Cost & Management AccountingONE

CHAPTER -I 2015

An Overview of Cost & Management Accounting

1.1 Introduction
ACCOUNTING: There are many definition of accounting, among these the one that formulated by the
American Accounting Association’ (AAA), Accounting is defined as the process of identifying,
measuring and communicating economic information to permit informed judgments and decisions by
users of the information. According to this definition, the function of accounting is to provide the
information about the business activities.

As accounting plays an important role in the decision making process of business entities, it is often
called “the language of business” because it provides financial information about an organization’s
economic activities which is intended to be used as a basis for decision making. The basic function of any
language is to serve as a means of communication. Accounting summarizes financial transactions and
enables the accountants to convey economic information to various parties interested in them so as to
enable them to make correct judgments. Communication is preceded by accounting process which
consists of recording, classifying, summarizing, and interpreting. As an information system, accounting
system may be shown as under:

Input
Business transactions in termsSystem
Processing of money
Output
Recording, classifying, summarizing, analyzing & interpreting
Financial statements for communication

Accounting plays a great role in society by providing information to a number of groups who may be
directly or indirectly interested in the working of an enterprise. In order to satisfy information needs of
different people, different branches of accounting have developed. Each and every branch of accounting
is generally confined to its own area of operation. Following are the branches of accounting:

(i) Financial Accounting

(ii) Management Accounting
(iii) Cost Accounting
1.2 Cost Accounting & Its Relations to Management Accounting & Financial Accounting

Cost accounting is the branch of accounting which has been developed in the last few decades in order to
overcome the limitations of financial accounting in certain aspects. Accounting serves the purpose of providing
financial information relating to the activities of a business. This information helps the business in general way
but the details regarding operating efficiency cannot be found.

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1.2.1 Cost & Management Accounting - I
Financial Accounting 2015
 Financial Accounting in “Dictionary for Accountancy” is defined as the accounting for revenues,
expenses, assets and liabilities that is commonly carried on in the general office of the business.
 Financial Accounting is mainly concerned with recording, classifying and summarizing financial
transactions with a view to prepare financial statements.
 The main task of financial accounting is to prepare “Income Statement” i.e., ‘Profit and Loss
Account’ and the ‘Statement of Financial Position’ i.e., “Balance Sheet” and furnish valuable
information to the outsiders.
 In spite of new accounting devices, financial accounting is limited and inadequate in regard to the
information to be supplied to the management. Cost accounting and management accounting have
emerged because of limitation of financial accounting.
Limitation of Financial Accounting: (Cost – Accounting Advantages)
(1) Provides historical information only
 Financial accounting is historical in nature and tells about the cost which has already
incurred.
 It does not provide the cost information to the management for decision making.
(2) Shows only overall performance
 Financial accounting provides information about the performance of the business in terms
of profit or loss in an overall manner.
 But it does not provide any information about the departments, products or process.
(3) Inadequate information to fix price
 Financial accounting does not provide required information for determining the price of
the products or services.
(4) No classification of expenses
 In financial accounting there is no such system by which accounts are classified so as to
give data regarding cost by departments, processes or products.
 Again the expenses are not classified in to direct and indirect, fixed and variable,
controllable and uncontrollable etc.
(5) No analysis of loss
 Financial accounting does not analyze the losses which are incurred due to loss material, idle
time, idle plant capacity etc. Thus the exact causes of loss are not known.
(6) Fail to provide useful data to the management
 Financial accounting does not provide adequate information to the management for taking
important decisions in the matters relating to replacement of old machines, product mix, selection
of suppliers of inventory etc.

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 (7) No comparisonCost & Management Accounting - I
of cost 2015
 Comparison is important in the modern management control but financial accounting does not
provide any information for comparison of cost to the management relating to different jobs,
periods etc.
(8) Does not provide information about different costs
 Financial accounting does not provide sufficient cost data relating to materials, labour and other
overheads.
1.2.2 Management Accounting
 It is concerned with accounting information which is useful to the management in
formulating policies and controlling the business operations.
 According to ‘American Accounting Association’ “management accounting is the
application of appropriate techniques and concepts in processing historical and projected
economic data of an entity to assist management in establishing plans for reasonable
economic objectives and in the making of rational decision with a view towards achieving
these objectives.”
 Management accounting is a system that collects, classifies, summaries, analyses and
reports information that will assist managers in their decision making and control
activities.
 The main purpose of management accounting is to provide all the relevant information that
may be required by the management to take decisions.
 It is also concerned with evaluation of performance of the management as an institution.
 Management accounting cannot be installed without a proper cost accounting system.
 Management accounting covers all arrangements and combinations or adjustments of the
information from which top management can control the business.
 Management accounting is not a specific system of accounts, but could be any form of
accounting which enables a business to be conducted more effectively and efficiently.
1.2.3 Cost Accounting
Definition:
& Cost accounting may be defined as a specialized branch of accounting which involves
classification, accumulation, assignment and control of costs.
& According to Chartered Institute of Management Accountants (C.I.M.A.) England. ”cost
accounting is the process of accounting for costs from the point at which expenditure is incurred
or committed to the establishment of its ultimate relationship with cost centers and cost units. In

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 Cost
its widest usage, & Management
it embraces Accounting
the preparation -I
of statistical data, the application of cost control2015
methods and the ascertainment of the profitability of activities carried out or planned.”
& In short, cost accounting is the process of accounting for costs with the object of ascertaining and
controlling costs.
Basically cost accounting is developed to meet the needs of management which require more detailed
information than provided by the financial statements. Cost accounting provides the required information
in detail to various level of management for efficient use. This information supplied by the cost
accounting acts as a tool for making important decisions relating to optimum utilizations of the scarce
resources to reduce cost and increase the profitability of the business.
Features of cost accounting:
(1) Like financial accounting, cost accounting is based on the principle of debits and credits.
(2) Cost accounting is concerned with systematic recording and presentation of financial data.
(3) Cost accounting provides cost information. The purpose of cost accounting is to ascertain the cost
per unit of production and the cost of each element of expenditure.
(4) Cost accounting is a science as well as an art. Cost accounting is a science since it contains
systematized knowledge which the cost accounts applies. Cost accounting is an art since the
application of techniques and methods requires skill and judgment.
(5) Cost accounting is supplementary to financial accounting.
Objectives of cost accounting:
& To ascertain cost
& To determine selling price
& To control cost
& To prepare financial statements
& To formulate operating policies
FINANCIAL ACCOUNTING AND COST ACCOUNTING
The main function of cost accounting and financial accounting is to provide information. As such, both
branches of accounting are related to each other to a very large extent.
Points of similarities between cost accounting and financial accounting:
(1) Both are based on double entry system i.e., principles of debits and credits.
(2) In both cases transactions are recorded in monetary terms.
(3) Recording of accounting information is done in both the systems with the same basic documents
(4) Both systems show cost and profit.

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 Cost & Management Accounting - I 2015

Points of distinction
In spite of above points of similarity cost accounting and financial accounting differ in the following
respects:
Basis of Financial Accounting Cost Accounting
distinction
1) Purpose Its purpose is to determine profit for the Its purpose is to provide detail cost
accounting period & to show the information for cost ascertainment, cost
financial position of the concern at the control & decision making.
end of the accounting period.
2) Interested It provides information to external It provides information to management.
groups groups
3) Necessity Its maintenance is necessary to meet the Its maintenance is voluntary except in
requirements of the income tax, some industries.
companies act and other laws of the
country.
4) Mode of Financial accounts are prepared There are no statutory provisions
presentation according to accounting standard & regarding preparation & presentation of
accounting principles and statutory cost accounts.
requirements.
5) Recording Transactions are recorded, classified and Transactions are recorded, classified
of analyzed in to personal, real and nominal and analyzed objectively i.e., according
transactions accounts i.e., according to the nature of to the purpose for which the cost is
expenditure. incurred.
6) Analysis of Financial accounts show the profit of the Cost accounts show the profit made on
profits business as a whole and does not show each job, process or product.
profit for each product, process etc.
7) Reporting Financial accounting observes the Cost accounting makes day-to-day
accounting period which is normally a reporting like a movie picture. It aims
year. at continuous reporting at short
intervals say weekly.
8) Emphasis Its emphasis is on accuracy. Its emphasis is on timeliness.
9) Nature It is historical in nature and it is It is concerned with historical as well
concerned with historical data. as per-determined data.
10) Control It does not provide for adequate control It provides for a detailed system of
over costs. control over cost.

COST ACCOUNTING & MANAGEMENT ACCOUNTING

Points of similarity:
(a) Both these accounting systems use common basic data and reports to a material degree.

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 Cost
(b) Both are internal to &theManagement
organizationAccounting - I same objective of helping management in2015
and have the
decision making.
(c) Both use common tools and techniques like marginal costing, standard costing and budgetary
control.

Points of distinction:
In spite of above points of similarity cost accounting and management accounting differ in the following
respects:
Basis of Management Accounting Cost Accounting
distinction
(a) Contents It deals with the effect and impact of costs
It deals with the ascertainment and
on the business. accounting aspects of costs.
(b) Data Its data are derived from cost accounting &Its data are derived from financial
financial accounting. accounting.
(c) Scope Its scope is wider and it includes tax Its scope is narrower & it does not
accounting and tax planning also. include tax accounting & tax planning.
(d) Tools A management accountant uses many A cost accountant uses budgetary
& techniques other than budgetary control, control, standard costing and marginal
techniques standard costing and marginal costing. costing as the basic tools and
techniques.
(e) Emphasis Its main emphasis is on decision making on Its main emphasis is to ascertain & to
the part of management. control costs.
(f) Planning It is concerned with short-term as well as It is concerned with short-term
long-term planning. planning.

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