STRATEGIC

COST MANAGEMENT
(SCM)
TEXT BOOK

(1) COST AND MANAGEMENT ACCOUNTING –

M.N. Arora.
 STRATEGIC MANAGEMENT ACCOUNTING ( SMA )SYLLABUS

Course Objective:
To understand the components of product cost, their calculation methods, and
their control.
Course Outcome:
Students will be able to understand
a) Fundamentals of Management accounting and Cost accounting
b) Cost analysis
c) Marginal costing
d) Budget and Budgetary controls.

UNIT - I Introduction to Management Accounting, Cost analysis and Control:

Management accounting Vs. Cost accounting vs. financial accounting, Role of
accounting information in planning and control, Cost concepts and Managerial
use of classification of costs. Cost analysis and control: Direct and Indirect
expenses, allocation and apportionment of overheads, calculation of machine
hour rate. Activity based costing.
UNIT - II: Costing for Specific Industries:
Unit costing, Job Costing, Cost Sheet and tender and process costing and their
variants, treatment of normal losses and abnormal losses, inter-process profits,
costing for by-products and equivalent production.

UNIT - III: Marginal Costing - I:

Introduction, Application of Marginal costing in terms of cost control, profit
planning, closing down a plant, dropping a product line, charging general and
specific fixed costs, fixation of selling price. Make or buy decisions, key or
limiting factor.

UNIT - IV: Marginal Costing - II:

Selection of suitable product mix, desired level of profits, diversification of
products, closing down or suspending activities, level of activity planning.
Break-even analysis: application of BEP for various business problems. Inter-
firm comparison: need for inter-firm comparison, types of comparisons,
advantages.
UNIT - V: Budgetary Control:
Budget, budgetary control, steps in budgetary control, Flexible budget, different types
of budgets sales budget, Cash budget, Production budget, Performance budgets,
Zero Based Budgeting;
An introduction to cost audit and management audit. Standard Costing: Standard Cost
and Standard Costing, Standard costing Vs Budgetary control, Standard costing Vs
estimated cost, Standard costing and Marginal costing, analysis of variance,
Material variance, Labor variance and Sales variance.

Suggested Readings:
1. Hansen Mowen, Cost and Management Accounting& Control,
2. Thompson Publications 2012  S. P. Jain and K. L. Narang, Cost and Management
Accounting, Kalyani Publishers, New Delhi, 2006.
3.M. Y. Khan, P. K. Jain, Management Accounting: Theory and Problems, TMH, New
Delhi, 4/e, 2007.
4. James Jiambalvo, Managerial Accounting, John Wiley & Sons, Inc. New Delhi, 2007.
5.Atkinson, Banker, Kaplan and Young, Management Accounting, PHI, 2006.
6. Manash Gupta, Cost Accounting Principles and Practice, Pearson Education,2006
Unit – 1 Introduction to Management Accounting Cost Analysis and
Control

INTRODUCTION:

Accounting serves the purpose of providing financial information

relating to activities of a business such information is provided to
shareholders, Managers, Creditors, Debenture holders, Bankers,
Tax authorities and others. Broadly speaking, on the basis of type
of accounting information and the purpose for which such
information is used, accounting may be divided into 3 categories:

1. Financial Accounting ( or General Accounting)

2. Cost Accounting and
3. Management Accounting
 Management Accounting
The term ‘Management Accounting’ is the modern concept of accounts as a tool of
management. It is a broad term and is concerned with all such accounting
information that is useful to management.

Definition:
In the words of R. Anthony, “ Management Accounting is concerned with
accounting information that is useful to management”.

Functions (or Objectives) of Management Accounting:

Main functions of Management Accounting are as follows:
(1) Planning: Information and data provided by Management Accounting helps
management to forecast and prepare short term and long term plans for the
future activities for the business and formulate corporate strategy.

(2) Coordinating: Management Accounting techniques of planning also help in

coordinating various business activities. For example while preparing budgets
for various departments like production, sales, purchases etc., there should be
full coordination so that there is no contradiction.
 Management Accounting
Functions (or Objectives) of Management Accounting:

(3) Controlling: Controlling is a very important function of management and

management accounting helps in controlling performance by control techniques
such as standard costing, budgetary control, internal audit etc.

(4) Communication: Management Accounting System prepares reports for

presentation to various levels of management which show the performance of
various actions of the business. Such communication in the form of reports to
various levels of management helps to exercise effective control on various
business activities.

(5) Financial Analysis and Interpretation:

In order to make accounting data easily understandable, the management
accounting offers various techniques of analyzing, interpreting and presenting
this data in non accounting language so that every one understands it.
 Management Accounting
Functions (or Objectives) of Management Accounting:
(6) Tax Policies:
Management Accounting System is responsible for tax policies and procedures and
supervises and coordinates the reports prepared by various authorities.

(7) Qualitative Information:

Apart from monetary and quantitative data, management accounting provides
qualitative information which helps in taking better decisions. Quality of goods,
customers and employees, legal judgments, etc. are some of the examples of
Qualitative information supplied and used by the management accounting
system for better management.

(8) Decision Making:

Correct decision making is crucial to the success of a business. Management
accounting has certain special techniques which help management in short term
and long term decisions.
For example, Techniques like Marginal costing, Differential Costing etc help in
decisions such as pricing of products, Make or Buy.
 Scope of Management Accounting
The Scope of Management Accounting includes the following:
(1) Financial Accounting: Financial Accounting provides basic historical data
which helps management to forecast and plan its financial activities for the
future period. Thus for an effective and successful management accounting,
there should be proper and well designed financial accounting system.

(2) Cost Accounting: Many of the techniques of cost control like Standard Costing
and Budgetary Control and techniques of profit planning and decision making
like Marginal Costing, CVP analysis and differential cost analysis are used by
the management accounting.

(3) Budgeting and Forecasting: In order to plan business activities for the future,
forecasting and budgeting play a very significant role. Forecasting helps in the
preparation of budgets and budgeting helps management accounting in
exercising budgetary control.

(4) Tax Planning: In order to take advantage of various provisions of tax laws,
management accountant has to depend upon tax accounting and planning to
minimize its tax liabilities and save more funds for the business.
 Scope of Management Accounting
(5) Reporting to Management: For effective and timely decisions, there should be
a system of prompt and intelligent reporting to management. Both routine and
special reports are prepared for submission to top management, middle order
management and operating level management depending on their requirements.

(6) Cost Control Procedures: Any system of management accounting is

incomplete without effective cost control procedure like inventory control, lab
our control, overhead control, budgetary control etc.

(7) Statistical Tools: Various tools of anlayzing and presenting statistical data like
graphs, tables, charts etc are used in preparing reports for use by the
management.

(8) Internal Control and Internal Audit: Management accountant heavily

depends on internal financial controls like internal audit and internal check to
plug loop holes in the financial system of the concern.
 Scope of Management Accounting
(9) Financial analysis and interpretation:
Management accountant employs various techniques to analyze and interpret
financial data to make it understandable and useable to the management. Such
analysis helps management to achieve objectives of management in a more
efficient manner.

(10) Office Services:

Management Accountant is expected to maintain and control office routines and
procedures like filing, copying, communicating, electronic data processing and
other allied serives.
 COST ACCOUNTING
COST ACCOUNTING:
It is a formal system of accounting for costs by means of which costs of products and
services are ascertained and controlled.

Definition:
According to the Institute of Cost and Management Accounts, London, “cost accountancy is
the application of costing and cost accounting principles, methods, techniques etc., to
the science, art and practice of cost control, cost audit and ascertainment of
profitability.”

OBJECTIVES OF COST ACCOUNTING

Objectives of Cost Accounting can be summarized as under

1. To ascertain the cost of production on per unit basis, for example, cost per kg, cost per
meter, cost per liter, cost per ton etc.
2. Cost accounting helps in the determination of selling price. Cost accounting enables to
determine the cost of production on a scientific basis and it helps to fix the selling price.
3. Cost accounting helps in cost control and cost reduction
 OBJECTIVES OF COST ACCOUNTING
4) Ascertainment of division wise, activity wise and unit wise profitability
becomes possible through cost accounting.

5) Cost accounting also helps in locating wastages, inefficiencies and other

loopholes in the production processes/services offered.

6) Cost accounting helps in presentation of relevant data to the management

which helps in decision making.

7) Cost accounting also helps in estimation of costs for the future.

 Advantages of Cost Accounting
The principal advantages of Cost Accounting are as follows:

(1) Reveals profitable and unprofitable activities:

A System of Cost Accounting reveals profitable and unprofitable activities. On this
information, Management may take steps to reduce or eliminate wastages and
inefficiencies occurring in any form such as idle time, under utilization of plant
capacity, spoilage of materials etc.

(2) Helps in Cost Control:

Cost Accounting helps in controlling costs with special techniques like Standard
costing and Budgetary Control.

(3) Helps in Decision Making: It supplies suitable cost data and other related
information for managerial decision making, such as introduction of a new
product line, determining export price of products, Make or Buy etc.
 Advantages of Cost Accounting
(4) Guides in Fixing Selling prices: Cost is one of the most important factors to be
considered while fixing prices. A System of cost accounting guides the
management in the fixation of selling prices, particularly during depression
period when prices may have to be fixed below cost.

(5) Helps in Inventory Control: Perpetual Inventory System, which is an integral

part of cost accounting helps in the preparation of interim profit and loss
account. Other Inventory control techniques like ABC analysis are used in cost
accounting.

(6) Aids in Formulating Policies: Costing provides such information as enables

the management to formulate production and pricing policies and preparing
estimates of contracts and tenders.

(7) Helps in Cost reduction: It helps in the introduction of a cost reduction

programme and finding our new and improved ways to reduce costs.
 Advantages of Cost Accounting
(8) Reveals idle capacity:
A Concern may not be working to full capacity due to reasons such as shortage of
demand, machine breakdown or other problems in production. A Cost
Accounting system can easily work out the cost of idle capacity so that
management may take immediate steps to improve the position.

(9) Checks the accuracy of financial accounts:

Cost Accounting provides a reliable check on the accuracy of financial accounts
with the help of reconciliation between the two at the end of the accounting
period.

(10) Prevents frauds and manipulation:

Cost audit System, which is a part of Cost Accountancy, helps in preventing
manipulation and frauds and thus reliable cost data can be furnished to
management and others.
 Financial Accounting
Financial Accounting is mainly concerned with recording business transactions in
the books of accounts for the purpose of presenting final accounts to
management, shareholders and tax authorities, etc.

Definition:
It is defined as “ the art of recording, classifying and summarizing in a significant
manner and in terms of money transactions and events, which are in part at
least, of a financial character and interpreting the results thereof”.

Objectives of Financial Accounting:

Some of the main objectives of financial accounting are as follows,

(1) To maintain a systematic and accurate record of financial transactions without

which it is difficult to make effective decisions.
(2) To Protect the properties of the firm form being wasted and unnecessary
usage.
(3) To maintain the records of income, expense and losses for ascertaining the net
profit or loss of a business concern.
 Financial Accounting
(4) To ascertain financial position of business which is useful for management,
investors, creditors etc.
(5) To ascertain financial stability of business by preparing statement of assets and
liabilities at a specific date.
(6) To helps the Entrepreneurs in rational decision making.
 Difference between Management , Cost and Financial Accounting

POINT OF FINANCIAL COST MANAGEMENT

DIFFERENCE ACCOUNTING ACCOUNTING ACCOUNTING
MEANING The main purpose of The main purpose of Management
Financial Accounting Cost Accounting is to Accounting is
is to prepare Profit provide detailed cost concerned with
and Loss account and information . accounting
Balance Sheet for information that is
reporting to owners useful to
or shareholders and management”.
other outside
agencies.

Statutory These Accounts are Maintenance of Management

requirements obligatory to be these accounts is accounting is purely
prepared according voluntary except in voluntary and its use
to the legal certain industries depends upon its
requirements of where it has been utility to
Companies Act and made obligatory to management.
Income Tax Act. keep cost records
under the co’s Act.
 Difference between Management , Cost and Financial Accounting

POINT OF FINANCIAL COST MANAGEMENT

DIFFERENCE ACCOUNTING ACCOUNTING ACCOUNTING
Emphasis Main emphasis is on Main emphasis is on Main emphasis is on
finding out the Profit cost ascertainment planning controlling
or loss of the and cost control to and decision making
company and ensure maximum to maximize profit.
Financial Position. profit.
Scope In Financial Scope of cost Its scope is broader
accounting, Trading accounting is limited than that of cost
account, Profit & to providing cost accounting as it
Loss account and information for provides all types of
Balance sheet are managerial uses. information.
prepared.
Periodicity of Financial reports are It prepares the It provides
reporting prepared periodically report weekly or information when
usually on an annual monthly basis. ever it is required by
basis the management.
 Difference between Management , Cost and Financial Accounting

POINT OF FINANCIAL COST MANAGEMENT

DIFFERENCE ACCOUNTING ACCOUNTING ACCOUNTINGM
Data base It is based on It is based on data It is based on data
historical data / past derived from derived from Cost &
events . Financial accounting. financial a/c & other
sources.
Accounting It is governed by It is bound to follow It is not bound by
Standards generally accepted the standards Accounting
accounting principles prescribed by the Standards. It may use
and Conventions. Cost Accounting any practice which
(ICWA) generates useful
information to
management.
Status in It is given highly In the Organizational It is generally placed
Organization importance form all set up cost at a higher level of
types of accountant is placed hierarchy than the
organizations , and at a lower level in cost accountant.
priority than cost and hierarchy than the
Management Management
accountant. Accountant.