INTRODUCTION TO COST/MANAGEMENT ACCOUNTING

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INTRODUCTION TO COST/MANAGEMENT ACCOUNTING
Financial Accounting is mainly concerned with the
stewardship function of a business that is,
accounting for what has happened over the past
financial year and reporting that information to
shareholders and other users of accounting
information.
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• The main job of the financial accountant is to
  record all the financial transactions which
  affect the business and these duties include
• setting up book-keeping/record keeping systems
  to record the income and expenditure of a
  business.
• keeping a record of the businesss assets and
  liabilities.
• preparing the final accounts of a business
  Trading and Profit and Loss Account and a Balance
  Sheet.
• preparing tax figures.

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DISADVANTAGES OF FINANCIAL ACCOUNTING?

• The main limitations of Financial Accounting from
  managements point of view is that the
  information provided by Financial Accounting is
• out of date for management purposes
• not detailed enough for management
• not suitable for
• Planning
• decision making
• controlling costs

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The Cost and Management Accountant, on the other
hand, is mainly concerned with providing
information to assist management make better
informed decisions and to help them plan ahead
and to control the costs of the business.

• In general, the Cost and Management Accountant is
  mainly concerned with providing management with
  internal information to enable them to
• plan for the future
• make decisions
• control costs

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• The main duties of the Cost Accountant are
• classifying costs that is, deciding whether
  costs relate to materials, labour or overheads.
• working out the final cost a job/product/service
  in order to determine the price to be charged to
  the customer.
• providing detailed analysis of costs to help
  management make better informed decisions.
• preparing budgets of future requirements for
  materials, labour and overheads in order to meet
  planned sales and production targets.

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ADVANTAGES OF COST ACCOUNTING

• The main advantage of Cost Accounting is that it
  provides detailed, up-to-date information to help
  management make decisions and control costs.

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PLANNING OR BUDGETING

• Cost Accounting helps management plan for the
  future in terms of estimating
• future sales
• future production targets
• future material requirements
• future labour requirements
• future cash flows
• future profits

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DECISION MAKING

• Cost Accounting helps management to make better
  informed decisions as to whether to
• make or buy in component parts
• continue or discontinue producing a loss-making
  product
• accept or reject a special order at below the
  normal selling price
• invest in expensive new plant and machinery

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CONTROLLING COSTS

• Cost Accounting helps management to control costs
  by allowing them to
• compare actual cost with budgeted costs
• assign responsibility for the control of costs to
  individuals and departments

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PRICING

• Cost Accounting helps management to ascertain the
  costs of a job/product/service in order to
• determine the final selling price to be charged
  to the customer
• submit tenders for contracts

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CLASSIFICATION OF COSTS

• There are three elements of cost
• materials,
• labour and
• overheads.

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Materials, Labour and Overheads

• Materials are the natural resources that go into
  the making of any product, for example wood for a
  table, wool for a coat, flour for bread.
• Labour is the human resource that is essential
  for the production of any article and is rewarded
  with wages and salaries.
• As well as materials and labour, other expenses
  are incurred in production and these are
  generally known as overheads, for example
  electricity, rates and cleaning.

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Fixed Costs and Variable Costs

• Fixed costs are not affected by changes in the
  level of production. If output rises, the cost
  does not go up if output falls the cost does not
  go down, for example rent
• Variable costs are those which change along with
  a change in the level of production, for example
  the cost of the wood for a table. When
  production increases, the cost rises and when
  production falls, the cost decreases.

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Semi-Variable Costs

• Several costs cannot be placed in either category
  and are classified as semi-variable costs. These
  costs, for example electricity, gas and telephone
  charges, usually have a standing charge which is
  fixed and to this is added a variable charge
  which varies with usage.

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Direct Costs

• Direct costs are those which can be traced to the
  product being made, for example the wood for a
  table or the cloth for a jacket.

Direct materials
Direct wages
Direct expenses
Prime Costs
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Indirect Costs

• Indirect costs are the other costs, also known as
  overheads, that arise but cannot be readily
  identified with a particular product, for example
  heating, cleaning and supervision.

Prime Cost
Factory Overheads
Cost of Production
Cost of Production
Selling and Administration Overheads
Total Costs