1

COST AND MANAGEMENT ACCOUNTING

“A STUDY ON TECHNIQUE OF COST USED IN

MANUFACTURING UNIT”

PROJECT

Submitted by

S ABHISHEK
Reg. No. BC0190002

Submitted to
Dr T .S. AGILLA
Assistant Professor of Law

TAMIL NADU NATIONAL LAW UNIVERSITY

(A State University established by Act No. 9 of 2012)
Tiruchirappalli
Tamil Nadu – 620 027
MAY – 2021

S ABHISHEK
2

Reg. No. BC0190002

II Year – B.com.LL.B. (Hons.)

Tamil Nadu National Law University

Tiruchirappalli

Tamil Nadu – 620 027”

DECLARATION

“I ABHISHEK S, Register Number BC0190002, hereby declare that this Research Paper /
Research Project work “A STUDY ON TECHNIQUE OF COST USED IN
MANUFACTURING UNIT ” has been originally carried out me under the guidance and
supervision of Dr.T.S AGILLA, Assistant Professor of Law Tamil Nadu National Law
University, Tiruchirappalli - 620 027. This work has not been submitted either in whole or in
part of any Degree / Diploma at any University.”

. Place : Tiruchirappalli

Date : 20/05/2021

ABHISHEK S

ACKNOWLEDGEMENT
3

“At the outset, I take this opportunity to thank my Professor Dr T.S. AGILLA, from the
bottom of my heart who has been of immense help during moments of anxiety and torpidity
while the project was taking its crucial shape.

Secondly, I convey my deepest regards to the Vice Chancellor Prof. (DR.) V.S. ELIZABETH
and the administrative staff of TNNLU who held the project in high esteem by providing
reliable information in the form of library infrastructure and database connections in times of
need.

Thirdly, the contribution made by my parents and friends by foregoing their precious time is
unforgettable and highly solicited. Their valuable advice and timely supervision paved the
way for the successful completion of this project. Finally, I thank the Almighty who gave me
the courage and stamina to confront all hurdles during the making of this project. Words
aren’t sufficient to acknowledge the tremendous contributions of various people involved in
this project, as I know ‘Words are Poor Comforters’. I once again wholeheartedly and
earnestly thank all the people who were involved directly or indirectly during this project
making which helped me to come out with flying colours”.

S ABHISHEK
4

TABLE OF CONTENTS:

TABLE OF CONTENTS
CONTENT Page.no.
RESEARCH DESIGN: INTRODUCTION 5
RESEARCH  OBJECTIVE 6

RESEARCH METHODOLOGY     6

THEORITICAL PART: CHAPTER1: THE TYPES OF COSTING     7

TECHNIQUES USED IN MANUFACURING INDUSTRY
ILLUSTRATION: CHAPTER 2 : THE THEOREY OF COSTING IN     8
MANUFACTURING SECTORS:
 FINDINGS AND SUGESSTIONS    9

CONCLUSION       13

BIBLIOGRAPHY       15

RESEARCH DESIGN:
INTRODUCTION:
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This research paper will have the critical study about the cost techniques that are used to
determine the cost of the products produced in the manufacturing unit sector of work and the
nature of costing will mainly be studied. The tricky part of a manufacturing is determining
the proper product mix and pricing. In order to optimize profits, it is important to keep tabs
on inventory, production costs, and net income. The costing system gives these parameters
the power to be effectively monitored. The cost methodologies used in production processes
help companies figure out the value of all the production inputs and outputs. If you know
how to implement the right costing approaches in manufacturing, you can have a better
handle on how to make decisions about output levels, pricing strategies, potential spending,
and so forth. Cost accounting is used to describe all the various expenses, both contingent and
fixed, incurred in the course of production. It will initially gather and report all these
production costs, before calculating and comparing results to future business decisions.
Below are listed are some of the factors involved in cost accounting. The monetary as well as
non-financial knowledge framework is present in every company because information is
crucial to the money-making and resource-gathering process. The use of management
accounting data has allowed managers to use a range of other functions, including strategy
design, R&D, budgeting, and pricing. Many cost accounting techniques arose in the course of
the introduction of industrialization. Another phase of the economic cycle emerged as
manufacturing came to the fore and replaced the days of agri-business. Commentary: Wawa
points out that during the industrialization, companies parted from their management, short-
out staffing, and emerging railways implemented higher costs per ton, cost per mile, as well
as other steps such as operating expenses divided by sales. United States corporate
development has been linked to accurate cost and operational data serving to the needs of the
growth of transportation, manufacturing, and distribution organizations from the period of
1850 to the early 1900s According to Kaplan, internal planning and control was essential for
large firms like textile mills and railroads as early as early as the 1800s, when they realized
they had to manage various production and delivery processes (utilization of raw materials). 1
Operating costs are assigned to a single, such as the amount of time in the day spent on a
computer. In terms of ABC, analyses of activities are used to find acceptable costs. The
outcomes of these kinds of experiments lead to better analysis of the cost and profitability of
a particular services and goods. for example, cost accountants may issue an ABC may hire
people on the production line and ask them to make a time allocation survey in order to show

1
Kaplan RS (1984) The Evolution of Management Accounting. The
Accounting Review, 59(3):390-418.
6

which activities take up their time. Their expenses only apply to the products or services that
have used the resources. This provides the management with an accurate view of the time and
money invested.2 If you take the business as an example, let's say that it is in the process of
producing both trinkets and widgets. The development of trinkets is demanding, as they
necessitate a lot of manual labor on the workers. The manufacture of widgets generally
consists of supplying raw materials to a machine and waiting for it to finish its task for
several hours for the finished product. I didn't see any point in allocating overhead to both
items. The time use for the trinkets was minimal. Labor is burdened with trinkets, while
computer use is burdened with overhead. This project will study about the costing techniques
in the used in the manufacturing unit and it seek the matter.

RESEARCH OBJECTIVE:

This main objective of the research is to:

 To study about the costing techniques and understand them.

 To study what are the different methods of cost accounting that used in the
manufacturing unit
 To study about the nature of manufacturing unit and its product for modes of costing.

RESEARCH METHODOLOGY:

This is a practical based empirical project and is a descriptive-analytical essay that is mainly
based on a critical study. It is heavily reliant on secondary and electronic data sources. Books
and other references as directed with the scope of digital media and official secondary data
helpful in completing this project.

THEORITICAL PART:

2
Banker RD, Datar SM, Kemerer L (1991) A model to evaluate
variables impacting the productivity of software maintenance.
Journal of Management Science, 37(1):1-18.
7

CHAPTER1: THE TYPES OF COSTING TECHNIQUES USED IN

MANUFACURING INDUSTRY

There in the manufacturing environments employ a methodologies are based on a cost- and
pricing theory. The two most critical variables in finding manufacturing costs are: the waste
cost and the reuse factor. If you are inventory cost and inventorying something, you are
costing it.

 included in inventory: The raw materials, which a business works on and distributes,
and those that are sold to consumers. In a company, the inventory's value is counted
as an asset for accounting purposes and thus has a direct influence on the price of
products sold and the net profits. In the production, there are several ways to account
for costs that are already in the inventory:
 First-in, First-out (FIFO) lists the costs of inventories in chronological order. An
example of a business that prefers the FIFO inventory management system is
restaurants and other food-processing businesses. Because products have a sell-by
date, the oldest products need to be offered for sale first.
 The LIFO method “that This method determines the price of inventories under the
assumption that the last item of inventory purchased is the first one sold.”
 Inventory averaging or weighed average is the most widely used in industries
where inventories are accumulated or mixed, such as chemicals, for example. The
ACU approach looks at the cost per unit after each purchase.
 Estimating or specific indication – This specifies the cost of each component used
in the production or the total price of products or services. An alternative to this
approach is useful for businesses that buy pricey goods. the product too expensive
most important of all.

Then the costing based on the product also matters as

The approach to product costing includes evaluation of all the different facets of
production, as well as estimating the overall product cost. there are various
Manufacturing strategies include the following:

Job costing incorporates all of the relevant costs, including supplies, labour, and assigns
them to a method to calculate the final cost. make-to-to-order environments depend on
this form of costing.
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Standard costing is the Manufacturing activities use one of the most frequently found
costing methods. also costs and output "standards" which are defined for production and
inventory

ABC costing :This approach guides an organization's capital and its use to comply with
the costs of the company's goods and services. Indirect costs are included in direct costs
to increase pricing decisions.

Direct costing: direct costs only include variable expenses (i.e. costs that increase or
decrease proportionally with production output). Fixed costs are not considered.

Target costing: Target's approach to pricing is more forward-looking than the others. It
aims to assess potential costs and what effect they will have on profitability and product
pricing, but not just product costs at the present.”3

To decide on the best cost model, apply a cost-benefit analysis. Even though you will know a
lot about the financial details, it is necessary to calculate the return on your investments so
that you can receive the desired return. For companies that only manufacture a small-
quantities of goods, such as bakeries, this information is more up to date if they make them as
they're ordered, current pricing information is crucial. Historical cost estimates will likely
result, though direct cost estimates are inappropriate. To manufacturers that offer a large
variety of goods or products, ABC costing is difficult because it relies on manufacturing
costs. Every pricing approach has advantages. These methods may be suitable for
manufacturing but may not be suitable for long-term decision making. It has become clear
that there are a number of costing methods that result in considerable differences in costs, but
at the moment it is not necessary to use one approach to the exclusion of others. The primary
focus of this solution is on conventional cost and revenue management, but it uses innovative
revenue streams as well. They apply multiple-costing disciplines in order to their pricing
decisions. Use the full range of costing features to inform pricing decisions.”4

ILLUSTRATIONS:

3
garaminfotech.com/blogs/2018/costing-techniques-for-your-manufacturing-industry
4
nvestopedia.com/terms/c/cost-accounting.asp
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THE THEOREY OF COSTING IN MANUFACTURING SECTORS:

based on a case study by japan manufacturing units

The main aim is to give my own theories and cost accounting techniques Reflective;
conciseness .An analysis of organizational behavior takes account of the many variables such
as technology, culture, and the outside world to explain how it affects the organizational
design and execution of projects. ‘The key principle of the essence of contingency theory is
that the essence of best practices depends on contingencies. When you ask a contingency
theorist for an answer, the usual response is that it depends on various factors. Contingency
as used in philosophy and direct implementation are almost the same. An asymmetry between
two phenomena that makes a contingency. Thus, if there is one phenomenon, one might
conclude about another. Contingency theory has been used in many ways in accounting and
has come from different sources. found that fiscal, technical, and sociological aspects of
budgeting all played a major role in that system's workings Banker Datar and Kemerer
examined the extent to which contingency management systems and just-in-in-time or other
services affect shopfloor procedures. Shield and Nakagawa note that the disagreement over
the use of GAAP exists because of the divergent purposes and accounting training paths of
the GAAP professionals Direct labour is used in the United States to offset manufacturing
costs, while Japanese companies claim that this distribution does not distort the product cost,
but they still use it because they see it as a means to enable better productivity and tech
performance. 90% of the accountants in the U.S. are educated in colleges, and spend the next
ten to fifteen years as part of an accounting function rotation Some of them are assigned to an
accounting training programme that lasts for a period of six months or a year, during which
they will be placed in house with an accountant who works with them. Typically, after a
considerable experience in the accounting department, these individuals move on to the
general manager's position. cost-plus-analysis There are several traditional costing methods,
including standard costing, absorption costing, and market costing. But in today's world, the
conventional methods have been lambasted for their ineffectiveness. The newer approaches
proposed by modern accounting advocate include Activity-Based Costing (ABC), Life Cycle
Costing, and Just-in-Time accounting. A excessive costs (Overutilization). CIMA
terminology defines standard costing as "comparing real costs to preset requirements so as an
approach that facilitates regulation by exception". VAR, or the methodology that relies on the
use of variance analysis principles for cost and revenue management Once costs are set on a
scientific basis, they are measured against the benchmark in a short time period of time.
10

Recurrent variances are analysed and appropriate action is taken to put them in place to
maintain performance. The costs concerned with regulating are based on the Küçova
standards standard costing is typically applied in industries where uniformity is essential,
such as petroleum, pharmaceutical, and food manufacturing, and also in a few restaurants and
eateries where food is produced on an intermittent basis, including canned fruit and
vegetables. One of the greatest weaknesses of conventional costing is that it can't be applied
to the non-manufacturing market. In other words, many service and nonprofit organisations,
regular costing is also applies However, academic researchers have challenged the use of this
methodology, stating that it has had lost its relevancy. As in, for instance, Johnson and
Kaplan contend that traditional costing is not suitable for the extremely global and
increasingly competitive environment in which we live today, they argue that it should be
abandoned. Drury (2009) has noted that modern businesses are challenging the accuracy of
standard costing because of their rapidly evolving cost structures, and standard methods do
not adequately measure the total labour required, among other things. Standard costing is also
burdened by its emphasis on direct labour, which can often result in delaying the process of
reporting, according to our experience. Also in spite of how dramatically the market climate
has changed, techniques such as standardising processes and documentation remain valuable;
the patient's journey The absorption approach also known as the full costing counts all
manufacturing costs as variable costs even though they are set. It is an accepted accounting
theory that for external users of funds that accountancy rules should be applied when
producing financial statements (Hoare). Absorption costing is the best method of calculating
pricing as it ensures all costs are covered, it helps in reporting, and applies the matching
principle, and so is appropriate for use in valuing assets, as well as financial statements.
While conventional absorption costing may be of limited use in a manufacturing environment
where direct labour costs are the main contributors to cost, ICAN notes that "Traditional cost
accounting probably isn't valuable because processes are very automated and overhead costs
are significantly higher." affordable use of resources Presenting data in terms of variable and
fixed costs separately is also known as 'marginal' costing. princorporate thinking concentrates
emphasis on certain changes resulting from the decision If used for Make or Rejecting or
accepted orders, it may help short-of-term decisions such as abandoning a line of business or
outsourcing. On-till-distribution just-in-in-time framework is a known methodology for
working Just-in-in-time is a development system (JIT), which is focused on shortening both
supply chain response and product delivery times. According to many sources, the JIT is
mainly migrated to the Western industry in the 1980s as a result of its origins in Japan. In
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general, Ohno Tai is credited as the creator of this method of working A method was
popularised after the introduction of Toyota Several organisations have assigned the
nomenclature "short-cycle manufacturing" to the method Demand-flow manufacturing by
IBM and continuous-flow manufacturing The broad application of the 1980s of the term JIT
manufacturing is a matter of historical note, but since then, lean manufacturing has come to
dominate. The Toyota Production System (TPS) has been and Lean Manufacturing (LM)
generally accepted as synonymous. Many manufacturing processes have undergone a process
known as "just-in-in-time" or JIT have been used for decades. Adoption of JIT has proven to
be successful in developing countries. In a just-in-in-time scheme, the manufacturer must
keep the goods at the factory to keep prices down, and as a result, would receive very limited
inventories of materials. JIT (Just-In-In-Time) is based on the premise of push processing,
which gets rid of the inventory completely. A JIT theory relies on the basic principle that
everything should be done as quickly as possible whenever possible in a system unless there
is a need for it. The three terms Duclos, and Luminus believe that the JIT concept can be
applied to any type of company, not just manufacturing firms, but banks, insurance
companies, and hotels. Anderson, Cantel, Rosen, and Rosen and Anderson also claim that JIT
can be used in service organisations. a Just-in-time strategy is more concerned with process
than with product or "As in the automotive, so in service-oriented industries." activities-based
costing The ABC strategy was established in the late 'mid 1980s' by Prof. Robin Cooper (a
cost engineer) (a professor of Management Accounting at Harvard University). It was
designed primarily to deal with the ambiguities associated with overconcentration. In the
beginning, it was a result of the misused American methodologies. The ABC technique was
created in the 1980s in the US. A sophisticated cost structure, which facilitates the allocation
of indirect costs, allows a refined allocation and identification of direct costs. He, or the ABC
Board's management, favours the use of smaller cost pools called "activities". Using cost
drivers, we allocate costs to goods or services based on these costs "customer information
management approach" Activity-based cost accounting is an approach to calculating the total
cost of the finished product by following the utilisation of resources and accounts for
projects. Based on previous work, we assign resources to each job according to when we
think it would be consumed. It is paid by the costs imposed on outputs, rather than by the
amount of money invested in it. The main reason why activity-based costing (ABC) is being
developed is due to the concepts of activity based costing (ABM). Robert Kaplan and
William Burns popularised the idea of ABC decades later. CIMA argues that Activity-Based
Costing and Inventory Management does away with the low-value tasks for consumers and
12

managers, while still reducing or avoiding any costs from arbitrary allocation of overhead.
However, the adoption of ABC is both time- and resource-intensive (Rojas and Media, nd). It
originated in the US, and diffused to other nations, as well as the manufacturing sector, as a
French and Japanese technique, but despite these disadvantages, many teachers maintain that
ABC systems are costly, difficult to modify, and time-consuming to implement compression-
For instance, among other brands, HendersenDee is one of the names of a Houston-based
manufacturer of roof awnings, which was derived from an initialism which started with the
letters A, B, C, and D. It took three days for the ABC programme to measure the costs for the
150 operations, orders, and approximately 10,000 line items for the company. targeting
CIMA for more variety and more short-term customer needs Costs started to decrease when
companies have realised that the majority of their costs were already allocated at the
conception level. Target has employed multidisciplinary approaches, such as process re-
refinement and total quality control since day one. The idea is to set a target cost equal to a
desired profit margin. The company's goal is to keep a business competitive in a very
dynamic market The tool was originally developed in the manufacturing sector, but this
capability has also been demonstrated in the service industry. “ as essential to service
companies as manufacturers The two most important elements are the needs of the consumer,
which have to be discovered, and the price or financial goals that you're trying to meet (since
limited resources are required). Its advantages include the ability to see the early stage of
product and service growth, to concentrate on the primary customers, and to bring in
specialists in several fields, in order to reduce costs. total cost analysis It's referred to as
"whole life costing" or "whole life costing," because the actions taken at purchase serve to
restrict the long-in-the-the-tooth. lifestyle or life-cycle costing is commonly used by firms
and governments (European Commission nd). The benefits of life cycle costing include;
better assessment of choices, better decision-making about future outcomes, better
anticipation of conditions, and increased knowledge of tradeoffs between success and
expense; on the negative side, greater forecasting and lack of data require more effort and
time. In the life cycle costing method, initial capital outlays or the acquisition of physical
assets are considered capital expenditures; the act of providing customers with service and
keeping them is an operational expenditure. A credit card or insurance company incurs start-
up costs due to the issuance of new policies, such as applications and in particular for new
clients, which takes time to recover. (throughput measurement) budgeting Maximizing
throughput while simultaneously retaining or decreasing operating costs is a critical function
of CIMA-managed distribution systems. Decision making and business management have a
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strong correlation with throughput accounting. It starts by identifying an organization's

mission - finding out what it wants to accomplish and goes on to assist them in the quest to
accomplish it by increasing the 'goals' of their organisation. Throughput (processing speed) is
the way to determine if an organisation is meeting its goals. For a non-profit entities, the
objective could be economical, but for commercial entities, the objective is profit.
Throughput accounting is a crucial in today's modern business practise, allowing managers to
quantify the profitability of constricted capital. It divorces itself from cost accounting as well.
Processing time, inventory, and operating cost all influence operating profit, according to the
ICAN. whereas in the variable costs are ‘included in the total cost' and in marginal costing,
the term ‘throughput contribution' is sometimes used which is synonymous with it meaning
‘marginal contribution'.”5

FINDINGS AND SUGESSTIONS:

Our aim is to learn manufacturing and service-sector cost accounting techniques. There have
been complaints for decades about traditional methods such as standard costing, absorption
costing, and marginal costing because of their inability to provide useful information in a
world of advanced technologies, global competition, and decreased employee demand.
Despite this, Absorption Costing and Fundamental and Applicable Cost still remain in use in
the industry. The new proposed strategies are 'Just in Time' accounting, Activity-Based
Costing, Life-Cycleaning accounting, Flush accounting, Cycle-Based Costing, Backlog
analysis, Activity-Based Costing, and Variable costing are all credited with successes. The
empirical evidence shows that JIT and target costing are predominantly found in Japanese
manufacturing and are much less common elsewhere. Ongoing empirical studies have
concluded that Just-in-in-Time (JIT), Activity-Based Costing (ABC), Life-Cycle Business
Model Expense (LCMC), and Throughput Accounting (KAIZ) are among the most
commonly used techniques in manufacturing The modern methodology in service-related
costs used by almost all Service Companies is Activity-Based Costing (ABC). decision-
making, budgeting techniques are commonly used in the service sector To be found in both
manufacturing and service firms, all three procedures known as Activity-Based, Budgetary,
and Control-Based budgeting are also. We employ various methods based on factors such as
culture, recent developments in technology, size of the company, and complexity of the
project. A firm's cost accounting approach is flexible because it's designed by them, so they

5
Nasieku Tabitha, Oluyinka Isaiah Ogungbade, “Cost Accounting Techniques Adopted by Manufacturing and
Service Industry within the Last Decade”, International Journal of Advances in Management and Economics
14

must adjust their methods to fit the particularities of their particular situation. Managers
understand that expenses can be modified, tailored, and deployed based on the evolving
requirements of the company. According to the FASB-driven financial accounting, only
insiders need to look into the books, and no one inside the company can do so. A specific
knowledge of management may set prices by analysing information that has economic value,
which impacts costs, revenue distribution, funding, and risk allocation. The Businesses
should use the costing strategies that are most appropriate for their particular area. For
instance, the degree of technical innovation, the company's size, the product's stage of
development, and the culture. Naturalistic studies should be conducted to improve cost and
control strategies. Businesses can follow only certain methods that have a realistic basis and
have been successfully implemented by their competitors.6

CONCLUSION:

The main aim of the study will be to study on the costing techniques and the and find out
which is more suitable and tangible for manufacturing unit, theoptimal costing model for
your company is a cost-benefit analysis. It is critical to balance the cost of accumulating
costing data, whether historical or future patterns, against the ease with which the approach
can be used to achieve the desired profit margin. Prior cost information is updated more
regularly for companies that manufacture a small number of goods or products that are
engineered/made-to-order. Since historical costs are reasonably reliable, work costing or
direct costing may be the appropriate approach. For companies that offer a broader range of
goods or mass produce similar products, determining Manufacturing Costs and specifically
associating them to a particular product is extremely difficult; thus, standard costing or ABC
costing is likely to be a better approach. Each of these manufacturing product costing
approaches has advantages that can aid in making correct pricing decisions. Each of these
approaches may be appropriate for a variety of production and decision environments; for
example, a costing approach optimised for incremental pricing decisions might not be
appropriate for long-term decision making. The method of costing used will result in
significant cost differences; however, in the modern era, it is not appropriate to choose one
technique over another. Highly Comprehensive and Effective Manufacturing Solution
combines conventional costing methodologies with hybrid functionality. These technologies

6
Hofstede GH (1983) The cultural relativity of organizational
practices and theories. Journal of International Business Studies,
14(2):75-89.
15

combine costing capabilities from various fields, enabling them to make accurate pricing
decisions. Choose a software solution that includes the required set of costing functionality /
features to assist you in making more informed pricing decisions.

BIBLIOGRAPHY

ARTICLES

 Nasieku Tabitha, Oluyinka Isaiah Ogungbade, “Cost Accounting Techniques Adopted

by Manufacturing and Service Industry within the Last Decade”, International Journal
of Advances in Management and Economics.
 Hofstede GH (1983) The cultural relativity of organizational practices and theories.
Journal of International Business Studies,14(2):75-89.
 Banker RD, Datar SM, Kemerer L (1991) A model to evaluate variables impacting
the productivity of software maintenance.Journal of Management Science, 37(1):1-18.
 Kaplan RS (1984) The Evolution of Management Accounting. The
 Accounting Review, 59(3):390-418.

WEB SOURCES:

 garaminfotech.com/blogs/2018/costing-techniques-for-your-manufacturing-
industry
 investopedia.com/terms/c/cost-accounting.asp