Introduction to Cost and Management Accounting

Cost Accounting

the process of collecting, classifying, allocating, analysing, reporting and controlling the cost of production or provision of services.

Major functions of cost accounting

Cost accumulation for inventory and income determination

The scope of cost accounting

Cost classification

Cost collection

Cost allocation

Cost analysis

Cost reporting

Cost classification

Organizing cost into different categories like fixed, variable, period or product

Cost collection

Gathering data on all expenditure related to production and operation

Cost allocation

Distributing indirect costs (overhead) to cost objects using various allocation basis

Cost analysis

Breaking down costs to understand their behavior, trends and relationships to activity levels.

Cost reporting

Presenting cost information in clear and useful formats to different levels of management so the best decision can be made.

Management Accounting

the process of preparing and using financial and non-financial information to help managers plan, control, evaluate performance and make decisions for the business.

The scope of MA

planning, performance measurement and control to improve the efficiency and effectiveness of existing operations.

Role of Cost Accounting in Manufacturing Industries

Product costing

Pricing products

Cost controls and efficiency

Inventory valuation

Decision-making tool

Product costing

To ascertain the cost of making a product by using techniques such as job costing and process costing.

Pricing products

To help determine selling prices of product by providing cost information.

Cost control and efficiency

To measure and improve efficiency by setting standards for materials, labour and overheads.

Inventory valuation

To determine the value of inventory (work-in-process and finished goods).

Decision-making tools 

To provide a basis for operating policies such as cost-volume relationship, whether to make or buy components from external suppliers or whether to add or drop a process.

Role of Cost Accounting in Service Industries

Service costing

Pricing services

Optimizing resources allocation

Service costing

Cost accounting helps to determine the cost of providing services to customers.

Pricing services 

The cost of delivering the service helps in setting price to ensure profitability.

Optimizing resource allocation:

Cost accounting helps service firms understand the cost of utilizing their primary resource - skilled labour. This aids in optimizing resource allocation.

The Importance and Role of Management Accounting

Planning

Decision-making

Controlling

Performance evaluation

Planning 

providing data that helps managers set goals and efficiently allocate limited resources to their most productive uses. For example, management accounting facilitates budgeting, which helps managers allocate resources.

Decision-making

providing relevant financial and non-financial data that allows managers to make well-informed choices regarding pricing strategies, product development, investment opportunities and operational efficiency. For example investment appraisal help to support investment decisions.

Controlling

Management accounting compares actual results with budgets or standards, identifies variances and help managers understand the causes so they can take corrective actions.

Performance evaluation

Management accounting measures efficiency and profitability of different products or departments.