Namaste.

Welcome to the new course that is a course on Cost and Management Accounting.

In this course this a short course just for 10 hours we are going to discuss about certain

important conceptual aspects as to what cost accounting is?

In very very brief we will discuss about the types of cost, the methods of cost accounting

and then we will go to management accounting part of it or the techniques of cost accounting

part.

So, techniques include marginal costing or breakeven point analysis or cost volume profit

analysis, then standard costing, budgetary control.

So, we will be also taking in to consideration various cases of CVP analysis or of standard

costing or budgetary control.

As far as the methods or the introductory part is concerned we will only go through

the conceptual part, I hope the course will be very much useful those who in short in

just 10 hours want to just get a glimpse of cost and management accounting the course

will be very much useful.

Myself Varadraj Bapat, I am a faculty in Accounting and Finance in School of Management IIT, Mumbai.

I am a rank holder chartered accountant and cost accountant then I have done M.Com, DISA

and have done PhD in finance from IIT Bombay.

My major teaching interests include financial cost accounting and also Indian economic and

financial model.

My research interest are also accounting, financial inclusion, corporate finance.

I am also into various extracurricular, but very important activities like yoga, spirituality

or Sanskrit, Bharathiya Sanskrithi, ABVP and so on.

Let us move to cost accounting now with this discussion.

So, in the beginning we will this particular PPT will talk about, what is cost accounting,

what is a distinction between cost and others streams of accounting, then what is cost and

classification of costs.

There are three majors streams; financial, cost and management accounting; some of you

might be knowing about financial accounting.

There are three important steps in financial accounting, first is recording of financial

transactions.

So, every financial transaction as and when happens is recorded in the financial accounting

system.

Then it is summarized in ledger and report is prepared which is in the form of financial

statements, the target users for financial accounting system is external users.

So, it is meant for shareholders, it is meant for employees, it is meant for government;

internal users also use it but, major target is external user.

Now, in relation or in comparison with this let us see what is cost accounting?

In cost accounting again the first step is similar recording of cost, in financial accounting

also it was recording of financial transactions, here it is recording of cost you may feel

it is duplication, but it is not.

So, because in cost accounting cost are recorded with lot more details.

For example, if salary bill for an organization is 5 crore, in financial accounting total

amount 5 crore will be include recorded.

But in cost accounting for each type of employees how much is paid, what where the activities

done by them on daily or hourly basis, for what that salary is paid like those details

are recorded that is why this is a more detail recording of cost that is involved.

Next is analysis of costs so, each of the costs are now broken down.

So, suppose we were talking about salary cost, they would be broken down as to what are factory

related salary cost, how much are admin related, how much are selling related, how much is

a overtime, how much is paid as incentives?

What was the nature of work being done for that by that employee, how much is a direct

cost in the salary, how much is the indirect cost in the salary?

Like that detailed analysis is made, comparisons are made sometimes projections are made in

financial accounting these are only the actuals you are not allowed to make projections.

But, in cost accounting we make estimates and those estimates are also used to make

budgets or to make future projections.

Based on all this analysis the cost statements are prepared as for the needs of users and

here the users are internal users.

So, manager, decision makers within the organization right from supervisor level to mid management

to CEO and even to board of directors, this is the confidential data.

So, it is normally shared with external users except for a few statements ok.

So, this is in brief what is cost accounting.

Now, this is the definition of cost accounting.

It involves recording, estimating, controlling and reporting of costs.

So, you would observe estimating is also involved and controlling is also involved.

So, cost accounting does not just stop at recording, it tries to keep those costs in

check, tries to control the cost.

Now, this process begins with the recording and also the basis on which they are calculated

and ultimately we prepare the cost estimates.

Now, the objectives of cost accounting system is ascertainment of cost so, to know the cost,

but it is not the total only; to the know the cost for the product, for a process, category

wise, plant wise, function wise.

So, it is detail ascertainment of cost, now this detail assessment is ascertainment is

used for cost control.

So, certain standards are set or budgets are laid down, their actuals are compared with

the norms or the standards and efforts are made to see that actual cost does not exceed

what is permitted or what is budgeted.

So, cost control exercises is done, cost reduction is also done.

So, that we have permanent benefit of lesser cost then a variety of information is generated

to help in decision making that could be for pricing decisions.

So, if we know correct information about cost we will be able to price our product or service

properly.

Customers might ask for some extra things, we have to give delivery, we may have to incur

certain risk like giving guarantee; all those aspects are calculated and built into cost.

So, that proper pricing can be done, it is also useful for other decisions like profit

planning because entity should know how much units it should produce or up to what level

it should extend it service.

Then budgeting is done so, that a systematic allocation of resources can be done; like

that variety of management decisions are catered and they would be taken much in a much better

way if accurate and timely cost data is available.

So, these are the objectives of cost accounting system.

Now, the advantages, since we know detail cost record it helps us in identifying losses

and efficiencies.

So, unprofitable activities can be weeded out, then certain cost reduction techniques

can be used or value analysis can be done.

So, that wasteful cost can be eliminated altogether and more value can be provided from whatever

resources which we are using.

And the third part which you already discussed that a better information helps in much improved

decision making.

It could be profit planning, it could be make or buy decision or instead of we making we

can go for outsourcing that product or going for outsourcing of a particular service.

All these types of decisions are made in much better way because of cost accounting system.

Now, management accounting this is a kind of umbrella concept where both financial and

cost data are taken together and it is mainly targeted to internal users.

As the name suggest it is called management accounting because, it is mainly for internal

users.

So, here in this figure we are seeing a comparison of management versus financial accounting.

In management accounting variety of decision making is done for better control and for

a good decision making, in financial accounting financial statements are prepared and target

are external stakeholders ok.

In this particular course we are going to focus on cost and management accounting.

Now, the definition of cost; now, in business or even in other activities other than business

the cost is usually a monitory valuation of any of these things; may be of effort or of

material, resources, time, risk involved and opportunities forgone for production or delivery

of any goods or service.

So, for any activity we are doing normally we have to sacrifice some resources either

to we have to give up opportunities are we have to spend on material or we have to give

our time or we have to give our resources.

All this will be included in the cost we will try to give a monitory valuation to it and

go on adding it for calculations of cost.

Normally, this is how business functions some production may be done, then we go for supply

chain or distribution and the product is supposed to reach the customer.

Now, the costs are incurred all these stages and accordingly the cost are also classified

related to production, related to marketing and distribution, related consumer service

or related to administration for looking after all these activities and there can be other

cost like research and development cost and so on.

This is one more definition of cost, it can be define as amount of resources given up

in exchange of any goods or services.

So, suppose we want to buy material, we will have to pay the supplier that is called as

a material cost.

When we pay salaries or overtime or incur on perquisites of the employees it will be

included as a labor cost or as salary cost or human resource cost.

Then we buy various services like electricity or like insurance on which costs are incurred

all these are included as an examples of cost.

There are also other type of cost known as capitalized cost.

Now, this is a cost incurred on fixed assets like purchase of machinery or like installation

of machinery.

Now, this cost are going to give us long term benefits; these are not cost just for that

period, if a machinery as a life of 5 years we will get the benefit for 5 years.

So, we will charge depreciation on that asset for 5 years period and that depreciation is

included on day to day cost.

So, the whole of capitalized cost is not considered as cost of that period, but a proper proportion

of that in the form of depreciation or amortization is included in the cost.

Now, very important part that is cost classification.

Now these will tell us different chapters in cost accounting because these is a detailed

analysis on the lines of the classification we can go for more detail study of a cost

for a particular item or for a particular product ok.

So, first we of classifying is by elements, first in a sense that is one of the most traditional

ways, then by function or by direct indirect, by controllability, variability, relevance

and so on right.

Now, let us go for first classification that is cost classification by elements.

Do you know what are the important elements of cost?

There are three important elements; the first one is material, labor and expenses.

Now, the material cost; this is the cost incurred on any tangible substance or a thing.

Best example could be purchase of raw material, it can also be purchase of any of the components,

suppose you are purchasing any other tangible item that will be included in the material

cost.

Next is employee cost; this is the cost on all human resources will include salary, wages,

bonuses, perquisites, retirement benefits any other incentives or ESOP’s.

All this is included in the labour cost or employee cost.

Third are services so, when we purchase any outside service the cost incurred on the same

like electricity, like insurance, like rent that is all included in the expense, this

is also a residuary head.

So, what is not included material and labour will be included in the expense.

Now, this is the most traditional way of classifying as material, labour and expense.

But, to know more details or to try to control the cost further type of classifications were

also involved and that lead to classification by function.

So, as per the important business functions the cost also are classified.

So, what are the important business functions?

Just think over it, I think most of you are getting it can be production, it can be selling

and distribution, it can be administration and so on.

According to that the costs are also classified.

So, we have got production cost, admin cost, selling cost; there can be other functions

like R and D, those according to then the cost will be classified.

Now, what is the advantage of this classification?

Because now it is as per the function so, it helps us in better control of the cost.

So, whatever is a material labour or overheads consume for production we can hold production

manager responsible for it.

We can set a target for the same according to the level of output, we can make admin

manager responsible for admin cost and go on adding the cost related to office or related

to administration.

This is our functional cost, help us in better control that does not mean element wise costs

are not important.

This is overlapping, that is one way of classifying this is another way we are going to learn

further different ways.

The third important function is selling and distribution.

So, we the classification helps us in whether we should outsource a function, whether we

should go for better control, whether we should give more focus, is it our strength, weakness

we come to know from cost classification by function.

Now, next important classification is cost classification by direct and indirect.

So, the direct cost are those cost which can I easily identified.

So, different cost can be divided as per cost centres or as per products.

If we can identify a cost to a cost centre we can consider it as a direct cost for example,

cost of fruits in fruit pulp production.

So, if you are making fruit pulps we know that raw material in the form of fruit will

be purchased.

We also know that for which product, let us see if your making mango juice the mangoes

which are purchased can be charged to mango juice production unit.

If we are making some juice of some other product, let us say guavas we can go for identifying

that purchase to that particular unit then those costs that is purchase of raw material

will become a direct cost.

Because, it can be easily traced or identify as against this there are certain there is

one example given over here.

That if you are into business of hardware of computers, suppose you are assembling PC

you know that hard disc goes into making of PC.

So, the cost of hard disk you can easily identified with the particular PC which is getting assembled.

So, you call it a direct cost as against this there are several cost which are common in

nature.

They may not be for a specific product then they those are called as indirect cost, let

us say we are in we are a small unit making hardware.

So, we make we assemble PC’s, we assemble certain other things, we also do some small

service or repair work.

Now, number of engineers or technical personnel either work for servicing maintenance or they

also work for assembling of PC’s or certain items.

Now, we exactly do not know the salary paid to a particular person and its linkage to

anyone particular product or a service job because, different work is being done simultaneously

in our office or in the workshop.

So, salary cost cannot be as easily identified as we are able to know the cost of hard disk,

are you getting?

So, cost of hard disk for a particular PC is a direct cost whereas, the salary cost

become a better example of indirect cost.

Can you think of any other example of indirect cost?

For example, rent if we are paying rent for our shop or our factory can we identify it

to for any one product?

That will not be possible, because rent is for the whole system in that we are making

several products, we are also doing certain service related jobs.

So, rent remains an indirect cost, earlier we took example of fruit pulp manufacture.

So, we know that the raw material that is fruits purchased are for making of particular

type of pulp, it is a direct cost.

Can you think of any indirect cost?

For example, if we are if you have a maintenance team or even one person for maintenance of

these machines, same person whenever there is any problem services or maintains different

machines.

So, it will not be possible for us to know exactly with accuracy salary of the person

to be charged to which unit of pulp manufacture.

So, it is an example of indirect cost, are you getting me?

So, here is a example given maintenance support group or security.

So, outside the factory there is a security, that security is for let us say there are

10 units inside the factory.

Security is common for all the 10 units, we will not know exactly the salary of security

to be charged to which unit that is why it is considered as indirect cost.

Same way storage cost in go downs or in showrooms this also become indirect cost.

There is another name for indirect cost which is more popular and you might have heard it

that is over heads.

Now, the overhead cost being common in nature cannot be charged directly or cannot be charged

at cannot be attributed directly like a direct cost.

So, many times a rate per hour is calculated.

We take the total for that type of overhead divided by number of hours.

Suppose here is an example of maintenance, if we have a maintenance and support group

we calculate their total cost divided by a number of hours for which they have work which

will give us rate per hour.

Now, whenever maintenance person is called and suppose works for 5 hours and rate per

hour is 2000 then 5 into 2000 we will be able to charge 10000 for the unit which has used

maintenance facility, getting it?

So, overheads are charged using rate per hour, sometimes composite or departmental rates

are calculated.

There are also some techniques like a activity based costing which are little advanced techniques

for charging of overheads.

Later on we will go into it, but right now let us understand that this particular classification

direct versus indirect is very much useful for better control of cost.

It helps us in ascertainment of cost for a particular product or for particular cost

centre, it also helps us in better control.

Because, we will know that for this product this is a direct cost and we will be able

to give more attention or make a budget or a standard for more and a more suitable control

of that particular cost.

So, here will stop at whatever classification we have discuss and we are going to continue

this and discuss some more types of classifications in the next session.

Namaste Thank you.