Management And Cost Accounting Theory Essay

1026 words - 5 pages


What is Accounting?

• Need for Accounting –
o Increased global trade,
o Rise in the complexities of business,
o Large scale, due to Industrial Revolution
• Father of double entry system of accounting – Luca di Bargo Pacioli (Italy, 1494)
• Accounting can be defined as recording, classifying, summarizing, analyzing and interpreting the business transactions.
• The function of accounting is to report to the owners, managers - at regular intervals, about the performance of the entity.
• Accounting facilitates planning & controlling the operations of the business.
• Based on the functions discussed earlier, ...view middle of the document...

✓ Cost sheets analysis
✓ Material costs
✓ Overheads costs
✓ Marginal Costing
✓ Break-even Analysis
✓ Budgetary Control
✓ Standard Costing


What is a Cost?

➢ ‘Cost’ is a loss of resources for achieving certain objectives or benefits/ advantages.
➢ ‘Cost’ is the amount of expense (actual or notional) incurred or attributable to a specified article product or activity.
➢ ‘Cost’ is always related to a particular object, i.e. difficult to assess any cost in isolation. E.g. – cost of 1 apple, ticket cost, exam fees etc.

Costing, Cost Accounting and Cost Accountancy

➢ ‘Costing’ is the technique and process of cost ascertainment.
➢ ‘Cost Accounting’ is the collection and recording of costs and preparation of periodical reports.
➢ ‘Cost Accountancy’ is the application of costing and cost accounting principles, methods and techniques for the purpose of managerial decision making.

Objectives of Cost Accounting
o Ascertainment of costs
o Fixing selling price
o Profitability analysis
o Cost control & cost reduction
o Ascertainment of profits of activities
o Assisting management in decision making
o Variance analysis (actual vs. budgeted)
o Measuring use of resources

Cost Concepts & Terminology

• Cost Object – anything for which a separate measurement of cost is desired. E.g. a product, a service, a project, a brand etc.
• Cost Unit – it is a unit of product, service or time in relation to which costs are ascertained/ expressed. E.g. cost per km, cost per litre etc.
• Cost Centre – it is defined as a location, person or an item for which costs may be ascertained for the purpose of cost control. For e.g. library (impersonal) and librarian (personal)
• Direct Cost – costs which can be directly related or allocated to an activity, cost unit, cost centre. E.g. raw material, labour cost in prodn.
• Indirect Cost – costs that cannot be directly linked or allocated to a cost unit, cost centre. E.g. consumables, driver salary in production.
• Opportunity Cost – value of sacrifice made or a benefit foregone by accepting an alternative course of action. E.g. land used for commercial property, & residential development foregone.
• Out-of-pocket cost – costs involving actual cash outflows. Mainly a short-run concept, used in determination of selling price.
• Product Cost – costs that are associated with purchase/ production/ sale of material. E.g. material, labour, transport etc. (variable costs)
• Period Cost – costs that are not associated with a product, but are incurred for a specific period. Costs are irrespective of actual activity. For e.g. electricity, rent etc. (fixed costs)
• Sunk Cost – costs that are incurred in the past (historical costs). Not useful in decision making in the current period.
• Relevant Cost – costs that are affected by management...

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