Cost and Management Accounting: A

Comprehensive Study Guide

This guide covers the fundamental topics in Cost and Management Accounting as per the
common BBA Honours syllabus, structured into four distinct units.

Unit I: Introduction to Cost and Management

Accounting
1. Meaning, Objectives, and Scope
Cost Accounting:
●​ Meaning: Cost accounting is the process of classifying, recording, allocating, and
reporting the various costs incurred in the operation of an enterprise. It is primarily
concerned with cost ascertainment and cost control.
●​ Objectives:
○​ Cost Ascertainment: To determine the cost of products, services, jobs, or
processes.
○​ Cost Control: To control costs by setting standards, identifying variances, and
taking corrective actions.
○​ Cost Reduction: To find permanent ways to reduce costs without compromising
quality.
○​ Determining Selling Price: To provide a basis for fixing the selling prices of
products or services.
○​ Assisting Management: To provide cost information for decision-making, planning,
and control.
●​ Scope: The scope includes cost classification, cost ascertainment, cost allocation, cost
control, cost reporting, and cost audit.
Management Accounting:
●​ Meaning: Management accounting involves presenting accounting information in a way
that assists management in creating policies and in the day-to-day operations of an
undertaking. It utilizes data from both financial and cost accounting to guide strategic
decisions.
●​ Objectives:
○​ Planning and Policy Formulation: To provide data for forecasting and setting
goals.
○​ Decision Making: To help choose between alternative courses of action (e.g.,
make or buy, product mix).
○​ Controlling Performance: To measure and evaluate performance against set
standards and budgets.
○​ Reporting to Management: To provide timely reports to different levels of
management for effective control.
○​ Motivating Employees: To help in setting goals and measuring performance,
which can be linked to incentive schemes.
●​ Scope: Its scope is broad and includes financial accounting, cost accounting, budgeting,
tax planning, financial analysis, and strategic management.

2. Key Differences: Financial vs. Cost vs. Management Accounting

Basis of Distinction Financial Accounting Cost Accounting Management
Accounting
Primary Objective To record, classify, and To ascertain and To provide information
report financial control the cost of to internal management
transactions to external products or services. for decision-making.
stakeholders.
Users External (Investors, Primarily Internal Exclusively Internal
Creditors, Government) Management. Management.
and Internal
Management.
Legal Requirement Mandatory for most Generally voluntary, Purely voluntary.
companies. except for certain
manufacturing
industries.
Time Focus Historical data. Reports Both historical and Future-oriented.
on past performance. present data. Focuses on planning
and forecasting.
Principles Followed Governed by Generally Follows its own set of No fixed rules; depends
Accepted Accounting principles and on the needs of
Principles (GAAP) and procedures. management.
IFRS.
Reporting Format Standardized formats Flexible reporting Highly flexible,
for Profit & Loss A/c formats (e.g., Cost need-based reports.
and Balance Sheet. Sheets).
Unit of Measurement Primarily monetary Both monetary and Both monetary and
terms. non-monetary units non-monetary units.
(e.g., hours, units).
3. Role of the Cost and Management Accountant
The role of a cost and management accountant is crucial for business success. They act as
strategic partners in the organization by:
●​ Providing Information for Decision-Making: Offering analysis on pricing, make-or-buy
decisions, product profitability, and capital investments.
●​ Planning and Controlling: Assisting in the preparation of budgets and standards, and
then analyzing variances to control operations.
●​ Resource Management: Guiding the efficient use of materials, labor, and other
resources.
●​ Performance Evaluation: Developing metrics to evaluate the performance of different
departments, divisions, and managers.
●​ Strategic Formulation: Participating in the strategic planning process by providing
insights into the cost structure of the company and its competitors.
Unit II: Cost Concepts, Classification, and Analysis
1. Elements of Cost
The total cost of a product or service is composed of three main elements:
1.​ Direct Materials: Materials that can be directly identified and traced to a specific product
or cost object. Example: Wood used to make a table.
2.​ Direct Labor: Wages paid to workers who are directly involved in the production process.
Example: Wages of a carpenter building the table.
3.​ Overheads (or Indirect Costs): All other costs that are not direct materials or direct
labor.
○​ Indirect Materials: Materials that cannot be easily traced to a single product.
Example: Glue or nails used in the table.
○​ Indirect Labor: Wages of employees who support the production process but are
not directly involved. Example: Salary of a factory supervisor.
○​ Indirect Expenses: Other expenses incurred in the factory. Example: Factory rent,
insurance, depreciation of machinery.

2. Cost Classification
Costs can be classified based on various factors:
●​ By Traceability:
○​ Direct Costs: Costs directly attributable to a cost object (e.g., direct materials,
direct labor).
○​ Indirect Costs (Overheads): Costs that cannot be traced to a single cost object.
●​ By Change in Activity (Behavior):
○​ Fixed Costs: Costs that remain constant in total, regardless of the level of activity,
within a relevant range. Example: Rent, salaries.
○​ Variable Costs: Costs that change in total, in direct proportion to the level of
activity. Example: Direct materials, direct labor.
○​ Semi-Variable Costs (Mixed Costs): Costs that have both a fixed and a variable
component. Example: Telephone bill with a fixed rental and variable call charges.
○​ Step Costs: Costs that are fixed for a certain level of activity and then increase to a
new fixed level. Example: A supervisor's salary, where one supervisor is needed for
every 10 workers.
●​ By Function:
○​ Manufacturing Costs: All costs related to the production process.
○​ Administrative Costs: Costs related to general management and administration.
○​ Selling & Distribution Costs: Costs incurred to create demand and deliver the
product to customers.
○​ Research & Development Costs: Costs for developing new products or improving
existing ones.

3. Cost Ascertainment Techniques

●​ Job Costing: Used when work is done against specific orders or jobs. Costs are
collected for each job separately. Industries: Printing, furniture making.
●​ Process Costing: Used in industries with continuous production of a single product.
Costs are averaged over the units produced in a period. Industries: Chemicals, oil
refining.
●​ Activity-Based Costing (ABC): A modern method where overheads are first traced to
activities and then allocated to products based on their consumption of those activities. It
provides a more accurate cost per unit.
●​ Standard Costing: Predetermining costs for products/services and then comparing
actual costs with these standards to measure performance.

4. Cost-Volume-Profit (CVP) Analysis

CVP analysis studies the relationship between costs, volume, and profit at different levels of
activity.
●​ Key Concepts:
○​ Contribution: The amount remaining after deducting variable costs from sales. It
contributes towards covering fixed costs and then generating profit.
■​ Contribution = Sales - Variable Costs
■​ Contribution = Fixed Costs + Profit
○​ Profit-Volume (P/V) Ratio: Measures the rate at which profit increases with sales.
■​ P/V Ratio = (Contribution / Sales) * 100
●​ Break-Even Analysis:
○​ Break-Even Point (BEP): The level of sales (in units or value) at which there is no
profit and no loss. Total Revenue = Total Cost.
■​ BEP (in units) = Fixed Costs / Contribution per unit
■​ BEP (in value) = Fixed Costs / P/V Ratio
●​ Margin of Safety:
○​ The difference between actual sales and break-even sales. It indicates how much
sales can drop before the company starts incurring a loss.
■​ Margin of Safety = Actual Sales - Break-Even Sales
■​ Margin of Safety = Profit / P/V Ratio

Unit III: Costing Systems and Applications

1. Material Cost Accounting and Control
●​ Inventory Management: Techniques to ensure the optimal level of inventory is
maintained. A key tool is the Economic Order Quantity (EOQ), which calculates the
ideal order size to minimize ordering and holding costs.
●​ Procurement Procedures: The process of purchasing materials, from raising a purchase
requisition to receiving and inspecting the goods.
●​ Valuation Methods: Methods to price the materials issued to production:
○​ FIFO (First-In, First-Out): Assumes that the first materials purchased are the first
ones to be issued.
○​ LIFO (Last-In, First-Out): Assumes that the last materials purchased are the first
ones to be issued.
○​ Weighted Average: Issues are priced at the weighted average cost of all materials
in stock.
●​ Treatment of Losses:
○​ Wastage: Loss of material due to factors like evaporation or shrinkage (usually
treated as an overhead).
○​ Scrap: The residue from production with a small realizable value (value is credited
to the job or overheads).
○​ Spoilage: Goods that are damaged beyond rectification (cost is charged to the
specific job or treated as overhead).
○​ Defectives: Goods that can be rectified with additional cost (the cost of rectification
is charged to the job or overheads).

2. Labor Cost Accounting and Control

●​ Wage Payment Methods:
○​ Time Rate System: Payment is based on the time spent by the worker.
○​ Piece Rate System: Payment is based on the number of units produced.
○​ Incentive Schemes (e.g., Halsey, Rowan): Combine time and piece rates to
reward efficient workers.
●​ Labor Turnover: The rate at which employees leave an organization. High turnover
increases costs of recruitment and training.
●​ Idle Time: The time for which wages are paid, but no production is done (e.g., machine
breakdown). The cost is usually treated as an overhead.
●​ Overtime: Work done beyond normal working hours. The premium paid for overtime is
treated as an overhead unless it's for a specific job at the customer's request.

3. Overhead Cost Accounting and Control

The process of charging overheads to cost objects involves several steps:
1.​ Classification: Grouping overheads by function, element, or behavior.
2.​ Allocation: Charging an entire overhead cost item directly to a specific cost center.
3.​ Apportionment: Distributing an overhead cost item among multiple cost centers on a
suitable basis (e.g., rent based on floor area).
4.​ Absorption (or Recovery): Charging the overheads of a cost center to the products or
jobs that pass through it, using a pre-determined overhead absorption rate.
●​ Treatment of Under/Over-Absorption: If actual overheads are different from the
absorbed overheads, the difference (under or over-absorption) is typically transferred to
the Costing Profit & Loss Account.

4. Preparation of Cost Sheets

A Cost Sheet is a statement that shows the detailed breakdown of the total cost of a product. It
is prepared to ascertain the cost and fix the selling price.
Specimen Cost Sheet | Particulars | Amount (Rs.) | Amount (Rs.) | | :--- | :--- | :--- | | Direct
Materials Consumed | | XXX | | Direct Labor | | XXX | | Direct Expenses | | XXX | | Prime Cost | |
XXX | | Add: Factory Overheads | | XXX | | Works Cost / Factory Cost | | XXX | | Add:
Administration Overheads | | XXX | | Cost of Production | | XXX | | Add: Selling & Distribution
Overheads | | XXX | | Total Cost / Cost of Sales | | XXX | | Add: Profit | | XXX | | Selling Price |
| XXX |

5. Other Costing Methods

●​ Job Costing: Ascertaining cost of a specific job.
●​ Batch Costing: A variation of job costing, where a group (batch) of identical products is
treated as a single job.
●​ Contract Costing: Used for large, long-term projects like construction.
●​ Process Costing: For continuous manufacturing processes.
●​ Service Costing (Operating Costing): Used in service industries like transport,
hospitals, and hotels to find the cost of providing a service.

6. Reconciliation of Cost and Financial Accounts

This is a statement prepared to explain the difference between the profit shown by the cost
accounts and the profit shown by the financial accounts. Differences arise because of items
shown in only one set of accounts (e.g., purely financial incomes/expenses) or different
valuation methods (e.g., stock valuation).

Unit IV: Management Accounting Tools and

Techniques
1. Budgeting and Budgetary Control
●​ Budgeting: The process of preparing budgets, which are quantitative statements of plans
for the future.
●​ Budgetary Control: The process of using budgets to control the activities of a business.
It involves comparing actual results with budgeted figures to take corrective action.
●​ Types of Budgets:
○​ Functional Budgets: Budgets for different functions like sales, production,
materials, etc.
○​ Fixed Budget: A budget prepared for a single level of activity.
○​ Flexible Budget: A budget that can be adjusted to any level of activity. It shows
costs at different activity levels.
○​ Zero-Base Budgeting (ZBB): A method where every budget starts from a "zero
base," and every expense must be justified for each new period.

2. Standard Costing and Variance Analysis

●​ Standard Costing: A technique where standard costs are pre-determined and then
compared with actual costs to find variances.
●​ Variance Analysis: The process of analyzing the difference between standard and actual
costs. The main variances are:
○​ Material Variances: (Price, Usage)
○​ Labor Variances: (Rate, Efficiency)
○​ Overhead Variances: (Volume, Expenditure)
○​ Sales Variances: (Price, Volume)

3. Marginal Costing for Decision-Making

Marginal costing differentiates between fixed and variable costs. It is used for short-term
decision-making as it focuses on contribution.
●​ Key Decisions:
○​ Make or Buy: Deciding whether to manufacture a component in-house or purchase
it from an external supplier. The decision is based on comparing the marginal cost
of making with the purchase price.
○​ Pricing Decisions: Setting prices in special circumstances, like accepting an
export order below the normal price, as long as the price covers the marginal cost.
○​ Product Mix Decisions: When there is a limiting factor (e.g., machine hours), the
most profitable product mix is determined by ranking products based on their
contribution per unit of the limiting factor.

4. Capital Budgeting
Techniques to evaluate long-term investment proposals.
●​ Net Present Value (NPV): Calculates the present value of future cash inflows from a
project, minus the initial investment. A positive NPV indicates the project is acceptable.
●​ Internal Rate of Return (IRR): The discount rate at which the NPV of a project is zero. If
the IRR is greater than the company's cost of capital, the project is accepted.

5. Financial Analysis and Reporting

●​ Ratio Analysis: Calculating and analyzing financial ratios (e.g., liquidity, profitability,
solvency) to interpret financial statements.
●​ Cash Flow Analysis: Preparing a Cash Flow Statement to show the inflows and outflows
of cash from operating, investing, and financing activities.
●​ Fund Flow Analysis: Preparing a Fund Flow Statement to analyze the changes in the
working capital of a company between two balance sheet dates.

6. Performance Measurement and Management

●​ Key Performance Indicators (KPIs): Financial and non-financial metrics used to track
and evaluate the performance of an organization (e.g., customer satisfaction, employee
turnover).
●​ Balanced Scorecard: A performance management framework that looks at four
perspectives to provide a "balanced" view of performance:
1.​ Financial Perspective
2.​ Customer Perspective
3.​ Internal Business Process Perspective
4.​ Learning and Growth Perspective

7. Strategic Cost Management

This involves using cost information for strategic decision-making to gain a sustainable
competitive advantage. It focuses on cost reduction and value chain analysis, linking the
company's cost strategy to its overall business strategy.