Easy and Clear Cost concepts for you.!!

1. Management Accounting

2. Management Accounting
Management Accounting is "the process of
identification, measurement, accumulation,
analysis, preparation, interpretation and
communication of information used by
management to plan, evaluate and control within
an entity and to assure appropriate use of and
accountability for its resources.
Management accounting also comprises the
preparation of financial reports for non-
management groups such as shareholders,
creditors, regulatory agencies and tax authorities.
Cost accounting is a central element of managerial
accounting.

3. MEANING OF COST
ACCOUNTING
• Cost accounting is the process of
determining and accumulating the cost of
product or activity. It is a process of
accounting for the incurrence and the
control of cost.
• It also covers classification, analysis, and
interpretation of cost.
• In other words, it is a system of accounting,
which provides the information about the
ascertainment, and control of costs of
products, or services.

4. Scope of Cost Accounting
• Cost book-keeping: It involves maintaining complete
record of all costs incurred from their incurrence to
their charge to departments, products and services.
• Cost system: Systems and procedures are devised for
proper accounting for costs.
• Cost ascertainment: Ascertaining cost of products,
processes, jobs, services, etc., is the important function
of cost accounting. Cost ascertainment becomes the
basis of managerial decision making such as pricing,
planning and control.
• Cost Analysis: It involves the process of finding out the
causal factors of actual costs varying from the budgeted
costs and fixation of responsibility for cost increases.

5. • Cost comparisons: Cost accounting also includes comparisons
between cost from alternative courses of action such as use
of technology for production, cost of making different
products and activities, and cost of same product/ service
over a period of time.
• Cost Control: Cost accounting is the utilization of cost information
for exercising control. It involves a detailed examination of
each cost in the light of benefit derived from the incurrence
of the cost. Thus, we can state that cost is analyzed to
know whether the current level of costs is satisfactory in
the light of standards set in advance.
• Cost Reports: Presentation of cost is the ultimate function of cost
accounting. These reports are primarily for use by the
management at different levels. Cost Reports form the basis
for planning and control, performance appraisal and
managerial decision making.

6. Objectives of cost accounting
Determining selling price,
Controlling cost
Providing information for decision-making
Ascertaining costing profit
Facilitating preparation of financial and
other statements.

7. Importance of Cost accounting
1. Importance to Management
• Helps in ascertainment of cost
• Aids in Price fixation
• Helps in Cost reduction Elimination of wastage
• Helps in identifying unprofitable activities
• Helps in checking the accuracy of financial
account
• Helps in fixing selling Prices
• Helps in Inventory Control
• Helps in estimate

8. 2. Importance to Employees : Worker and
employees have an interest in which they are
employed. An efficient costing system benefits
employees through incentives plan in their enterprise,
etc.
3 Creditors : They can base their judgement about the
profitability and prospects of the enterprise upon the
studies and reports submitted by the cost accountant.
4. Importance to National Economy : An efficient
costing system benefits national economy by stepping
up the government revenue by achieving higher
production. The overall economic developments of a
country take place due to efficiency of production.

9. LIMITATIONS OF COST
ACCOUNTING
• It is expensive
• The results shown by cost accountant differ
from those shown by financial accountant.
• It is unnecessary because it involves
duplication of work.
• Costing system itself does not control costs. If
the management is alert and efficient, it can
control cost without the help of the cost
accounting. Therefore it is unnecessary.

10. What is cost?
Cost is foregoing or sacrifice , measured
in monetary terms, incurred or
potentially to be incurred , to achieve a
specific purpose.
Thus it has three features:
i. Sacrifice : it is current or future decrease in cash
or other asset or increase in liabilities.
ii. Money value : it is always in monetary terms.
iii. Stated objective : it is some benefit in the
future.

11. Important terminologies
Cost object : the purpose or object for
which cost is measured is called cost
object or cost unit. It may be unit of
product, a machine, a job ,a
department ,an order and so on.
Cost centre : When costs are
accumulated for an organizational unit or
department it is called cost centre.

12. Types of cost
1 Manufacturing Cost
• Direct cost : Cost associated directly
with the final product.eg. Leather used
for manufacturing shoes.
It may be
Direct Material : cost of raw material used
to produce finished product.
Direct Labor : cost of labor used for
converting raw material into finished
product.

13. • Indirect cost : Cost which cannot be directly identified
with the cost object. Eg Salary of the watchman.
It may be
Indirect Material : cost of material which do not become
a part of finished product.eg. Grease.
Indirect Labor : cost of labor not used for converting
raw material into finished product.eg salary of clerk.
• Factory overhead : All manufacturing cost except direct
material and labour are included in factory overhead.
Indirect material and labor cost are included in Factory
overhead.Other Eg. Rent, power, taxes etc.

14. 2 Non Manufacturing cost
Distribution cost : cost incurred to
perform marketing functions.Also known
as selling cost or marketing cost.
General and administrative costs : cost
not covered under any of the
categories.eg salary of the
administrators , accounting cost etc.

15. Cost Concept
Classification of Cost Concept according to
management needs:
Income Measurement
Profit Planning
Costs Control
Special Situations requiring special
decisions

16. Cost Concept relating to income
measurement
Product cost and period cost
Absorbed and unabsorbed cost
Expired and Unexpired cost
Joint product cost and separable cost

17. Product cost and period cost
Product cost : These cost are identified
with goods produced or purchased for
resale.
Example – raw material and direct labor
cost
Period cost : they vary with passage of
time and not volume of production.
Example – Rent, insurance premium, salary.
Thus these cost are matched against the
revenue of the current period.

18. Absorbed and unabsorbed cost
• Fixed cost add value to the product and
this value is well taken into account in
determining the selling price.
• Therefore, these costs must be absorbed
by the revenue of the period in which the
product have been sold and not
necessarily in the year in which they have
been incurred.
• Let us understand this concept with the
help of Example and graph.

19. Suppose that the fixed coat are Rs. 30000
normal production is 15000 units.it means
every unit of product absorbs Rs. 2 of Fixed
cost.Thus absorbed cost is the which is
charged to production.
Now if company produce only 10000 units
then cost incurred is Rs.20000 and Rs. 10000
constitute unabsorbed cost.Thus unabsorbed
cost is cost which remains uncharged to
production.(This happens when production is
below normal production)

20. Now if company produce 16250 units
then cost incurred is Rs.32500 and Rs.
2500 constitute over absorbed cost.(This
happens when production is above
normal production)

22. Expired and unexpired cost
An Expired cost is one which cannot
contribute to the production of the
future revenues. It is a cost that has been
recognized as an expense. When an
entity fully consumes or receives benefit
from a cost it is an expired cost.
Unexpired cost is one which has
capability of contributing to the
production of revenue in the future.

23. Joint Product cost & Separable
cost
Jointproduct cost are the cost of a single
process or a series of processes that
simultaneously produce two or more
products of significant sales value.
Separable cost refers to any cost that can
be attributed to particular product or
process.

24. Cost concept relating to profit
planning
Fixed , variable and semi- variable/mixed
cost
Future cost and budgeted cost

25. Fixed , variable and semi-
variable cost
Fixed cost are costs associated with
those inputs which do not vary with
changes in the volume of output or
activity within specified range of activity
or output for a given budget period. Eg.
Rent of factory.
Variable cost tend to vary in total in the
direct proportion or in a one to one
relationship to changes in production
activity. Eg. Material cost , direct labor
cost.

26. Future cost and Budgeted cost
Future cost are reasonably expected to
be incurred at some future date as a
result of a current decision.
Budgeted costs when an operating plan
involving future costs is accepted and
incorporated formally in the budget for a
specific period , such cost get converted
to what is called budgeted costs.

27. Cost concept for Decision
making
Relavantand irrelivant cost
Incremental cost/ differential cost
Out of pocket cost and sunk cost
Opportunity cost and imputed cost

28. Relevant Cost
It is a cost that differs between
alternatives being considered.
Cost which is influenced by decisions is a
relevant cost and hence it is important
for decision makers.
Examples are Incremental
cost/Differential cost which are the cost
which will be incurred if management
chooses one course of action as opposed
to another.

29. Irrelevant Cost
Irrelevant cost are not affected by a
decision, regardless of the choice that is
made.
Sunk costs are the examples
Sunk cost are the cost which have
already been incurred in past and will not
require current cash expenditure.
Depreciation , cost of issue of new
shares and debentures are the examples
of Sunk cost.

30. Out of Pocket cost
These are the costs which will be
required currently or in near future in
cash are out of the pocket costs.
It is wrong to say that all fixed cost are
sunk cost and all variable cost are out of
pocket cost
Salary of CEO is fixed but it is not sunk
because it will be paid in near future so it
is out of pocket
If manufacturing process change and

31. Opportunity cost
Opportunity cost represents the benefits
foregone by not choosing the second best
alternative in favor of the best one.
These are associated only with feasible
alternatives.
An imputed cost is any cost that results
from using an asset instead of renting,
selling, or lending it. The term also applies
to forgone income from choosing not to