SYLLABUS

UNIT I: Introduction to Cost and Management Accounting

Introduction to Cost Accounting, Meaning of Costing System; Cost Concepts and Cost

Classifications; Introduction to Management Accounting, Nature and Scope; Tools and

Techniques of Management Accounting; Distinction between Financial Accounting, Cost

Accounting and Management Accounting, Applications of Cost and Management Accounting.

UNIT II: Understanding Cost Behaviors

Material Cost: Purchase Procedures, Store Keeping and Inventory Control, Economic Order

Quantity (EOQ), Calculation of Minimum Level, Maximum Level, Re-order Levels and Re-

Order Quantity, ABC Analysis, Inventory Valuation under LIFO and FIFO method

Labor Cost: Classification of Labor Costs, Payroll Procedures, Incentive Wages Schemes and

Bonus (Halsey, Rowan, Taylor‟s Differential Piece Rate System, and Gantt‟s Approach)

Overheads: Meaning, Classification, Allocation, Apportionment, Absorption and Control

UNIT III: Contract and Process Costing

Meaning and Concept, Accounting Procedure of Contract Costing, Accounting Treatment of

Process Costing (Including Inter-Process Profit) and its applications.

UNIT IV: Costing Systems

Concept, Applications of Marginal Costing System and Absorption Costing System, Income

Measurement under Marginal Costing System and Absorption Costing System, Reconciliation

Statement.

UNIT V: Cost-Volume Profit Analysis

Meaning, Applications, Break-Even Analysis, (Single and Product Mix), Margin of Safety

and its applications.

UNIT VI: Budget Process, Performance Evaluation and Control

Concepts, Importance, Advantages, Limitations and Relevance of Budget Process in

Management Accounting, Concepts of Planning, Budgeting and Forecasts, Preparation of

Functional Budgets: Sales Budget, Production Budget, Purchase Budget and Cash Budget,

Meaning and Objectives of Standard Costing, Measurement of Material, Labor and Overhead

Variances and their interpretations.

Accounting is the process of recording financial transactions pertaining to a business. The

accounting process includes summarizing, analyzing and reporting these transactions to
oversight agencies, regulators and tax collection entities. Or simply we can define as an
accounting is the process of identifying, measuring, recording, classifying, summarizing,
interpreting, analyzing and communicating the financial transactions to the concerned parties.

Branches of Accounting:-

1. Financial Accounting

Financial accounting involves recording and classifying business transactions preparing

and presenting financial statements to be used by internal and external users.
In the preparation of financial statements, strict compliance with generally accepted
accounting principles or GAAP is observed. Financial accounting is primarily based on
historical data.

2. Management Accounting

Managerial or management accounting focuses on providing information for use by internal

users, which is generally known as the management. This branch deals with the needs of the
management rather than strict compliance with generally accepted accounting principles.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis,
evaluation of business decisions, and similar areas. It helps to provide an information and
analysis to support internal decision-making, planning, and control within an organization. It
plays a crucial role in helping managers make informed decisions to achieve an organization's
goals.
Objectives/ Functions of Management accounting:-
1. Planning: Management accounting helps in setting objectives, formulating plans, and
developing budgets to guide the organization's activities. It provides financial data and
analysis to support the planning process.
2. Controlling: It assists in monitoring actual performance against planned targets.
Managers can identify variances and take corrective actions to ensure that the
organization's objectives are met.
3. Decision making: Management accounting provides relevant information for decision-
making. This includes analyzing the financial and non-financial aspects of different
courses of action to choose the best option.
 4. Performance Evaluation: It helps in assessing the performance of various departments,
divisions, or products within the organization. Key performance indicators (KPIs) are
used to measure and evaluate performance.
5. Cost Determination: Management accounting calculates and allocates costs to products,
services, or activities, helping in pricing decisions and cost control.
Limitations of management accounting:-
1. Subjective Data: Management accounting often relies on estimates and subjective judgments,
which can introduce bias and inaccuracies into the decision-making process.
2. Historical Data: It primarily uses historical financial data, which may not always be a reliable
predictor of future performance, especially in rapidly changing business environments.
3. Costly: Collecting and processing management accounting information can be costly in terms of
time and resources, especially for small businesses.
4. Information Overload: Providing too much information can overwhelm managers, making it
challenging to focus on critical issues.
5. Confidentiality: Sensitive financial information can sometimes be misused or leaked, leading to
potential security and privacy concerns.
6. Lack of GAAP Compliance: Management accounting is not always bound by Generally
Accepted Accounting Principles (GAAP), which means that it may not always align with
external financial reporting and compliance requirements.
7. Limited to Internal Use: Management accounting is designed for internal decision-making, and
its reports are not typically shared with external stakeholders, such as investors or creditors.
8. Inherent Uncertainty: The future is uncertain, and management accounting cannot eliminate
uncertainty; it can only provide tools and information to manage it

3. Cost Accounting
It is considered as a subset of management accounting, cost accounting refers to the recording,
presentation, and analysis of manufacturing costs. Cost accounting is very useful in
manufacturing businesses since they have the most complicated costing process. It is the process
of accounting for cost, which is concerned more with the ascertainment, allocation, distribution
and accounting aspects of costs. It deals with the classification, recording, allocation,
summarization and reporting of current and prospective costs. Actually, it is the formal
mechanism of ascertainment and control of cost.
It is an internal reporting system that aims to assist the management for planning and decision
making. It primarily emphasizes on cost and deals with collection, analysis, interpretation and
presentation for managerial decision making on various business problems.
Cost accounting is more concerned with short-term planning and its reporting period is much
lesser than financial accounting.
Objectives and Functions of Cost Accounting:-
1. To ascertain cost:-
The main objective or function of cost accounting is to ascertain the cost of goods and services.
Under cost accounting, costs are collected, classified and analyzed with the aim of finding out
the total as well as per unit cost of goods, services, process.
2.To analysis cost and loss:-
It helps to stop misuse of material tale time, breakdown or damage of machine and other
material.
3. To control cost:-
Cost accounting aims at controlling cost by using various techniques, such as standard costing
and budgetary
4. To help in fixation of sales price:-
The total cost of the goods and services are accumulated and profit is added to the total cost ,
then the sales price of the product is identified. So, the cost accounting helps in the fixation of
the selling price of the goods.
5. To help management:-
Cost accounting, aims at assisting the management in planning and is implementation by
providing necessary costing information that also enable in evaluation of the past activities as
well as future planning.
Importance /Advantages of Cost Accounting:-
The importance / advantages of cost accounting are presented below.
1.Helps in controlling cost: Cost accounting helps in controlling cost by applying som.
techniques such as standard costing and budgetary control.
2.Provides necessary cost information: It provides necessary cost information to the
management for planning, implementation and controlling.
3. Ascertains the total and per unit cost of production: It ascertains the total and per unit cost
of production of goods and services that helps to fix the selling price as well.
4. Introduces cost reduction programmes: It helps to introduce and implement different cost
reduction programmes.
5.Discloses the profitable and non profitable activities: It discloses the profitable and non
profitable activities that enable management to decide to eliminate or contract unprofitable
activities and expand or develop the profitable activities.
6. Provides information for the comparison of costs: It provides reliable data and information
which enables the comparison of costs between periods, volumes of
output, departments and processes.
Limitations of Cost Accounting:-
1. Lack of uniformity: Cost accounting lacks a uniform procedure. It is possible that two
equally competent cost accountants may arrive at different results from the same information.
Keeping this limitation in view, all cost accounting results can be taken as mere estimates.
2. Conceptual diversity: There are a large number of conventions, estimations and flexible
factors in cost accounting. In such a context, the reliability of cost accounting might be low.
3.Costly: There are many formalities which are to be observed by a small and medium size
concern due to which the establishment and running costing system becomes more expensive.
4.Ignorance of futuristic situation: The contribution of cost accounting for handling futuristic
situations has not been much. For example, it has not evolved so far any tool for handling
inflationary situation.
5.Lack of double entry system: Under cost accounting, double entry system is not adopted. So
it does not enable to check the arithmetical accuracy of the transactions and locate the errors.
6.Developing stage: Cost accounting is in developing stage since its principles, concepts and
conventions are in evolutionary phase.

Cost concept and cost classification:-

Cost is frequently used word. Since all use the word cost as per their own need and purpose,
therefore the meaning of cost differs depending upon the need and purpose. An accountant,
economist, engineer and a manager define it according to their need. Therefore, it is not easy to
define the term “cost”. However, in simple words, cost is defined as an amount of money
spent for obtaining goods or service. Cost is a resource foregone or sacrifice in monetary
terms, to achieve particular objectives.
The Oxford Dictionary defines cost as the paid for something.
As per ICMA, London “cost can be defined as the amount of expenditure (actual or notional)
incurred on or attributable to a given thing.”
As per Horngren, Sundemand Stratton “Cost may be defined as the sacrifice or giving up
resources for a particular purpose. Cost is frequently measured by monetary units that must be
paid for goods and services.”
Classification of costs
1.Element/Nature
2.Functions or activities
3.Variability or behaviour
4.Controllability
On the basis of Elements/ Nature
- Material cost
Material cost represents the total of costs of main raw materials, components, consumable stores
and packing materials. Materials cost also includes import duties, dock charges, transport cost,
storing cost receiving and inspection cost, and other costs associated with the materials
purchased.
- Labour cost
Labour cost is the total of wages incurred for the effort or services made by labours in the
productions of goods and services. Therefore, wages paid to the workers are termed as labour
costs.
- Expenses
Expenses are the total of costs incurred for production, administration and selling and
distributing operations. Such expenses include the cost of drawing, cost of special tools, cost of
trial production, royalties, rent, lighting and welfare expenses.
All the three elements of cost can further be divided or grouped into two types based on their
nature such as direct and indirect costs.
- Direct costs
Direct costs are those materials, labour and other expenses which can easily be attributed or
identified with a unit of product, process or operation.
- Indirect costs
Indirect costs are those types of cost, which cannot easily be attributed to or identified with a unit
of product, process or operation. Therefore, the total of costs of indirect materials, indirect labour
and indirect expenses is referred to as indirect costs.
On the basis of Functions or activities
- Production Cost
Production cost is the sum of the cost incurred for realizing finished goods. It includes direct
material cost and conversion cost needed to convert such direct material into finished goods. So,
it is the sum of Prime cost plus manufacturing expenses or factory overhead or work overhead. It
is also called manufacturing cost or factory cost or work cost.
- Non-Production cost
Non-production cost refers to the expenses incurred for running administrative and selling and
distribution works. So, non-production cost is known as operation cost too.
On the basis of Variability or Behaviour
- Variable Cost
Cost which change proportionality with volume of output or services are called variable costs.
They increase or decrease in total amount with the increase or decrease in volume of output.
However, the per unit variable cost is constant.
- Fixed Cost
Cost that does not change with output is fixed cost. It remains fixed for a stipulated period and
for a specific capacity output. Fixed cost is called constant or capacity cost. It is also called
create cost as it remains unchanged for a stipulated period. Fixed cost in total amount remains
constant whereas fixed cost per unit changes inversely with output changes.
- Semi-variable cost
Those cost which do not change proportionately like variable costs but their increase will be less
than proportionate unlike the variable costs is termed as semi-variable cost. The examples of
semi-variable costs are salary of supervisors, travelling salesman salary, repair and maintenance
costs etc. such costs contain fixed and variable portions. So, semi variable cost is also called
mixed costs.
Difference between fixed and variable cost
Fixed Cost Variable Cost
fixed costs are expenses that remain constant Variable costs are expenses that change
for a period of time irrespective of the level of directly and proportionally to the changes as
outputs per production.
Total amount of cost remains constant. Total amount of cost does not remain constant.
Per unit cost does not remain constant. Per unit cost remains constant.
On the basis of Controllability
Controllability may be defined in terms of change or alternation of costs. An effective cost
control requires knowledge of cost controllability. Cost under controllability may be categorized
into controllable and uncontrollable costs.
- Controllable cost
The cost subject to control or substantial influence of a particular manager or individual is called
controllable cost. In controllable cost, the cost can be changed or altered by the action of a
specific managers. Example; direct materials, direct labour, other overheads such as indirect
labour, factory supplies, cutting tools, power costs, repair and maintenance etc are controllable
costs.
- Uncontrollable costs
Costs that are not subject to influence by the action of manager is called uncontrollable costs.
These costs remain unchanged or unaltered. Example: managerial salaries, staff salaries,
depreciation after purchase of equipment, rent. Some costs may be controllable in the short run
but not in the long run.
Difference between financial and management accounting

Financial accounting Management accounting

It is an accounting branch which records the It is an accounting system which is concerned with
financial transactions for preparation of financial
the recording and providing all relevant
statements to depict the financial position. information for decision making.
It keeps record of financial transactions only. It keeps record of both financial and non-financial
transactions.
The prime objective of it is to provide financial The prime objective of it to support the internal
information to the various users. management for decision making.
It is mandatory as per the law. It is not mandatory as per law.
It is based on the principles of GAAP and the There are not any specific rules and regulations.
IFRS.
Financial accounting is not dependent on It depends fully on financial accounting for the
management accounting for the information. various information.
Unit- 2

Purchase of Material
Material is the one of the major component for any organization since it affects the production,
quality of products, price and sales. Thus, a systematic process is developed for the purchase of
materials. Purchase includes the identification of the material to be purchased, selection of the
appropriate suppliers, sending the purchase order, examination of the materials to ensure that
they are as per purchase order and payment of bills. The department involved in the purchase of
material is called the purchase department.
The purchase department performs the following activities.
- To avail the materials regularly.
- To purchase the qualitative materials in harmonized conditions.
- To purchase the materials in economic order quantities and remove the over and under stocking
of materials.
- To maintain a cordial relationship with the suppliers.
- To update and avail the information on supply, quality, price, purchase procedures, terms of
payment, carriage process etc.
Types of Purchase
There are two types of material purchase. They are mentioned below:
a) Centralized Purchase
Centralized purchase means that all the purchase activities are routed through only department.
All purchase should be made by the purchase department to avoid duplication and overlapping
procurements. In this system, all the other departments should send purchase requisitions to the
centralized purchasing department to make timely and suitable purchases.
b) Decentralized Purchase
In this purchasing system, there is no purchasing manager and purchasing department. So, all
departments are given authority for purchasing goods and material as per their needs and
requirements.
Purchase procedures:-
1. Receiving purchasing requisition
2. Offering tenders
3. Selection of suppliers
4. Sending purchasing order
5. Receiving and inspecting goods
6. Passing bill for payments

Stock control through ABC Analysis:-

ABC analysis is a way of categorizing the material on the basis of the quantity of consumption
and their relative values(prices). Some materials might be consumed in lower quantities but their
price may be very high. Such materials are kept in group 'A'. Similarly, some materials may be
consumed in large quantities but their values may be lower. Such materials are kept in group
*C. In between these two, some materials may be consumed in moderate quantity with the
moderate price. Such materials are kept in group 'B'. Under ABC analysis, very close control is
exercised over the materials in Group „A‟, whereas a very little control is exercised over the
materials in Group „C‟.
Labour cost:-
a) Human resource is the key assets of any type business( i.e. manufacturing as well as
service).
b) Labour cost refers to the remuneration paid to the employees in form of wages, salary,
bonus, allowances for their time and effort for manufacturing goods and services.
c) Labour cost may be very high due to inefficiency of labaour, idle time, unusual overtime.
So, labour cost control is necessary.
Incentive wage system
a) Halsey premium plan
b) Rowan premium plan
c) Taylor‟s Differential piece rate system
d) Gantt‟s task and Bonus scheme
a) Rowan Premium Plan
Total wages= TT* SR+ TS/ST( TT*SR)
Where,
TT= time taken
SR= Standard Rate
TS= Time saved(ST-TT)
(In the formula, 1st part (TT*SR) is a Basic wage and 2nd part TS/ST (TT* SR) is Bonus.
Effective wage rate = total wages/TT

Note:- The bonus on Rowan Premium plan is always greater than Halsey premium
plan.

b) Halsey Premium Plan

Total wages = TT* SR+ ½ (TS* SR)
Where,
TT= Time Taken
SR= Standard Rate
TS= Time saved (ST-TT), ST= Standard Time
(In the formula, 1st part (TT*SR) is a Basic wage and 2nd part ½ (TS* SR) is Bonus.
Effective wage rate = total wages/TT

c) Taylor’s Differential piece rate system

Normal piece rate= Standard wage rate
Standard Production
Total wages
 Below standard= Actual production* Low piece rate
At standard= Actual production* High piece rate
Above standard= Actual production* High piece rate
Where,
low piece rate= 80 % of normal piece rate
High piece rate= 120 % of normal piece rate
d) Gantt’s task and Bonus scheme
Normal piece rate= Standard wage rate
Standard Production
Total wages
Below standard= Standard production* Normal piece rate
At standard= Actual production* High piece rate
Above standard= Actual production* High piece rate
Where,
low piece rate= 80 % of normal piece rate
High piece rate= 120 % of normal piece rate

Overhead cost:-

a) Distribution of overhead:- When overheads are distributed among the departments ,

then it is called distribution of overhead. It is the process of departmentalization of
overheads.
b) Allocation of overhead:- Overheads are the common expenses incurred for a number of
departments and cost centers or cost units. Certain items of overheads can be directly
identified with a particular department or cost centre. The process of charging such items
of overhead to a particular department or cost centre is known as allocation of overhead.
Allocation of overhead can be made only when the amount of overhead incurred by a
particular department or cost centre is known. Therefore, allocation of overheads means
charging all the amount of cost to a particular department or cost centre. For example
repairs and maintenance for a machine should be charged or allocated to that department
where the machine is installed.
c) Apportionment of overhead:- There are certain overheads, which are common to a
number of departments or cost centres. They cannot be directly identified or allocated to
a particular department or cost centre. The distribution of such overhead to several
departments or cost centers proportionately on some equitable basis is known as
apportionment of overheads. For example, salary paid to the general manager should be
distributed to the production, administration and selling departments as the general
manager looks after all the departments. Some other common expenses are electricity,
rent, lighting, etc.

Contract costing:-
  Contract refers the agreement between two parties to carry out a certain work in a
specified period of time.
 Two parties are involved in contract- contractor and contractee.
 The price which is agreed between the contractor and contractee to get the work done is
considered as “contract price”.
Budgetary Control
 Budget is the estimation of revenue and expenditure of a business for a specified period
of time.
 It can be defined as a proper allocation of the resources too. It defines how resources will
be acquired and used.
Application of Budget:-

 Planning

 Facilitating communication and co-ordination

 Allocation and used of resources

 Controlling

 Evaluation

Cost volume Profit analysis:-

The total cost of a firm depends on its volume of output. The total cost has two parts— fixed and
variable. Fixed cost remains fixed at all levels of production in the short-run, but variable cost
proportionately changes with the volume of output. Cost-volume-profit (CVP) analysis is a method
of cost accounting that looks at the impact that varying levels of costs and volume have on operating
profit.CVP analysis commonly known as break-even analysis Which provides the idea to the management
to increase the profit. It looks to determine the break even point for different sales volumes and cost
structures.

Assumptons of CVP Analyais:-

1. The selling price is constant. The price of a product or service will not change as volume changes.
2. All cost can be segregated into fixed and variable.
3. Costs are linear and can be accurately divided into variable and fixed elements.
4. The variable element is constant per unit, and the fixed element is constant in total over the entire
relevant range.
5. In multiproduct companies, the sales mix is constant.
6. In manufacturing companies, inventories do not change. The number of units produced equals the
number of units sold.
7. Uncertainty does not prevail.
Importance/Objectives of CVP Analaysis
• Profit planning;
• Help in preparation of flexible budgets;
• Ascertainment of no profit and no loss level;
• Ascertainment of optimum product mix;
• Taking pricing decisions;
• Production planning;
• Taking other managerial decisions;
• Help in controlling cost;
• Achieving efficiency;