Module 1: Introduction to Cost & Management Accounting

1. Meaning, Objectives and Importance of Cost and Management Accounting

Cost Accounting:
Systematic recording and analysis of costs associated with the products or services of a business.

Management Accounting:
Provides financial and non-financial information to managers for planning, controlling, and
decision-making.

Objectives:

 Ascertain the cost of product/service.

 Assist in budgeting and cost control.
 Provide information for decision-making.
 Evaluate business performance.

Importance:

 Cost control and efficiency.

 Supports strategic planning.
 Facilitates performance evaluation.
 Enhances profitability and competitiveness.

2. Functions and Role of Cost Accounting Department

Functions:

 Collection and classification of cost data.

 Budget preparation and variance analysis.
 Inventory valuation.
 Product costing.
 Assist in pricing and decision making.

Role:

 Provides data for managerial control.

 Helps in reducing wastage and inefficiencies.
 Acts as a support for strategic decisions.
3. Installation of Cost Accounting System

Steps:

1. Define the objective and scope of the system.

2. Select appropriate methods (job, process, ABC, etc.).
3. Design cost codes and cost centres.
4. Develop forms and documentation.
5. Select and install software (if needed).
6. Train personnel and implement system.
7. Monitor and review regularly.

4. Difference Between Cost, Financial, and Management Accounting

Basis Cost Accounting Financial Accounting Management

Accounting
Users Internal only Internal & External Internal
Focus Cost control & Profit/loss and position Decision-making
reduction
Nature Analytical Historical Future-oriented
Legal Optional Mandatory for Optional
Requirement companies
Format Flexible Follows Flexible
GAAP/Standards

5. Elements and Classification of Cost & Methods of Costing

Elements of Cost:

1. Direct Material
2. Direct Labour
3. Direct Expenses
4. Overheads (Factory, Administration, Selling)

Classification of Costs:

 By Nature: Direct, Indirect

 By Behavior: Fixed, Variable, Semi-variable
 By Function: Production, Admin, Selling & Distribution
Methods of Costing:

 Job Costing: Custom jobs/projects

 Process Costing: Mass production (e.g. chemicals)
 Batch Costing: Group of identical items
 Contract Costing: Construction contracts
 Unit/Output Costing: Brick, mining, cement industries
 Operating Costing: Transport, hospitals

MCQs

1. Prime cost includes:

A) Factory overheads
B) Direct costs only
C) All costs
D) Selling expenses

2. Which of the following is not a classification of cost by behavior?

A) Fixed cost
B) Variable cost
C) Opportunity cost
D) Semi-variable cost

3. The main purpose of management accounting is to:

A) Maintain records
B) Determine financial position
C) Assist management in decision-making
D) Comply with tax laws

4. Which is a method of costing suitable for printing presses?

A) Job costing
B) Process costing
C) Operating costing
D) Batch costing

5. The main objective of Cost Accounting is to:

A) Determine profitability
B) Meet statutory requirements
C) Ascertain cost and control it
D) Prepare final accounts

6. Management Accounting is primarily concerned with:

A) Cost computation
B) Historical financial records
 C) Assisting internal decision-making
D) Auditing

7. Which of the following is NOT an importance of Cost Accounting?

A) Helps in fixing selling price
B) Helps in cost control
C) Mandatory for all companies
D) Assists in decision-making

8. Which of the following is a key function of the Cost Accounting Department?

A) Recording only financial transactions
B) Conducting internal audits
C) Collecting, classifying, and analyzing cost data
D) Preparing cash flow statements

9. Cost Accounting Department plays a major role in:

A) Preparing tax returns
B) External audit
C) Providing cost-related data to management
D) Managing shareholder communication

10. Which report is typically generated by a Cost Accounting Department?

A) Balance sheet
B) Trial balance
C) Cost sheet
D) Cash book

11. First step in installing a Cost Accounting system is:

A) Appointing cost accountant
B) Designing cost control reports
C) Identifying objectives and scope
D) Finalizing financial statements

12. Which of the following is NOT considered in the installation of a cost system?
A) Selection of cost methods
B) Training staff
C) Share market listing
D) Integrating with other departments

13. One of the key challenges in installing a cost system is:

A) Finalizing directors
B) Employee resistance
C) Filing GST
D) Printing annual report
14. Financial Accounting is mainly used for:
A) Future planning
B) Tax saving
C) External reporting
D) Internal audits

15. Which of the following is true for Management Accounting?

A) Follows accounting standards
B) Mandatory for public companies
C) Used for internal managerial purposes
D) Focuses only on past data

16. Which accounting type emphasizes cost reduction and efficiency?

A) Financial Accounting
B) Management Accounting
C) Cost Accounting
D) Forensic Accounting
17. Which of the following is NOT an element of cost?
A) Direct material
B) Indirect labour
C) Income tax
D) Factory overhead
18. A variable cost:
A) Remains constant per unit
B) Remains constant in total
C) Increases with volume
D) Both A and C

19. Which method of costing is most suitable for mass production of identical items?
A) Job costing
B) Batch costing
C) Process costing
D) Contract costing

20. In batch costing, the cost is computed for:

A) Each unit individually
B) Each job
C) Each batch of production
D) A month or quarter

21. Which of the following is a functional classification of cost?

A) Fixed and variable cost
B) Direct and indirect cost
C) Production, admin, selling cost
D) Sunk and opportunity cost
 Activity Based Costing (ABC)

Meaning

ABC costing is a costing method that identifies activities in an organization and assigns the
cost of each activity to products or services according to the actual consumption by each. It
helps to find out the true cost of products/services by eliminating inaccuracies of traditional
costing methods.

Why ABC Costing?

 Traditional methods use a single base like machine hours.

 ABC uses multiple cost drivers for accurate allocation.
 Identifies high-cost activities and inefficiencies.
 Useful in complex and service-based industries.

Steps in ABC Costing

1. Identify Activities
Examples: Order processing, machine setup, quality control.
2. Assign Costs to Activities (Activity Cost Pools)
All costs related to a specific activity are grouped.
3. Identify Cost Drivers
A cost driver is a factor that causes a change in the cost of an activity.
Example: No. of machine hours, No. of purchase orders, No. of setups.
4. Calculate Cost Driver Rate

Cost Driver Rate= Total Cost of Activity / Total Cost Driver Unit

5. Assign Costs to Products

Multiply the cost driver rate by the actual number of cost driver units consumed by each
product.
 Practical Problems on ABC

Q.1 A company manufactures Products A and B. Overhead cost is ₹1,00,000. Overheads are split:

Activity Cost Cost A B

Driver Usage Usage
Machine ₹40,000 No. of 10 5
Setups setups
Material ₹30,000 No. of 15 5
Handling material
orders
Quality ₹30,000 No. of 20 10
Control inspections

Q.2 XYZ Ltd. makes two products – P1 and P2. Overhead cost is ₹1,80,000 split among the following
activities:

Activity Cost Cost P1 P2

Driver Usage Usage
Machine ₹60,000 No. of 6 4
Setups setups
Material ₹50,000 No. of 20 10
Handling requisitions
Quality ₹70,000 No. of tests 14 6
Testing

Q.3 ABC Ltd. produces 500 units of Product M and 1,000 units of Product N.

Activity Total Cost Driver Product M Product N

Cost Usage Usage
Ordering ₹20,000 No. of orders 25 15
Machine ₹30,000 Machine 2,000 3,000
Hours hours
Packaging ₹10,000 No. of boxes 500 1,000
Q.4 Company manufactures conference tables and follows ABC to absorbs overhead. The
company has chosen the following cost pools and cost drivers for the production overhead:

Cost pool Production overhead Cost driver Cost driver quantity

Machine set up 4,00,000 No of set ups 5000 Setups
Production orders 1,00,000 No of orders 200 Orders
Machine maintenance 1,60,000 Machine hours 4000 Hours
Parts repairs 2,40,000 Number of parts 8000 Parts

You are required to :

1. Compute the overhead rate for each cost driver

2. The company receives a special order of 20 conference tables that requires the following
number of support activities:

3. Number of machine set ups: 60, number of production order: 25, number of machine
hours:400, number of parts to be repaired-50

4. How much production overhead would be charged to this order?

5. Compute the factory cost for this order from the following table: Direct material Cost per unit-
4000, direct wages per unit: 2500, Direct expense per unit-Rs1,000

Q.5 The budgeted overheads and cost driver volumes of Neptune Ltd. are as follows :

Cost Pool Budgeted Overhead Cost Driver Budgeted Volume

Material Procurement 2,90,000 No. of Orders 550
Material Handling 1,25,000 No. of Movements 340
Set-up 2,07,500 No. of Set-up 260
Maintenance 4,85,000 Maintenance Hours 4,200
Quality Control 88,000 No. of Inspection 450
Machinery 3,60,000 No. of M/c hours 12,000

The firm has produced a batch of 2,600 components of AXL-5, its Material cost was ` 1,30,000,
and Labour cost ` 2,45,000

The usage activities of the said batch are as follows :

Material Orders — 26 , Maintainance hours — 690, Material Movements — 18, Inspection —

28, Set-ups — 25, M/c hours — 1,800

Required : (i) Calculate Cost driver rates that are used for tracing appropriate amount of
overheads to the said batch; and (ii) Ascertain the cost of batch of components using Activity
Based Costing.