STUDY MATERIAL

EXECUTIVE PROGRAMME

COST AND MANAGEMENT
ACCOUNTING

MODULE 1
PAPER 2

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we have highlighted the concept of activity based costing, cost records, different costing systems.
Thereafter study focuses on the marginal costing, standard costing, budgeting & its applications for
decision making in business. At last we have discussed about cost accounting records, cost audit and
analysis & interpretation of financial statements.
In this study every efforts has been made to give a comprehensive coverage of all the topics
relevant to the subject. In all study lessons the requisite theoretical framework for understanding the
practical problems in the subject has been explained and wherever necessary practical illustrations
have been given to facilitate better understanding. At the end of each study lesson a brief about the
lesson have been given under the caption ‘Lesson Round Up’ as well a good blend of theoretical and
practical questions have been given under the caption ‘Self Test Questions’ for the practice of
students to test their knowledge. In fact, this being a practical paper, students need to have good
theoretical knowledge and practice to attain the requisite proficiency and confidence.
This study material has been published to aid the students in preparing for the Cost and
Management Accounting paper of the CS Executive Programme. It is part of the education kit and
takes the students step by step through each phase of preparation stressing key concepts, pointers
and procedures. Company Secretaryship being a professional course, the examination standards are
set very high, with emphasis on knowledge of concepts, applications, procedures and case laws, for
which sole reliance on the contents of this study material may not be enough.
Therefore, in order to supplement the information/contents given in the study material, students
are advised to refer to the Suggested Readings mentioned in the study material, Student Company
Secretary, Business Dailies and Journals.
In the event of any doubt, students may write to the Directorate of Academics and Professional
Development in the Institute for clarification at
Although due care has been taken in publishing this study material yet the possibility of errors,
omissions and/or discrepancies cannot be ruled out. This publication is released with an
understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies
or any action taken in that behalf.
Should there be any discrepancy, error or omission noted in the study material, the Institute shall be
obliged if the same are brought to its notice for issue of corrigendum in the ‘Student Company Secretary’.


Installation of a Costing System
Practical Difficulties in Installing a Costing System
Role of Cost Accountant in Decision Making
Management Accounting: Evolution, Meaning, Objectives and Scope
Tools and Techniques of Management Accounting
Relationship of Cost Accounting, Financial Accounting, Management Accounting and
Financial Management
• Conflicts in Profit versus Value Maximisation Principle
• Role of Management Accountant in Decision Making

2. Material Cost
• Materials Control – Concept and Techniques
• Procurement Procedures and Documentation: Methods of Purchasing; Procedure of
Purchases, Stores and Issue of Material; Stock Verification
• Methods of Pricing of Material: FIFO, LIFO, Simple Average, Weighted Average
• Accounting and Control of Material Losses, Wastage, Scrap, Spoilage and Defectives
• Inventory Management: Techniques of fixing of minimum, maximum and reorder levels,
Economic Order Quantity, ABC Analysis ; Stock Verification and Perpetual Inventory
3. Labour Cost
•
•
•
•
•
•

Meaning and Classification of Labour Costs
Accounting and Control of Labour Costs
Time Keeping and Time Booking
Attendance and Payroll Procedures, Time Recording, Overtime and Idle Time

Applications
• Batch Costing: Features and Applications
• Contract Costing: Features, Distinction between Job and Contract Costing, Progress
Payments, Retention Money, Escalation Clause, Contract Accounts, Accounting for
Material, Accounting for Plant Used in a Contract, Contract Profit and Accounting Entries
• Process Costing: Features, Applications and Types of Process Costing,Process Loss,
Abnormal Gains and Losses, Equivalent Units, Inter-Process Profit, Joint Products, ByProducts and Accounting
• Service Costing: Features and Applications, Unit Costing and Multiple Costing,
Application, Identification of Cost Unit and Cost Determination and Control
8. Marginal Costing
•
•
•
•
•
•
•
•

Meaning, Advantages, Limitations and Applications
Breakeven Analysis
Cost-Volume Profit Analysis
P/V Ratio and its Significance
Margin of Safety
Absorption Costing: System of Profit Reporting and Stock Valuation
Difference between Marginal Costing and Absorption Costing
Income Measurement under Marginal Costing and Absorption Costing

9. Standard Costing
• Definition, Significance and Applications

•
•

Nature and Scope of Cost Audit
Cost Accounting Records and Cost Audit under Companies Act,1956
Purpose, Scope and Advantages of Cost Audit
Implementing Authorities of Cost Audit
Cost Audit Techniques and Programmes
Cost Audit Report
Cost Auditor – Appointment, Rights and Responsibilities

12. Analysis and Interpretation of Financial Statements
•
•
•
•
•
•
•
•

Financial Statements: Nature, Attributes, Objectives, Importance, Limitations
Recent Trends in Presenting Financial Statements
Financial Statements Analysis: Types, Methods, Objectives, Limitations
Ratio Analysis: Accounting, Uses, Classification, Advantages, Limitations
Cash Flow Statement
Fund Flow Statement
Difference between Cash Flow and Fund Flow Statement
Management Reporting



:

Cost and Management Accounting (Theory and
Problems); Himalaya Publishing House,
Ramdoot, Dr. BhaleraoMarg, Kelewadi,
Girgaon, Mumbai-400 004.

4.

S.N. Maheshwari

:

Cost and Management Accounting;
Sultan Chand & Sons, 23, Daryaganj
New Delhi -110 002.

5.

I.M. Pandey

:

Management Accounting;
Vikas Publishing House (P) Ltd.
A-22, Sector 4, Noida – 201 301

6.



C.T. Horngren

:

Cost and Management Accounting - A Managerial
Emphasis; Pearson Education Asia,
482, F.I.E. Patparganj, Delhi-110 092.

B.M. Lall Nigam & I.C. Jain

:

Cost Accounting Principles and Practice;
Prentice Hall of India, M-97, Connaught Circus,
New Delhi-110 001.

10.


(viii)
11.

Drury Colin

:

Management and Cost Accounting; International
Thomson Business Press, London.



Subject

1.

Introduction to Cost and Management Accounting

2.

Material Cost

3.

Labour Cost

4.

Direct Expenses and Overheads

5.

Activity Based Costing (ABC)

6.

Cost Records

7.

Costing Systems

Page
Learning Objectives

…

1

Concepts of Cost

...

2

Evaluation of Cost Accounting

…

3

Costing, Cost Accounting and Cost Accountancy

...

3

Objectives of Cost Accounting

...

4


Techniques of Costing

...

18

Cost Accounting Standards

…

19

Installation of a Costing System

...

21

Practical Difficulties in Installing a Costing System

...

23

Role of Cost Accounting in decision making

…

24


Difference between Financial Accounting and Cost Accounting

...

31

Difference between Financial Accounting and Management Accounting

...

32

Difference between Cost Accounting and Management Accounting

...

33

Limitations of Management Accounting

...

34

Conflicts in Profit versus Value Maximization Principle

…

35

Inventory Control

...

42

Objectives of Inventory Control

...

42

Techniques of Inventory Control

...

42

Procurement Procedure & Documentation

…

61

Methods of Purchasing

...

62


Issue of Materials

...

70

Material (Stores) Requisition Note

...

70

Bill of Materials

...

70

Stock Verification

…

71

Method of Pricing of Material Issues

...

72


LESSON ROUND-UP

...

96

SELF-TEST QUESTIONS

...

97

Learning Objectives

…

103

Labour Cost

…

104

Classification of Labour Cost

…

104


LESSON 3
LABOUR COST


(xii)
Page
Overtime

...

109

Idle Time

...

110

Labour Turnover

...

112

Labour Remuneration System

...

117


Miscellaneous Topics

...

142

LESSON ROUND-UP

...

144

SELF-TEST QUESTIONS

...

144

Learning Objectives

…

147

Direct Expenses

...

148


Allocation of Overheads

...

159

Apportionment of Overheads

...

160

Absorption of Overheads

...

166

Methods of Absorbing Production Overheads

...

167

Over or Under Absorption of Overheads

...

176


LESSON ROUND-UP

...

186

SELF-TEST QUESTIONS

...

187

LESSON 4
DIRECT EXPENSES AND OVERHEADS


(xiii)
LESSON 5
ACTIVITY BASED COSTING
Page
Learning Objectives

…

189

Introduction of Activity Based Costing

…


192

Terminology of Activity Based Costing

…

193

Stages in Developing Activity Based Costing

…

193

Different Types of Activities

…

195

Importance of Activity Based Costing

…

195

Uses of Activity Based Costing

…


Non-Integrated Accounting System

…

208

— Principal Ledgers

…

208

— Control Accounts

…

209

— Entries to record transaction

…

209

Advantages of non-integrated accounting

…

211


Need for Reconciliation

…

218

Causes of Difference

…

219

LESSON 6
COST RECORDS
Learning Objectives
Cost Ledger

Reconciliation of Cost and Financial Accounts

I.

Items Shown only in Financial Accounts

…

219

II.

Items Included in Cost Accounts Only

221

Preparation of Reconciliation Statement or Memorandum Reconciliation Account

…

221

LESSON ROUND-UP

...

230

SELF-TEST QUESTIONS

...

230

Learning Objectives

…

237

Single/Output/Unit Costing

…


246

— Basic Principles & Special Terms

…

247

— Applications

…

249

— Advantages and Limitations

…

249

…

252

— Features

…

252


…

262

…

266

— General Principles of Process Costing

…

266

— Features of Process Costing

…

266

— Applications of Process Costing

…

267

— Comparison between Job Costing and Process Costing

…


278

— Valuation of Work in Progress (Equivalent Production)

…

280

— By-Products and Joint Products

…

290

Different Methods of Charging Depreciation

VI. Abnormal Gains and Losses

LESSON 7
COSTING SYSTEM

Batch Costing

Contract Costing

Process Costing


(xv)
Page

…

296

— Unit Costing and Multiple Costing

…

296

— Cost Unit

…

297

— Transport Costing

…

297

— Bailer House Costing

…

300

— Canteen Costing


...

322

Features of Marginal Costing

…

322

Advantages of Marginal Costing

…

322

Limitations of Marginal Costing

…

323

Break-even Analysis/Cost-Volume-Profit Analysis

...

324

Objectives of Cost-Volume-Profit Analysis


…

328

Profit-Volume Ratio

...

328

Margin of Safety

...

329

Methods for Determining Break-even Points

...

330

Break-even Chart

…

337

Profit-Volume Chart


...

359

Service Costing

LESSON 8
MARGINAL COSTING


(xvi)
Page
Income Measurement under Marginal and Absorption Costing

...

360

Pricing Decisions (Discriminating Price and Differential Selling)

...

364

LESSON ROUND-UP

...

371


Applications Standard Costing

…

380

Various Types of Standards

...

381

Standard Costing System

…

382

Installation of a Standard Costing System

…

382

Functions of a Standard Costing System

…

382


Standard Administration Costs

...

385

Standard Costs for Selling and Distribution

...

385

Variance analysis

...

385

Material Cost Variance

...

389

Labour Cost Variance

...

398


Reporting of Variances to Management

...

415

LESSON ROUND-UP

...

415

SELF-TEST QUESTIONS

...

417

Learning Objectives

…

419

Budget

...

420



422

Advantages of Budgetary Control

...

422

Limitations of Budgetary Control

...

423

Preliminaries for the Adoption of a System of Budgetary Control

...

424

Installation of Budgetary Control System

...

424

Preparation and Monitoring of various types of Budgets

…


445

LESSON ROUND-UP

...

446

SELF-TEST QUESTIONS

...

447

Learning Objectives

…

449

Cost Audit

…

450

Provisions of Companies Act, 1956 pertaining to Cost Accounting Records

…


454

Rights and Responsibilities of Cost Auditor

…

455

Implementing Authorities of Cost Audit

…

456

Cost Audit Techniques

…

456

Cost Audit Programme

…

457

Cost Audit Report

…

462

Nature of Financial Statements

...

462

Attributes of Financial Statements

...

463


(xviii)
Page
Objectives of Financial Statements

...

465

Importance of Financial Statements

...

466

Limitations of Financial Statements


...

471

Methods of Analysing Financial Statements

...

472

Ratio Analysis

…

479

Accounting Ratios

...

479

Uses of Ratio Aalysis

…

480

Classification of Ratios


...

516

Preparation of a Cash Flow Statement

...

518

Reporting of Cash Flows from Operating Activities

...

518

Format of Cash Flow Statement

...

523

Usefulness of Cash Flow Statement

...

525

Fund Flow Statement


…

552

LESSON ROUND-UP

…

553

SELF-TEST QUESTIONS

…

553

Test Paper 1/2013

...

561

Test Paper 2/2013

...

565

Test Paper 3/2013

Objectives, Importance and Scope of cost
accounting

•

Classifications and Elements of Cost

•

Cost Centre and Cost Unit

•

Methods and Techniques of Costing

•

Cost Accounting Standards

•

Installation of a Costing System

•

Practical Difficulties in Installing a Costing
System

Accounting


•

Relationship of Cost Accounting, Financial
Accounting, Management Accounting and
Financial Management

•

Limitations of Management Accounting

•

Conflicts
in
Profit
Maximisation Principle

versus

•

Role of Management
Decision Making

Accountant

•

Lesson Round Up


3. Difference between cost accounting, management
accounting and financial accounting.
4. To familiarize with costing terminology.

Management Accounting is concerned with the information which is useful to Management.


2

EP-CMA

CONCEPTS OF COST
Cost is the amount of resource given up in exchange for some goods or services. The resources given up
are money or money’s equivalent expressed in monetary units.
The Chartered Institute of Management Accountants, London defines cost as “the amount of
expenditure (actual or notional) incurred on, or attributable to a specified thing or activity”.
This activity of a firm may be the manufacture of a product or the rendering of a service which involves
expenditure under various heads, e.g., materials, labour, other expenses, etc. A manufacturing organisation
is interested in ascertaining the cost per unit of the product manufactured while an organisation rendering
service, e.g., transport undertaking, canteen, electricity company, municipality, etc., is interested in
ascertaining the costs of the service it renders. In its simplest form, the cost per unit is arrived at by dividing
the total expenditure incurred by the total units produced or the quantum of service rendered. But this
method is applicable if the manufacturer produces only one product. If the manufacturer produces more than
one product, it becomes imperative to split up the total expenditure between the various products so that the
cost of each product can be ascertained separately. Even if only one product is manufactured, it may be
necessary to analyse the cost per unit of each item of expenditure that goes to make up the total cost. The
problem becomes more complicated where a multiplicity of products is produced and it is necessary to
analyse the cost per unit of each product into various items of expenditures that make up the total cost.
For a consumer cost means price. For management cost means 'expenditure incurred' for producing a
particular product or rendering a particular service. The process of ascertaining the cost is known as


EVOLUTION OF COST ACCOUNTING
The history of accounting is as old as civilization. It is the process of identifying, measuring, recording and
communicating economic information, capable of being expressed in terms of money. The utility of
accounting information lies in its ability to reduce uncertainty. The information has to be relevant, verifiable,
quantifiable and free from bias.
Prior to the industrial revolution, businesses were small and characterized by simple market exchanges
between individuals and organizations. In those times there was a need of accurate book keeping though not
that much of cost accounting.
th

However, the industrial revolution in the 18 century brought large sized process industries performing single
activities (e.g. textiles, railways etc.). During this period, there was a lack of market for intermediary products
because of which cost information gained importance as a tool for measuring efficiency of different
processes. But the concept of prime cost was used around 1875 by some Industrialists. The period, 1880 AD
-1925 AD saw the development of complex product designs and the emergence of multi activity diversified
corporations like Du Pont, General Motors etc. It was during this period that scientific management was
developed which led accountants to convert physical standards into cost standard, the latter being used for
variance analysis and control. In 1913 J.L. Nicholson published a book “Cost Accounting Theory and
Practice” from New York.
During World War I and II the social importance of cost accounting grew with the growth of teach country's
defend expenditure. In the absence of competitive markets for most of the required to fight war, the
Governments in several countries placed cost-plus contracts under which the price to be paid was the cost of
production plus an agreed rate of profit. The reliance on cost information by the parties to defence contracts
continued after World War II as well. Even today, most of the government contracts are decided on a cost
plus basis.

COSTING, COST ACCOUNTING AND COST ACCOUNTANCY
Costing
Costing is the techniques and processes of ascertaining costs. These techniques consist of principles and

includes the presentation of information derived there from for the purpose of managerial decision making”.

REVIEW QUESTIONS
State whether the following statement is “True” or “False”
Costing and Cost Accounting are the same thing:
•

True

•

False

Correct answer: False

OBJECTIVES OF COST ACCOUNTING
Cost accounting aims at systematic recording of expenses and analysis of the same so as to ascertain the
cost of each product manufactured or service rendered by an organisation. Information regarding cost of
each product or service would enable the management to know where to economise on costs, how to fix
prices, how to maximise profits and so on. Thus, the main objects of cost accounting are the following:
(1) To analyse and classify all expenditures with reference to the cost of products and operations.
(2) To arrive at the cost of production of every unit, job, operation, process, department or service and
to develop cost standard.
(3) To indicate to the management any inefficiencies and the extent of various forms of waste, whether
of materials, time, expenses or in the use of machinery, equipment and tools. Analysis of the
causes of unsatisfactory results may indicate remedial measures.
(4) To provide data for periodical profit and loss accounts and balance sheets at such intervals, e.g.,
weekly, monthly or quarterly, as may be desired by the management during the financial year, not
only for the whole business but also by departments or individual products. Also, to explain in detail
the exact reasons for profit or loss revealed in total, in the profit and loss account.

accounting increases the overall productivity of an organisation and serves as an important tool, in bringing
prosperity to the nation. Thus, the importance of cost accounting can be discussed under the following
headings:

(a) Costing as an Aid to Management
Cost accounting provides invaluable aid to management. It provides detailed costing information to the
management to enable them to maintain effective control over stores and inventory, to increase efficiency of
the organisation and to check wastage and losses. It facilitates delegation of responsibility for important
tasks and rating of employees. For all these, the management should be capable of using the information
provided by cost accounts in a proper way. The various advantages derived by the management from a good
system of costing are as follows:
1. Cost accounting helps in periods of trade depression and trade competition - In periods of
trade depression, the organisation cannot afford to have losses which pass unchecked. The
management must know the areas where economies may be sought, waste eliminated and
efficiency increased. The organisation has to wage a war not only for its survival but also continued
growth. The management should know the actual cost of their products before embarking on any
scheme of price reduction. Adequate system of costing facilitates this.
2. Cost accounting aids price fixation - Although the law of supply and demand to a great extent
determines the price of the article, cost to the producer does play an important role. The producer
can take necessary guidance from his costing records in case he is in a position to fix or change the
price charged.
3. Cost accounting helps in making estimates - Adequate costing records provide a reliable basis
for making estimates and quoting tenders.


6

EP-CMA
4. Cost accounting helps in channelising production on right lines - Proper costing information
makes it possible for the management to distinguish between profitable and non-profitable activities.

increase in efficiency of production. Control of costs, elimination of wastages and inefficiencies led to the
progress of the industry and, in consequence of the nation as a whole.

SCOPE OF COST ACCOUNTING
The Scope of Cost Accounting Is Very Wide and Includes:
(a) Cost Ascertainment: The main function of cost accounting is the ascertainment of cost of product or
services rendered. It includes collection, analysis of expenses and measurement of production at
different stages of manufacture. The collection, analysis and measurement requires different
methods of costing for different types of production such as Historical costs, Standard costs,
Process cost, Operation cost etc.


Lesson 1

Introduction to Cost and Management Accounting

7

It can be done in two ways, namely
(i) Post Costing, where the ascertainment of cost is done based on actual information as recorded
in financial books.
(ii) Continuous Costing, where the process of ascertainment is of a continuous nature i.e. where
cost information is available as and when a particular activity is completed, so that the entire
cost of a particular job is available the moment it is completed.
(b) Control of Costs: In the era of competition, the goal of every business is to sustain; in costs at the
lowest point with efficient operating conditions. To sustain, It is essential to examine each individual
item of cost in the light of the services or benefits obtained so that maximum utilisation of the money
expended or- it may be recovered. This requires planning and use of standard for each item of cost
for locating deviations, if any, and taking remedial measures.
(c) Proper matching of cost with revenue: In cost accounting manager prepares monthly or quarterly