chp 1 - cma

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Chapter 1

Overview to Management

Accounting

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Introduction• In today’s business world, the resources available are very

scarce.• Hence, every business unit must strive hard to obtain maimum

output with the available input in order to ensure the optimumutili!ation o" scarce resources.

• #he value o" input is measured against the value o" output.

• In the present era o" cut$throat competition, the need to studythis sub%ect is growing very "ast.

• &very businessman ma'es a constant e(ort to improve his)herbusiness. A manager has to 'now the answers to the "ollowing*uestions1. +hat is the maimum prot that a business can draw-

. Has the prot margin increased or reduced as compared to previous years-

/. +hich product line is ma'ing more prot-

0. Has too much capital been bloc'ed in raw materials-

. +hether the cost o" production has gone up as compared to earlier years-

2. 3oes the selling price re*uire a revision-

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Cost Accounting

• Cost accounting is the process of accounting forcost.

• Cost accounting is generally concerned with

internal reporting for management requirement. – It helps the management in planning,

controlling, and decision making.

• The development of cost accounting is of recent

origin. – Cost accounting has gained a lot o" signicance in

recent past due to heavy industriali!ation and theoverall cut$throat competition.

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Defnition o Costing, CostAccounting and Cost

Accountancy• #he Chartered Institute o" ManagementAccountants, 4.5. 6CIMA7 denes costing as8the techni*ue and process o"ascertaining6determining7 costs.’

• Costing is a tool to determine the cost o"products or service.

• Cost accounting 9 analysis and classicationo" costs or ependiture.

• Cost accountancy 9 application o" costing andcost accounting principles.

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:unctions o" CostAccounting

• 8Cost Accounting is to serve management inthe eecution o" policies and in thecomparison o" actual and estimated results inorder that the value o" each policy may be

appraised and changed to meet the "utureconditions.’ – #o calculate cost per unit – #o prepare a correct cost analysis – #o ascertain the wastage in each process o"

manu"acture – #o provide necessary in"ormation "or the

determination o" selling price

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:unctions o" CostAccounting

– #o compute product$wise prot

– #o serve the management in the valuation o" +or'$In$;rogress

– #o install and implement cost control systems

– #o advice management "or "uture epansion

– #o establish an e(ective reporting system

– #o guide the management in the preparation andimplementation o" incentive schemes based on

productivity and cost savings.

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:inancial Accounting

• #he "unctions o" nancial accounting areconcerned with that o" boo''eeping, i.e.maintenance o" records o" costs,

debtors, and creditors, etc.• As per the company law re*uirements,

the company has to maintain the

accounts "or their adoption by theshareholders in the Annual <eneralMeeting.

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=imitations o" :inancialAccounting• #H& >?A@CH O: CO# ACCO4@#I@< #A?#&3 #O :=O4?IH A

A &;A?A#& 4>B&C# >&CA4& O: #H& :O==O+I@<=IMI#A#IO@ O: :I@A@CIA= ACCO4@#I@<.

• :inancial accounting doesn’t aims at continuous reporting o"nancial data, which the cost accounting does

• :inancial accounts will not reveal the data by %obs, process,

products, etc.• It provides only historical data, and it would be too late "or any

corrective action.

• It does not provide data "or ade*uate control over materials,labour, and overheads.

• In nancial accounting, there are no systems to setpredetermined estimates, standards, or budgets.

• It "ails to etend proper guidance in "raming pricing policy.

• #he data are not sucient "or potential managerial decisions.

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:inancial Accounting vs. CostAccounting

• :inancial accounting and cost accounting can bedi(erentiated on the bases o" "ollowing criteria

• ;urpose• :orms o" Accounts

• ?ecording• Items o" Costs• Analysis o" ;rots• Control•

;eriodicity• @ature o" #ransaction• Inventory Daluation• :igures

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:inancial Accounting vs.Cost Accounting

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Cost Accounting andManagement Accounting

• #o *uote B. >atty, 8Management Accountancy is theterm used to describe the accounting methods,systems and techni*ues, which coupled withspecial 'nowledge and ability, assistsmanagement in its tas's o" maimi!ing protsor minimi!ing losses.

• Management Accountancy is the blendingtogether into a coherent whole, nancialaccounting, cost accountancy and all aspects o"nancial management.’

• Management Accounting is an etension o"managerial aspects, o" cost accounting.

• #hus, it is the accounting to assist themanagement in planning and decision$ma'ing.

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Cost accounting vs managementaccounting

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?ole o" ManagementAccountant

• A great variety o" accounting in"ormation is available to

managers.• #he accountant chooses the in"ormation to be reported to a

manager byE – Identi"ying the purpose "or which the in"ormation is needed. – 3etermining the relevance o" the in"ormation.

• #he accountant has to identi"y the specic purpose "or which

cost accounting in"ormation is re*uired by the manager.• In"ormation is relevant i" it

– A(ects the accomplishment o" the ob%ectives o" the decisionma'er.

– +ill change as a result o" the decisions or choice made by thedeci$ sion ma'er.

•

Historically, the Management Accountant was 'nown as8Controller’ since he)she was in charge o" all nancialaccounting and cost accounting "unctions.

• Line managers are directly responsible "or attaining thisob%ective as eciently as possible.

• +hen a department’s primary tas' is to advise and serve otherdepartments in the organi!ation, it is a 8sta(’ department.

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:unctions o" Controller and #reasurer

Controller Treasurer;lanning and Controlling ;rocurement o" =ong 9

term :inance

?eporting andInterpreting

Investor

&valuating andConsulting

hort 9 #erm :inancing

#a Administration >an'ing

<overnment ?eporting Credits and Collections

;rotection o" Assets Investments

&conomic Appraisal Insurance

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Ob%ects o" Cost Accounting

• #o determine the actual cost o" each article, process, operation,service, department or segment o" activity.

• #o reveal and report ineciencies in the "orm o" material wastage,loss o" time in material buying, storing, and issuing.

• #o provide actual gures o" cost comparison with estimates o"costs and price ing.

• #o nd out the degree o" eciency and productive capacity o" menand machines and ideal standard "or their wor'ing.

• #o implement incentive wage plans "or wor'ers.• #o reduce cost through budgetary control and standard costing.• #o study trends at di(erent volumes o" output, and to determine

production policies and programs.

• #o ensure continuous chec' and ad%ustment o" stores andmaterials with the help o" perpetual inventory.

• #o organi!e internal audit system, and interloc'ing o" nancial andcost accounts to veri"y the accuracy o" each other.

• #o "urnish necessary data "or the preparation o" prot and lossaccount and balance sheet at short intervals Fe.g., monthly,*uarterly, etc.G "or each department or business as a whole.

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Advantages o" CostAccounting

• ;rice :iation• Control on 4nprotable Activities• 4se"ul In"ormation• Cost Control• ;rovides Daluable 3ata• &(ective Chec'• ;reparation o" >udgets and ?egulations o"

production

• :iation o" ?esponsibilities• Independent Chec'• ;revention o" Manipulation, misappropriation,

and "rauds

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Ob%ections against CostAccounting

• &pensive

• 3i(erences in ?esults

•

4nnecessary• +orthless

• Inapplicability

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;rinciples o" Costing

• &very concern must design its own costingsystem, 'eeping in view its peculiarproblems.

•

I" nancial boo's can a(ord the necessaryin"ormation, separate costing system isnot needed.

• ?easonable accuracy is enough, o" course,

this depends upon the nature o" industry.• As a rule, costing in"ormation should be

collected as and when the wor' proceeds.

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&ssentials o"Cost Accounting ystem

• imple and &asy

• hould suit the organi!ation

• Co$ordination and co$operation among

eecutives• &nsure proper accounting and

allocation o" material

•

Cost accounts should be able toreconcile with :inancial accounts

• It should be &conomical

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Importance o" Costing

• #o the Management

– ;lanning

– Organi!ing

– Controlling

– >udgeting

– 3ecision$ma'ing

– ;ricing

– &valuation o" operating eciency

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• #o the &mployees

– Incentive >onus

– Higher earnings through time andmotion study

– Overtime payments

– >enet o" %ob evaluation

– Continuous employment and %obsecurity

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• #o the creditors – Can access more in"ormation in comparison

to :inancial accounts

–

#o ascertain the solvency, protability• #o the government

– More taes through higher production

– 4se"ul in preparing import and eport policy

• #o the society – =ower prices through cost reduction

– >etter *uality o" products and services

chp 1 - cma

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