MPA 604: Cost and

Managerial Accounting

Tanzina Haque FCMA

Professor
Department of Accounting & Information Systems
University of Dhaka
MPA 602: Cost and
Managerial Accounting

Introduction
 DEFINITION OF
ACCOUNTING
► Accounting is the process of identifying, measuring and communicating
economic information about an entity to permit informed judgments and
decisions by users of the information (Anthony et al, 1995)

economic information
users of the information
 What economic information?

Examples
• Assets of the entity
• Liabilities of the entity
• Expenses & income of the entity
• Performance of the entity
• Financial position of the entity
• Liquidity position of the entity
 Users of accounting information

• Management
• Investors: Shareholders/owners & lenders
• Creditors/ suppliers
• Debtors/customers
• Government
• The public/ Community
• Financial analysts
• Employees
 Branches of Accounting

• Financial Accounting
• Cost Accounting
• Management Accounting
 Accounting:

► Financial Accounting: (Stewardship

Accounting)
► limits its activities in recording business transaction and
determining financial results and position.
► Cost Accounting: (Control Accounting)
► takes the responsibility of determining cost of products
and services and controlling costs with a view to
maximizing profit.
► Management Accounting: (Decision making
Accounting)
► takes the duty of helping management in planning and
decision making.
 Functions:
► Fin. Acc.
► Recording business transaction.
► Determining the end results of the business.
► Determining the financial position on the closing date of the
accounting period.
► Cost Acc.
► Determining cost of product or services.
► Controlling cost of product or services.
► Measuring efficiency.
► Supplying financial and cost data.
► Mgt. Acc.
► Assisting management in planning.
► Assisting management in taking decisions in special situation
 Relationship of Financial,
Management, and Cost AccountingProduct
Costs

FINANCIAL COST MANAGEMEN

ACCOUNTIN ACCOUNTING T
G ACCOUNTING
Cost Accounting
 Cost Accounting

► “Cost Accounting is the identification, accumulation,

assignment and analysis of production and activity cost data
to provide information for external reporting, internal
planning and control of ongoing operations and special
decisions.”
► Cost accounting is concerned with providing information for
financial accounting and management accounting purposes.
Cost accounting provides the product cost data needed for
inventory valuation in the statement of financial position and
for income determination in the Income Statement. It also
provides the cost data needed for budgeting, the control of
operation and special decisions e.g. pricing decision.
 Advantages of Cost Accounting:
► Cost determination
► Cost control
► Identification and elimination of wastage.
► Identification of causes resulting in increase or decrease in profit
or losses.
► Identification of variances.
► Identification of causes of variation within departments and over
the period.
► Measuring the effects of capacity utilization at different levels.
► Development of cost reduction program.
► Identification of responsibility center.
► Material control.
► Management information
► A cost accountant may furnish data relating to managerial decision
in respect of buy or make, acceptance of order below cost etc.
► A cost accountant may help fixation of product price by supplying
necessary financial and cost data.
► Use of managerial costing may help the management taking short
run decision.
► Miscellaneous advantage
► A cost accounting system may supply information for use by
various outside agencies.
► The operation of cost audit may prevent fraud pr manipulation in
cost accounts.
► Cost of closing stock i.e. material, work-in-process and finished
goods may be derived automatically.
 The Role of Cost Accounting:

► Establishing costing methods & procedures that permit control & if

possible reduction or improvement of costs.
► Aiding & participation in the creation & execution of plans & budgets.
► Creating inventory value for costing & pricing as described by law & at
times controlling physical quantities.
► Determining company costs & profit for an annual & shorter
accounting period in total or by segment, as determined by mgt. or
required by governmental regulations.
► Providing mgt. with cost information in connection with problems
that involve a choice among alternative courses i.e. decision making.
The decision may be to enter into a new market, develop the costs of a
new product, discontinue a product line, buy or lease equipment, or
take other action to increase profit or solve problems.
What is Managerial Accounting?
• It is the process of identifying, measuring, accumulating, analyzing, preparing,

interpreting, and communicating information that managers use to fulfill organizational

objectives.

• The branch of accounting that produces information for managers within an

organization is termed as Managerial Accounting.

• The term Managerial accounting refers to accounting for the management, i.e.,

accounting which provides necessary information to the management for discharging

its functions. The functions of the management are planning, organizing, directing and

controlling.

• Thus, Managerial accounting provides information to management so that planning,

organizing, directing and controlling g of business operation can be done in an orderly

manner. 15
1959- Committee of Mgt Acc. of the AAA
► “ The application of appropriate techniques & concepts in
processing the historical & projected income data of an entity
to assist management in establishing plans for reasonable
economic objectives & in the making of rational decisions
with a view toward achieving these objectives. It includes the
method & concepts necessary for effective planning, for
choosing among alternatives business actions & for control
through the evaluation & interpretation of performance. Its
study involves consideration of ways in which accounting
information may be accumulated, synthesized, analyzed &
presented in relation to specific problems, decisions & day to
day task of business management.”
1-17

Comparison of Financial and Managerial

Accounting
 Distinction between Cost Accounting and
Managerial Accounting

Cost Accounting:
Cost Accounting is the process of a accounting for costs which begins with recording
of income and expenditure or the bases on which they are calculated and ends with
the preparation of statistical data.

Managerial Accounting:
It is the process of identifying, measuring, accumulating, analyzing, preparing,
interpreting, and communicating information that managers use to fulfill organizational
objectives
 Difference Between Cost Accounting and Managerial Accounting
Base Cost Accounting Managerial Accounting

Meaning Cost Accounting is a process of Managerial accounting is one which enables

ascertaining the cost management in doing its functions efficiently.

Objects The primary object of Cost accounting Managerial accounting is aims at representation of
cost data or accounting information for
is to determine the records, cost of
management use.
products and services.

Scope The scope of Cost accounting is not Managerial accounting has wider scope. It
wide, it is apart of Managerial includes Financial accounting, Cost
accounting accounting an statistics etc.

Principles Under this system of cost accounting No principles is followed under the system of
certain principles are followed. managerial accounting.

Parties Both parties, internal and external have Managerial accounting is specially designed for
interested in costing management or internal use.

Principles Cost accountancy have some it is not so in the case of the management
and formats established and set accounting accounting
principles and formats
Cost
 Cost

► Cost can be defined as the value of the sacrifice made to

acquire goods or services, measured in monetary units by the
reduction of assets or incurrence of liabilities at the time the
benefits are acquired. At the time of acquisition the cost
incurred for present or future benefits. When these benefits
are utilized, the cost becomes expense.
► An expense is defined as a cost that has given a benefit and is
now expired. Unexpired costs that can give future benefits
are classified as assets.
► When assets are given up for nothing in return in those cases
the value of the assets given up becomes a loss.
Cost Classification
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
1-25

Manufacturing Costs
Manufacturin
Direct Direct
g
Materials Labor
Overhead

The Product
1-26

Direct Materials

Raw materials that become an integral part of the

product and that can be conveniently traced
directly to it.
1-27

Direct Labor

Those labor costs that can be easily traced

to individual units of product.
1-28

Manufacturing Overhead
Manufacturing costs cannot be traced directly to
specific units produced.
Examples: Indirect materials and indirect labor

Materials used to support Wages paid to employees

the production process. who are not directly
involved in production
Examples: Lubricants and work.
cleaning supplies used in the Examples: Maintenance
automobile assembly plant. workers, janitors and
security guards.
1-29

Classifications of Nonmanufacturing Costs

Administrative
Selling Costs
Costs

Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
 Volume of Production:
► Fixed cost: are those in which total fixed cost remain
constant over a relevant range of output, while the fixed
cost per unit varies with the output. Beyond the relevant
range of output, fixed cost will vary.
► The relevant range refers to that range of activities in
which management expects the firm to be operative in the
next planning period.
► Variable cost: are those that in total will change
proportionately as levels of activities are changed. A
variable cost can be viewed as a cost that is constant as per
unit.
► Mixed cost: contain both fixed and variable characteristics
over relevant ranges of operation. Mainly two types:
► Step cost
► Semi-variable cost
• Relationship between cost & volume within the relevant
range:
• Total variable cost change in proportion to change in volume.
• Per unit variable cost remain constant when volume changes.
• Total fixed cost remain constant when volume changes.
• Per unit fixed cost increase/decrease when volume
decrease/increase.
 Classification of costs:

The achievement of the objective of cost accounting requires

that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:
► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
 Ability to trace:

• Direct cost: cost that management is capable of tracing to

specific items or areas. e.g. direct material, direct labor etc.
• Indirect cost: cost that are common to many items and
are not therefore directly traceable to any one item or area.
Indirect costs are usually charged to items or areas on the
basis of allocation techniques.
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
 Departments where incurred:
► Production dept.: These contribute directly to
the production of the item and include
departments in which conversion and production
processes take place. They include manual and
machine operations directly performed on the
product manufactured.
► Service dept.: These are departments which are
not directly related to the production of an item.
Their function is to provide services for other
depts. The cost of service departments are usually
allocated to production departments since the
benefit from the service provided.
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
 Functional areas:
► Manufacturing cost: they are related to the production of
an item. They are the sum of direct material cost, direct
labor cost, other direct expenses and factory overhead.
► Administrative cost: these are incurred for the overall
management of the enterprise which cannot be readily
identified with one of the major functional areas. It
includes all expenses necessary for the maintenance of an
efficient management administration.
► Selling & Distribution cost: are cost that incurred after
the manufacturing process. It includes all expenditure
necessary for the transition of the product from the
manufacturing to the immediate buyer.
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
 Period charges to income:

► Product cost: relates to the product on hand,

either unsold finished goods or semi-finished
goods. They are inventoried and carried forward
as assets until the goods to which they relate are
sold, then they are matched against sales.
► Period cost: are cost that are associated with the
revenues of the current period. They are not
assigned directly to the products on hand because
they do not represent value added to any specific
product.
1-41

Product Costs Versus Period Costs

Product costs include Period costs are not
direct materials, direct included in product
labor, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold Expense

Sal
e
Balance Income Income
Sheet Statement Statement
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
 Time when computed:
► Historical cost: are past cost valued at the
acquisition cost of the asset. It has the basic
advantage of confirming to GAAP and so are
assumed to be objective , verifiable and free from
bias.
► Standard/ Predetermine cost: express the
future trend of the historical cost and result from
prediction model. It is useful for planning &
control. Standard cost set yardstick for future
performance.
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and decision making.
Relationship with Accounting period:
• Capital expenditure: provides benefits to future
period and is classified as an asset.
• Revenue expenditure: is assumed to the current
period and is classified as an expense.
• A capital expenditure will flow into the cost
stream as an expense when the asset is used up
or written off.
 Classification of costs:
The achievement of the objective of cost accounting requires
that cost should be ascertain, analyzed and classified.
Classifications are based on the relationship of costs to:

► The product
► Volume of production/cost behavior pattern.
► Ability to trace.
► Departments where incurred.
► Functional areas.
► Timing of charges against revenue.
► Time when computed
► Relationship with accounting period.
► Relationship to planning, controlling and
decision making.
 Relationship with Planning, Controlling &
Decision making purposes:

► Committed fixed cost: are those fixed unavoidable costs

necessary for maintaining a basic organization and a
production capacity. Their incurrence continues even if the
volume of activity is zero.
► Discretionary fixed cost: arises from yearly appropriation.
Decision for repairs and maintenance costs, advertising costs,
executive training cost etc.
► Controllable cost: are those which may be directly
influenced by unit managers in a given time period.
► Non-controllable cost: are those which are not directly
administered at a given level of management authority.
• Relevant cost: are expected future cost that differ among
alternative courses of action
• Irrelevant cost: are unaffected by management’s actions.
• Differential cost: a differential cost is the difference between
the cost of alternative courses of action on an item by item
basis. If the cost is increasing from one alternative to another
it is called an incremental cost and if the cost is decreasing
from one alternative to another it is called decremental cost.
• Opportunity cost: it is the cost of next best alternative
forgone. Where a decision to persue one alternative is made,
the benefits of other options are forgone. Benefits lost from
rejecting the next best alternative are the opportunity cost of
the chosen action. Since opportunity costs are not actually
incurred they are not recorded in the accounting records.
They are however relevant cost fop decision making purposes
and must be considered in evaluating a proposed alternative.
► Sunk cost: irrevocable costs are called sunk cost. Sunk cost
referred to those cost that result from expenditure made in
the past and can’t be changed by present or future decisions.
► Imputed cost: are costs not actually incurred in some
transactions but which are relevant to the decision as they
pertain to a particular situation. This cost do not enter into
traditional accounting system but they are being related with
economic reality help in making better decision.
► Out of pocket cost: refers to cash outlay immediately or at
some future date. These costs are relevant cost. Sometime
this cost is termed as direct or variable cost. This cost
concept is useful for management decision making.
► Avoidable cost: are those cost which may not have been
incurred under expected condition. e.g. abnormal loss.
► Joint cost: is the cost of two or more products that are
produced simultaneously by a single process and are not
identifiable as individual types of products until a certain
stage of production known as the split off point is reached. In
other words, it is the total cost incurred up to the point of
separation.
► Common cost: are those cost which are incurred for more
than one product, job, territory or any other specific costing
object. It is not easily identifiable with individual product and
therefore generally apportioned.