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module 4

Uploaded by

Akm Seve
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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FUNDAMENTALS OF COST AND MANAGEMENT ACCOUNTING –

Module 4 and 5

1. Cost accounts :
• Involves recording, analysing, and allocating costs.
• Categorizes manufacturing costs to provide production insights.
Classification of cost :
• Direct Materials
• Direct Labor
• Manufacturing Overhead
Cost accounting system :
• Job order costing
• Process costing
2. Job order costing :
Purpose: Determines the manufacturing cost of individual products or jobs.
Usage: Applied when producing distinct products or services requiring separate cost
calculations.
Key Feature: Costs are traceable and assigned to specific jobs or services.
Examples : Film Production : Calculating the cost of producing individual movies,
including sets, actors, costumes, and post-production.

3. Marginal Costing:
• Focuses only on variable costs (e.g., direct materials, direct labor, variable overhead)
as product costs, while fixed costs are treated as period costs.
• Helps in decision-making by analyzing the profit impact of producing additional units
or discontinuing products.
• Key Concept: Contribution margin (sales minus variable costs).
Budgetary Control:
• Establishes budgets, monitors actual performance against budgets, and takes
corrective actions as necessary.
• Includes planning, coordinating, and monitoring financial activities (e.g., income,
expenditure, production, cash flow).
• Aids in resource allocation, cost control, and overall performance improvement.
• Key Tool: Variance analysis (identifies deviations between actual and budgeted
results).
Variance Analysis:
• Compares planned financial outcomes with actual results, categorized as favorable or
unfavorable.
• Common variances: Sales, cost, and profit variances.
• Provides insights for performance evaluation and future planning adjustments.

4. Applications of Marginal Costing


• Pricing Decisions: Helps set optimal selling prices by covering variable costs and
ensuring a contribution to fixed costs and profit margin.
• Make or Buy Decisions: Compares marginal cost of in-house production with external
purchase cost to choose the cost-effective option.
• Accepting Foreign Orders: Evaluates profitability by comparing incremental revenue
with additional fixed costs to decide on accepting the order.
• Deciding Sales Mix: Determines the optimal product mix by analyzing contribution
margins to maximize overall profitability.

5. Break even analysis

Identifies the point where total revenue equals total costs, resulting in no profit or loss.

Key Components:

• Fixed Costs: Costs that remain constant (e.g., rent, salaries, insurance).
• Variable Costs: Costs that vary with production or sales (e.g., raw materials,
labor).
• Total Costs: The sum of fixed and variable costs.
• Total Revenue: Income from the sale of goods or services.

Applications:

• Set Pricing Strategies: Determines minimum sales volume needed to cover


costs.
• Evaluate Profitability: Analyzes the impact of sales volume on profits.
• Risk Assessment: Assesses risks in business ventures or product launches.
• Financial Planning: Helps decide production levels, resource allocation, and
expansion strategies.
FUNDAMENTALS OF COST AND MANAGEMENT ACCOUNTING

(Module 5)

Types of Budgets - Point-Wise Notes

A. Operating Budget:

a. Focuses on revenues and expenses for a specific period.


b. Includes sales, production, and operating costs.
B. Financial Budget:
a. Deals with capital structure and financing activities.
b. Includes cash budgets and capital expenditure plans.
C. Cash Budget:
a. Projects cash inflows and outflows.
b. Ensures liquidity and operational cash needs are met.
D. Capital Budget:
a. Details planned investments in long-term assets (e.g., equipment, facilities).
b. Assesses financial feasibility and business impact.
E. Sales Budget:
a. Forecasts expected sales volumes and revenues.
b. Based on market analysis and historical data.
F. Expense Budget:
a. Outlines expected costs for business activities.
b. Aids in cost control and financial planning.
G. Flexible Budget:
a. Adjusts based on changes in activity levels.
b. Offers a dynamic view of costs and revenues.
c. Improves performance evaluation and variance analysis.
H. Master Budget:
a. Comprehensive financial plan incorporating all individual budgets.
b. Includes operating budgets (e.g., sales, production) and financial budgets (e.g.,
cash, capital).

Performance budgeting

• It creates a connection between estimated inputs and expected outputs.


• It outlines the objectives, required funds, program costs, and quantitative measures of
accomplishments and performance.
• The emphasis is on both expenditure and achieving targeted outcomes.

Zero based budgeting


• (ZBB) requires each expense to be justified from scratch for every budget period.
• Budgets begin with no carry-over from the previous year's budget.
• Every expense must be fully justified based on its necessity and benefits.
• ZBB promotes efficiency by challenging the automatic approval of past expenses.
• It is also known as Priority-Based Budgeting, focusing on prioritizing essential
expenses.
• Unlike traditional budgeting, which adjusts previous budgets, ZBB starts fresh each
year.

Computerised accounting system

• Computerized accounting systems automate financial tasks.


• They reduce errors and increase accuracy.
• Provide real-time updates and financial reports.
• Can integrate with other business systems.
• Ensure tax compliance and manage costs.
• Scalable for businesses of all sizes.
• Popular software: QuickBooks, Tally, Xero.
• Benefits: Efficiency, accuracy, better management.
• Challenges: Setup costs, training, technical issues.

Significance

• Efficiency and Speed


• Accuracy
• Real-Time Reporting
• Cost-Effectiveness
• Data Security and Backup
• Compliance and Standardization
• Integration
• Decision-Making Support

Prepackaged Accounting Software:

• Commercially available with predefined features.


• Ready to use "out of the box."
• Caters to the accounting needs of various businesses.
• Examples: QuickBooks, Xero, Sage.
• Modules include general ledger, accounts payable, accounts receivable, etc.

GNU Khata:

• Open-source accounting software for SMEs.


• Developed under the GNU General Public License.
• Part of the GNU Project.
• GST-compliant, adhering to Goods and Services Tax regulations.

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