Cost and management accounting involves three parts: financial accounting, cost accounting, and management accounting. Financial accounting records and reports on financial transactions and statements. Cost accounting records and measures cost information for decision making and performance evaluation. Management accounting provides accounting data to management for planning, decision making, control, and motivation of employees. It has a different structure, principles, users, and timeliness than financial accounting.

1. Cost & Management Accounting
HASSAN SAMOON

2. Introduction
• Accounting
– Accounting is a wider term and includes recording, classifying and
summarizing of business transactions in terms of money,
preparation of financial reports and analysis and interpretation of
these reports for the information and guidance of management.
– The business accounting system consists of three parts:
i. Financial Accounting
ii. Cost Accounting
iii. Management Accounting

3. Financial Accounting
• Financial accounting may be defined as the science and art of
systematically recording, classifying and summarizing business
transactions of financial character and finally interpreting the
results for determining the financial profit or loss at the end of
an accounting year.
• It also shows the financial position of the firm, and thus,
records and reports financial statements – Balance sheet,
income statement and statement of cash flows.

4. Cost Accounting
• Cost accounting is that branch of the accounting
information system, which records, measures and
reports information about costs.
• The primary purpose of cost accounting is cost
ascertainment and its use in decision making and
performance evaluation.

5. COST ACCOUNTING -
MEANING
Cost accounting is concerned with recording, classifying and
appropriate allocation of expenditure for the determination of
the costs of products or services, and for the suitably arranged data
for purposes of control and guidance of information to management
for decision making.
Cost means “the price paid for something”
Cost ascertainment is computation of actual costs incurred
Cost estimation is a process of predetermining costs of goods and
service.

6. OBJECTIVES OF COST ACCOUNTING
Estimation of costs
Ascertainment of costs
Cost control
Cost reduction
Determining selling price
Facilitating preparation of financial and other statement
Providing basis for operating policy

7. Elements of cost
Materials Labour Expenses
Direct Indirect Direct Indirect Direct Indirect
Overheads
Production or
works overheads
Administration
overheads
Selling & Distribution
overheads

8. MATERIAL: The substance from which the finished product is
made is known as material.
(a) DIRECT MATERIAL: is one which can be directly or easily
identified in the product Eg: Timber in furniture, Cloth in dress,
etc.
(b) INDIRECT MATERIAL: one which cannot be easily identified
in the product.
Eg: disposable safety equipment, disposable tools, glue, tape, oil,
etc.

9. LABOUR: The human effort required to convert the
materials into finished product is called labour.
(a) DIRECT LABOUR: is one which can be conveniently identified or attributed
wholly to a particular job,
product or process.
Eg: wages paid to carpenter, fees paid to tailor, etc.
(b) INDIRECT LABOUR: is one which cannot be conveniently identified or
attributed wholly to a particular job, product or process.

10. EXAMPLES OF INDIRECT LABOUR
At factory level – foremen’s salary, works manager’s salary, gate
keeper’s salary, etc
At office level – Accountant’s salary, GM’s salary, Manager’s
salary, etc.
At selling and dist.level – salesmen salaries, Logistics manager
salary, etc.

11. OTHER EXPENSES: are those expenses other than
materials and labour.
DIRECT EXPENSES: are those expenses which can be
directly allocated to particular job, process or product.
Eg : Excise duty, royalty, special hire charges,etc.
INDIRECT EXPENSES: are those expenses which
cannot be directly allocated to particular job, process
or product.

12. Examples of other expenses
At factory level – factory rent, factory insurance,
lighting, etc.
At office level – office rent, office insurance, office lighting,
etc.
At sales & dist.level – advertising, show room expenses
like rent, insurance, etc.

13. Fixed, Variable and Semi- Variable Costs
Fixed Costs – expenses that do not alter in the short run in
relation to changes in output e.g. rent, insurance and
depreciation. These costs are linked to time rather the level of
business activity
Variable Costs – expenses that alter in the short run to
changes in output e.g. raw materials, packaging and
components. They are payments for the use of inputs
Semi Variable Costs – expenses that vary with output but
not in direct proportion e.g. maintenance costs. They often
comprise a fixed element and a variable element

14. Direct and Indirect Costs
Direct Costs – costs that can be directly
identified with a product or cost centre.
They are mainly variable costs but can
include some fixed costs e.g. the rent of a
building solely used for one product. They
are also referred to as prime costs
Indirect Costs – costs that cannot be
allocated accurately to a cost centre or
product e.g. administration costs,
management salaries or maintenance
costs. Another term for this is overheads

15. Management Accounting
• Meaning
Management accounting involves furnishing of the accounting
data to the management in such a way that it facilitates the
decision making and improve the efficiency within the
organization and finally helps in achieving the goals of the
organization.

16. Definitions – Management Accounting
• According to American Accounting Association: Management
Accounting includes the methods and concepts necessary for control
through the evaluation and interpretations of performances.
• According to Robert N. Anthony: Management Accounting is
concerned with accounting information that is useful to the
management.

17. Objectives of management accounting
Helpful in Planning & policy formation:-forecasting, setting goals, framing policies on the
basis of available information.
Help in decision-making:-makes decision on cost, price, profit & savings.
Helpful in controlling: management accounting deviceslike standard costing & budgetary
control are helpful in controlling performance
Motivating to employee: delegation increase the job satisfaction of employees & encourage
them to look forward
Provides accounting information to management

18. Management Accounting Vs.
Financial Accounting
Dimension Management Financial
Accounting Accounting
1.Structure Varies according Unified Structure
to the information
2. Sources of Whatever is useful Generally Accepted
Principle to management Accounting Principles
3. Need Optional Statutory Obligation
4. Time orientation Historical and estimates Historical
of the future
5. Report entity Responsibility Centers Overall Organization
6. Purpose A means to the end of
assisting management
External reporting /
statements for outside
7. Users Relatively small group: Relatively large group:
known identity mostly unknown

19. Management Accounting Vs.
Financial Accounting
Dimension Management Financial
Accounting Accounting
8. Information Monetary and Primarily Monetary
Content non-monetary
9. Information Many approximations Few approximations
Precision
10. Report frequency Varies with purpose: Quarterly and annual
monthly or weekly
11. Report Timeliness Report issued promptly Delay of weeks or even
after end of period covered months
12. Liability Potential Management will take Legally punishable.
action

20. Thank You