Finance and Accounting have grown in importance in today’s competitive business environment, where corporate organisations must provide an accurate and fair picture of their financial status. As a result, the use of accounting in the business sector has become an essential aspect. The Company Secretary must offer comprehensive and accurate information about the company’s financial activities to management for decision making. This emphasises the need of keeping accurate, up-to-date, and conforming books of account.
Cost and management accounting is a branch of accounting which helps in reducing cost, improving profit and helps in increasing the efficiency of the organisation and provides this information to the management which will help them in improving decision-making. Mainly cost accounting is concerned with managing the cost of production of goods and services where a cost accountant tries to analyse the cost of production and report the deviation so that necessary steps can be taken as per requirement. Cost accounting and management accounting is a very crucial process for the proper utilisation of resources. Cost accounting and management accounting are the branches of accounting that have been developed due to the limitations of financial accounting. Management accounting is concerned with helping managers to take important decisions in the company. So by combining these two terms Cost and management accounting provides information about the financial and operational performance of the organisation which will help in taking valuable decisions for the organisation.
Concept of Cost
The amount of resources given up in return for particular products or services is referred to as the cost. Money or money’s equivalent represented in monetary terms are the resources given up.
The Chartered Institute of Management Accountants, London defines cost as “the amount of spending (real or notional) expended on, or related to a given object or activity”.
This activity of a company may be the production of a product or the provision of a service, both of which entail spending under numerous headings, such as materials, labour, miscellaneous expenditures, and so on.
A manufacturing organisation is interested in determining the cost per unit of the product created, whereas a service organisation, such as a transportation undertaking, canteen, electrical company, municipality, and so on, is interested in determining the expenses of the service it provides.
In its most basic form, the cost per unit is calculated by dividing the total expenditure by the total number of units produced or services delivered. However, this strategy is only effective if the manufacturer only manufactures one product. If the company produces more than one product, the total spending must be divided across the numerous items so that the cost of each product may be determined independently. Even if just one product is produced, it may be important to examine the cost per unit of each expenditure item that contributes to the total cost. When a large number of products are created, the situation gets more difficult, and it is important to break down the cost per unit of each product into several components of expenditure that make up the entire cost.
Concept of Cost Management
A specialised discipline of accounting known as cost accounting deals with the classification, accumulation, assignment, and control of expenses.
Cost accounting is described as follows by the C.I.M.A. London’s Costing terminology:
“The creation of budgets, standard costs, and real costs of activities, processes, products, and the study of variations, profitability, or the social use of money.”
Cost accounting differs from costing in that the latter merely offers the foundation and data needed to calculate costs. Once the data is made available, costing may be done mathematically using memo statements or by using the integral accounting approach.
Objective of Cost Accounting
Cost accounting is the systematic recording and analysis of costs in order to determine the cost of each product made or service supplied by an organisation. Information on the cost of each product or service would allow management to determine where to cut expenses, how to set pricing, how to maximise revenues, and so on. Thus, the primary goals of cost accounting are as follows:
- Analyze and categorise all expenses in relation to the cost of products and operations.
- To determine the cost of production for each unit, task, operation, process, department, or service and to create a cost standard.
Any inefficiencies and the level of different types of waste, whether of materials, time, money, or in the usage of machinery, equipment, and tools, must be reported to management. Analysis of the causes of disappointing outcomes may point to corrective actions.
To supply data for periodic profit and loss statements and balance sheets at such intervals, e.g., weekly, monthly, or quarterly, as the management may require during the fiscal year, not only for the entire organisation but also for departments or particular items. Also, in the profit and loss statement, must explain in detail the actual causes for profit or loss disclosed in total.
To identify the sources of manufacturing cost savings in terms of processes, equipment types, design, output, and layout. Daily, weekly, monthly, or quarterly updates may be required to guarantee timely and positive action. To offer real cost numbers for comparison with estimates, and to serve as a reference for future estimates or quotations, as well as to aid management in their price-fixing policies.
To show how standard costs are produced, what the cost of production should be, and how the actual costs that are finally recorded may be contrasted. To show comparative cost statistics for various time periods and output volumes. To provide information to enable management to make different short-term decisions, such as price quotations to special clients or during a slump, make or buy decisions, allocating priorities to various items, and so on.
Importance of Cost Accounting
- Costing as a Management Tool: Management benefits greatly from cost accounting. It delivers thorough costing information to management in order for them to keep effective control over stores and inventory, boost organisational efficiency, and reduce waste and losses. It makes it easier to delegate responsibility for essential tasks and rate personnel. For all of this, management must be capable of properly utilising the information given by cost accounts. The following are the numerous benefits that management derives from a good costing system.
- Cost accounting is useful during times of trade depression and competition: During moments of the commercial downturn, the organisation cannot afford unrestrained losses. Management must be aware of areas where savings may be made, waste avoided, and efficiency raised. The organisation must fight not just for survival but also for ongoing expansion. Before beginning on any price-cutting programme, managers should be aware of the true cost of their products. An adequate costing system makes this possible.
- Price determination is aided by Cost Accounting: Although the law of supply and demand affects the price to a large part, the cost to the producer is crucial. If the producer is in a position to set or adjust the price charged, he can draw the required direction from his costing data.
- Estimation is aided by Cost Accounting: Adequate costing records give a solid foundation for estimating and quoting tenders.
- Cost accounting assists in directing production to the Correct Lines: Proper costing information allows managers to differentiate between lucrative and non-profitable operations. Profits may be increased by focusing on productive operations and removing those that are not.
- Wastage is eliminated by Cost Accounting: Because cost accounting is concerned with the precise breakdown of expenses, numerous types of waste or loss can be identified.
- Cost accounting allows for Comparisons: Proper costing record keeping gives varied costing data for comparison, which aids management in formulating future courses of action.
- Cost accounting offers information for the Profit and Loss Account on a regular basis: Adequate costing records give the management the data needed to prepare the profit and loss account and balance sheet at the intervals requested by the management.
- Cost accounting assists in identifying and improving efficiency: If the numerous procedures involved in the production are closely investigated, losses due to material waste, idle time of workers, improper supervision, and so on will be revealed. Efficiency can be monitored, expenses can be regulated, and different methods to improve efficiency may be implemented.
- Inventory control is aided by cost accounting: Cost accounting provides the oversight that management requires in terms of material stock, work-in-progress, and finished items.
Cost Accounting Scope
- Cost Ascertainment: The primary aim of cost accounting is to determine the cost of goods or services provided. It entails data collecting, expenditure analysis, and production measurement at various phases of manufacturing. For different forms of manufacturing, multiple costing techniques are required, such as historical costs, standard costs, process costs, operation costs, and so on.
It may be accomplished in two ways, respectively- Post-costing is the process of determining costs based on real information recorded in financial accounts.
- Continuous costing refers to a procedure of ascertainment in which cost information is provided as and when a specific action is finished, such that the total cost of a particular project is known the minute it is completed.
- Cost Control: In an age of competition, the objective of any business is to keep expenses as low as possible while maintaining efficient operating conditions. To sustain, it is necessary to assess each individual cost item in light of the services or advantages acquired in order to make the best use of the money spent or- it may be recovered. This necessitates preparation and the use of standards for each cost item in order to identify and correct any irregularities.
- Proper cost-to-revenue matching: In cost accounting, the management generates monthly or quarterly accounts to represent the cost and income data associated with the sale of that time.
- Management Aids Decision-making: Decision-making is the process of selecting between two or more options depending on the outcomes of those alternatives. A cost-benefit analysis is also required. All of this is possible with a decent cost accounting system.
Concept of Management Accounting
Every day, many transactions and events occur in every company enterprise: sales are made, purchases are made, costs are met or incurred, payments are received and paid, and assets are sold and acquired. These events, which result from management decisions and actions, have an effect on the enterprise’s operational efficiency and position. The majority of these interactions and occurrences have or can be quantified and expressed in monetary terms. Because they have an impact on the operation and position of the organisation, they must be measured, documented, analysed, and reported to management so that the management can assess their impact. Management accounting connects management and accounting.
Management accounting is concerned with all such information that is valuable to management. Management accounting is concerned with any information essential for decision-making. Management accounting, as opposed to financial accounting, offers information to internal users, despite the fact that the core data comes from the same accounting system, namely the financial and cost accounting systems.
Management accounting collects and disseminates accounting, cost accounting, economic, and statistical data to men at various managerial levels to aid in the execution of managerial duties and assessments. It is the creation and use of various strategies for capturing, analysing, interpreting, and presenting data in order to make financial, costing, and other data active and effective in the execution of managerial activities such as planning, decision-making, and control. It should be mentioned that management accounting employs both accounting and statistical and mathematical methodologies. Management accounting is forward-thinking, thus it should be able to process economic information and data so that it may be used by management.
As a result, management accounting may be defined as the processing and presentation of accounting, cost accounting, and other economic data, both historical and prospective, in order to aid in the performance evaluation of managerial tasks such as planning, decision-making, and control. Data processing and presentation entails the use of cost accounting, budgetary management, standard costing, break-even analysis, ratio analysis, finances and cash flow analysis, and other procedures.
Management Accounting’s Objective
The following are the primary goals of management accounting:
- To create Plans and Policies: Planning includes making predictions based on the facts at hand, establishing objectives, formulating policies, identifying potential courses of action, and selecting an activity schedule. It makes it easier to prepare remarks in light of past performance and provides projections for the future.
- In order to comprehend Financial Documents: The purpose of management accounting is to provide the management with financial data. Financial data must be presented in a way that makes it simple to understand. It uses statistical tools like charts, diagrams, graphs, etc. to portray accounting data.
- In order to aid in the Decision-Making Process: With the aid of several contemporary tools, management accounting strengthens the scientific nature of the decision-making process. For each of the available choices, data/information on cost, price, profit, and savings are gathered and then assessed in order to offer a foundation for making wise judgements.
- To assist with Control: For managerial control, management accounting is useful. Performance may be managed with the use of management accounting techniques like standard costing and budgetary control. The use of standard costing has an impact on cost management, and the use of budgets enables departmental control. Management accounting aids in the control of each and every person’s performance.
- To deliver a Report: Through reporting, management accounting keeps the management completely up to date on the situation of the business. It enables managers to make wise decisions quickly. It constantly updates senior management on the performance of several departments.
- To Make Operation Coordination Easier: Tools for total control and coordination of corporate activities are provided by management accounting. Budgets are a crucial tool for cooperation.
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