COST AND

MANAGEMENT
ACCOUNTING
Dr. Tripti Tripathi

Meaning of Cost
Accounting
Cost Accounting is the
process of accounting for
cost. Costing is a technique
and process of ascertaining
cost. It
is a
system of
determining
the
cost
of
products or services.

Costing Vs Cost
Accountancy
Costing
It is the determination
of cost by using any
method
like
airthematic
process,
memorandum
statements etc. It is the
finding out the cost of
the
products
or
services
by
any
technique or method.

Cost accountancy
It denotes the formal
accounting mechanism by
means of which cost are
ascertained by recording
them in the books of
accounts. It includes the
principles,
conventions,
techniques and systems
which are employed in a
business to plan and
control the utilisation of
resources.

Nature and Scope of Cost

Accounting
Cost accounting is both science and art . It is
a science because it consist of organised and
systematic knowledge , which a cost
accountant must possess
for proper
discharge of his functions. It is also an art
because it involves costing techniques and
methods
and the application of these
techniques helps the cost accountant
in
deciding to control cost.

Conti..
It is also a practice because a cost
accountant constantly endeavor for reducing
cost , present cost data in a condensed but
informative way.

Scope
Cost

Control A cost accountant is

concerned with furnishing such information as
to enable the management to control the cost
of operating the business.

Cost

ReductionIt is concerned with

achieving real and permanent reduction on
the unit cost of the goods produced or
services rendered without impairing their
quality or suitability.

Conti
Cost Audit It is the verification of cost

accounts and check on the adherence to the

cost accounting plan. It involves checking up
the arithmetical accuracy of cost accounts
and verifying whether the principles laid down
have been followed or not.

Objectives of Cost
Accounting
Ascertaining Cost
Determining Selling Price
Measuring and Increasing efficiency
Cost Control and Cost Reduction
Cost Management
Ascertaining Profits
Providing basis for managerial decision

making

Difference between Cost Accounting

and Financial Accounting
Basis

Financial Accounting

Cost Accounting

Purpose

The main purpose of financial

accounting is to prepare Profit
and Loss Accounts and balance
sheet for reporting to owners or
shareholders and other outside
agencies

The main purpose of

cost accounting is to
provide detailed
information to
management i.e
internal users

Statutory
Requireme
nts

These accounts have to be

prepared according to the legal
requirements of Companies Act
and Income tax Act

Maintenance of these
accounts is voluntary
except in certain
industries where it
has been made
obligatory to keep
records under
companies Act.

Analysis of
Cost and

It reveals the profit or loss of the It shows the detailed

business as a whole for a
cost and profit data

Conti..
Basis

Financial Accounting

Cost Accounting

Periodicity
of
reporting

Financial Reports are

prepared periodically ,
usually on an annual
basis.

It is a continuous process
and may be daily, weekly,
monthly, etc.

Control
Aspect

It lays emphasis on the

recording of the financial
transactions and does not
attach any importance to
control aspect.

It provides for a detailed

system of controls with the
help of certain special
techniques like standard
costing and inventory
control etc.

Historical
and
predetermin
ed costs

It is concerned almost
exclusively with historical
records. The historical
nature of financial
accounting can be easily
understood in the context

It is not only with historical

costs but also with
predetermined costrs

Conti
Types of
transactions
recorded

It records only external

transactions like sales,
purchase, receipts, etc.
with outside parties.

It not only records

external transactions
but also internal or
inter-departmental
transactions like issue
of materials by store
keeper to production
department

Types of
statements
prepared

It prepares general
purpose statements like
profit and loss accounts.

It prepares special
purpose statements
like reports on loss of
materials, Idle Time
Report

Difference between Cost and

Management
AccountingManagement
[Link].
Cost Accounting
Accounting
1

The main objective of

cost accounting is to
assist the
management in cost
control and decisionmaking.

The primary objective

of management
accounting is to
provide necessary
information to the
management in the
process of its
planning, controlling,
and performance
evaluation, and
decision-making.

Cost accounting
system uses
quantitative cost
data that can be
measured in

Management
accounting uses both
quantitative and
qualitative data. It
also uses those data

Conti..
[Link].

Cost Accounting

Management
Accounting

The main objective of

cost accounting is to
assist the
management in cost
control and decisionmaking.

The primary objective

of management
accounting is to
provide necessary
information to the
management in the
process of its
planning, controlling,
and performance
evaluation, and
decision-making.

Cost accounting
system uses
quantitative cost data
that can be measured

Management
accounting uses both
quantitative and
qualitative data. It

Conti..
3

Determination of
cost and cost
control are the
primary roles of
cost accounting.

Efficient and
effective
performance of a
concern is the
primary role of
management
accounting.

Success of cost
accounting does not
depend upon
management
accounting system.

Success of
management
accounting depends
on sound financial
accounting system
and cost accounting
systems of a concern.

Cost-related data as
Management
obtained from
accounting is based
financial accounting is on the data as

Conti
7

Cost accounting
reports are useful
to the management
as well as the
shareholders and
creditors of a
concern.

Management
accounting
prepares reports
exclusively meant
for the
management.

Only cost accounting

principles are used in
it.

Principals of cost
accounting and
financial accounting
are used in
management
accounting.

Statutory audit of cost No statutory

accounting reports
requirement of audit
are necessary in some for reports.
cases, especially big

Conti..
10

Cost accounting is
restricted to costrelated data.

Management
accounting uses
financial
accounting data as
well as cost
accounting data.

Methods of Costing
Job Order Costing In this case the cost of each job is ascertained
separately, applies where work is undertaken to customers special
requirements like motor workshop, printing press etc.
Batch Costing- A batch may represent a number of small orders passed through
factory in each batch. Each batch here is treated as a unit of cost and thus
separately coasted. Here cost per unit is determined by dividing the cost of the
batch by the number of units produced in the batch.

Conti
Contract Costing- Here the cost of each

contract is ascertained separately. It is

suitable for firms engaged in the construction
of bridges, roads, buildings etc.
Process Costing- Here the cost of
completing each stage of work is ascertained,
like cost of making pulp and cost of making
paper from pulp.
Operating Costing- It is used in the case of
concerns rendering services like transport,
supply of water, retail trade etc.

Cost Concepts
A cost is composed of three elements, i.e

material, labour and expense. Each of these

Total
elements can be direct
o.r indirect
Cost

Indirect
Cost

Direct
Cost

D.
Material

[Link]

D.
Expenses

Ind.
Material

Ind.
Labou
r

Ind.
Expen
ses

Material Cost
It is the cost of commodities supplied to an

undertaking.
It includes cost of procurement, freight inward
etc. directly attributable to the acquisition.
It is of two types
A) Direct Material
B) Indirect Material

Direct Material
Direct Material Cost is that cost which

can be conveniently identified with and

allocated to cost units. Direct materials
generally become a part of the finished
products.
For ex cotton used in a textile mill is a
direct material.

Indirect Materials
These are those materials which cannot

be conveniently identified with individual

cost units.
For ex- those items which do not
physically become a part of the finished
products like coal, lubricating oil, grease

Labour Cost
This is the cost of remuneration of the

employees of the undertaking.

It is of two types :A) Direct Labour
B)Indirect Labour

Direct Labour
Direct labour cost consists of wages paid to

the workers directly engaged in converting raw

materials into finished product. These wages
can be continently identified with a particular
product, job or process

Indirect Labour
It cannot be convinently identified

with a particular cost unit. In other

words, indirect labour is not directly
engaged in the production operations
but only to assist or help in
production operations.

Expenses
All cost other than material and

labour are termed as expenses. It is

defined as the cost of services
provided to an undertaking and the
notional cost of the use of owned
assets.

Direct Expenses
Direct expenses are those expenses

which can be identified with and allocated

to cost centres or units.
For eg.- Hire of special Plant for a particular

job, cost of patent rights, royalty paid in

mining.

Indirect Expenses
All indirect costs, other than indirect materials

and indirect labour cost, are termed as indirect

expenses. These cannot be directly identified
with a particular job, process and are common
to cost units .
For

e.g. Rent
lightening etc.

and

rates,

depreciation,

Prime Cost
Direct material+ Direct Labour + Direct

expenses

Over Head
This is the aggregate of Indirect Material cost,

Indirect Labour and Indirect expenses.

Overheads are divided into three groups:a) Production overheads
b) Office and administration overheads
c) Selling and distribution overheads

Production Overheads
These are those overheads which are

concerned with the production function. They

include indirect materials, indirect wages and
indirect expenses.
Examples: Coal, oil, grease, stationery in

factory
Indirect Labour- Works Managers salary,
wages of factory Sweeper
Indirect Expenses- Factory rent, dep. of plant

Office and administration overhead

This is the indirect expenditure incurred in

general administrative function. These

overheads are general character and have no
direct connection with production or sales
activities.
Examples- stationery used in genera

administrative office , salary of office staff,

rent of office building, office lightening and
power.

Selling and Distribution Expenses

Selling overhead is the cost of promoting

sales and retaining customers. It includes

expenditure incurred from the time to time
the product is completed until it reaches its
destination.
Example- Packaging material, catalogues,
salary of sales manager, salary of sales office
staff, advertising, travelling expenses etc.

COST- SHEET
It is a statement which is prepared

periodically to provide detailed cost of a cost

centre. A cost sheet not only shows total cost
but also the various components of total cost.

Elements of cost
Prime cost

Overheads

Direct
Direct
Direct
Material labour expenses
Indirect

Indirect

Indirect
Material

Labour

Expenses

Factory
Overheads
o

Office &
administration
overheads

Selling & distribution

overheads

PROBLEM-1

1.

Calculate prime cost from the following

information:
Direct material - Rs. 40,000, Direct labour - Rs.
30,000 Direct expenses - Rs. 25.000

Solution: Prime cost = Direct Material + Direct

labour + Direct expenses

= Rs. 40,000
+ Rs.30, 000 + Rs. 25,000

= Rs. 95,000

2. Calculate prime cost from the following

information: Opening stock of raw material = Rs. 12,500
Purchased raw material = Rs. 75,000
Expenses incurred on raw material = Rs.
5,000
Closing stock of raw material = Rs. 22,500
Wages Rs. 47,600 Direct expenses Rs.
23,400

Calculation of raw material consumed:Raw material consumed = Opening stock of material + purchases

of Raw material + expenses incurred on raw material - closing

stock of raw material

= Rs 12,500 + Rs 75,000 + Rs 5,000 Rs 22,500

= Rs. 92,500 Rs 22,500
= Rs. 70,000

Prime cost = Raw material consumed + Direct labour + Direct

expenses
= Rs 70,000 + Rs 47,600 + Rs 23,400
= Rs 1, 41,000

4. Calculate works cost or factory cost from the following

details:

Raw material consumed

= Rs 50,000

Direct wages
= Rs20, 000

Direct expenses = Rs 10,000

Factory expenses 80% of direct wages

Opening stock of work in progress = Rs 15,000

Closing stock of work in progress = Rs 21,000

Calculate cost of production from the following

information: Raw material purchased = Rs 42,500

Freight paid
= Rs 5,000
Labour charges
= Rs 12,500
Direct expenses
= Rs 10,000
Factory overhead 80% of Direct labour charges
Administrative overhead = 10% of work cost

Opening stock Closing stock

Raw material 8,000 10,000
Work in progress 7,500 9,000

[Link] cost sheet from the following particular in the book of B. M.

Rehman
Raw material purchased = Rs. 1, 20,000
Paid freight charges
= Rs 10,000
Wages paid to laborers = Rs 35,000
Directly chargeable expenses = Rs 25,000
Factory on cost = 20% of prime cost
General and administrative expenses = 4% of factory cost
Selling and distribution expenses = 5% of production cost
Profit 20% on sales
Opening stock Closing stock
Raw material 15,000 20,000
Work in progress 17,500 24,000
Finished goods 20,000 27,500

[Link] cost sheet in the book of M. B. Rehman from the following particulars.

Opening stock: - Raw material = Rs 5,000

Finished goods = Rs 4,000
Closing stock: -Raw material = Rs 4,000
Finished goods = Rs 5,000
Raw material purchased = Rs 50,000
Wages paid to laboures = Rs 20,000
Chargeable expenses = Rs 2,000
Rent and Taxes = Rs 7,400
Power = Rs 3,000
Experimental expenses = Rs 600
Sale of wastage of material= Rs 200
Office management salary = Rs 4,000
Office printing & stationery = Rs 200
Salaries to salesman = Rs 2,000
Commission to traveling agents = Rs 1,000
Sales= Rs 1, 00,000

7. The cost of sale of production A is made up as follows:

Material used in manufacturing Rs 5,500
Material used in packing material Rs 1,000
Material used in selling the product
Rs 150
Material used in the factory Rs 175
Material used in the office Rs 125
Labour required in production Rs 1,000
Labour required for supervision in factory
Rs 200
Expenses direct factory
Rs 500
Expenses indirect factory Rs 100
Expenses office Rs 125
Depreciation of office building Rs 75
Depreciation on factory plantRs 175
Selling expenses Rs 350
Freight on material Rs 500
Advertising Rs 125

Assuming that all products manufactured and sold, what should be the selling price be fixed to obtain
a profit of 20% on selling price.

8. The following inventory data relate to Nazia Ltd.

Inventories
Opening Closing
Finish goods Rs 1,100 Rs 950
Work in progress Rs 700 Rs 800
Raw materials Rs 900 Rs 950

Additional information:Cost of goods available for sales = Rs 6840

Total goods processed during the period = Rs 6540
Factory on cost
= Rs 1670
Direct material used
= Rs 1930

Requirements:determine raw material purchase

determine the direct labour and cost incurred
determine the cost of goods sold

Mr. Zia furnishes the following data related to the manufacture of a

standard product during the month of August 2008

Raw material consumed - Rs 15,000

Direct labour - Rs 5,000
Machine hours worked
- Rs 900
Machine hour rate - Rs 5
Administration overheads = 20% of works cost
Selling overheads - Rs 0.50 per unit
Unit produced - Rs 17,100
Unit sold - 16,000 @ Rs 4 per unit

You are required to prepare a cost sheet from the above showing:The cost per unit
Cost per unit sold and profit for the period

Practical problems (Short Answers)

1. Opening stock of raw material - Rs 15,000

Closing stock of raw material - Rs 20,000
Material purchased
- Rs 1, 20,000
Find raw material consumed
(Ans. 1, 15,000)

2. Raw material consumed

- Rs 1, 02,000
Raw material for consumption - Rs 1, 10,000
Raw material purchased
- Rs 1, 00,000
Find opening & closing stock of raw material (Ans. Rs 10,000

and Rs 8,000)

3. Prime cost
- Rs 1, 85,000
Current manufacturing cost
- Rs 2, 22,000
Total goods processed during the period
- Rs 2, 39,500
Works cost- Rs 2, 15,000
Find factory overheads, opening and closing stock of work in progress
(Ans. Rs 37,000, Rs 17,500 and Rs 24,000)

4. Cost of production - Rs 11,206

Goods available for sales - Rs 12,206
Cost of goods sold - Rs 10,831
Cost of Sales - Rs 11, 391
Sales - Rs 12,000
Find opening and closing stock of finished goods, selling expenses and
profit or loss (Ans. Rs 1,000, Rs 1,375, Rs 560 and Rs 609 profit)

5. Direct material consumed - Rs 60,000

Direct labour 50% of material consumed
Direct expenses
- 33/% of direct labour
Factory overheads - 40% of direct labour
Office overheads - on cost 66/% of works
Find office cost (Ans. Rs 1, 20,000)