MANAGEMENT ACCOUNTING

Chapter no.1 BASIC OF COASTING Meaning of cost Cost is the resource scarifies to achieve specifies objective it is always major monitory terms for business it is an amount paid to acquire goods or services actual cost incurred in the past is known as historical cost and the cost we incurred in the future is as known as budget and forecasting cost. Meaning of costing It involves collection and analysis of relevant cost data for interpretation and presentation to management for decision making and control .It is the set of processor used in redefining raw data is to useful information. A. Managerial decision making. B. To accretion cost of production and serving delivered by company and see the accretion profitability of various and services. SIGNIFICANT OF COSTING Company heaving proper costing system its useful to management in following ways. 1. Profitability analysis of different product and services is useful to take the decision on discontinuing unprofitable products. 2. Analysis of cost of various cost items helps the management to estimate the future cost with reasonable accuracies. 3. Two costing technique namely viz. Standard Costing and Budgetary Control are useful to locate the difference between the actual results and accepted result which is essential for managerial control.

4. For setting a price deserving pricing policy costing data useful. COST+PROFIT=PRICE Many times management wants to accept the effect of decrees in output or shutdowns of plant on profitability on the business costing department provides information to on this. Costing is useful to initial the action for efficient use of available resources. Performance of the manager is judge on the basis of cost saving and cost reduction costing department provide information relating to this. Costing data is useful for knowing of effect for productivity improvement upgrading the technology and implementation and new management technique on the cost and profit of company. Ex. Management wants to access the effect of various strategies on the cost of products and services and this information is provided by costing department.

5.

6. 7.

8.

COST MANAGEMENT 1. It is defined as set of activities and techniques to support goal of management. 2. And effective cost management system provides information to a manager to achieve the profitability in short run and maintain competitive in company in the long run. 3. It involves planning and control of cost to be linked to the revenue and the profit planning. For ex. To enhance revenue and profit management deliberately incurs cost for advertising and production innovation. COST CENTRE 1. It is the centre in the organization where cost is incurred.

2. Generally department in the organization are consider as a cost centre and department head as responsible for cost incurred in his cost centre. 3. Target and budget are sets only intern cost. 4. Cost centre are useful to control the cost of various operations. 5. Following four types of cost centre existing organization. A. Interpersonal cost centre is related to an activity not to a person. For ex. Plating Shop, Painting shop. B. Personnel cost centre For ex. Sales Management and Purchase Management. C. Production cost centre These are the cost centre where production activities are carried out. For ex. In Britannia biscuit company three productions are MAKING, BAKING, PACKING. D. Service cost Centre It is the cost centre which provides service to production activity. For ex. Canteen, Transport, Stores (Department).

Cost unit Depending upon peculiarities of business cost represent with reference to a particular unit and this is known as cost unit. Selection of cost unit is depend on. A. Type of industries. B. Management information system. C. Feathers of costing system providing in the organization. Following are the cost unit use in different industry.

Sr. No. 1. 2. 3. 4. 5. 6.

Industry Automobile industries. Business mfg. for ex. Parle-G Cigarette mfg. Chemicals industry. Textile industry. Goods transport company. ELEMENT OF COST

Cost unit Cost per car Cost per Kg. Cost per packet. Cost per liter/Kg./ton. Cost per miter. Cost per ton/Km.

COST

PRIME COST

OVERHEADS

DIRECT MATERIAL

DIRECT LABOUR

DIRECT EXPENSES

INDIRECT MATERIAL

INDIRECT LABOUR

INDIRECT EXPENSES

I. II. III.

RAW MATERIAL I. REMUNARATION I. RELETED TO PARTICULAR + + PRODUCT BOUGHT OUT II. BENEFIT + PRIMARY PACKING METHOD

I. PRODUCTION OVERHEADS II. ADMINISTRATION OVERHEADS III. SELLING AND DISTRIBUTION OVERHEAD

 Prime cost
It is the total of material, labor and expenses directly related to production they are called as Direct Material, Direct Labor and Direct Expenses. I. Direct Material It is the material which is directly present in the final product for Ex. Sugar in Cadbury or Refills in ball pens or Tiers in Car. DIRECT MATERAIL HAS 3 COMPONENTS 1. Raw materials It is the material on which further processing is necessary in the Factory for Ex. Steel Sheet used to manufacture refrigerator. 2. Bought outs These are the component and parts readily bought from out sides and are fitted in the product for Ex. Bought out the refrigerators are bulb, switch and compressor. 3. Primary Packing Methods It is the material required to pack the product so that you can presented to the final customer for Ex. Rappers used by Cadbury.

DIRECT LABOR It include all the remuneration and benefits paid to workman and who are directly involved in the manufacturing of a product for Ex. If ten workers are involved in manufacturing a machine and each one is paid Rs. 300 remuneration and 50 Rs. Benefits per hours for five days for 8 hours per day working then the direct cost be 1,40,000 Rs. 8x5x(300+50)x10

 Direct expenses They are also known as changeable expenses, these expenses are incurred for a particular product for Ex. If the company is manufacturing indica & indigo the cost of drawing & design for indica will be added cost of indica .where is that for indigo will be added cost of indigo. Overheads It is the total of material, labor and expenses not related to production. Overheads are: indirect material indirect labor indirect expenses Indirect material These material is not present in the final product but it is required to excerilates the rate of production. For Ex. Machine oil, coolants, welding rods. Indirect labor Salaries and benefits given to employee who are not involved in the process of production but these employee are required to increases quality and quantity of a product. For Ex. Production supervisor, executive supervisor, security guard.

 Indirect expenses These expenses are not related to a particular product, process or job they are common expenses to all the product for Ex. Electricity bill, Security, Computer Software and telephone bill. Cost classification i. Classification based on elements:Cost can be collected under these main elements that is material, labor and overheads when these cost are identifying with the particular product. They are called as direct cost and when these cost cannot be identifying with a particular product they are known as overheads. ii. Function wise classification:Cost can be collected under following gets production cost. iii. Production cost:It includes all cost relating to manufacturing activity and they are control by production manager. iv. Administrator cost:These costs are incurred for carrying out administrative function of organization. v. Selling and distribution cost:These include all the cost related to distribution, marketing sales and after sales services of companys product.

vi. R & D Cost:These costs include all the cost for searching new product and new processing and improving existing product and processes. Classification based on behavior on cost.