Course Name: Cost and Management

Accounting
Module 1: Overview of Cost and
Management Accounting

Introduction
Finance and accounting have assumed much importance in today’s competitive world of
business wherein corporate organisations have to show the true and fair view of their financial
position. Thus, the application of accounting in the business sector has become an indispensable
factor. Financial information is essential for any economic decision, because financial
accounting information focuses on actual events that are useful in making number of decisions.
For the purpose of decision making, the past is used as a guide to future estimates of the
developing various different alternatives.
Accounting information is important for every business which will serve the needs of variety of
interested parties. To satisfy the needs of all interested parties a sound accounting system is very
necessary. Accounting is defined as ‘the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which are of financial
character and interpreting the result thereof” – American Institute of Certified Public
Accountants (AICPA).

‘Cost and Management Accounting’ is very important and useful for optimum utilisation of
existing resources. Cost accounting is developed to help the internal management in decision
making. The information provided by cost accounting acts as a managerial tool so that business
can utilise the available resources at optimum level. Management accounting is an extension of
management aspects of cost accounting. It provides the information to management so that
planning, organizing, directing and controlling of business operations can be done in an orderly
manner.
These branches of accounting have been developed due to limitations of financial accounting.
Financial accounting is mostly concerned to record the business transactions in books of
accounts so that final accounts can be prepared.
‘Cost and Management Accounting’ is an indispensable discipline for corporate management, as
the information collected and presented to management based on cost and management
accounting techniques helps management to solve not only specific problems but also guides
them in decision making.

Management accounting
In every business enterprise, various transactions and events take place every day; sales are
effected, purchases are made, expenses are met or incurred, payments are received and made,
assets are sold and acquired. These events, arising out of the decisions and actions of
management, exercise their effects and impact on the operational efficiency and position of the
enterprise. Most of these transactions and events have money values or can be measured and
expressed in money values. Since they affect the operation and position of the enterprise, they
need to be measured, recorded, analysed and reported to the management, so that the
management can evaluate their effect upon the enterprise.

Management accounting links management with accounting. It deals with the processing of
financial and cost accounting data for managerial decision making. It is concerned with
providing information to management in an organisation to enable them to carry out their
planning, controlling and decision-making responsibilities. All such information that is useful to
the management is the subject matter of management accounting. Any information required for
decision making is the concern of management accounting. This also helps the manager to
discharge their duties more efficiently and effectively.

Management accounting collects and provides accounting, cost accounting, economic and
statistical information to the men at various managerial levels to assist them in the performance
of managerial functions and their evaluations. It is the development and application of various
techniques of recording, analysis, interpretation and presentation, making the financial, costing,
and other data active and effective in the performance of managerial functions, viz., planning,
decision-making and control.
Management accounting makes use of accounting techniques as well as statistical and
mathematical techniques.
Management Accounting is the presentation of accounting information in such a way as to assist
management in the creation of policy and the day-to-day operation of an undertaking. Thus, it
relates to the use of accounting data collected with the help of financial accounting and cost
accounting for the purpose of policy formulation, planning, control and decision-making by the
management.

Characteristics/Nature of management accounting

 1. Selective Nature: Management Accounting takes into consideration only that data from
the income statement and position state merit which is relevant and useful to the
management. Only that information is communicated to the management which is helpful
for taking decisions on various aspects of the business.

2. Provides Data and not the Decisions: The management accountant provides data which
is helpful to the management in decision-making.

3. Concerned with Future: Management accounting deals with the forecast with the
future. It helps in planning the future because decisions are always taken for the future
course of action.

4. Analysis of Different Variables: Management accounting helps in analysing the reasons

as to why the profit or loss is more or less as compared to the past period. Moreover, it
tries to analyse the effect of different variables on the profits and profitability of the
concern.

5. No Set Formats for Information: Management accounting will not provide information
in a prescribed proforma like that of financial accounting. It provides the information to
the management in the form which may be more useful to the management in taking
various decisions on the various aspects of the business.

Scope
The scope of management accounting is very wide and broad-based. It includes all information
which is provided to the management for financial analysis and interpretation of the business
operations.

1. Financial accounting: The financial accounting system information is the basis of

future business planning and financial forecasting. Designing of a proper financial
accounting system is a must for obtaining full control and co-ordination of operations of
the business.
2. Cost Accounting: Cost accounting is concerned with the ascertainment of
various elements of costs for different business operation and activities. These cost data
are used in the management accounting system for further analysis so as to solve business
problems and take quality decision.
3. Budgeting and Forecasting: Management accounting includes budgetary
control and forecasting techniques also. Under budgetary control system, the budgets are
prepared on functional basis and measure the actual performance, find the difference
 between the actual and standard for taking corrective actions In this way, budgeting
assists the management for identifying responsibility and ensuring coordination.
4. Cost Control Procedures: These procedures are integral part of the management
accounting process and includes inventory control, cost control, labour control, budgetary
control and variance analysis, etc.
5. Reporting: Reporting is divided into two types. Interim reporting is supplying
information to the top management. External reporting is supplying information to
outsiders i.e. shareholders, banks and financial institutions.
6. Methods and Procedures: It includes all those methods and procedures which help the
concern to use its resources in the most efficient and economical manner. It undertakes
special cost studies and estimations and reports on cost volume profit relationship under
changing circumstances.
7. Tax Accounting: It is an integral part of management accounting and includes
preparation of income statement, determination of taxable income and filing up the return
of income etc.
8. Internal Financial Control: Management accounting includes the internal control
methods like internal audit, efficient office management, etc.
9. Interpretation: Management accounting is related to the interpretation of financial data
to management and advising them on decision-making.
10. Office Services: It includes maintenance of proper data processing and other office
management services. The management accountant may be required to maintain and
control office services in some organizations.
11. Evaluating the Performance of the Management: Management accounting provides
methods and techniques for evaluating the performance of the management. It evaluates
the performance of the management in the light of the objectives of the organisation.
Thus, it helps in the implementation of the principle of management by exception.

Functions
1. Provides data: Management accounting serves as a vital source of data for management
planning. The accounts and documents are a repository of a vast quantity of data about
the past progress of the enterprise, which is a must for making forecasts for the future.
2. Modifies data: Management accounting modifies the available accounting data
rearranging in such a way that it becomes useful for management.
The modification of data in similar groups makes the data more useful and
understandable. The accounting data required for management decisions is properly
compiled and classifies.
3. Communication: Management accounting is an important medium of communication.
Different levels of management (top, middle, and lower) need different types of
 information. Also management accounting establishes communication within the
organization and with the outside world.
4. Analyses and interprets data: The accounting data is analyzed meaningfully for
effective planning and decision-making. For this purpose, the data is presented in a
comparative form, Ratios are calculated, and likely trends are projected.
5. Means of communication: Management accounting provides a means of communicating
management plans upward, downward, and outward through the organization.
6. Facilitates control: Management accounting helps in translating given objectives and
strategy into specified goals for attainment by a specified time and secures the effective
accomplishment of these goals efficiently. All this is made possible through budgetary
control and standard costing, which is an integral part of management accounting.
7. Qualitative information: Management accounting does not restrict itself to financial
data for helping the management in decision making but also uses such information that
may be capable of being measured in monetary terms. Such information may be collected
from special surveys, statistical compilations, engineering records, etc.
8. To assist in planning: Management Accounting assists the management in planning as
well as to formulate policies by making forecasts about the production, selling the inflow
and outflow of cash, etc. Not only that, but it may also forecast how much may be needed
from alternative courses of action or the expected rate of return from that place and at the
same time decides upon the programmed of activities to be undertaken.
9. Assist in organising: By preparing budgets and ascertaining specific cost centers, it
delivers the resources to each center and delegates the respective responsibilities to
ensure their proper utilization. As a result, an interrelationship grows among the different
parts of the enterprise.
10. Decision making: Management accounting furnishes accounting data and statistical
information required for the decision-making process, which vitally affects the survival
and the success of the business. Management accounting supplies analytical information
regarding various alternatives, and the choice of management is made easy.
11. Assist in motivation: By setting goals, planning the best and economic courses of action,
and also by measuring the performances of the employees, it tries to increase their
efficiency and, ultimately, motivate the organization as a whole.
12. Coordinate: It helps the management in coordination the whole activities of the
enterprise, firstly by preparing the functional budgets, then co-coordinating the whole
activities of the enterprise, firstly, by preparing the functional budgets, then co-
coordinating the whole activities by integrating all functional budgets into one which
goes by the name of ‘Master Budget.’ In this way, it helps the management by con-
coordinating the different parts of the enterprise. Besides, overall coordination is not at
all possible without budgetary control.’
 13. Control: The actual work done can be compared with ‘Standards’ to enable the
management to control the performances effectively.

Difference between Cost Accounting and Management Accounting

1. Purpose: The purpose of cost accounting is the ascertainment of cost at each stage of
production. The puspose of management accounting is to provide information to the
management for decision making.

2. Basis: Cost accounting is prepared mainly on the basis of past and less emphasis is given
on the future. Management accounting aims at future based on the past information.

3. Preparation: Cost accounting is prepared on the basis of some rules and regulations
prescribed by ICWAI. Management accounting is prepared without adopting any specific
and rigid rules. It may be prepared according to the will of the managerial personnels.

4. Reports: The reports of cost accounting are subject to statutory audit whereas the reports
of management accounting are not.

5. Usefulness: The reports of the Cost accounting are useful both to the internal and
external parties, while those of management accounting are useful only to the internal
parties.

6. Scope: Cost accounting does not include tax planning and tax accounting whereas
management accounting includes them.

7. Maintenance of records: Cost accounting record maintenance is compulsory for

complying the statutory requirements in selected industries as notified by government.
Management accounting record maintenance is purely voluntary and for internal use of
management of the company.

8. Planning aspect: Cost accounting is mainly concerned with short term planning and
management accounting is concerned with short term as well as long term planning of the
organisation.

9. Installation of system: Cost accounting can be installed without the help of management
accounting in the organisation, but management accounting cannot be properly installed
without a proper cost accounting system.
 10. Derivation of data: Cost accounting data are derived basically from financial accounts,
while management accounting data are derived from both financial as well as cost
accounts.

The Management Accountant

The management accountant, also referred to as controller, is the manager of accounting
information used in planning, control and decision making area. Management accountants are
key figures in determining the status and success of a company.
The role of the management accountant is to perform a series of tasks to ensure their company's
financial security, handling essentially all financial matters and thus helping to drive the
business's overall management and strategy.

Role of management accountant involve:

1. Participating in management process
2. Maintaining optimum capital structure
3. Investment opportunities
4. Financial investigations
5. Long-term and short-term planning
6. Participation in management process
7. Decision making
8. Control
9. Developing management information system
10. Corporate planning

Strategic Decisions

Decision making
Management accountant provides necessary information to management in taking short term
decisions (e.g. pricing of product, discontinuing a product, etc.) and long term decisions (e.g.
capital budgeting, project financing, etc.).
The job of management accountant is limited to provision of required information in a
comprehensive as well as reliable form to the management for decision making purposes.
Management accountants involve setting goals, directing and controlling, which means tacitly
that they are involving in decision making, which is the new function of management
accounting.

Planning
 The management accountant plays an important role in forecasting future business and
economic events for making future plans, i.e. long-term plans, strategic management
accounting, formulating corporate strategy, market study, etc.
Management accountants involve setting goals and objectives for the organization, and
determining the way to fulfill them, by selecting specific action implementations.
The management accountant analyses and prepares reports like standard costs, budgets, cash
and fund flow analysis, etc. for control.

Controlling
It means "evaluating the results of business operations against the plans and making
adjustment to keep the company pressing towards towards its goals. In other words, planning
and directing should be controlling to ensure the efficiency of effectiveness. Besides, the
remarkable aim of controlling is to determine the success of the planning function.

Cost-Benefit Approach

Cost-benefit analysis involves the weighing of the costs associated with a decision against
the benefits arising from that decision. The analysis is used to decide whether to proceed with
a course of action or not. Cost-benefit analysis can include both quantitative and qualitative
factors.

The Chief Financial Officer and The Controller

A Controller is responsible for the accounting and record keeping of an organization. Additional
responsibilities can include management of information technologies, insurance, sales tax
reporting, federal income tax reporting, outside CPA audits and human resources. Controllers are
in essence responsible for the financial and regulatory compliance of the Company. Think of
controllers as the “historians” for the company.

Though a CFO is ultimately responsible for the financials of a company, the role of the CFO is
more encompassing. They will often review the financial statements, but, that is only to get a
prospective of past performance. The CFO will take then those numbers and analyze them to
improve future performance working closely with operations and management. CFO’s are key in
developing and implementing strategy for the company to achieve it’s goals.

In terms of the entrusted responsibilities of the CFO vs controller, check out the following list:

i. The Chief Financial Officer has a much larger role in an organization than does a
financial controller.
ii. While the controller is the head of the accounting in a company, the CFO is responsible
for, and has to observe every financial and operative function of the organization.
iii. A controller looks after the accounts, while the CFO has to be aware of all the business
operations in a company that relates to the controller’s accounts. In addition to
understanding the interrelation of the financial system.
iv. The Chief Financial Officer must be able to identify heavy business risks and make
appropriate business decisions regarding those risks.

Cost Terminology
Direct Costs
Direct costs are costs which are directly accountable to a cost object. Some overhead costs
which can be directly attributed to a project may also be classified as a direct cost. Initial
delivery are not included in direct attributable cost Direct costs are directly attributable to the
object.

Indirect Costs
Indirect costs are costs that are not directly accountable to a cost object. Indirect costs may be
either fixed or variable. Indirect costs include administration, personnel and security costs.
These are those costs which are not directly related to production. Some indirect costs may be
overhead.

Cost Allocation
Cost allocation is a process of providing relief to shared service organization's cost centers
that provide a product or service. In turn, the associated expense is assigned to internal clients'
cost centers that consume the products and services.

Variable Costs
Variable costs are costs that change as the quantity of the good or service that a business
produces changes. Variable costs are the sum of marginal costs over all units produced. They
can also be considered normal costs. Fixed costs and variable costs make up the two
components of total cost.

Fixed Costs
A fixed cost is a cost that does not change with an increase or decrease in the amount of goods
or services produced or sold. Fixed costs are expenses that have to be paid by a company,
independent of any specific business activities.

Cost Drivers
A cost driver is the unit of an activity that causes the change in activity's cost. Cost drivers
are the structural determinants of the cost of an activity, reflecting any linkages or
interrelationships that affect it.

Relevant Range
The relevant range is the range of activity where the assumption that cost behavior is a
straight line (linear) is reasonably valid. Managerial accountants like to assume that the
relationship between a cost and an activity run in a straight line.

Total Costs and Unit Costs

In economics, total cost (TC) is the total economic cost of production and is made up
of variable cost, which varies according to the quantity of a good produced and includes
inputs such as labour and raw materials, plus fixed cost, which is independent of the quantity
of a good produced and includes inputs that cannot be varied in the short term: fixed
costs such as buildings and machinery, including sunk costs if any.

The unit cost is the price incurred by a company to produce, store and sell one unit of a
particular product. Unit costs include all fixed costs and all variable costs involved in
production.

Inventoriable Costs
Inventoriable costs, also known as product costs, refer to the direct costs associated with the
manufacturing of products for revenue generation. Often, inventoriable costs include direct
labor, direct materials, factory overhead, and freight-in.

Period Costs
In managerial and cost accounting, period costs refer to costs that are not tied to or related to
the production of inventory. Examples include selling, general and administrative (SG&A)
expense.

Prime Cost
Prime costs are a firm's expenses directly related to the materials and labor used in
production. It refers to a manufactured product's costs, which are calculated to ensure the best
profit margin for a company.

Conversion Cost
Conversion costs are the costs involved in converting the direct material into the product
and therefore are direct labor and manufacturing overhead.
Relationship of Types Of Costs
Broadly types of costs are classified as direct and indirect, fixed and variable etc. The
relationship of direct & indirect costs with fixed & variable costs is a very crucial concept to
understand for doing a real interpretation of costs in any manufacturing business.

Direct and variable costs

These are those costs which are related to the product, traceable and whose total cost change in
proportion to the change in total output. This is very simple to understand and the best and
simple example can be the direct material costs like tones of sand in preparation of tiles.

Direct and fixed costs

These are those costs which are related to the product, traceable but whose total cost does not
change in proportion to the change in output. It is little difficult to visualize.

Indirect and variable costs

These are those costs which are not directly related to the product and therefore not traceable but
whose total cost changes in proportion to the change in total output.

Indirect and fixed costs

These are those costs which are not directly related, traceable to product but whose total cost
does not change in proportion to the change in the output. It is again a simple to visualize cost.