDING It records historical It records and
OF DATA data. presents estimated,
budgeted data. It
makes use of both
historical costs and
predetermined
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Cost and Management Accounting –unit 1 BBA Law II Sem
costs.
USERS_OF External users like Used by Internal
INFORMATION shareholders, management at
creditors, financial- different levels.
analysts,
government and its
agencies ,etc.
ANALYSIS OF COSTS It shows profit/loss It provides details
AND PROFITS of the organization. of costs and profit
of each product,
process, job etc.
TIME PERIOD They are prepared They are prepared
for a definite as and when
period, usually a required.
year.
PRESENTATION_OF A set format is used There are no set
INFORMATION for-presenting formats for
financial presenting cost
information. information’s.
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Cost and Management Accounting –unit 1 BBA Law II Sem
Key Differences between cost and management
accounting
The basic objective of cost accounting to help the
management in cost control and decision making. While
the main objective of management accounting is to
provide vital information to the decision makers in
planning, controlling, and decision-making.
Cost accounting provides quantitative information while
management accounting provides both quantitative and
qualitative information.
Cost accounting deals with the ascertainment of cost of
production and inventory while management accounting
deals with information related to managers to set goals
and plan strategies.
The scope of cost accounting is narrow as it is limited to
cost information only while the operation of management
accounting is wide as it deals with both financial and non-
financial information.
Cost accounting focuses on recording of past and present
data while management accounting mainly emphasis on
future projections.
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Cost and Management Accounting –unit 1 BBA Law II Sem
For audit purpose, the inclusion of cost information in
financial statement is important while management
Accounting has no statutory requirement for audit
purpose.
Cost accounting information and manufacturing or
productions statements have value for shareholder and
relevant creditors while management accounting
information is restricted to management only.
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