Cost and Management Accounting Notes. Intro

BBF, PSM, BBA 121 COST ACCOUNTING AND BUDGETING. INTRODUCTION:Accounting:-

Accounting is a discipline which provides accounting information to interested users to enable them make economic decisions !he inte intere rest sted ed user userss ma" ma" incl includ ude e the the inte intern rnal al manag managem emen ent, t, pote potent ntia iall inves investo tors rs,, shareholders, emplo"ees, financial institutions, government departments etc !he users of financial accounting information alwa"s make different decisions and hence re#uire different t"pes $forms of accounting information because of that reason, it%s important to have different branches of accounting !hese include&' 

Financial accounting

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Cost accounting

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Management accounting 

FINANCIA ACCOUNTING

!his is a branch of accounting which speciali(es in the maintenance of accounting records and preparation of financial reports Financial reports include the balance sheet which shows the financial position of the firm, the income statement which reports on the level of performance of the firm, the sources of funds and how "ou have utili(ed it in a given period COST ACCOUNTING

!his is also a branch of accounting which provides cost information which can be used in valuation of stock and profit measurement )t%s the cost accumulation discipline which aggregates different cost elements so as to provide the cost of different products, services activities, processes etc !he s"stem helps$speciali(es in the maintenance of cost accounts

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!he cost information helps managers to achieve the following ob*ectives&' 1 Setting of selling prices especiall" where the cost oriented pricing approaches are used e$g cost + make up selling price 2 !he cost information helps "ou in controlling costs - !he cost information helps "ou in controlling costs . )t helps in stock valuation and profit measurement / )t helps in planning 0planning involves the anal"sis of costs DIFFERENT BET!EEN FINANCIA ACCOUNTING AND COST AND ACCOUNTING ". #a$ties inte$este% in t&e in'o$mation ($o)i%e%.

Management accounts provide information to internal users its inward looking information it serves manager, emplo"ees and B34 members who are the ones to make decision, plan and control the organi(ation Financial accounts are made fir e5ternal users eg public, govt financial anal"sts etc who are interested in different information *. In'o$mation o' $e(o$ts

Financial accounting statements are prepared once a "ear at the end of ever" accounting period Management accounts can be prepared when need arises hence the" can be prepared at an" time +. In'o$mation ($o)i%e% , t&e to sstems.

Management accounting provide the predetermines information or future information Financial accounting reports on what has read" been e5isting )t is backward looking /. Statuto$ $e0ui$ements.

Financial statement preparation is a statutor" re#uirement ie with financial is accounting it%s a must that reports are prepared Management accounting ma" or ma" not prepare financial statements ie it%s optional that wh" some organi(ations don%t have cost or management accountants

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1. Rules an% (olicies 'olloe%

Financial accounting has specific standards and rules eg AS6, concepts and principles that are e5pected to be followed when preparing financial statements For management accounting there are no specific formats that showed be followed for the preparation of reports ". Au%it $e0ui$ement

All financial reports must be audited before the" are relied on b" the users to satisf" whether the" portra" whats on the groundPotra" a true and fair view For management information, since it%s an internal issue there is no re#uirement of an auditors report 2.co)e$age

Financial accounting covers a wider scope as compared to management accounting since its reports are made to be used b" a wide range of users public Management accounting also ma" cover a wider coverage in terms of planning Since planning involves different aspects of the organi(ation the" it ma" be considered to have a wide range as compared to financial accounting 7owever management accounts also cover specific aspects 3. Accu$anc

Financial accounting produces estimations where as management accounting information provides information which is accurate and detailed eg considering materialit" in financial accounts is open ones willingness ie what material to one person ma" be immaterial to the other 8ou can%t base of f$s to make decisions since the" provide data and not information T4E ROE OF COST AND M9!  ACCOUNTANT IN T4E MANAGERIA #ROCESS To ($o)i%e in'o$mation &ic& can ,e use% , manage$s 5

a Planning& !his is where ob*ectives are set setting up of strategies that will enable "ou achieve these ob*ectives, identification of markets to be sensed etc

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,6 Cont$olling o' costs an% ot&e$ ,usiness acti)ities

8ou can onl" control if there standards and policies in place "ou find that "ou are going be"ond what is planned then "ou have revise "ear decision 6ontrol c"cle Set ob*ectives that must be achieved Measure actual performance will give "ou actual results 6ompare actual performance with the set standards variance should e5ist which be favourable or un favourable

Ta7e collecti)e action

c 4ecision making& managers are e5pected to take decisions and hence the relevant information must be provided to decision makers who are managers b" a management accountant Managers take different decisions ie bu" or make outsource or emplo" one permanent basis rotabilit" or viabilit" of the product product mi5 decisions ma" also be made 4ecision%s concerning segmentation of product ie should use past power or delete the production of product B or not

%6 4el(s in ,u%get 'o$mulation an% ,u%get management.

A budget is a control tool that e5presses ones intentions or plans in #ualitative terms !o have a budget "ou must desire cost information that will enable "ou to value some of the items that will be incorporated in the budget e O$ganisations !he information provided van help managers to organi(e firms resources to coordinate different activities and ever coming up with organi(ation structure

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INTRODUCTION TO COSTS COST CONCE#TS AND TERMS

1 A cost can be defined as an e5change price, 3: e5penditure incurred to produce a product, or represented b" decrease in assets or increase in liabilities A cost could be a loss, an e5pense or a production or a production cost

*. Cost unit.

A cost unit is a unit of measurement of costs or a unit in which costs can be e5pressed eg kilogram, kilometer, tonne etc -. Cost cent$es !hese are divisions or sections within organi(ations to which cost can be related or attributed 6ost 6entre%s could be departments, machines emplo"ees so long as the" can attribute or relate to specific costs !48 DO !E 4A9E COST CENTRES IN ORGANIATIONS5

)t is to have an incentive control ie provide accountabilit" of the resources provided to the department )t applies to responsibilit" accounting who is supposed to give an answer *. Cost o,;ecti)es

!hese tr" to e5plain wh" cost information is desired or re#uired Managers need information for different purposes !here are - main cost ob*ectives i6

Cost 'o$ stoc7 )aluation an% ($o'it measu$ement

)nformation should enable a manager to value what he has produced this information can be got from manufacturing costs ii6

Costs 'o$ %ecision ma7ing.

!here are relevant costs and irrelevant costs :elevant costs and irrelevant costs don%t change and hence do not influence decision making

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iii)

Costs 'o$ cont$olling an% (lanning

)dentif" controllable and uncontrollable costs )nformation meant to achieve a given ob*ective can not be used to achieve another ob*ective

CASSIFICATION OF COSTS

6lassification of costs is the grouping of costs basing on their common characteristics or attributes 6osts are classified different wa"s to answer #uestions asked b" managers$ management Management want different information for different purposes, cost must be grouped and arranged to serve the purpose of management  6osts are classified because of the following reasons&' ". E)aluate a$c at the end of the "ear ne5pired items are in the balance sheet as prepa"ments while the e5pired items help in measuring profits p  l a$c ,6 Classi'ication o' cost un%e$ t&e o,;ecti)e o' %ecision ma7ing. !his is to enable one make economic decisions )nformation is meant for manager to make economic decisions nder this we have the following classification ". Classi'ication acco$%ing to cost ,e&a)iou$ *. Classi'ication acco$%ing to $ele)ant an% i$$ele)ant 6lassification according to cost ,e&a)iou$ !his classification tries to e5plain how the costs behave at the volume of output or level of activit" is changed or ad*usted Behaviour of costs will guide "ou know how much "ou should produce )n attempt to e5plain from this behaviour, the following terms must be anal"(ed a6 )a$ia,le costs ,6 'i=e% costs c6 semi )a$ia,le costs %6 semi 'i=e% costs a6 9a$ia,le costs !hese are costs that change in direct proportion with the level of activit" !here is a direct relationship between the output and total variable costs )ncrease in out put leads to increase in variable costs

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!he variable cost per unit remains statue ie it doesn%t change under the same manufacturing environment or methods )f "ou change the methods then it will also change eg fuel consumed under the same driver road or vehicle remains constant but the more the distance covered the more the costs fuel re#uired )n manufacturing costs, variables could be direct material costs, direct labour costs part to casual labourers