Cost and Managerial accounting.

1. Cost Accounting
Adolph Matz
Milton F. usry
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2. What is Accounting????
Accounting is a specialized information
system that provides economic information
to different group of people.
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3. Branches of Accounting…
 Financial Accounting
 Cost Accounting
 Management Accounting
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4. Financial Accounting..
 Primary function of financial accounting is to record in
a systematic way money transactions between an
economic entity and third parties such as suppliers,
customers, employees, bankers etc.
 Financial accounts provide information to “inside users
(Management)” and “Outside users (shareholders,
investors, trade unions, general public etc.)”
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5. Definition:
Committee on Terminology of American institute of Certified Public
Accountants
 Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events
which are in part at least of a financial character and interpreting
the results thereof.
 Financial accounting (or financial accountancy) is the field of
accounting concerned with the summary, analysis and reporting of
financial transactions pertaining to a business.
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6. Cost Accounting:
Institute of Cost and Management Accountants of U.K.
 “The application of accounting and costing principles, methods
and techniques in the ascertainment of costs and analysis of
savings or excesses as compared with previous experience or
with standards”.
It can also be defined as
 Determining the costs of products, processes, projects, etc. in
order to report the correct amounts on the financial statements.
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7. Management Accounting:
 The application of professional knowledge and
skill in the preparation and presentation of
accounting information in such a way as to assist
management in the formulation of policies and
in the planning and control of operations of the
undertaking.
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8. Tracing the Roots of Cost Accounting:
 The practice of costing is as old as the business activity level itself.
 After Industrial Revolution (1780) due to vast production,
quantitative information became the need of management
 During world war 1st (1914-1918) huge quantities of weapons were
produced and sold at cost plus profit contracts.
 The great Depression (1930s) also increased the need to determine
cost more precisely.
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9. Contributions of Cost Accounting:
 Planning
 Controlling
 Evaluation of Alternatives
 Inventory Management
 Pricing
 External Reporting
 Analysis of Financial Statements
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10. Planning:
 Process of setting objectives and steps needed to attain
them
 The plans are numerically expressed in the form of
budgets
 Budgeting is the area where contribution of cost
accounting is most visible.
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11. Controlling:
 it is the process by which management makes sure that intended and
desired results are consistently and continuously achieved. It consists of
three steps:
i. Establishment of standards
ii. comparison of results against standards
iii. correction of deviation
Performance Report… Department A
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Item Budgeted
cost
Actual cost Variance Explanation
001 - - - -
002 - - - -

12. Evaluation of Alternatives:
 whether it is less expensive to make or Buy a product
 whether to continue or discontinue a product
 cost accounting provides information as to how future
costs and revenues will be affected under each
alternative and help management to take decisions.
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13. Inventory Management:
 complete record of material from entering time to the time they
are sold in the form of finished product
 Stock Evaluation
 valuation of work in process inventory
 quantitative models for material planning and management
developed by cost accounting
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14. Pricing of products and Services:
 determination of price of new products as well as
adjustment of price of existing products
 determination of bid price
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15. External Reporting:
 Detailed cost reports are prepared and presented in
front of users
For example:
Reports prepared and presented in front of Assembly and
Government regulatory agencies.
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16. Analysis of Financial Statements:
 Financial statements are analyzed by external
users and management
 Analysis helps to take decisions regarding
profitability, financial strength and trend etc.
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17. Comparison of Financial and Managerial
Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
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18. Cost vs Financial Accounting:
Financial Accounting Cost Accounting
Information to external users Information to internal users
General purpose financial statements Special purpose statements
Conform to generally accepted
accounting principles
Conform to information needs of
management
Provides accounting data in monetary
terms
Monetary and non-monetary terms
Financial statements are prepared on
yearly or half yearly basis
Cost statements and reports are
prepared more frequently i.e. weekly and
daily basis.
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