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Cost and management accounting

Finance and accounting have assumed much importance in today’s competitive world of business wherein corporate organizations 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.  Secretary has to provide complete and accurate information about the financial operations of the company to management for decision making. This emphasizes that the books of account are to be maintained accurately, up-to-date and as per the norms. 

The subject ‘Cost and Management Accounting’ is very important and useful for optimum utilization of existing resources. These are branches of accounting and had been developed due to limitations of financial accounting. It 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.

What is cost accounting?

Cost accounting is a form of managerial accounting that aims to capture a company’s total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense. Cost accounting is used by a company’s internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions.

  • Cost accounting is used internally by management in order to make fully informed business decisions.
  • Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the needs of management.
  • Cost accounting considers all input costs associated with production, including both variable and fixed costs.
  • Types of cost accounting include standard costing, activity-based costing, lean accounting, and  marginal costing.

OBJECTIVES OF COST ACCOUNTING

The main objectives of cost and management accounting are explained as below: 

(i) Ascertainment of Cost:

The main objective of cost accounting is accumulation and ascertainment of cost. Costs are accumulated, assigned and ascertained for each cost object. 

(ii) Determination of Selling Price and Profitability:

The cost accounting system helps in determination of selling price and thus profitability of a cost object. Though in a competitive business environment selling prices are determined by external factors but cost accounting system provides a basis for price fixation and rate negotiation. 

(iii) Cost Control:

Maintaining discipline in expenditure is one of the main objective of a good cost accounting system. It ensures that expenditures are in consonance with predetermined set standard and any variation from these set standards are noted and reported on a continuous basis. To exercise control over cost, following steps are followed: 

(a) Determination of pre-determined standard or results:

Standard cost or performance targets for a cost object or a cost centre is set before initiation of production or service activity. These are desired cost or result that need to be achieved. 

(b) Measurement of actual performance:

Actual cost or result of the cost object or cost centre is measured. Performance should be measured in the same manner in which the targets are set i.e. if the targets are set up operation-wise, and then the actual costs should also be collected and measured operation-wise to have a common basis for comparison.

(c) Comparison of actual performance with set standard or target:

The actual performance so measured is compared against the set standard and desired target. Any deviation (variance) between the two is noted and reported to the appropriate person or authority. 

(d) Analysis of variance and action:

The variance in results so noted are further analyzed to know the reasons for variance and appropriate action is taken to ensure compliance in future. If necessary, the standards are further amended to take developments into account. 

(iv) Cost Reduction:

It may be defined “as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.”

Cost reduction is an approach of management where cost of an object is believed to be further reduced. No cost is termed as lowest and every possibility of cost reduction is explored. To do cost reduction, the following action is taken:

(a) Each activity within an entity is segmented to analyze and identify value added and non- value added activities. All non-value added activities are eliminated without affecting the essential characteristics of the product or process. Value chain Analysis, a strategic tool, developed by Michael Porter, is one of the methods to do value analysis.

(b) Conducting continuous research and study to know better  to do anything. The three-fold assumptions involved in the definition of cost reduction may be summarized as under:

(a) There is a saving in unit cost.

(b) Such saving is of permanent nature.

(c) The utility and quality of the goods and services remain unaffected, if not improved.

(v) Assisting management in decision making:

Cost and Management accounting by providing relevant information, assist management in planning, implementing, measuring, controlling and evaluation of various activities. A robust cost and management accounting system not only provides information internal to industry but external also.

What is management accounting?

Management accounting is the provision of financial and non-financial decision-making information to managers. In management accounting or managerial accounting, managers use the provisions of accounting information to inform themselves better before they decide matters within their organizations, which allows them to manage better and perform control functions. 

Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that assists executives in fulfilling organizational objectives.

The Institute of Chartered Accountants of England and Wales defines, “Management Accounting is that form of accounting which enables a business to be conducted more efficiently.”

Characteristics of Management Accounting

Decision-making system:

The financial data provided by the management accounting, is helpful to the management in framing policies and assisting the day to day operations.

1.Future-oriented:

Management accounting is future-oriented as it helps in planning and deciding the future course of action.

2.Qualitative and Quantitative Information:

In management accounting, qualitative information relating to the performance of the managers and other staff is also considered, along with the other financial data.

3.No set format:

There is no set format for the disclosure of the information. Management accounting usually presents information in the form which is easily understandable to the managers and other users.

4.Discretionary activity:

Management accounting is not compulsorily required by the statute. Indeed, management accounting is done as per the requirement of the organization and hence, it can be done weekly, monthly, quarterly, half-yearly, etc.

 

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