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Mfc cost accounting

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  • 1.  “Profitability is the sovereign criterion of enterprise, and Cost Accounting greatly promotes it.” Peter F. Drucker
  • 2. Programme:Master of Finance and Control[MFC] Level:Master Total Lecture hour:36 Internal Evaluation: 50 marks Evaluation: On going or continuous process Final Examination: 50 Marks Class hour:1.5 LH Attendance: 80 % of LH to be qualified
  • 3.  Cost accounting is a fast growing discipline.  It developed mainly with the Industrial Revolution from 1760 onwards.  It has a major resource for gaining competitiveness  It is foundation of profitability.  Cost accounting is a cost information system It records ,measures and reports information about costs of some object.
  • 4. Institute of Management Accountants,USA,Says “Cost accounting is the system within an organization that provides for the collection and assignment of costs to cost objects.” Thus, it is a process which identifies,ascertains,records,classifies,allots,a nd present cost data.
  • 5.  CIMA,London, “Cost accounting is defined as “ the application of costing and costing principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”.
  • 6. Cost accounting is defined as a technique or method for determining the cost of project, process or thing .This cost is determined by direct measurement, arbitrary assignment, or systematic and rational allocation. It provides information for two major purposes: 1. Valuing ending inventories and determining cost of goods sold for financial reporting purposes, 2. Costing products and services for management control purposes(planning, monitoring and controlling operations and performance evaluation
  • 7.  To ascertain cost of production of every unit,job,operation,process,department and service,and to develop cost standards.  To facilitate cost planning and control  To disclose profitable and unprofitable activities.  To facilitate decision making  To evaluate performance of operations.  To help determine cost and price of products.  To provide data for comparison of costs within the firm and also between similar firms.
  • 8.  To indicate to the management any inefficiencies and the extent of various forms of waste, whether of material,time,expense or in the use of machinery, equipment and tools. Analysis of the causes of unsatisfactory results may indicate remedial action.
  • 9.  Price Determination strategies  Help in cost control, cost reduction and inventory control.  Wastage control (wastage of labour,material and other resources)  Decision making  Reveals profitable and unprofitable activities  Cost information can be used as a basis for budgetary control and standard costing that leads optimum efficiency.  Provides cost data to outside Agencies(Govt,wage tribunal, trade union etc).
  • 10.  Importance to Management(busi. policy,bid,use of resources,st costing,budgetery control,)  Importance to Investors  Importance to Consumers  Importance to employees  Importance to Government(Tax policy,Industrial Policy, Export-import policy, settle of disputes)  Functions of Cost Accounting  Cost ascertainment  Cost Analysis  Cost Control
  • 11.  Financial Accounting is largely concerned with financial statements for external use by investors,creditors,labour unions, financial  analysts, government agencies, and other interest groups. It involves recording, classification and analysis of business transactions in subjective manner so as to facilitate preparation of profit and loss account, balance sheet and cash flow statement for showing the results of the business operation as a whole.
  • 12.  Gary A. Porter and Curtis L Norton: “ Financial accounting is the branch of accounting concerned with communication with outsiders through financial statements.” Financial accounting is oriented towards the preparation of financial statements which summarize the result of operations for selected period of time and show the financial position of the business at particular dates.
  • 13.  Contents:Income statement,Balance sheet and cashflow statement.  Accounting System:Techniques and procedures used by accountant in measuring,describing and communicating financial data to users.(Journal,ledgers,trial balance,financial statements are prepared using double entry accounting system)  Accounting Priciples : GAAP(methods,procedures and techniques).  Measurement Unit:  Users of Financial accounting Information
  • 14.  Systematic records of financial transactions are made in financial accounting with the following advantages.  Explains profit and loss of a business for a specified period  Reasons leading to profit and loss can be located to take a necessary action to increase profit  Discloses the financial status of a business enterprise  Regulates reminders for receivable amount to reduce bad debts  Arrangement for the amount payable to outsiders becomes easier  Preparation of a trial balance facilitates the checking of errors toward maintaining an arithmetic accuracy of transactions  Discovers and facilitates preventing frauds  Guidance for the purpose of taking decisions  Evidence for making an assessment of income tax
  • 15.  Does not provide detailed cost information  Does not segregate cost:  Does not determine price:  No provision for standards:  Does not control cost  Does not explain losses on account of stoppage of production and idle plant capacity  Does not provide future information
  • 16.  Management accounting is a branch of accounting concerned with providing internal users(Management) with information to facilitate planning ,control and decision making.  It is a system of collecting ,classifying,summarizing,analysing and reporting information that assists managers in their decision making and control activities.
  • 17.  Institute of Cost and Management Accountants,UK,defines”Management Accounting is the application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking.”  Objectives:  Assist in planning and formulation of future policies  Help in Interpretation of financial Information  Helps in controlling Performance.  Help in organizing  Help in the solution of strategic business problems  Help in Decision Making
  • 18.  Costs can be defined as money or monetary value sacrificed to achieve goods or services. The sacrifice may be in terms of cash expenditure, property transfer, service rendering and promises to pay in future.  Cost refers the amount of expenses spent to generate product or services.  A manager of a manufacturing firm pays money for materials, labour, electricity, rent, repair, maintenance and so on. Payment of money or money’s worth to get something is very common and pervasive. This payment is called expense or expenditure or cost.
  • 19.  Cost is the amount of resources given up in exchange for some goods or services.  – Horngren, Sundem and Stratton “Cost may be defined as the sacrifice or giving up of resources for a particular purpose. Cost is frequently measured by monetary units that must be paid for goods and services. Costs are initially recorded in elementary from. Then these costs are grouped in different ways to help managers make decisions. To aid decisions managers want the cost of something. This something is called a cost object, which may be defined as any activity for which a separate measurement of cost is desired.”
  • 20.  Direct Material:  The cost of materials that is directly and conveniently identifiable or traceable to each unit of product is defined as direct material. Direct material, also known as raw material, is the main ingredient of the finished product. Finished products are the refined or value– added forms of the direct material. A tangible product is almost impossible without the direct material.  Examples :  Direct Material Wood , Raw cotton, Crude oil, Textile etc  Process  Finished Product Furniture, Textiles, Diesel, Garments etc
  • 21.  The labours that are paid with each piece of marginal product are direct labours. Direct labour costs can be directly traced to each unit of product without any apportionment basis. Direct labour is, therefore, defined as the employment of those workers who are physically engaged in the production of the output.  Examples of direct labour costs include the wages of operatives who assemble parts into finished products like sewing labour in a garment factory that is paid per piece or the time spent to make shirts, pants and trousers.
  • 22.  Any expenses other than the direct material cost and direct labour cost which are directly incurred on a particular product are direct expenses. They can be directly identified with each unit of product.  Examples of direct expenses are; cost of product designing, product model, handling from one process to the next process, cost of patent and royalties, and so on.
  • 23.  All those expenses which cannot be directly traced or identified with each unit of the products are overhead costs. In fact, overhead costs are indirect costs which cannot be directly charged to a particular unit of a product without allocating these on the basis of some appropriate methods.  All expenses other than prime costs are overhead costs or indirect costs.  Key elements of overhead costs are:  Indirect Materials: Items of indirect materials cannot be identified with any one product. Oil and grease used to clean the machine are indirect materials.  Indirect Labour: salary of a factory supervisor  Indirect Expenses: Rent, stationery, heat, light, power, repair and maintenance, depreciation
  • 24.  a. Variable costs  b. Fixed costs  c. Mixed costs. Classification according to Behaviour of Costs
  • 25.  Manufacturing Cost  General and administration cost  Selling and Distribution  Research and Development..  Classification By Controllability..  Controllable costs  Uncontrollable Costs
  • 26.  Avoidable and Unavoidable costs  Relevant and Irrelevant costs  Product(Inventory) cost and Period costs  Opportunity cost  Sunk cost  Differential cost  Common Cost and joint cost  Shut down cost  Imputed cost  Conversion Cost