INTRODUCTION TO
COST/MANAGEMENT ACCOUNTING
Financial Accounting is mainly concerned with
the “stewardship” function of a business – that
is, accounting for what has happened over the
past financial year and reporting that
information to shareholders and other users of
accounting information.
The main job of the financial accountant is to record all
the financial transactions which affect the business and
these duties include:
• setting up book-keeping/record keeping systems to
record the income and expenditure of a business.
•keeping a record of the business’s assets and liabilities.
•preparing the final accounts of a business – Trading and
Profit and Loss Account and a Balance Sheet.
•preparing tax figures.
DISADVANTAGES OF FINANCIAL
ACCOUNTING?
The main limitations of Financial Accounting
from management’s point of view is that the
information provided by Financial Accounting is:
• out of date for management purposes
• not detailed enough for management
• not suitable for –
• Planning
• decision making
• controlling costs
The Cost and Management Accountant, on the
other hand, is mainly concerned with providing
information to assist management make better
informed decisions and to help them plan ahead
and to control the costs of the business.
In general, the Cost and Management Accountant is
mainly concerned with providing management with internal
information to enable them to:
•plan for the future
•make decisions
•control costs
The main duties of the Cost Accountant are:
•classifying costs – that is, deciding whether costs
relate to materials, labour or overheads.
•working out the final cost a job/product/service in
order to determine the price to be charged to the
customer.
•providing detailed analysis of costs to help management
make better informed decisions.
•preparing budgets of future requirements for
materials, labour and overheads in order to meet planned
sales and production targets.
ADVANTAGES OF COST
ACCOUNTING
The main advantage of Cost
Accounting is that it provides
detailed, up-to-date information to
help management make decisions and
control costs.
PLANNING OR BUDGETING
Cost Accounting helps management plan for
the future in terms of estimating:
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future sales
future production targets
future material requirements
future labour requirements
future cash flows
future profits
DECISION MAKING
Cost Accounting helps management to make
better informed decisions as to whether
to:
• make or buy in component parts
• continue or discontinue producing a loss-making
product
• accept or reject a special order at below the
normal selling price
• invest in expensive new plant and machinery
CONTROLLING COSTS
Cost Accounting helps management to
control costs by allowing them to:
• compare actual cost with budgeted costs
• assign responsibility for the control of
costs to individuals and departments
PRICING
Cost Accounting helps management to
ascertain the costs of a
job/product/service in order to:
• determine the final selling price to be
charged to the customer
• submit tenders for contracts
CLASSIFICATION OF COSTS
There are three elements of cost:
materials,
labour and
overheads.
Materials, Labour and Overheads
Materials are the natural resources that go into
the making of any product, for example wood for a
table, wool for a coat, flour for bread.
Labour is the human resource that is essential for
the production of any article and is rewarded with
wages and salaries.
As well as materials and labour, other expenses
are incurred in production and these are generally
known as overheads, for example electricity, rates
and cleaning.
Fixed Costs and Variable Costs
Fixed costs are not affected by changes in the
level of production. If output rises, the cost does
not go up; if output falls the cost does not go down,
for example rent
Variable costs are those which change along with a
change in the level of production, for example the
cost of the wood for a table. When production
increases, the cost rises and when production falls,
the cost decreases.
Semi-Variable Costs
Several costs cannot be placed in either
category and are classified as semivariable costs. These costs, for example
electricity, gas and telephone charges,
usually have a standing charge which is
fixed and to this is added a variable charge
which varies with usage.
Direct Costs
Direct costs are those which can be
traced to the product being made,
for example the wood for a table or
the cloth for a jacket.
Direct materials + Direct wages +
=Prime Costs
Direct expenses
Indirect Costs
Indirect costs are the other costs, also known as
overheads, that arise but cannot be readily
identified with a particular product, for example
heating, cleaning and supervision.
Prime Cost + Factory Overheads
= Cost of Production
Cost of Production + Selling and Administration Overheads
= Total Costs