An Overview of Cost & Management Accounting | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE D: TAXATION AND FUNDAMENTALS OF COSTING

An Overview of Cost & Management Accounting

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1. Introduction to Cost Accounting

Cost Accounting is the process of recording, classifying, analyzing, summarizing and allocating costs associated with a process, and then developing various courses of action to control the costs. It helps businesses determine the actual cost of production or service.

Evolution:

Cost Accounting emerged during the industrial revolution when manufacturing became more complex. The focus was to determine accurate production costs to set competitive selling prices.

Objectives:

• Ascertain cost of product/service
• Cost control and cost reduction
• Assist in decision-making

Scope:

It includes cost computation, cost reduction, budgeting, and performance evaluation of cost centers.

2. Concepts and Classification of Cost

• Direct Cost: Directly attributable to a product (e.g., raw material)
• Indirect Cost: Not directly traceable (e.g., factory rent)
• Fixed Cost: Constant regardless of production (e.g., salaries)
• Variable Cost: Varies with output (e.g., direct labor)

3. Cost Centre and Cost Unit

Cost Centre: A location, person, or item for which costs are ascertained.

Cost Unit: A unit of product/service for which cost is measured (e.g., per kg, per hour).

4. Methods and Techniques of Costing

• Job Costing
• Batch Costing
• Process Costing
• Contract Costing
• Activity-Based Costing

5. Cost Accounting Standards (CAS)

CAS provide a structured framework for cost accounting practices ensuring transparency and comparability of cost-related data.

6. Management Accounting

Management Accounting is focused on providing information to internal stakeholders to aid in planning, control, and decision-making.

Tools and Techniques:

• Budgeting and Forecasting
• Variance Analysis
• Cost-Volume-Profit Analysis
• Ratio Analysis
• Break-even Analysis

7. Relationship with Other Accounting Branches

• Cost Accounting vs Financial Accounting: Cost accounting helps internal cost control; financial accounting is for external reporting.
• Management Accounting vs Cost Accounting: Management accounting is broader, using cost data for decisions.
• Link to Financial Management: Insights from management accounting support investment and financing decisions.

8. Mathematical Examples (Medium-Hard)

1. Calculate prime cost: Direct Materials ₹80,000 + Direct Labor ₹50,000 + Direct Expenses ₹10,000 = ₹1,40,000
2. Fixed cost = ₹1,20,000; Variable cost per unit = ₹20; Production = 2,000 units. Total cost = ₹1,60,000
3. Break-even point: Fixed Cost ₹90,000; Selling Price ₹50/unit; Variable Cost ₹30/unit ⇒ BEP (units) = 90,000 / (50 - 30) = 4,500 units
4. Overhead absorption rate: Budgeted Overheads ₹1,00,000; Budgeted Labor Hours = 10,000 ⇒ Rate = ₹10/hour
5. Contribution Margin = Selling Price ₹100 - Variable Cost ₹60 = ₹40
6. Profit Volume Ratio = (Contribution/Sales) × 100 = (₹40/₹100) × 100 = 40%
7. Find cost per unit: Total Cost ₹5,00,000 for 10,000 units = ₹50/unit
8. Margin of Safety = Actual Sales ₹4,00,000 – Break-even Sales ₹3,00,000 = ₹1,00,000
9. Inventory Turnover = Cost of Goods Sold ₹8,00,000 / Average Inventory ₹2,00,000 = 4 times
10. ROI = (Net Profit ₹1,20,000 / Investment ₹6,00,000) × 100 = 20%

9. Multiple Choice Questions

1. Which of the following is a fixed cost?
   • a) Raw Material
   • b) Electricity
   • c) Rent
   • d) Labor
2. Which method is used in mass production industries?
   • a) Job Costing
   • b) Process Costing
   • c) Batch Costing
   • d) Contract Costing
3. Management Accounting provides information primarily to:
   • a) Government
   • b) Internal Management
   • c) Creditors
   • d) Public
4. Which is not a tool of Management Accounting?
   • a) Ratio Analysis
   • b) Budgeting
   • c) Journal Entry
   • d) Break-even Analysis
5. Prime cost includes:
   • a) Direct materials, labor, and expenses
   • b) Overheads
   • c) Administrative expenses
   • d) Selling expenses
6. Break-even point occurs when:
   • a) Total cost > Sales
   • b) Total cost = Sales
   • c) Variable cost = Fixed cost
   • d) Net profit = Total cost
7. Which of the following is a variable cost?
   • a) Rent
   • b) Direct labor
   • c) Insurance
   • d) Salary
8. Activity-Based Costing is best for:
   • a) Simple production processes
   • b) Complex production environments
   • c) Financial accounting
   • d) Cash flow analysis
9. Cost Unit in transport is usually:
   • a) Ton
   • b) Ton-km
   • c) Kilogram
   • d) Hour
10. Cost Centre can be:
    • a) A department
    • b) A person
    • c) A machine
    • d) All of the above