Financial accounting Cost accounting Management accounting

Financial accounting Financial accounting is mainly concerned with recording, classifying and summarising financial transactions in accordance with generally accepted principles of accounting. Financial accounting records cash and credit transactions of a business according to the nature of expenditure and income so that; Trading and profit and loss account & Balance Sheet may be prepared. Statement of sources and applications of cash flow may be prepared.

Management accounting It is that branch of accounting which provides information for planning and control to the management. It assists the management in the creation of policy and in day to day operations of the business.

Cost accounting It explains the cost of production of a product or a service according to its components per unit as well as total. It involves classification, accumulation, analysis, assignment and control of cost. It’s need arose because of the limitation of financial accounting. ‘the technique and process of ascertaining cost.’

Limitations of cost accounting Financial accounts show only the net results of the business. Financial accounts do not make any difference b/w direct and indirect cost. Financial accounts fail to reveal the weak points of the business. Financial accounts fail to help in fixation of selling price. Financial accounts fail to provide control on material, labour and other expenses. Contd.

Limitations contd. Financial accounts lack to reveal operating efficiency or inefficiency. Financial accounts fail to provide comparison of cost of products. Financial accounts lack in performance appraisal of the organisation. Financial accounts fail to analyse the losses. Financial accounts fail to keep proper records regarding use of machinery. Financial accounts fail to reveal profits product wise.

Scope of cost accounting Cost calculations Cost accountingCost control

Financial accounting Vs. cost a/cs Similarities; Same vouchers. Double entry system is used in both. Profit and loss is disclosed in both. Cost a/cs is subsidiary and supplementary to financial a/cs. Reconcilliation is required to prove the accuracy of both systems. Both systems help in managerial policies.

Differences in both systems Points of difference: Purpose Recording method Control Periodicity of reporting Information Fixation of selling price Reporting of cost Analysis of profit contd.

Contd. Figures Stock valuation Operational rather than mandatory Disclosure of relative efficiency Use of charts, graphs and diagrams

Principles of cost a/cs A cost should be related to its cause. A cost should be charged only after its incurrence. Abnormal cost should be excluded from costing. Past costs are not charged to future periods. Principle of double entry system should be applied.

Objectives of cost accounting To ascertain costCost controlDetermination of selling price

Contd. Ascertainment of profitabilityInter –firm comparisonControl on wastage

Contd. Minimum capital in stocks Effective information systemInternal audit system

Deciding business policies To introduce a new product Use of idle capacityDeciding sales mix

Contd. Make or buy decisionExporting even at a low costClosing down or suspending activities

Advantages of cost a/cs Advantages to mgt.Advantages to employeesAdvantages to society& nation

Advantages to mgt. Identification of profitable & unprofitable activities. Calculation of tender price. Formulation of business policies. Helps in decision making. Helps in making comparison. Helps in controlling cost of production. Helps in checking material cost.

Advantages to employees Better wages. Distinction b/w efficient & inefficient worker. Higher std. of living. Social recognition of workers. Low labour turnover. Elimination of strikes, lockouts and dispute. More bargaining power of the empolees.

Advantages to society & nation Better quality products at low prices. Uplift of society as a whole. Economically powerful & progressive nation. Capable to meet international competition. Formulation of better national policies.

Methods of costing Job costing Batch costing Contract costing Process costing Unit costing Operating costing

Features of ideal costing system Simplicity Suitability to the business Economical Flexibility Comparability Minimum official work Minimum change in existing set up Uniformity of forms Efficient control on material & labour

Contd. Allocation & apportionment of overheads Reconciliation of cost &financial a/cs Accountability should be established Duties and responsibility of cost accountant should be clearly defined.

Installation of costing system Minimum disturbance to existing set up. Introduction of costing system in steps. To control wastage and improve overall efficiency

Steps for installing costing system Objective and expectation from costing system should be defined. Studying the structure of organisation. Nature of business to be studied. Reporting system. Co-operation and support of staff. Determining the cost rates. Organising the cost office. Co-ordinating with other deptt. s

Difficulties in installing costing system Lack of support from top level mgt. Opposition by existing accounting staff. Non- cooperation by other staff. Shortage of trained staff. Heavy cost of installation and operation of costing system.

Objections against cost a/cs Highly expensive. Unnecessary Results are not trust worthy. Excessive use of stationery. Inapplicable in so many cases.