Cost and Management Accounting

Semester - VI
B.Com and BMS

Student workbook

Edition: 2024
#44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block,
Bengaluru, Karnataka 560069

Iii ill

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Course: BMS Semester: VI
No. of Hours: 45 Hours Credits: 3
Subject: COST AND MANAGEMENT ACCOUNTING
Course Objectives:
The Course aims to
Acquire a reasonable knowledge of cost and management accounting and evaluate cost and
management accounting statements and their applicability in organizations for the purpose cost
reduction and efficiency improvement and to enable the students to understand the analysis and
interpretation of financial statements with a help of ratio analysis tools for decision-making.
Module - 1 08 hours
Over View of Cost and Management of Accounting
Definition – Meaning and Scope – Objectives – Functions – Merits and Demerits – Cost Accounting
and Financial Accounting-Cost classification – Elements of cost – cost units- cost center – profit
center – Types, Methods and Techniques of Costing - Cost sheet and quotation-Need of
Reconciliation -Reasons for difference in Profits-Preparation of reconciliation statements including
Memorandum reconciliation account.

Concepts of management, Objectives and functions of Management Accounting– Essentials of a

good Management accounting System- Scope of Management Accounting- Tools & techniques used
in Management Accounting – Comparison between Cost Accounting & Management Accounting

Module – 2 10 Hours
Materials Cost
Meaning – Types – Direct Material – Indirect Material – Material control – Purchasing Procedure –
Store Keeping – Techniques of Inventory Control – Setting of stock levels – EOQ – ABC analysis –
VED analysis – Just in time – Perpetual inventory system – Documents used in Material Accounting
– Methods of Pricing Material issue – FIFO – Weighted Average Price Method.
Module - 3 08 Hours
Labour Cost
Importance of labour cost control – time keeping and time booking – idle time – over time –
computation of labour cost – remuneration systems and incentive schemes (incentives and bonus
schemes), labor turnover ratios, labor efficiency ratios, labor capacity and volume ratios.

Module - 4 08 Hours
Overheads Cost
Definition – overhead allocation – apportionment - re apportionment – direct distribution –step ladder
– reciprocal service methods – repeated distribution and simultaneous equation methods – absorption
of overheads – methods of absorption – labor hour rate and machine hour rate, under and over
absorption.

Module - 5 11 Hours
Analysis of Ratios and Financial Statements
Financial analysis, Interpretation of financial analysis– Comparative statements - common size
statement, and Trend analysis. Meaning and Definition of ratio, Meaning of Accounting ratio, and
Ratio Analysis – Uses and Limitations – Classification of Ratios- Liquidity ratios, Profitability ratios
and Solvency ratios. Problems

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Reference Books :
1. Jain and Narang. Cost Accounting, 2018, Kalyani Publication House
2. M.N Arora 2017, Cost Accounting,
3. M.V. Shukla, 2020– Cost and Management Accounting
4. M.Y. Khan & P.K. Jain, Management Accounting, Tata McGraw Hill, 8 edition, 2022.
th

5. Jan Williams, Susan Haka, Mark S bettner, Joseph V Carcello, 2018, Financial and
Managerial Accounting - The basis for business Decisions, 18 edition, Tata McGraw Hill
th

Publishers, 2020
6. Charles T. Horngren, Gary L.Sundem, David Burgstahler, Jeff Schatzberg, Introduction to
Management Accounting, PHI Learning, 2022, 16th edition.
7. N.M. Singhvi, RuzbehJ. Bodhanwala, Management Accounting – Text and cases,3 edition rd

PHI Learning, 2018

8. Ashish K. Battacharya, Introduction to Financial Statement Analysis, Elsiever, 2021.
9. M.N. Arora, Cost and management accounting, 2014 Vikas Publishing House PVT Ltd.
10. H.S. Mahableshwara Bhatta, Cost Accounting –Himalaya publishing House Ravi. M.
Kishore, Cost and Management Accounting, Taxman
11. Bhattacharyya, Principles of Practice of Cost Accounting A.K PHI
12. Jain. S. Narang, Advance Cost Accounting,. K Kalyani Publishers
13. C.T Datar, S.M Foster. G Pearson, Cost Accounting: Managerial Emphasis Horngren
Publication 14 th Edition.
14. R. Narayanaswamy, Financial Accounting, PHI, sixth edition.
15. T.S. Reddy & A. Murthy, Financial Accounting, Margham Publications, 2021
16. Jan Williams, Susan Haka, Mark S bettner, Joseph V Carcello, Financial and Managerial
Accounting - The basis for business Decisions, 18th edition, Tata McGraw Hill
Publishers, 2020
17. Earl K. Stice James D.Stice, Financial Accounting, Reporting and Analysis, 8th edition,
Cengage Learning.

Course Outcomes:
CO NO COURSE OUTCOME BTL
At the end of the course, the students will be able to
Acquire the basic knowledge on cost and management accounting 2
1
concepts, preparation of cost sheet and Reconciliation statement
Apply the concept of material control, Material Accounting – Methods 3
2
of Pricing Material.
3 Apply the labor cost concepts and its computations. 3

4 Analyze the overhead allocation methods and absorption techniques 4

Examine the different types of ratios and interpret them towards 4
5
decision-making.

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1.1 Introduction:

Cost accounting is a branch of accounting and has been developed due to the limitations of financial
accounting. Financial accounting is concerned with bookkeeping aimed at the preparation of Profit and
Loss Account and Balance Sheet. It provides information regarding the profit and loss that the business
enterprise is making and its financial position on a particular date. The information concerning the
business enterprise is helpful to the management to control in a general way but details regarding
operating efficiency of these divisions are lacking. Financial accounting does not help the management in
laying down policies, guide the management to make decisions or evaluate the performance of the
management. In order to overcome these drawbacks, a system of accounting was developed, which is
cost accounting.

1.2 Definition of Financial Accounting:

"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."
The information supplied by financial accounting is summarized m the following three statements at the
end of the period, generally one year.
(a) Profit and Loss Account showing the net profit or loss during the period
(b) Balance Sheet showing the financial position of the firm at a point of time
Thus, the objective of financial accounting is to present a true and fair view of company's income,
financial position and funds at regular intervals of one year.

1.3 Limitations of Financial Accounting:

1. No clear idea of operating efficiency. Financial accounting does not give a clear picture of
operating efficiency when prices are rising or decreasing because of inflation or trade depression.
2. It shows only overall performance. Financial accounting discloses only the net result of the
collective activities of a business as a whole. It does not indicate profit or loss of each department, job,
process or contract. It does not disclose the exact cause of inefficiency.
3. No classification of expenses and accounts.
4. It does not provide data for cost comparison.
5. No control on cost in terms of material cost, labour cost & overhead cost.
6. No standards to assess the performance. In financial accounting, there is no well developed
system of standards to appraise the efficiency of the organization in the use of materials, labour and
overhead costs.
7. It is historical in nature.
8. No analysis of losses.
9. Inadequate information for price fixation & for reports.
10. It fails to supply useful data to the management for decision-making.

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1.4 Meaning & Definition of Costing & Cost Accounting:

The terms 'costing' and 'cost accounting' are often used interchangeably. The Chartered Institute of
Management Accountants (CIMA) UK has defined costing as, "the techniques and processes of
ascertaining costs."
It consists of principles and rules which determine:
a. the cost of manufacturing a product; e.g., motor car, furniture, etc; and
b. The cost of providing a service; e.g., electricity, transport, etc.

Definition of Cost Accounting:

As per CIMA (UK) "Cost accounting is the process of accounting for cost from the point at which
expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres
and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost
control methods and ascertainment of profitability of activities carried out or planned."
In simple words, costing means finding out the cost of product or service by any technique or method,
the cost accounting means costing using double entry system.

Cost Accountancy:
As per CIMA (UK) is, "the application of costing and cost accounting 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 therefrom for the purposes of managerial decision
making."

Cost accountancy is thus the science, art and practice of a cost accounting. Cost accountancy includes
costing, cost accounting, cost control and cost audit.

1.5 Objectives of Cost Accounting:

The objectives of cost accounting are ascertainment of cost, fixation of selling price, proper recording
and presentation of cost data to management for measuring efficiency and for cost control.

• To ascertain the cost per unit of the different products manufactured by a business firm
• To provide a correct analysis of cost
• To disclose sources of wastage of material, time or expenses or in the use of machinery, equipment etc.
• To provide required data for price fixation
• To find out the profitability of each of the products and advise management as to how these profits can
be increased
• To have good control over stocks of raw materials, work-in-progress, consumable stores and finished
goods

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• To implement the cost control system over material, labor & overheads
• To advise management on future expansion policies and capital projects
• To help in the preparation of budgets and implementation of budgetary control
• To effectively develop an information system so that management at all levels can get the required
information to take right decision at right time.

Broadly speaking, the above objectives can be re-grouped as below:

• Ascertainment and analysis of cost and income by product, function and responsibility
• Accumulation and utilization of cost data for control purpose
• Providing useful data to management for taking decisions
• Guides formation of business policy
• Determination of selling price.

1.6 Advantages of Cost Accounting:

The main advantages of cost accounting are given below:

• Profitable and unprofitable activities are disclosed and steps can be taken to eliminate or reduce those
activities, which are unprofitable.
• It enables measuring of efficiency and then to maintain and improve it using the cost data which is
available for comparison.
• It provides information for preparation of estimates and tenders.
• It guides & helps in preparation of future production policies & plans.
• By disclosing the sources of loss or waste and by suggesting corrective actions & controls, it helps in
detection & prevention of such wastages & inefficiencies. Thereby it increases the profits.
• It enables a periodical determination of profits or losses without stocktaking.
• It provides data for cost comparison for different periods, for different purposes. All this facilitates in
maintaining costs at the lower levels by creating efficient operating
Conditions consistently.
• It reveals exact cause of a decrease or an increase in profit or loss.
• It facilitates the introduction of suitable wage payment plans & incentive plans by measuring the
efficiencies of workers.
• A good system of costing ensures growth of the business & greater security of service and adequate
reward to workers.
• It facilitates the assessment of Excise Duty and Income Tax and the formulation of policies regarding
industry, export, import, taxation etc. It also facilitates the preparation of national plans for economic
development by providing ready figures. This way it helps the government.
• One of the main objectives of cost accounting is cost control & cost reduction. It aims to reduce cost of
production and maximize the profits of the business. In this manner, it serves the purposes of benefitting
both consumers & the business.

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1.7 Limitations of Cost Accounting:
Cost Accounting is not an exact science but is an art which has been developed through theories and
accounting practice based on reasoning and common sense. Below mentioned are the limitations of Cost
Accounting:
• It lacks a uniform procedure. Thus, two competent cost accountants may arrive at different results from
the same information.
• Calculation of cost depends on the use to which the data are required to be put to. Because of inclusion
of some items of cost on estimated basis it is difficult to have actual true cost.
• It is expensive to install costing system in small and medium size concerns.
• Cost accounting has not contributed much in handling futuristic situations. For example, it has not
evolved any tool for controlling inflationary situation.

1.8 Difference between Cost Accounting & Financial Accounting:

Purpose It provides information about the It provides information to

Business in a general way to its Management for proper planning,
stakeholders. control and decision-making.
Form of Accounts are kept to meet the Maintenance of cost accounts is
accounts Requirements of Companies Act and obligatory in some manufacturing
Income Tax Act. concerns whereas it's voluntary in other
organizations to meet the requirements
of management.
Recording It classifies records and analyses the It records the expenditure in an
transactions in a subjective manner objective manner i.e. according to the
i.e. according to the nature of purposes for which the costs are incurred.
expenses.
Control The importance is on recording than It provides a detailed system of
Control. Control for materials, labor and overhead
costs.
Periodicity At the end of the year operating As & when information is required
of reporting results and financial position is cost reports are given to the management.
reported.
Analysis of Financial accounts disclose the net Cost Accounting is only a part of the
profit profit or loss of the business as a financial accounts and discloses profit or
whole. loss of each product, job or service.
Reporting of The costs are reported in aggregate The costs are broken down on a unit
costs basis

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Nature of Financial accounts relate to Cost accounts relate to transactions
transactions commercial transactions mainly connected with the manufacture of goods
concerned with external and services and include only those
transactions of the business. expenses which enter into the production.
Cost accounts are concerned with internal
transactions.
Information Monetary information alone is Non-monetary information like units
used is also used (i.e. it deals with monetary as
(i.e. only monetary transactions well as non-monetary
are recorded). Information).
Fixation of Financial accounts are not Cost accounting provides sufficient data
Selling Price maintained with the object of for fixation of selling prices.
fixing
selling prices.
Facts & Financial accounts deals with Cost accounts deal partly with facts
Figures actual and figures and partly with estimates.
facts and figures.
Stock It is valued at cost price or market Stocks are valued at cost price.
Valuation price whichever is lower.
Historical & It is concerned almost exclusively It is concerned not only with
pre- determined with historical records. historical costs but also with pre-
costs determined costs.
Type of It prepares general purpose It generates special purpose reports &
statements statements & produces statements like ideal time report
prepared information that is used by many or loss of material.
. classes of people.
Type of Financial accounting is a positive Cost accounting is not only a positive
science science because it is subject to science but also a normative science
legal rigidity with regard to the because it includes techniques of
preparation of the financial budgetary control and standard costing.
statements. Costing is an empirical science, that is to
say, the rules, which govern it, are largely
conditioned by the operations, personnel
and policy of the undertaking with respect
to which its techniques are to be applied.
.

1.9 Installation of a Costing System:

The installation of a costing system requires a thorough study and understanding of all the aspects
involved, as otherwise, the system may be a misfit and enterprise will not be able to derive full
advantage of a costing system. There cannot be readymade costing system for every undertaking.
Hence, in order to meet the specific needs of the business a costing system has to be specially devised
to give it a blend of efficiency & economy.

Steps in Installation of a Costing System:

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• Preliminary investigations relating to the technical aspects of the business should be made.
• The organizational structure of the business should be studied to ascertain the scope of authority of
each executive.
• The methods of purchase, storage & issue of materials should be examined & modified as per the
requirements.
• The existing steps/methods of remunerating the labours should be examined for the purpose of
introducing any incentive plans.
• Forms & accounting records should be so designed, so as to involve minimum clerical labour &
expenditure.
• The size and layout of the factory should be studied.
• The system should be effective in cost control & cost reduction.
• Costing system should be simple & easy to operate.
• Unnecessary details should be avoided.
• The installation & operation of the system should be economical.
• The system should be introduced gradually.
Difficulties encountered in installation of the costing system:
• Lack of support of the top management
• Resistance from the accounting staff
• Non-cooperation of the working & supervisory staff
• Shortage of trained staff

1.10 Meaning of Cost:

The term 'cost' does not have a definite meaning and its scope is extremely broad and general.
According to Oxford Dictionary, cost means "the price paid for something."'

CIMA (UK) defines Cost as "the amount of expenditure (actual or notional) incurred or attributable to a
given thing."

Cost Vs. Expense and Loss:

Though the terms 'cost' and 'expense' are used interchangeably they should be distinguished from
expense and loss. Expense is defined as "an expired cost resulting from a productive usage of an asset. In
other words, an expense is that portion of the revenue earning potential of an asset which has been
consumed in the generation of revenue. For example, depreciation on plant, (expired cost) is charged to
profit and loss account as an expense and cost of plant remaining after providing depreciation (unexpired
cost) is shown as an asset in the balance sheet. Prepaid insurance & Electricity consumed in running a
machine are other examples.
Loss: Loss is defined as "reduction in firm's equity, other than from withdrawals of capital for which no
compensating value has been received." A loss is an expired cost resulting from the decline in the service
potential of an asset that generated no benefit to the firm. Example: Obsolescence or destruction of stock

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by fire.

1.11 Elements of Cost:

A cost is composed of three elements, i.e., material, labour and expenses. Each of these elements may be
direct or indirect as shown below:

1.12 Cost Centre and Cost Unit:

Cost is ascertained by cost centres and cost units.

Cost Centre:
According to CIMA (UK) as "a location, person, or item of equipment (or group of these) for which
costs may be ascertained and used for the purpose of control". It refers to a section of the business to
which costs can be charged & the main purpose is cost control.
It maybe:
• A location (a department, a sales area),
• An item of equipment (a machine, a delivery van),
• A person (a salesman, a machine operator) or
• A group of these (two automatic machines operated by one workman). The main purpose of
ascertaining the cost of a cost centre is control of cost.

Cost centres are primarily of two types:

(a) Personal cost centre - which consists of a person or a group of persons.

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(b) Impersonal cost centre - which consists of a location or an item of equipment or group of these.
From functional point of view it can be classified as below:
(a) Production cost centre - Examples are machine department, welding department, finishing shop,
etc.
(b) Service cost centre - examples are stores department, repair shop, canteen, etc. costs incurred in
service cost centres are of indirect type.

Cost Unit:
A cost unit is defined by CIMA (UK) as a "unit of product, service or time in relation to which cost may
be ascertained or expressed". Cost units are the 'things', that the business is set up to provide of which
cost is ascertained.
Examples:
Industry Normal Cost Unit
Cement Tonne
Chemicals Tonne, Kilogram, litre, gallon, etc.
Nursing home Bed per day
Electricity Kilowatt hour (KWH)
Transport Passenger kilometre/tonne kilometre
Cotton or jute Bale
Timber Cubic foot
Hotel Room per day

1.13 Classification of Cost:

1.14 Methods of Costing & Techniques of Costing:

Methods of Costing:
Methods or types of costing refer to the processes employed in the ascertainment of cost. Several
methods have been designed to suit the needs of different industries.
1) Job costing / Job order costing: This method is applied where work is undertaken to customer's
specific requirements. Costs are collected and accumulated for each job or work order or project
separately.
e.g.: Printing press - as per order Repair shops
Interior decorators, painters, etc.
In case of job costing, job itself is the cost unit.
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2) Contract costing: This is a variation of job costing and therefore principles of job costing apply to this
method. A contract is a big job and job is a small contract.
e.g.: Construction of buildings, roads, dams, bridges, etc. Here, contract itself is the cost unit.

3) Batch costing: This also is a variation of job costing, where each batch of products is a cost unit, for
which costs are ascertained. Cost unit is 'one batch'.
E.g.: Readymade garments, toys, shoes, tyres and tubes, etc.

4) Process costing: It is used in case of mass production industries, manufacturing standardized products
in continuous process of manufacturing. Costs are accumulated for each process or department & unit
cost is arrived by dividing the total cost of the process by number of units manufactured.
E.g: Textile industry, chemical, paper manufacturing, sugar industry, etc.

5) Single, output or Unit costing: This method is used when production is uniform and consists of two or
three varieties of the same product are produced. Cost per unit is formed by dividing total cost by the
number of units produced.
e.g.: Mines, steel production, etc.
6) Service or Operating costing: This method is used in undertaking which provide services instead of
manufacturing products.
e.g.: Insurance companies, transport undertakings, electricity companies, hospitals, cinema houses,
hotels, etc.
Cost units are passenger per km, seat per show in cinema, room per day in hotels etc.
7) Multiple or composite costing: Under this method, more than one method of costing are applied for
ascertainment of cost in respect of the same product.
E.g.: Manufacturing of components and assembling them into final product - T.V, cars, watches,
computers, etc.

8) Operation costing: It's a refinement and more detailed application of process costing. Here,
manufacturing consists of number of distinct operations. Cost per unit is determined with reference to the
final product.
Techniques of Costing: Techniques are not alternatives to methods of costing but, in addition to these
methods, techniques may be used for special purpose of control and policy in any business irrespective of
method of costing.

1. Standard costing: This technique is basically used to control the cost. Here, the comparison is made of
the actual cost with a pre-arranged standard cost of any deviation or variance is analysed by causes.
Suitable actions can be taken to correct the deviations.
2. Budgetary control: This technique is applied to control the total expenditure on materials, wages and
overhead and actual performance as compared with planned performance.
3. Marginal costing: Costs separated into fixed and variable and this technique is applied to study the
effect on profit of changes in the volume or type of output.
4. Absorption costing: Under this technique, total costs (fixed and variable) are charged to the products
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or processes.
5. Uniform costing: It is the use of same costing principles and practices of several undertakings for
common control and comparison of cost.
6. Activity-Based Costing (ABC) is a method of allocating costs to products and services. It is generally
used as a tool for planning and control. It was developed as an approach to address problems associated
with traditional cost management systems that tend to have the inability to accurately determine actual
production and service costs, or provide useful information for operating decisions.
Activity-Based Costing makes a lot of sense for companies with multiple products or services who are
suffering from inaccurate costing information and need to know which products are really winners and
which are losers.
7. Life cycle costing refers to sum of all recurring and one-time (non-recurring) costs over the full life
span or a specified period of a good, service, structure, or system. In includes purchase price, installation
cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the
end of ownership or its useful life. Life cycle cost analysis refers to:
Life cycle assessment & whole-life cost, the total cost of ownership over the life of an asset, also
commonly referred to as "cradle to grave" or "womb to tomb"
8. Throughput Costing: Method of costing a product where only the unit-level direct costs are assigned to
the product.
Throughput Accounting (TA) is a dynamic, integrated, principle-based, and comprehensive management
accounting approach that provides managers with decision support information for enterprise
optimization.
9. Target costing is a pricing method used by firms. It is defined as "a cost management tool for reducing
the overall cost of a product over its entire life-cycle with the help of production, engineering, research
and design". A target cost is the maximum amount of cost that can be incurred on a product and with it
the firm can still earn the required profit margin from that product at a particular selling price.
Target costing involves setting a target cost by subtracting a desired profit margin from a competitive
market price.

1.15 Cost Sheet:

Cost sheet is defined by CIMA, U.K. as "a document which provides for the assembly of the detailed
cost of a cost centre or cost unit."
Thus, cost sheet is a periodical statement of cost designed to show in detail the various elements of cost
of goods produced like prime cost, factory cost of production and total cost. It is prepared at regular
intervals, e.g., weekly, monthly, quarterly, yearly, etc. comparative figures of the previous period may
also be shown in the cost sheet so that assessment can be made about the progress of the business.

1.16 Purposes of cost sheet:

Cost sheet serves the following purposes:
1. It reveals the total cost and cost per unit of goods produced.
2. It discloses the break-up of total cost into different elements of cost.
3. It provides a comparative study of the cost of current period with that of the corresponding previous

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period.
4. It acts as a guide to management in fixation of selling prices and quotation of tenders.
Cost Sheet (or statement of cost) for the period.......
Cost per unit Rs.
Particulars
Total cost Rs. (Cost / Sales)
Direct Materials XXX
Direct Labour XXX
Direct (or Chargeable) Expenses XXX
Prime Cost XXX
Works Overheads XXX
Works Cost X XX
Office and Administrative Overheads XXX
Cost of Production X XX
Selling and Distribution Overheads XXX
Total Cost or Cost of Sales XXX
Profit or Loss XXX
Sales XXX XXX

1.17 Treatment of Stocks:

Stocks may be of three types: (a) Stocks of raw materials (b) Stocks of work-in-progress (c) Stocks of
finished goods.
The treatment of the above three types of stocks is illustrated in the following specimen cost sheet.

Cost Sheet for the period........

Total cost Cost per
Particulars
Rs. unit Rs.
Opening stock of raw materials XXX
Add: Purchases
Add: Expenses on Purchases
Less: Closing Stock of Raw materials XXX
Cost of Material Consumed Direct Wages
Direct Expenses
Prime Cost XXX
Add: Factory Overhead XXX
Add: Opening Stock of Work-in-progress XXX
Less: Closing Stock of Work-in-progress XXX
Factory or Works Cost XXX
Add: Administrative Overhead XXX
Cost of Production XXX
Add: Opening Stock of Finished goods
XXX
Add: Closing Stock of Finished goods
Cost of Goods Sold XXX
Add: Selling and Distribution Overhead XXX
Cost of Sales XXX
Profit (or Loss) Sales XXX
Note: In case the value of closing stock of finished goods is not given in the question, it will be valued at

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the current cost of production.

Components of Total Cost:

Elements of cost may be grouped as follows:
1. Prime Cost = Direct material + Direct labour + Direct expenses
2. Works Cost or Factory Cost = Prime cost + Factory overhead
3. Cost of Production= Work cost+ Administration overhead
4. Total Cost or Cost of Sales = Cost of production + Selling and distribution overhead.

1.18 Items Excluded From Cost:

The following items are of financial nature and thus not included while preparing a
1. Cash discount
2. Interest paid
3. Preliminary expenses written off
4. Goodwill written off
5. Provision for taxation
6. Provision for bad debts
7. Transfer to reserves
8. Donations
9. Income-tax paid
10. Dividend paid
11. Profit/loss on sale of fixed assets
12. Damages payable at law, etc.

1.19: Illustrative Cost Sheet (Detailed)

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Self-assessment:
1. The amount of expenditure (actual or notional) incurred or attributable to a given thing is called (Ref
1.4)
2. A location, person, or item of equipment (or group of these) for which costs may be ascertained and
used for the purpose of control is called (Ref 1.12)
3. A unit of product, service or time in relation to which cost may be ascertained or expressed is called
(Ref 1.12)
4. An example of uncontrollable cost is (Ref 1.13)
5. Abandonment of a plant is cost. (Ref 1.13)
6. An example of batch costing (Ref 1.14)
7. A document, which provides for the assembly of the detailed cost of a cost centre or cost unit is called
(Ref 1.15)
8. Closing stock of finished goods is valued at (Ref 1.17)
9. Provision for taxation is excluded from cost sheet because (Ref 1.18)
10. A formal statement of price at which the goods are agreed to be supplied or work order is to be
executed, sent in reply to an invitation is called (Ref 1.22)
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Illustration 1
Akash Ltd. supplies you the following information and requires you to prepare a cost sheet.
Rs.

Stock of Raw Materials on 1st Sept, 2023 75,000

th
Stock of Raw Materials on 30 Sept, 2023 91,500
Direct Wages 52,500
In Direct Wages 2,750
Sales 2,00,000
Work-in-progress on 1st Sept, 2023 28,000
Work-in-progress on 30th Sept, 2023 35,000
Purchases of Raw Materials 66,000
Factory Rent, Rates and Power 15,000
Depreciation of Plant and Machinery 3,500
Expenses on Purchases 1,500
Carriage Outward 2,500
Advertising 3,500
Office Rent and Taxes 2,500
Traveler’s Wages and Commission 6,500
Stock of Finished Goods on 1st Sept, 2023 54,000
Stock of Finished Goods on 30th Sept, 2023 31,000

Solution:
Cost Sheet for the month ending 30th Sept., 2023

Particulars Rs. Rs.

Opening Stock of Raw Materials (1st Sept.) 75,000

Add: Purchases 66,000
Add: Expenses on Purchases 1,500
1,42,500
Less: Closing Stock of Direct Raw Materials (30th Sept) 91,500
51,000
Materials Consumed
52,500
Direct Wages 1,03,500
Prime cost 28,000
Add: Operating Stock of Work-in-Progress
Factory Overheads: 2,750
Indirect Wages 15,000
Factory Rent, Rates and Machinery 3,500 21,250
Depreciation of Plant and Machinery 1,52,750
Less: Closing Stock of Work-in-Progress 35,000
Works Cost 1,17,750
Add: Office and Administrative Overheads:
Office Rent and Rates 2,500
Cost of Production 1,20,250
54,000

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1,74,250
31,000
1,43,250

2,500
Add: Opening Stock of Finished Goods (1st Sept.) 3,500
Less: Closing Stock of Finished Goods (30th Sept.) 6,500 12,500
Cost of Goods Sold 1,55,750
Add: Selling and Distribution Overheads: 44,250
Carriage Outward 2,00,000

1.20 Treatment of Scrap:

In certain manufacturing industries, scrap arises in the form of cuttings, trimmings; borings from metals
or timber, etc. scrap generally can be sold at a price. The realizable value of scrap is deducted from
factory overheads while preparing the cost sheet. This is shown in the following illustration:

Illustration 2:
From the following information, prepare a cost sheet to show:
(a) Prime cost (b) Works cost (c) Cost of production (d) Cost of sales and (e) Profit.
Rs.
Raw Materials Purchased 32,250
Carriage on Purchases 850
Direct Wages 18,450
Factory Overhead 2,750
Selling Overhead 2,450
Office Overhead 1,850
Sales 75,000
Sale of Factory Scrap 250
Opening Stock of Finished Goods 9,750
Closing Stock of Finished Goods 11,100

Solution:
Particulars Rs. Rs.
Raw Materials 35,250
Add: Carriage on Purchases 850 36,100
Direct Wages 18,450
Prime cost 54,550
Factory Overhead 2,750
57,300
Less: Sale of Factory Scrap
250
Works Cost 57,050
Add: Office Overheads 1,850
Cost of Production 58,900
Add: Opening Stock of Finished Goods 9,750

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68,650
Less: Closing Stock of Finished Goods 11,100
Cost of Goods Sold 57,550
Add: Selling Overheads: 2,450
Cost of Sales 60,000
Profit 15,000
Sales 75,000

Illustration 3:
Following information is obtained from the records of Zed Company Ltd, for the month ended,
31.12.2023
Rs. Rs.
Drawing Office Salaries 6,500 Stock of Materials 01.01.2023 62,800
Counting House Salaries 12,600 Stock of Materials 31.12.2023 48,000
Cash Discount Allowed 2,900 Materials Purchased 1,85,000
Carriage and Cartage inwards 7,150 Travelling Expenses 2,100
Carriage and Cartage outwards 4,300 Salesman's Salary and 7,700
Commission
Bad Debts Written Off 6,500 Productive Wages 1,26,000
Repairs of Plant 4,450 Depreciation: Factory 6,500
Factory Rent, Rates, Insurance 8,500 Depreciation: Office 300
Office Rent, Sales Insurance 2,000 Director's Fees 6,000
Sales 4,61,100 Gas & Water: Factory 1,200
Office Manager's Salary 10,000 Gas & Water: Office 400
Factory Supervision 3,000 General Expenses 3,400
Opening Stock of Finished Goods 15,000 Advertisement 5,000
Closing Stock of Finished Goods 20,000
Prepare a Cost-Statement Showing:
(a) Raw Material Consumed, (b) Prime Cost, (c) Factory Cost, (d) Cost of Production,
(e) Cost of Goods Sold (f) Cost of Sales (g) Profit, and (h) Sales

ZED Company Ltd.

Cost Statement for the Month ended 31.12.2023
Particular Amount (Rs.)
Opening Stock of Materials 62,800
Add: Materials Purchased 1,85,000
Add: Carriage and Cartage Inward 7,150
2,54,950
Less: Closing Stock of Materials 48,000
(a) Raw Materials Consumed 2,06,950
Add: Productive Wages 1,26,000
(b) Prime Cost 3,32,950
Factory Rent Rates Insurance 8,500
Factory Supervision 3,000
Factory Gas and Water 1,200
Repairs of Plant 4,450

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Depreciation 6,500
(c)Factory Cost 3,56,600
Drawing Office Salary 6,500
Counting House Salary 12,600
Office Rent Rates Insurance 2,000
Office Manager's Salary 10,000
Depreciation 300
Director's Fees 6,000
Office Gas, Water 400
General Expenses 3,400
(d) Cost of Production 3,97,800
Add: Opening Stock of Finished Goods 15,000
Less: Closing Stock of Finished Goods 20,000
(e) Cost of Goods Sold 3,92,800
Carriage and Cartage Outward 4,300
Bad Debts Written Off 6,500
Travelling Expenses 2,100
Salesmen's Salary and Commission 7,700
Advertisement 5,000
(f) Cost of Sales 4,18,400

Statement of Profit or Loss

Amount (Rs.)
Sales 4,61,100
Cost of Sales 4,18,400
Profit 42,700
Illustration 4:
Prepare the Cost Sheet to show the total cost of production and cost per unit of goods manufactured by a
company for the month of July, 2023. Also find the cost of sales and profit.
Rs. Rs.
Stock of Raw Materials, 1-7-2023 3,000 Office Rent 500
Raw Materials purchased 28,000 General Expenses 400
Stock of Raw Materials, 31-7-2023 4,500 Discount on Sales 300
Manufacturing Wages 7,000 Advertisement Expenses to be
Depreciation of Plant 1,500 charged fully 600
Loss on sale of a part of Plant 300 Income Tax paid 2,000
Factory Rent and Rates 3,000 Sales 50,000
.
The number of units produced during July, 2023 was 3,000.
The stock of finished goods was 200 and 400 units on 1-7-2023 and 31-7-2023 respectively. The total
cost of the units on hand on 1-7-2023 was Rs. 2,800. All these had been sold during the month

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Solution
STATEMENT OF COST AND PROFIT for the month of July, 2023
(Units Produced= 3,000)

Opening Stock of Raw Materials 3,000

Add: Raw Materials Purchased 28,000
31,000
Less : Closing Stock of Raw Materials 4,500
Value of Materials Consumed 26,500
Manufacturing Wages 7,000
Prime Cost 33,500
Depreciation on Plant 1,500
Factory Rent and Rates 3,000
Works Cost 38,000
Office Rent 500
General Expenses 400
Cost of production 38,900
Add: Opening Stock of Finished Goods 2,800
Rs.38,900 X 41,700
400 5,187
Less: Closing Stock of Finished Goods 3000
Cost of Goods Sold 36,513
Advertisement Expenses 600
Cost of Sales 37,113
Sales 12,887
Rs.38,900
50,000
Cost of Production per unit= 03000 =Rs. 12.97

Note: - Income tax, loss on sale of a part of plant and discount on sales are excluded from cost accounts.

1.21 Tender & Quotation & Estimations:

Cost Accounting facilitates preparation of price for a job or work order, in advance. As the
predetermined rates are used to absorb the indirect expenses, the total cost of a product is built up from
the information of Direct Material Cost and the Direct Labor Cost. The likely changes in the price are
also considered while calculating the total cost.

Tender: A formal statement of price at which the goods are agreed to be supplied or work order is to be
executed, sent in reply to an invitation is called Tender. It implies a competitive price being stated & this
term is normally used in the governmental transactions.

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Quotation: A statement of price that is quoted for a work order to be executed or service to be rendered
or goods to be supplied is called a "Quotation." Normally, this term is used other than in government
transactions.
Tenders and quotations though synonymously used, a subtle difference exists.

Estimation: An approximate price of a work order or goods or services, calculated on the basis of general
opinion and judgment, is called "Estimation." While preparing estimation, the general work, opinions
and personal judgments play the dominant roles. As a result, the price so stated would only be an
approximate price.

1.22 Illustrations on tenders & quotations:

1. The following expenses were incurred for a job during the year ending 31st December, 2023,

Direct Materials 5,000

Direct Wages 3,000
Chargeable Expenses 2,000
Factory Overheads 3,000
Administrative Overheads 4,000

Selling & Distribution 3,000

Selling price of the above job was Rs. 25,000. You are required to prepare a statement showing the profit
earned during the year 2023 and the estimated price of a job, which is to be executed in 2023. Materials,
wages and chargeable expenses will be Rs. 8,000, Rs. 10,000 and Rs. 2,000 respectively.
The overheads are recovered as below:
(a) Factory overheads as a percentage of direct wages,
(b) Administrative expenses and selling & distribution expenses as a percentage of factory cost.
Solution
Cost Statement for the year 2023
Particulars Rs.
Direct Materials 5,000
Direct Wages 3,000
Chargeable Expenses 2,000
Prime cost 10,000
Factory Overheads 3,000
Factory Cost 13,000
Administrative Cost 4,000
Cost of Production 17,000
Selling and Distribution 3,000
Cost of Sales 20,000
Profit 5,000
Sales 25,000

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Estimation for 2023

Particulars Rs.
Direct Materials 8,000
Direct Wages 10,000
Chargeable expenses 2,000
Prime cost 20,000
Factory Overheads 100% of Wages 10,000
Factory Cost 30,000
Administrative Cost 30.76923% of factory cost 9,231
Cost of Production 39,231
Selling and Distribution 23.07692% of factory cost 9,053
Cost of Sales 48,284
Profit 25% 12,071
Estimated Price 60,355

Illustration 2

Madhura Scooters finds that the total cost of production 100 scooters in the year 2022 was Rs. 3,00,000,
which were sold at Rs. 33,000 each.
The cost consisted of:
Material Rs. 12,00,000;
Direct wages Rs. 13,50,000,
Factory overhead Rs. 2,70,000;
Office overhead Rs. 1,41,000 and distribution overhead Rs. 390 per scooter.
For the year 2023 cost of manufacturing scooter is estimated as under:
a) Each scooter will require materials worth Rs. 13,500 and labour Rs. 13,500.
b) Factory overhead will bear the same relation to wages as in the previous period.
c) The percentage of office overhead on factory cost will be the same as in the past.
d) There will be an increase of Rs. 90 per scooter in selling and distribution overhead.
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Prepare a statement showing the profit that the company would make per scooter if it increases the price
of scooter by Rs. 3,000.

Solution:
Statement of cost and profit for the manufacture of 100 scooters for the year ending 31st December, 2022

Total Per
Amount Scooter
Rs. Rs.
Materials 12,00,000 12,000
Direct wages 13,50,000 13,500
Prime cost 25,50,000 25,500
Factory Overhead 2,70,000 2,700
Factory or Works Cost 28,20,000 28,200
Office Overhead 1,41,000 1,410
Cost of Production 29,61,000 29,610
Distribution Overhead 39,000 390
Total cost or cost of sales 30,00,000 30,000
Profit 3,00,000 3,000
Sales 33,00,000 33,000

Percentage of Factory Overhead to Wages=

Rs. 2,70,000/ Rs.13,50,000 x 1OO= 20%

Percentage of Office Overhead to Factory Cost:

Rs.1,41,000 / Rs. 28,20,000 x100 = 5%

Selling and Distribution Overhead per unit for the year 2007 = Rs. 390 (cost in 2018) + Rs. 90 (increase)
= Rs. 480
Selling Price for the year 2007 = Rs. 33,000 + Rs. 3,000 = Rs. 36,000
Statement of Cost and Profit per scooter for the year 2022
Per
Scooter
Rs.
Materials 13,500
Direct wages 13,500
Prime cost 27,000
Factory Overhead (20% of Rs. 13,500 Wages) 2,700
Factory or Works Cost 29,700
Office Overhead (5% of Rs. 29,700 Factory cost) 1,485
Cost of Production 31,185
480

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Selling and Distribution Overhead 31,665
Cost of sale 4,335
Profit 36,000
Sales

Illustration 3
Robin Shoe Co. manufacture two types of shoes A and B Costs for the year ended 31-3-2023 were:

Direct Materials 15,00,000

Direct Wages 8,40,000
Production Overhead 3,60,000
27,00,000
There was no work-in-progress at the beginning or at the end of the year.

It is ascertained that:
a) Direct material in type A shoes consists twice as much as that in type B shoes
b) The direct wages for type B shoes were 60% of those of type A shoes
c) Production overhead was the same per pair of A and B type
d) Administrative overhead for each type was 150% of direct wages
e) Selling cost was Rs. 1.50 per pair
f) Production during the year were: Type A 40,000 pairs of which 36,000 were sold; Type B 1,20,000
pairs of which 1,00,000 were sold
g) Selling price was Rs. 44 for type A and Rs. 28 for type B per pair.

Prepare a statement showing cost and profit.

Particulars Type A Type B
Total Per pair Total Per pair
Rs. Rs. Rs. Rs.
Direct Materials 6,00,000 15.00 9,00,000 7.50
Direct Wages 3,00,000 7.50 5,40,000 4.50
Prime cost 9,00,000 22.50 14,40,000 12.00
Production Overhead 90,000 2.25 2,70,000 2.25
Works Cost 9,90,000 24.75 17,10,000 14.25
Administrative Expenses 4,50,000 11.25 8,10,000 6.75
Cost of Production 14,40,000 36.00 25,20,000 21.00
Less: Closing Stock 1,44,000 4,20,000
Cost of goods sold 12,96,000 36.00 21,00,000 21.00
Selling and Distribution 23.07692% 54,000 1.50 1,50,000 1.50
Cost of Sales 13,50,000 37.50 22,50,000 22.50
Profit 2,34,000 6.50 5,50,000 5.50
Sales 15,84,000 44.00 28,00,000 28.00

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1.23 Reconciliation of Cost & Financial Accounts
Need for Reconciliation:
In those concerns where there are no separate cost and financial accounts, the problem of reconciliation
dose not arises. However, where cost and financial accounts are maintained independent of each other, it
is imperative that accounts are reconciled. However, both sets of books are concerned with the same
basic transactions but the figure of profit disclosed by the former does not agree with that disclosed by
the latter. Thus, reconciliation between the results of the two sets of books is necessary due to the
following reasons:
• To find out the reasons for the difference in the profit or loss in cost and financial accounts.
• To ensure the mathematical accuracy and reliability of cost accounts in order to have cost
ascertainment, cost control and to have a check on the financial accounts.
• To contribute to the standardization of policies regarding stock valuation, depreciation and overheads.
• To facilitate coordination and promote better cooperation between the activities of financial and cost
sections of the accounting department.
• To place management in better position to acquaint itself with the reasons for the variation in profits
paving the way to more effective internal control.
1.24 Reasons for Disagreement in Profit:
The following cause the disagreement between the costing and financial profit:

1. Items Shown only in Financial Accounts. There are a number of items which are included in
financial accounts but find no place in cost accounts. These may be items of expenditure or
For Private Circulation Only 27 | P a g e
appropriation of profit or items of income. The former reduce the profit while the latter have the
reverse effect. The items may be classified as under:
(a) Purely financial charges
(i) Loss arising from the sale of fixed assets,
(ii) Loss on investments,
(iii) Discount on debentures,
(iv) Interest on bank loan, mortgages and debentures,
(v) Expenses of the company's share transfer office,
(vi) Damages payable, (vii) Penalties and fines,
(vii) Losses due to scrapping of machinery,
(viii) Remuneration paid to the proprietor in excess of a fair reward for services rendered.
(b) Appropriation of profit. (i) Donations and Charities,
(ii) Taxes on income and profits,
(iii) Dividend paid,
(iv) Transfers to reserves and sinking funds,
(v) Additional provision for depreciation on fixed assets and for bad debts.
(vi) Capital expenditure specially charged to revenue.
(c) Writing off intangible and fictitious assets.
(i) Goodwill,
(ii) Patents and Copyrights,
(iii) Advertisement,
(iv) Preliminary Expenses,
(v) Organization Expenses,
(vi) Underwriting Commission,
(vii) Discount on Issue of Shares/Debentures.
(d) Purely financial incomes.
(i) Rent receivable,
(ii) Profits on the sale of fixed assets,
(iii) Transfer fees received,
(iv) Interest received on bank deposits,
(v) Dividend received,
(vi) Brokerage received,
(vii) Discount, commission received.

2. Items Shown only in Cost Accounts. There are certain items, which are included in cost accounts
but not in financial accounts. These items are very few and usually are notional charges. For
example, interest may be calculated on capital employed in production to show the nominal cost
of employing the capital though, in fact, no interest has been paid. Similarly, production may be
charged with a nominal rent for premises owned, to enable the concern to compare its cost of
production with that of a rented factory. Depreciation on assets is charged even when the book
value is reduced to negligible figure.
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3. Over or under-absorption of Overheads. Overheads are absorbed in cost accounts on the basis of
estimation like percentage on direct materials, percentage on direct wages, etc. may be more or
less than the actual amount incurred. If overheads are not fully absorbed i.e. the amount in cost
accounts is less than the actual amount, the shortfall is called under absorption. On the other
hand, if overhead expenses in cost accounts are more than the actual, it is called over-absorption.
Thus, under or over-absorption of overheads leads to difference in two accounts. Sometimes
selling and distribution expenses are ignored in cost accounts and as such costing profit will be
higher and thus requires reconciliation. Treatment of under/over-absorption of overheads has
already been discussed in a previous chapter.

4. Different Bases of Stock Valuation. The valuation of all stocks in financial accounts is done on
the basic principle of cost or realizable value whichever is less. The valuation of stock in cost
accounts is dependent on this fact whether it is raw material, work-in-progress and finished
goods. In case of raw material, value of stock will depend on whether FIFO, LIFO, or Average
method is adopted. Work-in-progress inventory may be valued at prime cost or works cost or cost
of production basis. Finished goods are generally valued at total cost of production basis. Thus,
different bases adopted for valuation of raw materials, work in-progress and finished goods may
differ and cause disagreement in the results.

5. Different Methods of Charging Depreciation. The methods of charging depreciation may differ in
financial accounts and cost accounts and may cause disagreement in profits of the two books of
accounts. For example, straight line or Diminishing Balance Method (as per provisions of the
Companies Act or Income Tax Act) is adopted in financial accounts whereas in cost accounts
machine hour rate or production hour or unit method may have been adopted.
6. Abnormal Gains and Losses. Abnormal items as abnormal wastage of material by theft, cost of
abnormal idle time, and cost of abnormal idle facilities, exceptional bad debts, and abnormal gain
on manufacturing may be shown in financial accounts but are excluded from the cost accounts
and are taken directly to the costing and profit and loss account. This causes different in profits as
per two books of accounts.

1.25 Methods of Reconciliation:

The reconciliation of costing and financial profits can be attempted either
(a) By preparing a Reconciliation Statement or
(b) By preparation Memorandum Reconciliation Account.

1.26 Reconciliation Statement:

When reconciliation is attempted by preparing a reconciliation statement, profit shown by one set of
accounts is taken as base profit and items of difference are either added to it or decided from it to arrive
at the figure of profit shown by other set of accounts.
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Procedure of Reconciliation:
When there is a difference between the profits disclosed by cost accounts and financial accounts, the
following steps shall be taken to prepare a Reconciliation Statement:

I. Ascertain the various reasons of disagreement (as discussed above) between the profits disclosed by
two sets of books of accounts.
II. If profit as per cost accounts (or loss as per financial accounts) is taken as the base.
Add:
• Items of income included in financial accounts but not in cost accounts.
• Items of expenditure (as interest on capital, rent on owned premises etc.) included in cost accounts but
not in financial accounts.
• Amounts by which items of expenditure have been shown in excess in cost accounts as compared to the
corresponding entries in financial accounts.
• Amounts by which items of income have been shown in excess in financial accounts as compared to the
corresponding entries in cost accounts.
• Over absorption of overheads in cost accounts.
• The amount by which closing stock of inventory is undervalued in cost accounts.
• The amount by which the opening stock of inventory is overvalued in cost accounts.
Deduct:
• Items of income included in cost accounts but not in financial accounts.
• Items of expenditure included in financial accounts but not in cost accounts.
• Amounts by which items of income have been shown in excess in cost accounts over the
correspondence entries in financial accounts.
• Amounts by which items of expenditure have been shown in excess in financial accounts over the
corresponding entries in cost accounts.
• Under absorption of overheads in cost accounts.
• The amount by which closing stock of inventory is overvalued in cost accounts.
• The amount by which the opening stock of inventory is undervalued in cost accounts.
II. After making all the above additions and deductions, the resulting figure will be profit as per
financial accounts.

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II.27 Proforma of Reconciliation Statement: -

Particulars Amount
Profits as per cost accounts XXX
Add:
1. Overvaluation of overheads xx
2. Financial items not recorded in cost a/cs. xx
3. Items charged only in cost a/cs xx
4. Overvaluation of opening Stock in cost books xx
5. Under valuation of closing Stock in cost books xx xx
XXX
Less:
1. Under absorption of overheads
2. Purely financial Charges
xx
3. Under valuation of opening Stock in cost books
xx
4. Over valuation of closing Stock in cost books Profits as per financial books
xx
XXX
xx XXX
Note: The above treatment of items will be reversed when the starting point is the profit as per financial
accounts (or loss as per cost accounts) is taken as the base

1.28 Memorandum Reconciliation Account:-

Reconciliation can also be done by preparing a Memorandum Reconciliation Account. This account is a
memorandum account only and does not form part of the double entry. When reconciliation is attempted
through Memorandum Reconciliation Account, profit to be taken as "base profit" is shown like opening
balance of this account. All items of differences required to be deducted are debited and those to be
added are credited to this account, the balancing figure of this account is the profit shown by other set of
accounts.
1.29 . Proforma of Memorandum Reconciliation Account:

Memorandum Reconciliation Account

To Financial expenses: By profit as per Cost accounts XXX
Discount XXX By Financial income:
Fines and penalties XXX Rent XXX
Bank Interest XXX Interest XXX
Underwriter's Commission XXX Dividend XXX
Donations XXX Profit on sales of assets XXX
Goodwill written off XXX By items charged in cost accounts: XXX
To Under-absorption of XXX Interest on own capital XXX
overheads
To Under-valuation of opening XXX Rent on own Building XXX
stock in Cost accounts
To Over-valuation of closing XXX By Over-absorption of overheads XXX

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stock in Cost accounts
To Under-charge of depreciation XXX By Over-valuation of opening stock XXX
in cost accounts in cost accounts
To Profit as per Financial Accounts XXX By Under-valuation of closing stock XXX
(b/f) in Cost accounts
By Over-charge of depreciation in XXX
Cost Accounts
XXX XXX

1.30 Self-assessment questions:

1. Reconciliation between cost & financial accounts ensures ------------------- accuracy and reliability of
cost accounts in order to have cost ascertainment, cost control and to have a check on the financial
accounts. (ref-1.23)
2. Abnormal wastage of material by theft, cost of abnormal idle time, cost of abnormal idle facilities,
exceptional bad debts, abnormal gain on manufacturing may be shown in financial accounts but are
excluded from the accounts. (ref-1.24)
3 .Profit on sale of fixed asset is a purely income. (ref-1.24)
4. While preparing reconciliation statement if profit as per cost accounts is taken as the base then over
absorption of overheads in cost accounts is to be -. (ref-1.27)
5. While preparing memorandum reconciliation account if profit as per cost accounts is taken as the base
then over valuation of closing stock in cost accounts is to be -. (ref-1.29)

1. The profit shown in the financial accounts was Rs. 1,12,870 and for the same period the cost
accounts showed a profit of Rs. 27,040.
Examination of the accounts showed the following differences:
Cost A/e's (Rs.) Financial A/e's (Rs.)
Depreciation 98,260 1,05,200
Stock valuations:
Opening Stocks 2,75,100 2,55,000
Closing Stocks 1,82,180 1,87,500
Profit on sale of asset 8,500
Dividend Received 26,350
Imputed rend charge 32,500
Reconcile the profit figures of the two sets of books.
Solution:
Reconciliation Statement
Profit as per Cost Accounts 27,040
Add: Profit on sale of asset 8,500
Dividend received 26,350
Imputed rent charge 32,500
Overvaluation of Opening Stock in Cost A/cs 20,100
Undervaluation of Closing Stock in Cost A/cs 5,320 92,770
1,19,810
Less: Under charge of depreciation in Cost A/cs 6,940

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Profit as per Financial a/cs 1,12,870

2. A company maintained separate cost and financial accounts, and the costing profit for 2019
differed to that revealed in financial accounts, which was shown as Rs. 50,000.

The following information is available.

Particulars Cost A/e's Rs. Financial A/e's Rs.

Opening Stock of Raw Materials 5,000 5,500
Closing Stock of Raw Materials 4,000 5,300
Opening Stock of Finished Goods 12,000 15,000
Closing Stock of Finished Goods 14,000 16,000

(i) Dividends of Rs. 1,000 were received by the company.

(ii) A machine with net book value of Rs. 10,000 was sold during the year for Rs. 8,000.
(iii) The company charged 10% interest on its opening capital employed of Rs. 80,000 to its
process costs. You are required to determine the profit figure which was shown in the cost
accounts.
Solution:

3. A manufacturing company disclosed a Net Loss of Rs. 5,72,000 as per their

Cost Accounts for the year ended March 31, 2023. The following information
was revealed as a result of scrutiny of the figures of both the sets of books:

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Solution:
Memorandum Reconciliation Account
Rs. Rs.
To Net Loss as per Costing 5,72,000 By Factory Overheads Over 16,000
Books absorbed in Cost A/e's
To Administration Overheads 24,000 By Interest on Investments 64,000
Under-recovered in Cost A/e's not included in Cost A/e's
To Income Tax not provided in 1,54,000 By Depreciation 25,000
Cost Accounts Overcharged in Cost A/e's
To Interest on Loan Funds not 2,63,000 By Transfer Fees 16,000
included in Cost A/e's Financial Accounts
By Stores Adjustment 8,000
Financial Books
By Net Loss as per Financial 8,84,000
Books (Bal. Fig.)
10,13,000 10,13,000

4. EDWIN Food Products Ltd. gives the following information for the year ended 31.12.2023
1. Sales Rs. 50,00,000
2. Stocks: Opening Closing
(Rs.) (Rs.)
(i) In Cost Ale
(a) Raw Material 60,000 80,000
(b) WIP 2,50,000 2,80,000
(c) Finished Stock 5,50,000 5,20,000
(ii) In Fin. Ale (a) Raw Material 64,000 70,000
(b) WIP 2,60,000 2,60,000
(c) Finished Stock 5,20,000 5,10,000
3. Preliminary Expenses Rs. 1,00,000
4. Income Tax Rs. 50,000
5. Direct Material Rs. 20,00,000
6. Direct Labour Rs. 16,00,000
7. Factory O.H. absorbed at 10% of Prime
Cost
8. Admin. O.H. absorbed at 5% of Factory

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Cost
9. Selling and Distribution expenses Rs. 1,50,000
recovered
10. Factory expenses Rs. 3,80,000
11. Administration expenses Rs. 2,00,000
12. Selling and Distribution expenses Rs.1,40,000
13. Dividend received Rs. 80,000
Required:
(A) P&L Ale to ascertain Profit or Loss for the period.
(B) Cost Statement to find the Profit or Loss for the period.
(C) Reconciliation Statement.
Solution
Profit and Loss A/c
Rs. Rs.
To Opening Stock: By Sales 50,00,000
Raw Material 64,000 By Closing Stock
WIP 2,60,000 Raw Material 70,000
Finished Stock 5,20,000 WIP 2,60,000
To Direct Material 20,00,000 Finished Stock 5,10,000
To Direct Labour 16,00,000 By Dividend received 80,000
To Preliminary Expenses 1,00,000
To Income Tax 50,000
To Factory expenses 3,80,000
To Administration expenses 2,00,000
To Selling &Distribution 1,40,000
To Profit 6,06,000
59,20,000 59,20,000
Particular Amt. (Rs.)
Opening Stock of Material 60,000
(+) Direct Material 20,00,000
20,60,000
(-)Closing Stock of Material 80,000
Cost of Material used 19,80,000

Cost Statement
Direct Labor 16,00,000
Prime Cost 35,80,000
Factory O.H. 10% of Prime Cost (35,80,000) 3,58,000
(+)Opening WIP 2,50,000
6,08,000
(-) Closing WIP 2,80,000 3,28,000
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Factory Cost 39,08,000
Administration O.H. 5% of Factory Cost (39,08,000) 1,95,400
Cost of Production 41,03,000
(+)Opening Finished Goods Stock 5,50,000
46,53,000
(-)Closing Finished Goods Stock 5,20,000
Cost of goods sold 41,33,400
Selling and Distribution expenses 1,50,000
Cost of sales 42,83,400
Profit 7,16,600
Sales 50,00,000
Reconciliation Statement as on 31.12.2019
Particular Amt. (Rs.)
Profit as per Cost Books 7,16,600
Add: i)Dividend received entered only in F.A. 80,000
ii) Overvaluation of Opening Finished Goods in C.A.
(5,50,000- 5,20,000) 30,000
iii) Over absorption of selling and distribution in C.A.
(1,50,000 -1,40,000) 10,000
8,36,600
Less :iv) Preliminary Expenses shown only in F.A. 1,00,000
v) Income Tax entered only in F.A. 50,000
vi) Undervaluation of opening stock of R.M. in C.A.
(64,000 -60,000) 4,000
vii) Undervaluation of opening W.I.P. in C.A.
(2,60,000 - 2,50,000) 10,000
viii) Overvaluation of closing stock of R.M. in C.A.
(80,000 - 70,000) 10,000
ix) Overvaluation of closing W.I.P. in C.A.
(2,80,000 - 2,60,000) 20,000
x) Overvaluation of closing Finished goods in C.A.
(5,20,000 - 5,10,000) 10,000
xi) Under absorption of Factory O.H. in C.A.
(3,80,000 - 3,58,000) 22,000
xii) Under absorption of Admin. O.H. in C.A.
(2,00,000 - 1,95,400) 4,600
2,30,600
Profit as per Financial Accounts 6,06,000

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II! !II

1.31 Summary:

• Cost accounting is a branch of accounting and has been developed due to limitations of
financial accounting. Costing means finding out the cost of product or service by any
technique or method. Thus, cost accounting means costing using double entry system.
• Cost accountancy is thus the science, art and practice of cost accounting. Cost
accountancy includes costing, cost accounting, cost control and cost audit.
• The objectives of cost accounting are ascertainment by cost, fixation of selling price,
proper recording and presentation of cost data to management for measuring efficiency
and for cost control.
• There are many differences between cost accounting & financial accounting on the basis
of purpose, recording, control, type of accounts, periodicity of reporting, analysis of
profit, reporting of costs etc.
• The installation of a costing system requires a thorough study and understanding of all
the aspects. There can't be readymade costing system for every undertaking.
• Cost is the amount of expenditure (actual or notional) incurred or attributable to a given
thing.
• A cost is composed of three elements, i.e., material, labour and expenses.
• According to CIMA (UK) cost is defined as "a location, person, or item of equipment (or
group of these) for which costs may be ascertained and used for the purpose of control".
• A cost unit is a unit of product, service or time in relation to which cost may be
ascertained or expressed.
• Costs have been classified on the basis of traceability, change in volume, controllability,
normality, time, managerial decision making etc.
• Cost sheet is a periodical statement of cost designed to show in detail the various
elements of cost of goods produced like prime cost, factory cost of production and total
cost.
• Reasons for difference in cost & financial accounts can be items shown only in financial
accounts, items shown only in cost accounts, under or over absorption of overheads,
different bases of stock valuation and different methods of charging depreciation.
• When reconciliation statement is prepared, profit shown by one set of accounts is taken
as base profit and items of difference are either added to it or decided from it to arrive at
the figure of profit shown by other set of accounts.
• When Memorandum Reconciliation Account, profit to be taken as "base profit" is shown
like opening balance of this account. All items of differences required to be deducted are
debited and those to be added are credited to this account, the balancing figure of this
account is the profit shown by other set of accounts.

1.32 Terminal Questions: For Reference Only

1. Define cost accounting.

2. Distinguish costing & cost accounting
3. State any two points of difference between cost accounting & financial accounting.
4. Define cost.
5. What is cost centre?
6. What is cost unit? Give two examples.
7. State any two methods of costing.
8. State any two techniques of costing.

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II! !II

9. State any four objectives of cost accounting.

10. What is contract costing? Give an example.
11. What are the constituents of the prime cost?
12. Differentiate between direct & indirect costs.
13. What is semi-variable cost? Give two examples.
14. Suggest the suitable method of costing for Textile & steel industries.
15. Total variable cost varies in direct proportion to the volume of output. Do you agree?
16. What is cost sheet?
17. What are the three elements of cost?
18. Give examples selling overheads?
19. Fixed cost per unit remains fixed. Do you agree?
20. Give four items of factory overhead.
21. What is a Reconciliation Statement?
22. State the need for Reconciliation
23. What are the reasons for difference in cost and financial accounts?
24. State four items (i) expenses and losses, (ii) incomes and gains. Which are shown only
in financial accounts?
25. What are the expenses which are shown only in Cost Accounts?
26. Give four examples of fictitious assets.
27. State any two basis of stock valuation.

Section A (5 marks)
1. Give limitations of financial accounting.
2. What are the objectives of cost accounting?
3. State the differences between financial accounting & cost accounting.
4. What are the advantages of cost accounting?
5. What are the limitations of cost accounting?
6. Briefly explain the installation of a costing system.
7. What are the elements of cost? Explain the different elements of total cost of a product
8. List out the different methods of costing.
9. Explain the techniques of costing.
10. State briefly the treatment of under or over-absorption of overheads while reconciling
costing profits with financial profits.
11. How will you deal with under or overvaluation of stocks in cost accounts while
preparing reconciliation statement?
12. "Under or overcharge of depreciation in cost accounts as compared to financial accounts
affects the reconciliation statement." Discuss.
13. Explain the causes of difference between Profit shown by Financial Accounts and Profit
shown by Cost Accounts.
14. The following direct costs were incurred on Job No 240 of ABC
Ltd Materials Rs 6,010
Wages:Dept A - 60 hours @Rs 30 per
hour Dept B - 40 hours @ Rs 20
per hour Dept C - 20 hours @ Rs
50 per hour
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Overhead for these three departments were estimated as follows:
Variable overheads: Dept A-Rs 15,000 for 1500 labour
hours
Dept B - Rs 4,000 for 200 labour hours
Dept C - Rs 12,000 for 300 labour
hours
Fixed overheads: Estimated at Rs 40,000 for 2,000 normal working hours.
You are required to calculate the cost of Job no 240 and quote the price to give of 25% of
profit on selling price.

15. Prepare a reconciliation statement.

Profits as per financial a/c 27300
Profits as per cost a/c 27400
Over absorption of administration O/H in cost a/c 600
Int. paid included only in fin. a/c 400
Under-absorption of factory O/H in cost a/c 1300
Dividends recd. 1000

Section B & C (9 &12 Marks)

1. "Financial accounting procedures are generally designed to ascertain the periodic profit
or loss but there are important limitations & deficiencies in the system". Discuss.
2. Describe the disadvantages alleged against cost accounting. Are the disadvantages real
in your opinion? Give reasons.
3. State the differences between financial accounting & cost accounting.
4. From the following particulars, prepare a Cost Sheet showing the total cost per tonne
for the period ended 31st Dec. 2023.

Rs. Rs.
Raw Materials 33,000 Rent and Taxes (office) 500
Productive Wages 38,000 Water Supply (works) 1,200
Unproductive Wages 10,500Factory Insurance 1,100
Factory Rent and Taxes 7,500Office Insurance 500
Factory Lighting 2,200Legal Expenses 400
Factory Heating 1,500Rent of Warehouse 300
Motive Power 4,400Depreciation of
Haulage (works) 3,000Plant and Machinery 2,000
Director's Fees (works 1,000Office Building 1,000
Director's Cleaning 2,000Delivery Vans 200
Factory Cleaning 500Bad Debts 100
Sundry Office Expenses 200Advertising 300
Estimating Expenses (Works) 800Sales Department's 1,500
Salaries
Factory Stationery 750 Upkeep of Delivery Vans 700
Office Stationary 900 Bank Charges 50
Loose Tools Written Off 600 Commission on Sales 1,500

The total output for the period has been 14,775 tonnes.

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5. Mr. Hari furnishes the following data relating to the manufacture of a standard
product during the month of April, 2023:

Raw Materials Consumed Direct Labour Rs. 15,000

Charges Machine Hours Worked Rs. 9,000
Machine Hour Rate Administrative Rs. 900
Overheads Selling Overheads Rs. 5
Units Produced Units 17,100 20% on works cost
Sold 16,000 at Rs. 4 per unit. Re. 0.50 per unit

You are required to prepare cost sheet

from the above, showing; (a) the cost of
production per unit; (b) profit per unit
sold and profit for the period.

6. Following details relate to Prashanthi Ltd., for the

year ending 30.06.23
Rs.
Direct Wages 6,00,000
Raw Materials Purchased (97,000 units) 11,14,000
Other Materials 36,000
Carriage Inward 5,640
Carriage Outward 3,000
Wages to Foreman 48,000
Research and Development 30,000
Other Wages 6,000
Office Manager's Salary 72,000
Employee State Insurance 6,000
Power, Fuel & Haulage 54,000
Drawing Office Expenses 36,000
Printing & Stationary 12,000
Counting House Salary 12,000
Sale of Scrap 1,640
Stock on 01-07-22
Material (1,000 units) 12,000
W.LP (800 units) 16,000
Finished Goods (6,000 units)
Stock on 30.06.23
Material (800 units) 10,000
WIP (1,000 units) 20,000
Finished Goods
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Income Tax 22,000
Donation to Charity 5,000
S & D Expenses (Re. 1 per unit)
Units manufactured during the year are 96,000. Finished stock is

valued@ current cost. Prepare cost sheet showing the following:

(1) Materials Consumed (2) Prime Cost (3) Factory Cost (4) Cost of
Production (5) Cost of Goods Sold (6) Total Cost of Sales (7) Profit as
10% on Sales (8) Sales Price and (9) Production Cost Per Unit.

What is a Tender?
"Tender" means an invitation to offer for an item/items or work. All Public Sector purchases/
Contracts in India, over a certain value has to be publicly notified
through Tender Notices which are advertised through All India Newspapers, Trade Journals,
Departmental Publications and Notice Boards, and now on Internet.

Tender
“Tender” means any offer for supply of goods or services received from a supplier in response to an
invitation to tender published in newspaper. A strictly controlled process for inviting bids for goods
and services in as wide and competitive a market as practical. This places the contract under the
Trust’s and/or the NHS terms and conditions. The term tender is also used to describe the offers
received from suppliers.

Quotations
A quotation is a document that a vendor or service provider would give to a customer to describe
specific goods and services that they may provide and its cost. Besides the term, quotation can also
be referred by other terms like Bid, Quote, Estimate, and Tender & Proposal. “Quotation” means
any offer for supply of goods or services received or collected from a supplier other than a tender.

Problem on Quotations:

1. An advertising agency has received an enquiry for which you are supposed to submit the quotation.
Bill of material prepared by the production department for the job states the following requirement
of material:

Paper 10 reams @ `1800 per ream

Ink and other printing material `5000
Binding material & other consumables `3000
Some photography is required for the job.
The agency does not have a photographer as an employee. It decides to hire one by paying `10000
to him. Estimated job card prepared by production department specifies that service of following
employees will be required for this job:
Artist (`12000 per month) 80 hours

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Copywriter (`10000 per month) 75 hours
Client servicing (`9000 per month) 30 hours
The primary packing material will be required to the tune of `4000. Production Overheads 40% of
direct cost, while the S & D Overheads are likely to be 25% on Production Cost. The agency
expects a profit of 20% on the quoted price. The agency works 25 days in a month and 6 hours a
day.

2. X Ltd. Provides you the following figures for the year 2022-23:

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Particulars
Direct Material 3,20,000
Direct Wages 8,00,000
Production Overheads (25% variable) 4,80,000
Administration Overheads (75% Fixed) 1,60,000
Selling and Distribution Overheads (2/3rd Fixed) 2,40,000
Sales @ ` 125 per unit 25,00,000

For the year 2023-24, it is estimated that:

1. Output and sales quantity will increase by 20% by incurring additional Advertisement Expenses
of ` 45,200.
2. Material prices will go up 10%.
3. Wage Rate will go up by 5% along with, increase in overall direct labor efficiency by 12%.
4. Variable Overheads will increase by 5%.
5. Fixed Production Overheads will increase by 33 1/3 %

Required:

(a) Calculate the Cost of Sales for the year 2022-2023 and 2023-2024.
(b) Find out the new selling price for the year 2023-2024.
(i) If the same amount of profit is to be earned as in 2022-2023.
(ii) If the same percentage of profit to sales is to be earned as in 2022-2023.
(iv)If the existing percentage of profit to sales is to be increased by 25%.
(v) If Profit per unit rs.10 is to be earned.

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Introduction of Management Accounting
Meaning:

Management Accounting is the presentation of accounting information to management

in order to formulate the policies and assist in its day-to-day activities . In other words,
it help the management to perform all its functions including planning, organizing,
staffing, directing and control.

Definition of Management Accounting

The Institute of cost and Management Accountants, London, has defined Management
Accounting as, "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 planning and control of the operation of the undertaking."

According to R.N Anthony, "Management Accounting is concerned with accounting

information that is useful to management.

Objectives of Management Accounting

The objectives of management accounting are as follows:

(i) To present financial information to the management in a way that is easily understandable

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(ii) To supply necessary data to the management for formulating future plans. The
data includes statements pertaining to past results and estimates for the future.

(iii) To help in keeping the actual performance as per the plans made by the management.

(iv) To establish a strong, working relationship amongst different individuals pertaining to

different departments, of the same organization.

(v) To maximize the wealth of the organization

(vi) To motivate the employees, by fixing targets and providing incentives“ (Vii) To keep the tax burden
of the organization minimum
(vii) To keep the management fully informed about the latest position of the organization

Nature of Management Accounting

(i) Mainly concerned with future: Planning is the process of looking ahead by taking the
reference of the past. The process of management accounting is driven towards the future course of
action with proper planning based on the analytical financial details other past. It considers the
budgets to forecast the future revenue, expenditure, and inflow and out follow of funds.

(ii) Recent origin: Management accounting has been well recognized in the modern business
houses due to increasing customer base and market complexity. Modern managerial decisions need
quantitative organized information rather traditional form of financial statements for making
effective decisions.

(iii) Management need oriented: Management Accounting is highly personalized service and
Subjective in nature. It is intended for the use of internal managerial decisions. It provides
necessary information as per the need of the management in the required format and ensures that
the information’s are sufficient to make effective decisions.

(iv) Information as per Management need: There is no hard and fast rule in the preparation
of management reports and statement, it always as per the situational requirement of the
management and based on the availability of the data for analysis and interpretation.

(v)Provides data and not the decisions: Management accounting discipline is not an replacement
of management. It provides just information to the managerial decisions. It facilitates decisions
since majority of the decisions are made considering the facts and figures provided by the
management accountants. But at the same time these data itself cannot form the decisions of the
management.

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(vi) Objective oriented: Management accounting present data in such a way that it enables the
management to formulate policies and programme so as to achieve the managerial or organizational
goals in most efficient and effective manner.

(vii) Financial and cost accounting information: Management accounting is all about the
analysis interpretation of financial, and cost accounting data, to generate such reports and statements,
which can prove useful to management in decision-making.
(viii) Increases efficiency: Management accounting is concerned with providing, the needed
information to the Management in the proper manner and assisting in the policy formulation and
managerial control. This enables the management to increase efficiency of its operation and ensures
the optimum profits with minimum operational risk.

Apart from the above unique features, Management Accounting is also characterized by
the following:
a) It does not follow any fixed norms or formats.
b) Basically concerned with forecasting
c) Mainly used for internal purpose.
d) Useful in managerial decision-making.
e) It is not compulsory as the any other disciplines like financial accounting and
cost accounting. It is purely optical to the management.
f) It is an interdisciplinary subject since it mainly depends on the financial and cost
accounting
Scope of Management Accounting

(i) Financial Accounting: Accounting is the process of systematic recording of financial

transactions so as to determine the true and fair financial position of a concern.
Management accounting derives the necessary data from the financial accounting. For
instance when fund flow statement or Ratio statement are to be prepared, financial
statements are very essential without which the preparation and decision about fund flow
and ratios are not possible.
(ii) Cost Accounting: Management accounting uses certain technique and tools of cost
accounting as well. Cost accounting provides the various techniques of costing, viz,
Marginal Costing, Standard Costing, Differential Cost Analysis etc. which plays significant

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role in the operation and control of the enterprise It assists management in measuring the
operational efficiency of the management and achieving managerial goals.
(iii)Budgetary Control: Budgetary control is a system of controlling Costs thorough
establishment of standards. It controls the activities of the business, measures the variance by
comparing the actual with the budgeted figures, and enquires into the reasons of such
variance at each step, so that the adverse variance may not be repeated in future.
(iv)Tax Planning: It is concerned with the computation of taxable income according to
Income- Tax Act, and filing of returns and the payment of tax. It is one of the core functions
of the modern management accountant, facilitating management in proper tax planning and
accounting.
(v) Analysis and Interpretation of Accounts: Financial statement can be better understood
through comparative study. The primary duty of the management accountant is to explain
the data relating to the management and assist management in taking decisions.
(vi)Reporting: Management accounting uses the technique of statistics wherever necessary
for effective analysis and interpretation. Sometimes reports on various aspects of the
business are to be submitted by the management accountants. At the time of preparation of
the statement or Repots, they use different statistical techniques, viz, Line Chart, Pie Chart,
Index Numbers etc. in order to be more attractive and intelligible.
(vii) Internal audit and control: Management accountants depend on the internal audit
and use that for generating reports on various financial issues for decision-making.
(viii) Budgetary Control: Budgetary control is a system of controlling costs thorough
establishment of standards. It controls the activities of the business, measures the variance by
comparing the actual with the budgeted figures, and enquires into the reasons of such
variance at each step, so that the adverse variance may not be repeated in future.
(i) Tax Accounting: It is concerned with the computation of taxable income as per Income
Tax Act, and filing of returns and the payment of tax. It is one of the core functions of the
modern management accountant, facilitating management in proper tax planning and
accounting.
(ii)Analysis and Interpretation of Accounts: Financial statement can be better understood
through comparative study. The primary duty of the management accountant is to explain
the data relating to the management and assist management in taking decisions.
(ix) Management Information System: It is very difficult to imagine organizations without
computers in the globalized corporate environment. Information has are stored and supplied
to the management with the help of computers for managerial decisions. The advancement

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in the technology has made management accountants job much easier and effective and has
made more depended on the technology from time to time.

Tools and Techniques used in Management Accounting:

The important tools and techniques are briefly explained below.

1. Financial Planning
The main objective of any business organization is maximization of profits. This objective is
achieved by making proper or sound financial planning. Hence, financial planning is considered as
best tool for achieving business objectives.
2. Financial Statement Analysis
Profit and Loss account and Balance Sheet are important financial statements. These statements are
analyzed for different period. This type of analysis helps the management to know the rate of
growth of business concern. This analysis is done through comparative financial statements,
common size statements and ratio analysis.
3. Cost Accounting

Cost accounting presents cost data in product wise, process wise, department Wise branch wise and
the like. These cost data are compared with predetermined one. This comparison of two costs
enables the management to decide the reasons responsible for the difference between these costs.
4. Fund Flow Analysis

This analysis find out the movement of fund from one period to another. Moreover, this analysis is
very useful to know whether the fund is properly used or not in a year When compared to the
previous year. The working capital changes and funds from operation are also find out through this
analysis.
5. Cash Flow Analysis

The movement of cash from one period to another can be find out through this analysis. Besides,
the reasons for cash balance and changes between two periods are also find out. It studies the cash
from operation and the movement of cash in a period.
6. Standard Costing

Standard costing is predetermined cost. It provides a yard stick for measuring actual performance.
It is used to find the reasons for the deviations if any.
7. Marginal Costing

Marginal costing technique is used to fix the selling price, selection of best sales mix, best use of
scarce raw materials or resources, to take make or buy decision, acceptance or rejection of bulk

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order and foreign order and the like. This is based on the fixed cost, variable cost and contribution.
8. Budgetary Control

Under Budgetary control techniques, future financial needs are estimated and arranged according
to an orderly basis. It is used to control the financial performances of business concern. Business
operations are directed in a desired direction.
9. Ratio Analysis

It is used to management in the discharge of its basic functions of forecasting, planning,

coordination, communication and control. It paves the way for effective control 0f business
operations by undertaking an appraisal of both the physical and monetary targets
10. Revaluation Accounting

The fixed assets are revalued as per the revaluation accounting method so that the capital is
properly represented with the assets value. It helps to find out the fair return On capital employed.

11. Decision-making Accounting

A business problem can be solved by choosing any one of the best and most profitable alternative.
To select such alternative, the relevant costs are compared. Thus, accounting information are used
to solve the business problem, which are arising out of increasing complexity of nature of business.

12. Management Information System

The free flow communication within the organization is essential for effective
functioning of business. Hence, the management can design the system through which
every employee of an organization can assess the information and used for discharging
their duties and taking quality decisions
Difference between Financial Accounting and Management Accounting
Basis Financial accounting Management Accounting
Users Mainly intended to serve external users Mainly intended to serve internal
like shareholders, bankers, creditors and users like management
Government.
Legality Statutorily compulsory as per different Not compulsory
acts such as companies act of 1956
income tax act of 1961 etc.
Development It is well developed and very old It is of recent development
system in practice
Subject It deals With preparation of financial It deals with presentation of needed

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matter statements through systematic information for management for
recording and determines the financial effective decisions.
position of a concern.
Standard There is specific standard for Preparation of statements and
Preparation as per the act and reports reports are not standardized
are practice.
Dependency It is an independent discipline. It is an inter dependent.

Publications It is compulsory to publish the It is not compulsory.

financial reports of the concern.
Statement and Generally Trading and profit and loss It prepares the funds and cash flow
report account and balance sheet are prepared statement, budgetary reports, ratio
prepared statements etc,
Consideration It considers only monetary It sometime considers non-
transactions. monetary aspect also like quality,
machine
hours, number of people working
etc.
Auditing Audit of books of accounts by a It is not necessary to get audited the
qualified charted accountant is records of management accounting,
compulsory
Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
Functions Basically executes the function of It basically assists management in
identification and recording of cost decision making through providing
and cost control in the operation. necessary information.
It is necessary to maintain cost It is purely optional to management
records in a systematic way in
Statutory certain manufacturing industries
compulsions asper the notification of the
notification

Focus It is focused on cost identification It focused on the effective decisions for

and cost control optimum managerial efficiency and
objective attainment.

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Users of the It is used by both internal as well as Used by only internal parties.
information external parties
Data used It derives certain data from financial It derives data from financial books, cost
records. books as well as certain other sources.
Scope and The scope of this discipline is limited The scope of this discipline is broader
coverage to the extent of cost recording and and covers various aspects
reporting like finance, costing, taxation, audit and
investments
Tools and It follows well developed tools and It doesn’t have well developed tools or
techniques techniques for identification and technique.
used recording of cost.

Differences between Financial Accounting and Cost Accounting

Basis Financial accounting Cost accounting
1. Purpose It serves the interest of business It renders information for the guidance
and other interested parties by of the management for the proper
Providing suitable information in planning control and decision making.
the financial statements.
2. Options F A is required to be kept as per the CA is voluntarily kept to serve the
requirements Of the company act management in the discharge of
and income tax act. management functions.
3. Analysis FA reveal the profit of the CA shows the profit result of each
business as a whole. business as a whole operations
process and product
4. Recording It consists of classification It records in an objective manner i.e.,
recording and analysis of according to which cost are incurred
transaction in a subjective manner
i.e., according to the nature of
expenditure.
5. Control It lays emphasis on the recording It provides for a detailed system of
aspect, no consideration is given to control with the help of standard

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control aspect. costing and budgetary control.
It involves reporting of There is a continuous flow of data
6. Reporting business performance at the end of information of cost report to
the accounting year. management.
7. This is to be maintained compulsory. This is to be maintained voluntarily.
Obligation
8.Audit Audit of FA is statutory Audit of CA is not compulsory.

9. Duration FA provides financial information CA furnishes reporting cost data at

of once a year. frequent intervals.
10. Pricing It fails to guide the formulation of It provides adequate data for
pricing policy. formulating pricing policy.
11. Valuation Stock is valued at cost or marked Stock is always valued at cost price.
of Stock p rice whichever less is.

Limitations of Management Accounting

1. Data Dependency

Management accounting derives information from financial accounting, Cost

accounting and other sources. Therefore, the conclusions arrived at by management
accountants depend largely on the accuracy of these two (Financial accounting and Cost
accounting) records.
Therefore, if the past data, which are collected from the financial and cost records, are
found inaccurate, the decisions suggested by the management accountants, on the basis of
the above, also will be inaccurate.

2.Does not give the decision

Management accounting cannot replace the decisions. It can just assist the management
in its operations through providing necessary analytical statements and advises
management for better and efficient managerial functions.

3. Costly affair

Installation and maintenance of Management accounting system is suitable for those

concerns, which has significant amount of transactions generally large establishments.

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Before, small concerns cannot afford to adopt this system.

4. No standardization as other disciplines

Management accounting is still in the development stage. So it has to face the problems
fluidity of concepts, improvement of techniques etc. It does not have any strong
principles like financial accounting and cost accounting. It does not follow any set rule
and hence differs in its practices.

5. Danger of misleading
The information provided by Management accountants cannot be taken as full proof
information for making any managerial decisions. Because the data used by
management accountants itself may have window dressed data due to which the
management accounts may mislead the management.

6. Needs human involvement for interpretation Management accounting

involves people to make final reports or interpretations, due to which the
interpretation may be of the personal opinion of the person Who has prepared it. It
creates differences in the interpretations and becomes more subjective rather than objective in
the analysis

Terminal Questions:
1. What is management accounting, and how does it differ from financial accounting?
2. Discuss the characteristics of management accounting.
3. Explain the importance of management accounting in modern businesses.
4. What are the primary objectives of management accounting?
5. How does management accounting assist in decision-making?
6. Discuss how management accounting contributes to planning and control within an
organization.
7. What are the key functions of management accounting?
8. Explain how budgeting a function of management accounting is.
9. Describe the role of variance analysis in management accounting.
10. What are the essential features of an effective management accounting system?
11. How does accuracy affect the effectiveness of a management accounting system?
12. Discuss the importance of timeliness in management reporting.
13. What is the scope of management accounting in an organization?
14. How does management accounting integrate with financial and cost accounting?
15. Explain the role of management accounting in strategic planning.
16. What tools and techniques are commonly used in management accounting?
17. How does standard costing aid in cost control?
18. Explain the concept of break-even analysis and its significance in management accounting.
19. Compare and contrast cost accounting with management accounting in terms of purpose and
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scope.
20. Discuss the differences between financial, cost, and management accounting with examples.
21. What are the advantages and limitations of both cost accounting and management accounting?

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