Cost & Management
Accounting (CMA)
Rachappa Shette,
Associate Professor, IIM Kozhikode
Faculty Block 3/2
rachappa.s@[Link]
Phone: 0495-2809 422
Cost and Management
Accounting: Course Objective
[Link] impart the skills of cost
ascertainment.
[Link] impart the skills of identification of
relevant cost for better managerial
decision making.
[Link] provide the students an exposure with
cost control.
Teaching pedagogy
• Lectures
• Simple problems
• Case analysis and Discussion
Mode of Assessment
• Quizzes -
20%
• Term End Test - 60%
• Assignments & Class Participation - 20%
Course Book
Cost Accounting: With Integrated Data Analytics
By
Karen Congo Farmer & Amy Fredin,
Wiley Publication
Additional reading
1. Cost Accounting- A managerial emphasis by Charles T
Horgren, Srikant Datar and George Foster.
2. Accounting Simplified by Rachappa Shette, Penguine
Publications.
3. Management and Cost Accounting by Colin Drury.
4. Readings in Management Accounting by [Link] Young.
5. [Link]
6. [Link]
Flow of the Topics
Break-Even and
Cost concepts Methods of cost
Cost-Volume-
and cost Sheet ascertainment
Profit analysis
Relevant Cost control
Costing and and
decision performance
making evaluation
Objective of today’s session
1. To understand the CMA course structure
2. To shift the orientation of learning from
Financial Accounting to CMA
3. To understand the importance of CMA in
business management
4. Cost Classification
Accounting and its branches
Meaning of Accounting:
Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgments and decisions by users of the information.
Braches:
I. Financial Accounting (FA)
II. Cost Accounting (CA)
III. Management Accounting (MA)
Financial Accounting
“Financial Accounting involves recording
and classifying business transactions and
preparing summaries of the same for
determining year end profit or loss and the
financial position of the concern”.
Users of financial accounting
1. Shareholders
2. Bankers
3. Suppliers
4. Clients
5. Bondholders holders
6. Equity analysts
7. Credit analysts
8. Regulators,
9. Managers, etc.
Practical Problems of FA
1. Recording transactions at historical cost
2. Not timely (Prepared once in a year)
3. Historical information
4. No information about the value of human resources
5. Personal bias
6. Records only quantitative information
7. Chance of manipulation
8. Comprehensive and Difficulty in understanding
9. No information of a specific Brand, Product, Branch,
Department, Project, Client, Component, Activity,
Machine, Region, etc.
Cost Accounting (CA)
“Cost Accounting is the process of
identification and measurement of cost”.
Objective of CA:
- Accumulation of cost data
- Ascertainment of cost
- Cost control and cost reduction
Management Accounting
“ Management Accounting is the process
within an organization that provides
information used by an organization’s
managers in planning, implementing, and
controlling the organization’s activities”
FA Vs CMA
1. Main objective
2. Primary Users
3. Rules of Measurement and reporting
4. Report frequency
Role of Cost & Management
Accountant (CMA)
• Scorekeeping role:
– How are we doing?
• Attention directing role:
– What opportunities and problems should
managers focus on?
• Problem solving role:
– Of the several alternatives available, which is
the best?
Managerial Decisions
Manufacturing related decisions:
– Make or not make a component
– Best product mix
– Best allocation of limited machine hours
– Best allocation of limited labor hours
– Best allocation of limited quantity of raw
material
– Continue or discontinue a product
– Outsourcing or insourcing decisions
Managerial Decisions
Sales related decisions:
– Own sales men Vs Outside sales agents
(Banks)
– Fixed salary Vs Commission Vs Combined
– Advertisement Budget
– Pricing Decision (cost Vs competitors)
– Pricing special orders
– Pricing for internal customers
– Accept or reject a special order
Managerial Decisions
Finance related decisions:
– Evaluation of projects related to expansion,
diversification,
– Modernization, etc.
– Break-even analysis
– Profit analysis
Managerial Decisions
• HR related decision
– Structure of the salary etc.
– Performance evaluation
Be data literate – Peter F. Drucker
(The Wall Street Journal, Dec 3, 1992)
• What information do I need to make decisions.
• How do I obtain the information
• How do I combine the information with existing
information to make a good decision.
• How do I bring existing data bases and
accounting systems together
• What information do I owe? To whom? When? In
what form?
Summary of Introduction to CMA
Measure costs right
and
make right decisions
Cost Terms
• Cost is a resource sacrificed or forgone to achieve a
specific objective
• Cost is a measurement, in monetary terms, of the
amount of resources used for the purpose of production
of goods and services.
• A cost object is anything for which a separate
measurement of costs is desired
– Product
– Service
– Project
– Customer
– Department
Cost Classification (1/6)
• Nature of cost
– Material
– Labor and
– others
Cost Classification (2/6)
• Cost behavior
– Variable cost: A variable cost changes in
total in proportion to changes in the total
volume.
– Fixed cost: A fixed cost remains unchanged
in total for a given time period, despite wide
changes in the total volume.
– Semi-variable cost: Semi-variable costs are
those costs with both a fixed and variable
component.
Cost Classification (3/6)
• Relation to cost object (Cost Traceability):
– Direct cost: Direct costs are related to the
particular cost object and can be traced to it in
an economically feasible way.
– Indirect cost: Indirect costs are related to the
particular cost object but cannot be traced to it
in an economically feasible way.
Cost Classification
Direct
Variable Fixed
Indirect
Cost Classification
Cost Object: Nano Car Produced
Direct Cost Indirect Cost
Variable Cost Tires used in Power costs at
assembly of Nano plant. Power
car usage is metered
only to the plant,
where multiple
products are
assembled
Fixed Cost Salary of Annual lease costs
supervisor on of land and
Nano assembly building. Lease is
line for whole plant.
Cost Classification (4/6)
• Functions / activites:
– Production
– Administration
– Selling
– Distribution
– Research and Development
Cost Classification (5/6)
• Management decision making:
– Marginal cost
– Opportunity cost
– Relevant cost
– Differential cost
– Sunk costs
– Normal cost
– Abnormal cost
– Avoidable cost
– Un-avoidable cost
– Prime cost
Other costs (6/6)
• Historical cost or actual costs
• Standard cost
• Process cost
• Batch cost
• Joint cost
• Inventoriable cost
• Period cost
Group activity
• Three Dog Bakery Case
Summary of today’s session
1. To understand the Cost & Management
Accounting (CMA) course structure
2. To shift the orientation of learning from
Financial Accounting to CMA
3. To understand the importance of CMA in
business management
4. Cost Classification
Reading
• Chapter 1 & 2 of prescribed text book.