Chapter – one (A)

Overviews of Cost and Management Accounting

Introduction
Information has probably become the most
valuable resource in modern business.

The primary purpose of accounting is to

provide relevant, credible and sufficient
information used by decision makers
(individuals, entities, government and the
society at large) to make sound decisions and
plays an important role in our economy and
the social system.
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 Accounting information addresses three
different functions:
1. Providing information to external parties (such
as; stockholders, and creditors) for investment
and credit decisions.
2. Estimating the cost of products produced and
services provided by the organization; and

3.Providing information useful to internal

managers who are responsible for planning,
controlling, decision making, and evaluating
performance 3
Cost Accounting
 Cost accounting is an accounting information
system that records, measures and reports
information about cost.

 Cost accounting is, thus, concerned with recording,

classifying and summarizing costs for
determination of costs of products or services,
planning, controlling and reducing costs and
furnishing of information to management for 4
 Cost accounting is defined as "a systematic set
of procedures for recording and reporting
measurements of cost of manufacturing goods
and performing services in the aggregate and in
detail.

 Cost accounting is a bridge between financial

and management accounting.
 It provides information to both management
accounting and financial accounting. 5
Objectives of Cost Accounting
1. Ascertainment of the cost per unit of the different
products that a business concern manufacturers.

2. To correctly analyse the cost of both the process and

operations.

3. Provide necessary data and help in fixing the price of

products manufactured or services rendered.

4. Determination of the profitability of each products and

help management in the maximization of these profits.6
5.Present and interpret data for management
planning, decision-making, and control

6. Help in the preparation of budgets &

implementation of budgetary control.

7. To provide specialized services for cost audit in

order to prevent errors and frauds

8. To facilitate prompt & reliable information to

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Management Accounting
 Management accounting is a segment of
accounting that deals specifically with how
accounting data and other financial information
can be used in the management of business,
governmental or non-profit entities.

 Management accounting is “a field of accounting

that provides both economic and non-economic
information that helps organization (managers) to
control their day to day operational activities and
make better decisions.”
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 “Management accounting as, the process of
identification, measurement, accumulation,
analysis, preparation, interpretation, and
communication of financial (and non
financial) information used by
management to plan, evaluate, and control
within the organization and to assure
appropriate use and accountability for its
resources”
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Objectives of Management Accounting

 The fundamental objective of management

accounting is to assist the management in carrying
out its duties efficiently so that maximize profits or
minimize losses. \

1. To formulate planning and policy

 Planning involves forecasting on the basis of
available information, setting goals, framing
polices, determining the alternative courses of10
 It makes available the relevant data after
pruning and analyzing them suitably for
effective planning and decision-making.

2. To interpret financial documents

 Management accounting is to present
financial information to the management
in such away that it is easily understood
using statistical devices like charts,
diagrams, graphs, etc. 11
3. To assist in decision-making process
 Management accounting makes decision-
making process more scientific with the
help of various modern techniques.

4. To help in control
 Management accounting tools e.g. standard
costing and budgetary control are helpful in
controlling performance. 12
5. To provide report
 Management accounting keeps the
management fully informed about the latest
position of the concern through reporting.

 It helps management to take proper and

quick decisions.

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Financial Accounting
 Financial accounting is designed to meet external
information needs and to comply with the International
Financial Reporting Standards/IFRS/.

 Financial accounting is the process that ends in the

preparation of financial reports on the enterprise for use
by both internal and external parties.

 The users of Financial accounting information are

investors, creditors, managers, unions, and government
agencies etc.
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Objectives of Financial Accounting
1. To summarize the operational result of a business
entity for a particular specified period showing a
profit or loss.
2. Presenting the net change in the net assets of that
enterprise based on the operational results.
3. Reflecting the financial position of the business
entity at a specific date.
4. Presenting economic (financial) information
based on historical data to external users for
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decision making.
Distinctions between the accounting disciplines
 To satisfy the needs of all interested parties, a
sound accounting system is very important
(necessary).

 Financial accounting is primarily concerned with

the preparation of financial statement, which
summarizes the results of operation for selected
period of time and show the financial position of
an entity at a particular date.
 A financial accountant is mainly serving
external parties 16
 Cost accounting is primarily concerned with
determination of cost of something, which
may be a product, service, a process or an
operation.

 It refers to the accounting procedures

relating to recording of expenditure and
the preparation of periodical statements
and reports with the object of determining
and controlling costs. 17
  A cost accountant has an obligation to
providing cost data for whatever purposes
for both external reporting and internal
reporting.

 Management accounting involves

collecting, analyzing, interpreting and
presenting all accounting information, which
is useful to the management. 18
 A cost accountant has an obligation to
providing cost data for whatever purposes for
both external reporting and internal
reporting.

 Management accounting involves

collecting, analyzing, interpreting and
presenting all accounting information, which
is useful to the management.
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 It provides the information to management so
that planning, organizing, directing and
controlling of business operations can be
done in an orderly manner.

 MA has a wider scope as compared to CA.

 Cost accounting primarily deals with cost

data while management accounting involves
the considerations of both cost and revenue.
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 Comparison between Financial and Management accounting
Areas of Management Accounting Financial
comparison Accounting
Report format Flexible format, driven by user’s Based on IFRS
Purposes of Provide information for planning, Report on past
reports control, performance measurement and performance
decision making
Primary users Employees, Managers Owners, lenders,
customers, government
agencies…etc.
Units of Historical or future dollars, physical Historical dollars
measurement measure in time or names of objects,
or non-monitory events
Nature of Future oriented, objective for decision Historical objective
information making, more subjective for planning (oriented)
relies on estimates
Frequency of Prepared as needed, may or may not Prepared on a regular
reports be a regular basis or a regular basis basis (minimum of
minimum of once once) a year 21
……End….

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