Cost and Management Accounting - 1

Dr. Kanagaraj Kalimuthu

Associate Professor
Department of Accounting and Finance
College of Business and Economics
Mettu University, Ethiopia
 Unit 1 : Introduction

• Purpose of an Accounting System

• Role of an Accountant
• Accounting and the Management Process
• Financial Accounting, Cost Accounting and Management
Accounting
• Ethical Considerations in Management Accounting
 Why we study about Cost and Management Accounting?
• To success in any business organization requires the use of cost
accounting concepts and practices. It provides key data to
managers for planning and controlling, as well as costing products,
services, even customers.
• Small and medium business, especially those in the state of early
development require quick and effective decisions in order to further
enhance their revenue and market competitiveness. Management
Accounting provides performance and financial data that allows
managers to formulate further plans according to available
information.
• Effective Production Decisions: When you need a new product or
subcomponent, it is difficult to determine whether or not it pays
better to produce the unit on your own or hire a third-party
production company to deliver the unit to you.
Planning Future Business Development: In order to plan future for a
company, we have to know its present situation and follow
financial patterns (shape) of your operations. This way we will be
able to create long-term plans for a business based on relevant
information. Simply put, if you wish to expand your production
capacities, management accounting can allow to access to
information when it’s most suitable to start the expansion process.
Making a Proper Budget Decision: Managerial accounting is
the ability to create an effective budget. Analyzing former actions,
uncompleted activities, and future investments play a crucial role in
determining the budget. We have to include all aspects of business
when calculating the budget and make sure to provide each section
of operation with sufficient funds to function exactly as you
planned.
Meaning of Accounting
• Accounting may be defined as the science and the art of
systematically recording, presenting, and interpreting
the financial facts of an individual or enterprise.
• Accounting the art, is the actual recording, classifying
and summarizing of the financial facts of an enterprise.
• Accounting is the system of collecting, classifying,
summarizing, analyzing and reporting financial
information about a firm. Accounting means The
Language of Business / The Language of Financial
Decisions.
• Accounting is defined as a process of record keeping
of all financial transactions in a business.
• In business, every transaction is expected to be
recorded. Every business has multiple transactions
going throughout the day, and it is essential that to
determine the productivity of the business, these
transactions be recorded.
• Accounting is an integral (essential / important) part
of the business which is used to record the list of
financial transactions occurring in the business.
Sometimes accounting is also defined as the process
of collecting, recording, studying, and reporting the
financial transactions of an organization.
Definition of Accounting

Accounting is the art of recording, classifying

and summarizing in a significant manner and
in terms of money, transaction and events
which are, in part at least, of financial character
and interpreting the results thereof.”
-American Institute of Certified Public
Accountant (AICPA)
Definition of Accounting

“Accounting is the process of identifying,

measuring and communicating economic
information to permit informed judgments
and decisions by users of information”.
-American Accounting Association (AAA)
Accounting System

• Accounting System is a system implemented by

companies to record financial information including
Income, Expense and Other accounting transactions
and acts as an important tool that monitoring and
tracks the performance of the company and ensures
smooth running of the business.
• Accounting system may be broadly classified into two
types namely single entry system and double entry
system.
 Single Entry
• This is an informal way of maintaining a record for financial transactions. Here
separate accounts are not opened. Only Expenses and Income as and when
happening is recorded. So it is not possible to prepare charts and other financial
statements from the single entry system. Single Entry is mostly maintained by
small businesses as they don’t have the expertise (knowledge) to follow the
latest systems and not accepted by authorities for tax reporting.
• In simple words, A single entry system records a transaction with a single entry
and only maintains one side of every transaction. It is the oldest method of
recording financial transactions and is less popular than the double entry
system and is mainly used for entries recorded in the income statement. This
term is used to describe the problems associated with the accounts from an
incomplete transaction and is popularly called as ‘Preparation of accounts from
incomplete records’
 Double Entry System
•There are numerous transactions in a business concern. Each transaction, when
closely analyzed, reveals two aspects. One aspect will be ‘receiving aspect’ or
‘incoming aspect’ or ‘expenses / loss aspect’. This is termed as the ‘Debit aspect’.
•The other aspect will be ‘giving aspect’ or ‘outgoing aspect’ or income / gain aspect’.
This is termed as the ‘Credit aspect’
•The double entry system is so named since it records both the aspects of a
transaction.
•In short, the basic principle of this system is, for every debit, there must be a
corresponding credit of equal amount and for every credit, there must be a
corresponding debit of equal amount.
•Double entry system of accounts is a scientific system of accounts followed all over
the world without any dispute. It is an old system of accounting. It was developed
by ‘Luco Pacioli’ of Italy in 1494. Under the double entry system of account, every
entry has its dual aspects of debit and credit. It means, assets of the business
always equal to liabilities of the business. Therefore, he is the father of Accounting.
Purpose of an Accounting System
An accounting system is an organized collection of
computerized and manual accounting processes,
procedures and controls created to collect, record,
classify, summarize and interpret accurate and
reliable financial data for decision making by
management.
The main purposes of an accounting system are to
prevent and detect fraud, waste and theft and to
generate financial statements for managers,
creditors and lenders. There are four purposes.
1. Timeliness
Time is a resource that should never be
wasted, since it can never be recovered. An
accounting system that is timely is an asset to
any organization, because it presents
information to users as and when required. A
timely accounting system is able to produce
the required reports for decision making just in
time to make major decisions.
2. Cost-Effective
Accounting systems have the goal of saving
costs, especially when training staff. When
implementing a new accounting system, the
cost of operating it should not be greater than
the benefits it provides. It is therefore essential
to tailor (modify / adapt) the accounting
system to the specific needs of the firm to
avoid waste generated by a system with
functions that the company will not need.
3. Informative
The primary goal of an accounting system is to ensure
that management, the board of directors and other users
of financial statements get sufficient information
necessary to enable them to make informed decisions
for the business. Information is power, and a firm with a
highly informative accounting system is able to make
effective plans to make the firm grow in its industry.
In short, an informative accounting system should be
able to satisfy the needs of various users like managers,
creditors, owners and government.
4. Reliability (Dependability / Honest)

A reliable accounting system produces

information that is free from bias (partiality). It
faithfully represents what is seeks to represent.
This information should be trustworthy and
dependable so users can make decisions.
For the information to be reliable, it must be
neutral and faithful in representing the general
condition of the firm.
 Role of an Cost and Management Accountant
Costing is essential / important to determine pricing of products and
services in every organization, which is accountable to its stakeholders.
This is where the role of a Cost and Management Accountant (CMA) is
critical, as this work cannot be done by just an ordinary accountant.
A CMA is a person who performs services like costing; pricing of goods
or services; prepares, verifies or certifies cost accounting; and prepares
related statements. A CMA’s job essentially involves an analysis of costs
and to plan / devise ways to reduce it.
The CMA is also expected to evaluate operating efficiency (use
resources like time, people, equipment, inventory and money in an
optimized way to serve the business) and effectiveness of production
and service management in different departments of an organization.
This analysis helps in comparing financial performances, making
assessments and projections, providing figures for future costing and
pricing policies and other related managerial decisions.
A CMA is required to advice on profitable product mix (refers to several
products that a company offers to its customers) identify business risks and
ensure mitigation (explanation).The employment avenues for CMAs’ are
various and can range from holding key positions such as Chief Finance Officer,
Chief Executive Officer and Finance Manager, etc. to Chairman, Managing
Director and Finance Director in MNCs, Private and Public Sector, Central and
State Government Institutions.
In the field of education, cost accountants can be appointed as Assistant
Professor, Professor and Principal/Director/Head of an institution in
Universities and colleges in the areas of Management, Business and
Administration.
To become a CMA a person has to qualify in the course offered by the Institute
of Cost Accountants of India which functions under the aegis of the Ministry of
Corporate Affairs.
Financial Accounting, Cost Accounting and Management Accounting

Definition: Financial accounting is the systematic procedure

of recording, classifying, summarizing, analyzing, and
reporting business transactions. The primary objective is to
reveal the profits and losses of a business. Financial
accounting provides a true and fair evaluation of a business.
It, therefore, safeguards the interests of stakeholders.
Financial accounting includes the bookkeeping of financial
transactions like purchases, sales, receivables, and payables.
Accountants follow the Generally Accepted Accounting
Principles (GAAP) for creating income statements, cash flow
statements, balance sheets, and shareholder’s equity
statements.
Objectives of Financial Accounting
The main objectives of financial accounting could be
• To ascertain the operating results of the enterprise
• To exhibit the financial position of the business; and
• To thrust control over the operation as well as the
resources of the business
Apart from the above, there are some objectives of
financial accounting which could be derived from the
above and they are:
1.Systematic Record Maintenance: Financial Accounting is to report
the results of most business events. Hence, it becomes important to
keep a systematic record of these events. This function embraces
(holds) recording transactions in the journal and subsidiary books
like cashbook, sales book etc., posting them to ledger accounts and
ultimately preparing the financial statements [final accounts].
2.Communicating the Results: The other main function of financial
accounting is to communicate the financial facts of the enterprise to
the various interested parties like owners, investors, creditors,
employees, government, and research scholars, etc. The cause of
this function is to enable these parties to have a better
understanding of the business and make sound and realistic
economic decisions.
3. Meeting the Legal Requirements : Financial accounting
aims at fulfilling the legal requirements, especially of the
tax authorities and regulators of the business by
discharging this function in accordance with certain
fundamental truths and uniform enforcement of Generally
Accepted Accounting Principles (GAAP).
Why Is Financial Accounting Important?
Here are some of the importance of financial accounting:
• Recording Financial Transactions: The primary function of
financial accounting is to write, maintain, and record financial
transactions within the company's accounting ledger.
• Comparing and Analyzing Financial Data: Another key aspect of
accounting is that it allows business owners to compare and
analyze financial data that helps improve decision-making.
• External Communication: Accounting allows businesses to
communicate their financial information to external
stakeholders like investors - an essential element for conducting
business. This further helps companies showcase their financial
standpoint and reliability to repay loans and make payments.
• Comparing Financial Reports: Accounting further aids
businesses in assessing their health by comparing
financial statements, thereby enabling them to analyze
their success.
• Recording transactions: Financial accounting is key to
keeping a detailed record of financial transactions, thereby
enabling them to stay organized. Further this helps
businesses in the audit process and even re-evaluating the
spending and budgeting.
Meaning of Cost Accounting
• Cost Accounting is a branch of accounting concerned with recording
and analyzing the cost elements of the organization. It records each
element of the company’s total cost of production including fixed cost
and several variable costs involved in various stages of production. All
cost elements are recorded, summarized, and presented in a better way
for proper understanding by the internal users of the organization.
• Cost accounting is considered as the subpart of managerial
accounting and helps the managers in better management of the
organization. It supplies all detailed information concerned with
production cost to managers so that important decision regarding
controlling costs can be taken. The information collected by cost
accounting is not available for external users but is only used by
internal users for management purposes.
Definition of Cost Accounting

The Institute of Cost and Works Accountants

(ICWA) (UK) defines cost accounting as “the
process of accounting for cost from the point at
which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost
centers and cost units. In its widest usage it hold
the preparation of statistical data, the application
of cost control methods and the ascertainment of
the profitably of activities carried out or planned”.
Functions of Cost Accounting

1. Ascertainment Of Cost
2. Controlling Cost
3. Aid To Management
4. Setting Up Selling Prices
5. Inventory Control
6. Measurement Of Efficiency
7. Discloses Profitable And Non-Profitable
Activities
1. Ascertainment Of Cost

Cost ascertainment is an important function played by

cost accounting. It records each and every element
relating to production activity systematically like fixed
and variable cost, direct and indirect cost.
The data collected by cost accounting is analyzed by
managers in determining the true and actual cost of
products. Now-a-days businesses manufacture a wide
and large range of products, in the absence of cost
accounting, it becomes difficult for them to find out the
real cost of their products.
2. Controlling Cost
Cost accounting helps the organization in controlling
its cost. Organization sets standards for their cost
which are treated best for the achievement of goals
and objectives. Cost accounting supplies detailed
information related to the cost of each step of
production. This information collected is then
compared with standards already set and if any
deviation is found, necessary steps are taken.
Therefore it helps in the detection of deviations in cost
and time controlling them.
3. Aid To Management
Cost accounting supports the managers in performing
their duties. It supplies them all necessary and relevant
data to the managers periodically that may be monthly,
quarterly or half-yearly. Managers analyze the detailed
cost information supplied by cost accounting and
accordingly take decisions. They framed and
implement policies in the organization as per the
information collected. It helps them in taking strategic
decisions and better management of organization
affairs.
4. Setting Up Selling Prices
Fixing up the right selling price for its product is a
challenging task for every business organization.
Cost accounting helps in the ascertainment of the
accurate cost of production of products. By adding
the profit margin to the real cost, company can
easily fix the selling cost for its products.
Businesses under cost accounting use different
techniques like batch costing, job costing, service,
and output costing for determining the selling price
of its products.
5. Inventory Control
Cost accounting helps in controlling the inventory
by recording each item of inventory. It maintains
complete records of all raw materials so that
timely proper order for raw materials can be made.
It avoids all situations like over-ordering and under-
ordering of raw materials.
Also, the complete record of finished goods is
made so that accordingly production process can
be regulated. It avoids wastages of resources and
the occurrence of losses for the organization.
6. Measurement Of Efficiency
Cost accounting helps in measuring the
efficiency of business operations. Managers can
easily acquire information regarding production
cost which can be analyzed to find out how
efficiently a business is running. It helps in
avoiding wastage of different resources of the
organization through proper monitoring. It uses
a standard cost method in measuring the
efficiency of each process, product and
department.
7. Discloses Profitable And Non-Profitable Activities
Cost accounting gives clear details of each activity
of business to managers that which one is
profitable and which one not. It supplies all detailed
information regarding the cost of each product of
the business.
Managers by comparing the cost of the product
with demand in the market can decide whether to
continue its production or not. It, therefore, helps in
determining profitable and non-profitable activities
of business by managers.
Objectives of Cost Accounting
1. Process Of Accounting For Cost
Cost accounting is a process of recording the income and expenditure
of the organization. Objective of cost accounting is to find out the
cost. cost includes raw material cost, labour cost, fixed cost and other
cost which is related to the production.
2. Records Income And Expenditure
Cost Accounting records income and expenditure which is related to
production. cost accountant constantly track and analyze the per-unit
cost of the product. so that the true and fair cost of production will
find out.
3. Provides Statistical Data
Cost Accounting provides statistical data for analysis and
interpretation of cost in production. It helps in proper and efficient
planning and also helps in the preparation of the budget.
4. Helps In Cost Control
• Cost Accounting helps in cost control. Cost control is a process of
identifying and reducing business expenses. So the profit of the
organization increase. Cost accounting comparison of Actual cost
with Standard cost and find out the problems. Then corrective
measures are taken into steps.
5. Preparation Of Budget
• Budget is the estimation of income and expenditure over a period of
time. Cost accounting provides statistical data for the preparation of
the budget and proper and efficient planning.
6.Comparison Of Actual With Standard
• We make standard cost in budget and planning. But cost accounting
provides the data and the correct information of the actual cost. So
that we can Compare of Actual cost with the Standard cost.
7. Presentation Of Correct Information
• Cost accountant regularly track and analyze the cost of
the product. Cost Accounting provides the raw data. Data
processing convert the raw data into information. Hence
Cost Accounting is present of Correct information.
8. Helps In Decision Making
• Cost Accounting helps managers to decide. It provides
the information to management related to production.
That helps to take decision and planning for future.
Importance of Cost Accounting
Cost accounting is essential for a business and benefits for the
employees, clients, stakeholders, and even the government. Here are
some of the best advantages of the cost accounting technique:
• As cost accounting helps differentiate fixed and variable expenses, it
helps the company make better financial decisions. Management can
decide the product price as per the cost incurred in producing the item.
• It helps efficient workers to get recognition and incentives on time.
This is because cost accounting help assesses the efficiency of every
worker and keeps a competitive work spirit going on.
• Cost accounting helps to manage and control costs by determining
the various costs incurred in running a company. With this technique,
a company can reduce operational costs and enhance work efficiency,
thereby benefiting the company and its client.
Types of Cost Accounting

Cost accounting is conducted through multiple

procedures based on managerial decisions.
Here are the best types of cost accounting:
1. Direct Cost Accounting
2. Standard Cost Accounting
3. Marginal Cost Accounting
4. Historical Cost Accounting
5. Uniform Cost Accounting
1. Direct Cost Accounting
• In the direct costing technique, only variable costs are
considered for cost accounting. It does not include
any fixed costs incurred by a company. However, this
process is generally used for short-term decision-
making. Using a direct cost accounting procedure for
a long-term decision can be hazardous (dangerous/
risky) as it does not include all types of costs.
• For instance, if you are computing the direct cost
accounting for a construction business, only material
cost (variable cost) will be used for analysis.
2. Standard Cost Accounting
• Standard costing is an estimation of the cost that
incur in a production process. As actual costs
cannot be pre-determined, manufacturers use
standard costing methods to plan their expenses
accordingly. It helps in preparing a company
budget in advance for streamlined financial
management.
• For instance, the raw material cost, labour charges,
etc., required for production is analyzed through
standard costing.
3. Marginal Cost Accounting
• A company determines the number of units to
produce and decides a cost structure based on that.
This is known as marginal cost. It is used to
determine the impact on expenditure and profit if a
single unit of production exceeds the estimated one.

• For instance, a company decides the marginal cost

for producing 100 units of soft toys. With this
technique, they can determine if the production unit
exceeds 140 and whether it will be profitable or not.
4. Historical Cost Accounting
Under this cost accounting method, a company's
financial statement records the price of an asset as per
the original cost incurred in purchasing it. The
company does not update the figures as per the market
records.
For instance, a company purchased the property 50
years ago for Rs. 10 lakhs; at present, the property
valuation is Rs.50 lakhs. However, if the company
maintains historical accounting, it will record the
property price of Rs.10 lakhs only.
5. Uniform Cost Accounting
Uniform costing is the latest cost control
technique that has no resemblance with any
other type of cost accounting. Under this method,
a large group of companies in the industry follow
and accept the same costing principles as per
mutual agreement. In India, coal, fertilizer, steel,
etc., industries use this costing method to
manage the company expenses on a mutual
agreement and participation.
Management Accounting
According to Robert N. Anthony has defined “Management Accounting
is concerned with accounting information, which is useful to the
management”.
According to Brown and Howard has defined “Management
Accounting is concerned with the efficient management of a business
through the presentation to management of such information that will
facilitate efficient planning and control”.
According to The Institute of Chartered Accountants of England and
Wales “Any form of Accounting which enables a business to be
conducted more efficiently can be regarded as Management
Accounting”
 Objectives of Management Accounting
The basic objectives of management Accounting are to help
management in the creation of policy and regular operation of the
business. It provides relevant accounting information to the
management for use in planning, organizing, decision- making and
control at the appropriate time.
The main objectives of management accounting may be enumerated
as follows:
1.Providing management with accounting, costing , and other
statistical data for use in planning and decision- making
2.Computing and presenting to the management the financial results
of alternative courses of action to decide on the best alternative
3. Translating the management plans covering all financial
activities of business
4. Verifying the figures for business activities to judge
consistency and practicability for need of revision of plans, if
any
5. Financial interpretation of plans to pinpoint individual
responsibilities
6. Measuring actual performance against standards, and
reporting the results of the operations to the appropriate
level of management
7. Measuring and reporting on the effectiveness of the
enterprise
 Role of Management Accounting in Management Process
An enterprise would operate successfully, if it directs all its resources and
efforts to accomplish its specified objective in a planner manner, rather than
reacting to events. Organization has to be both efficient and effective.
Organization is effective when the planned objective is achieved. However,
the firm is efficient only when the objective is achieved, with minimum cost
and resources, both in physical and monetary terms.
The role of Management Accounting is significant in making the firm both
efficient and effective. Management Accounting has brought out clear shift
in the objective of accounting. From mere recording of transactions, the
emphasis is on analyzing and interpreting to help the management to
secure better results.
In this way, Management Accounting eliminates intuition (perception) which
is not at all dependable, from the field of business management to the
cause and effect approach.
Significance of Management Accounting
The various advantages that accrue out of management accounting are
enumerated below:
(1) Delegation of Authority: Now a day the function of management is no
longer personal, management accounting helps the organization in
proper delegation of authority for the attainment of the vision and
mission of the business.
(2) Need of the Management: Management Accounting plays the role in
meeting the need of the management
(3) Qualitative Information: Management Accounting accumulates the
qualitative information so that management would concentrate on
the actual issue to deliberate and attain the specific conclusion even
for the complex problem.
(4) Objective of the Business: Management Accounting provides
measure and reports to the management thereby facilitating in
attainment of the objective of the business.
 Cost Accounting Vs Management Accounting
Cost Accounting Management Accounting
1. Nature CA records the quantitative aspect MA records both qualitative and
only. quantitative aspect.
2. Objectives CA records the cost of producing a MA provides information to
product and providing a service. management for planning and
coordination.
3. Area CA deals with cost ascertainment MA is wider in scope as it
only. includes financial accounting,
budgeting, taxation, planning
etc.
4. Recording of Data CA uses both past and present MA is focused with the
figures projection of figures for future.
5. Development Development of CA is related to MA has been developed in
industrial revolution. accordance to the need of
modern business world.
6. Rules and Regulations CA follows certain principles and MA does not follow any specific
procedures for recording costs of rules and regulations.
different products.
 Management Accounting Vs Financial Accounting
Management Accounting Financial Accounting
1. Purpose of Information Help managers make decisions to fulfill Communicate organization’s
an organization’s goals financial position to investors,
banks, regulators, and other outside
parties
2. Primary Users Managers of the organization External users such as investors,
banks, regulators, and suppliers

3. Focus and Emphasis Future-oriented (budget for 2011 Past-oriented (reports on 2010
prepared in 2010) performance prepared in 2011)
4. Rules of Measurement and Internal measures and reports Financial statements must be
Reporting do not have to follow GAAP but are prepared in accordance with GAAP
based on cost-benefit analysis and be certified by external,
independent auditors
5. Time span and Type of Varies from hourly information to 15 to Annual and quarterly financial
Reports 20 years, with financial and nonfinancial reports, primarily on the company
reports on products, departments, as a whole
territories, and strategies
6. Behavioral Implications Designed to influence the behavior of Primarily reports economic events
managers and other employees but also influences behavior
because manager’s compensation
is often based on reported financial
results
Ethics in Management Accountant
• Management accountants should behave ethically. They have an
obligation to follow the highest standards of ethical
responsibility and maintain good professional image.
• The Institute of Management Accountants (IMA) has developed
standards of ethical professional conduct. The IMA Statement of
Ethical Professional Practice has been revered (admired / valued)
as the central code of ethics for management accountants.
1. Competence
2. Confidentiality
3. Integrity and
4. Credibility
1. Competence (Ability / Skill)
• Maintain an appropriate level of professional expertise
by continually developing knowledge and skills.
• Perform professional duties in accordance with relevant
laws, regulations, and technical standards.
• Provide decision support information and
recommendations that are accurate, clear, concise, and
timely.
• Recognize and communicate professional limitations or
other constraints that would prevent responsible
judgment or successful performance of an activity.
2. Confidentiality (Secrecy)
• Keep information confidential except when
disclosure is authorized or legally required.
• Inform all relevant parties regarding
appropriate use of confidential information.
Monitor subordinates' activities to ensure
compliance.
• Refrain (avoid) from using confidential
information for unethical or illegal advantage.
3. Integrity (Honesty / Truth)
• Mitigate (reduce) actual conflicts of interest;
regularly communicate with business associates
to avoid apparent conflicts of interest. Advise all
parties of any potential conflicts.
• Refrain (avoid) from engaging in any conduct
that would prejudice carrying out duties ethically.
• Abstain (avoid) from engaging in or supporting
any activity that might discredit (dishonor) the
profession.
4. Credibility (Reliability / believability)
• Communicate information fairly and objectively.
• Disclose all relevant information that could
reasonably be expected to influence an intended
user's understanding of the reports, analyses, or
recommendations.
• Disclose delays or deficiencies in information,
timeliness, processing, or internal controls in
conformance with organization policy and/or
applicable law
Thank You