ICAI Notes: Introduction to Cost and Management Accounting | Cost and Management Accounting for CA Intermediate PDF Download

 Page 1


LEARNING OUTCOMES 
  
 
CHAPTER 
1 
INTRODUCTION TO 
COST AND
MANAGEMENT
ACCOUNTING
After studying this chapter, you would be able to- 
? State the meaning, objective and importance of Cost and
Management Accounting.
? Discuss the functions and role of Cost Accounting Department in an
organization.
? Discuss the installation of a Cost Accounting System in an
organization.
? Differentiate between Cost Accounting, Financial Accounting and
Management Accounting.
? List the various elements and classifications of cost.
? Explain the methods of segregating semi-variable costs into fixed and
variable cost.
? Discuss the concept of cost reduction and cost control.
? Discuss the methods and techniques of costing.
? A brief discussion on Digital Costing System.
© The Institute of Chartered Accountants of India
Page 2


LEARNING OUTCOMES 
  
 
CHAPTER 
1 
INTRODUCTION TO 
COST AND
MANAGEMENT
ACCOUNTING
After studying this chapter, you would be able to- 
? State the meaning, objective and importance of Cost and
Management Accounting.
? Discuss the functions and role of Cost Accounting Department in an
organization.
? Discuss the installation of a Cost Accounting System in an
organization.
? Differentiate between Cost Accounting, Financial Accounting and
Management Accounting.
? List the various elements and classifications of cost.
? Explain the methods of segregating semi-variable costs into fixed and
variable cost.
? Discuss the concept of cost reduction and cost control.
? Discuss the methods and techniques of costing.
? A brief discussion on Digital Costing System.
© The Institute of Chartered Accountants of India
 
 
 
1.2 
COST AND MANAGEMENT ACCOUNTING 
 
 1. INTRODUCTION 
Michael E. Porter in his theory of Generic Competitive Strategies has described 
‘Cost Leadership’ as one of the three strategic dimensions (others are ‘Product 
differentiation’ and ‘Focus or Niche’) to achieve competitive advantage in 
industry. Cost Leadership implies producing goods or provision of services at 
lowest cost while maintaining quality to have better competitive price. In a 
business environment where each entity is thriving to achieve apex position not 
only in domestic but global competitive market, it is essential for the entity to fit 
into any of the three competitive strategic dimensions. Cost Leadership, also in 
line with the subject Cost and Management Accounting, can be achieved if an 
entity has a robust Cost and Management Accounting system in place. In this 
chapter, we will learn various aspects of Cost and Management Accounting and 
its application in manufacturing and service environment. 
1.1 Meaning and Definition 
(i)  Cost- Cost is the amount of resource given up in exchange of some goods 
or services.  It can be expressed as a noun as well as a verb. As a noun, it 
Objectives of Cost 
and Management 
Accounting
Scope of Cost  
Accounting
Relationship of  Cost 
and Management 
Accounting with other 
related desciplines
Role & Functions of 
Cost and Management 
Accounting
Users of Cost and 
Management 
Accounting
Use of IT in 
Costing
Cost Objects
Responsibility 
Centres
Cost 
Classification
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


LEARNING OUTCOMES 
  
 
CHAPTER 
1 
INTRODUCTION TO 
COST AND
MANAGEMENT
ACCOUNTING
After studying this chapter, you would be able to- 
? State the meaning, objective and importance of Cost and
Management Accounting.
? Discuss the functions and role of Cost Accounting Department in an
organization.
? Discuss the installation of a Cost Accounting System in an
organization.
? Differentiate between Cost Accounting, Financial Accounting and
Management Accounting.
? List the various elements and classifications of cost.
? Explain the methods of segregating semi-variable costs into fixed and
variable cost.
? Discuss the concept of cost reduction and cost control.
? Discuss the methods and techniques of costing.
? A brief discussion on Digital Costing System.
© The Institute of Chartered Accountants of India
 
 
 
1.2 
COST AND MANAGEMENT ACCOUNTING 
 
 1. INTRODUCTION 
Michael E. Porter in his theory of Generic Competitive Strategies has described 
‘Cost Leadership’ as one of the three strategic dimensions (others are ‘Product 
differentiation’ and ‘Focus or Niche’) to achieve competitive advantage in 
industry. Cost Leadership implies producing goods or provision of services at 
lowest cost while maintaining quality to have better competitive price. In a 
business environment where each entity is thriving to achieve apex position not 
only in domestic but global competitive market, it is essential for the entity to fit 
into any of the three competitive strategic dimensions. Cost Leadership, also in 
line with the subject Cost and Management Accounting, can be achieved if an 
entity has a robust Cost and Management Accounting system in place. In this 
chapter, we will learn various aspects of Cost and Management Accounting and 
its application in manufacturing and service environment. 
1.1 Meaning and Definition 
(i)  Cost- Cost is the amount of resource given up in exchange of some goods 
or services.  It can be expressed as a noun as well as a verb. As a noun, it 
Objectives of Cost 
and Management 
Accounting
Scope of Cost  
Accounting
Relationship of  Cost 
and Management 
Accounting with other 
related desciplines
Role & Functions of 
Cost and Management 
Accounting
Users of Cost and 
Management 
Accounting
Use of IT in 
Costing
Cost Objects
Responsibility 
Centres
Cost 
Classification
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
1.3
 
INTRODUCTION TO COST AND MANAGEMENT 
ACCOUNTING  
   
 1.3 
can be defined as the amount of expenditure (actual or notional) incurred 
on or attributable to a specified article, product or activity. 
 As a verb, it can be as an action to ascertain the cost of a specified thing or 
activity. 
(ii)  Costing- Costing is defined as “the technique and process of ascertaining 
costs”. 
 According to CIMA “an organisation’s costing system is the foundation of 
the internal financial information system for managers. It provides the 
information that management needs to plan and control the organisation’s 
activities and to make decisions about the future.” 
(iii)  Cost Accounting- Cost Accounting is defined as "the process of 
accounting for cost which begins with the recording of income and 
expenditure or the bases on which they are calculated and ends with the 
preparation of periodical statements and reports for ascertaining and con-
trolling costs." 
(iv)  Cost Accountancy- Cost Accountancy has been defined as “the 
application of costing and cost accounting principles, methods and 
techniques to the science, art and practice of cost control and the 
ascertainment of profitability. It includes the presentation of information 
derived there from for the purpose of managerial decision making.” 
(v)  Management Accounting- As per CIMA Official Terminology “Management 
Accounting is the application of the principles of accounting and 
financial management to create, protect, preserve and increase value for 
the stakeholders of for-profit and not-for-profit enterprises in the public 
and private sectors.” 
 Management Accounting is an integral part of management function. It 
assists management by provision of relevant information for planning, 
organising, controlling, decision making etc.  
(vi)  Cost Management- It is an application of management accounting 
concepts, methods of collections, analysis and presentation of data to 
provide the information needed to plan, monitor and control costs. 
© The Institute of Chartered Accountants of India
Page 4


LEARNING OUTCOMES 
  
 
CHAPTER 
1 
INTRODUCTION TO 
COST AND
MANAGEMENT
ACCOUNTING
After studying this chapter, you would be able to- 
? State the meaning, objective and importance of Cost and
Management Accounting.
? Discuss the functions and role of Cost Accounting Department in an
organization.
? Discuss the installation of a Cost Accounting System in an
organization.
? Differentiate between Cost Accounting, Financial Accounting and
Management Accounting.
? List the various elements and classifications of cost.
? Explain the methods of segregating semi-variable costs into fixed and
variable cost.
? Discuss the concept of cost reduction and cost control.
? Discuss the methods and techniques of costing.
? A brief discussion on Digital Costing System.
© The Institute of Chartered Accountants of India
 
 
 
1.2 
COST AND MANAGEMENT ACCOUNTING 
 
 1. INTRODUCTION 
Michael E. Porter in his theory of Generic Competitive Strategies has described 
‘Cost Leadership’ as one of the three strategic dimensions (others are ‘Product 
differentiation’ and ‘Focus or Niche’) to achieve competitive advantage in 
industry. Cost Leadership implies producing goods or provision of services at 
lowest cost while maintaining quality to have better competitive price. In a 
business environment where each entity is thriving to achieve apex position not 
only in domestic but global competitive market, it is essential for the entity to fit 
into any of the three competitive strategic dimensions. Cost Leadership, also in 
line with the subject Cost and Management Accounting, can be achieved if an 
entity has a robust Cost and Management Accounting system in place. In this 
chapter, we will learn various aspects of Cost and Management Accounting and 
its application in manufacturing and service environment. 
1.1 Meaning and Definition 
(i)  Cost- Cost is the amount of resource given up in exchange of some goods 
or services.  It can be expressed as a noun as well as a verb. As a noun, it 
Objectives of Cost 
and Management 
Accounting
Scope of Cost  
Accounting
Relationship of  Cost 
and Management 
Accounting with other 
related desciplines
Role & Functions of 
Cost and Management 
Accounting
Users of Cost and 
Management 
Accounting
Use of IT in 
Costing
Cost Objects
Responsibility 
Centres
Cost 
Classification
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
1.3
 
INTRODUCTION TO COST AND MANAGEMENT 
ACCOUNTING  
   
 1.3 
can be defined as the amount of expenditure (actual or notional) incurred 
on or attributable to a specified article, product or activity. 
 As a verb, it can be as an action to ascertain the cost of a specified thing or 
activity. 
(ii)  Costing- Costing is defined as “the technique and process of ascertaining 
costs”. 
 According to CIMA “an organisation’s costing system is the foundation of 
the internal financial information system for managers. It provides the 
information that management needs to plan and control the organisation’s 
activities and to make decisions about the future.” 
(iii)  Cost Accounting- Cost Accounting is defined as "the process of 
accounting for cost which begins with the recording of income and 
expenditure or the bases on which they are calculated and ends with the 
preparation of periodical statements and reports for ascertaining and con-
trolling costs." 
(iv)  Cost Accountancy- Cost Accountancy has been defined as “the 
application of costing and cost accounting principles, methods and 
techniques to the science, art and practice of cost control and the 
ascertainment of profitability. It includes the presentation of information 
derived there from for the purpose of managerial decision making.” 
(v)  Management Accounting- As per CIMA Official Terminology “Management 
Accounting is the application of the principles of accounting and 
financial management to create, protect, preserve and increase value for 
the stakeholders of for-profit and not-for-profit enterprises in the public 
and private sectors.” 
 Management Accounting is an integral part of management function. It 
assists management by provision of relevant information for planning, 
organising, controlling, decision making etc.  
(vi)  Cost Management- It is an application of management accounting 
concepts, methods of collections, analysis and presentation of data to 
provide the information needed to plan, monitor and control costs. 
© The Institute of Chartered Accountants of India
 
 
 
1.4 
COST AND MANAGEMENT ACCOUNTING 
 
 2. OBJECTIVES OF COST ACCOUNTING 
The main objectives of Cost and Management Accounting are explained as below: 
(i) Ascertainment of Cost: The main objective of Cost Accounting is 
accumulation and ascertainment of cost. Costs are accumulated, assigned 
and ascertained for each cost object. This cost object may be a unit, job, 
operation, process, department or service. 
(ii) Determination of Selling Price and Profitability: The Cost Accounting 
System helps in determination of selling price and thus profitability of a cost 
object. Though in a competitive business environment selling prices are 
determined by external factors but cost accounting system provides a basis 
for price fixation and rate negotiation.  
(iii) Cost Control: Maintaining discipline in expenditure is one of the main 
objectives of a good cost accounting system. It ensures that expenditures 
are in consonance with predetermined set standard and any variation 
from these set standards is noted and reported on continuous basis. To 
exercise control over cost, following steps are followed: 
(a) Determination of pre-determined standard or results: Standard cost or 
performance targets for a cost object or a cost centre are set before 
 2. 
Objectives of Cost Accounting
Ascertainment of 
Cost
Determination 
of Selling Price 
and Profitability
Cost Control
Determination of pre-determined standard
Measurement of actual performance
Comparison
Analysis of variance and action
Cost 
Reduction
Assisting 
Management in 
Decision Making
© The Institute of Chartered Accountants of India
Page 5


LEARNING OUTCOMES 
  
 
CHAPTER 
1 
INTRODUCTION TO 
COST AND
MANAGEMENT
ACCOUNTING
After studying this chapter, you would be able to- 
? State the meaning, objective and importance of Cost and
Management Accounting.
? Discuss the functions and role of Cost Accounting Department in an
organization.
? Discuss the installation of a Cost Accounting System in an
organization.
? Differentiate between Cost Accounting, Financial Accounting and
Management Accounting.
? List the various elements and classifications of cost.
? Explain the methods of segregating semi-variable costs into fixed and
variable cost.
? Discuss the concept of cost reduction and cost control.
? Discuss the methods and techniques of costing.
? A brief discussion on Digital Costing System.
© The Institute of Chartered Accountants of India
 
 
 
1.2 
COST AND MANAGEMENT ACCOUNTING 
 
 1. INTRODUCTION 
Michael E. Porter in his theory of Generic Competitive Strategies has described 
‘Cost Leadership’ as one of the three strategic dimensions (others are ‘Product 
differentiation’ and ‘Focus or Niche’) to achieve competitive advantage in 
industry. Cost Leadership implies producing goods or provision of services at 
lowest cost while maintaining quality to have better competitive price. In a 
business environment where each entity is thriving to achieve apex position not 
only in domestic but global competitive market, it is essential for the entity to fit 
into any of the three competitive strategic dimensions. Cost Leadership, also in 
line with the subject Cost and Management Accounting, can be achieved if an 
entity has a robust Cost and Management Accounting system in place. In this 
chapter, we will learn various aspects of Cost and Management Accounting and 
its application in manufacturing and service environment. 
1.1 Meaning and Definition 
(i)  Cost- Cost is the amount of resource given up in exchange of some goods 
or services.  It can be expressed as a noun as well as a verb. As a noun, it 
Objectives of Cost 
and Management 
Accounting
Scope of Cost  
Accounting
Relationship of  Cost 
and Management 
Accounting with other 
related desciplines
Role & Functions of 
Cost and Management 
Accounting
Users of Cost and 
Management 
Accounting
Use of IT in 
Costing
Cost Objects
Responsibility 
Centres
Cost 
Classification
 1. 
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
1.3
 
INTRODUCTION TO COST AND MANAGEMENT 
ACCOUNTING  
   
 1.3 
can be defined as the amount of expenditure (actual or notional) incurred 
on or attributable to a specified article, product or activity. 
 As a verb, it can be as an action to ascertain the cost of a specified thing or 
activity. 
(ii)  Costing- Costing is defined as “the technique and process of ascertaining 
costs”. 
 According to CIMA “an organisation’s costing system is the foundation of 
the internal financial information system for managers. It provides the 
information that management needs to plan and control the organisation’s 
activities and to make decisions about the future.” 
(iii)  Cost Accounting- Cost Accounting is defined as "the process of 
accounting for cost which begins with the recording of income and 
expenditure or the bases on which they are calculated and ends with the 
preparation of periodical statements and reports for ascertaining and con-
trolling costs." 
(iv)  Cost Accountancy- Cost Accountancy has been defined as “the 
application of costing and cost accounting principles, methods and 
techniques to the science, art and practice of cost control and the 
ascertainment of profitability. It includes the presentation of information 
derived there from for the purpose of managerial decision making.” 
(v)  Management Accounting- As per CIMA Official Terminology “Management 
Accounting is the application of the principles of accounting and 
financial management to create, protect, preserve and increase value for 
the stakeholders of for-profit and not-for-profit enterprises in the public 
and private sectors.” 
 Management Accounting is an integral part of management function. It 
assists management by provision of relevant information for planning, 
organising, controlling, decision making etc.  
(vi)  Cost Management- It is an application of management accounting 
concepts, methods of collections, analysis and presentation of data to 
provide the information needed to plan, monitor and control costs. 
© The Institute of Chartered Accountants of India
 
 
 
1.4 
COST AND MANAGEMENT ACCOUNTING 
 
 2. OBJECTIVES OF COST ACCOUNTING 
The main objectives of Cost and Management Accounting are explained as below: 
(i) Ascertainment of Cost: The main objective of Cost Accounting is 
accumulation and ascertainment of cost. Costs are accumulated, assigned 
and ascertained for each cost object. This cost object may be a unit, job, 
operation, process, department or service. 
(ii) Determination of Selling Price and Profitability: The Cost Accounting 
System helps in determination of selling price and thus profitability of a cost 
object. Though in a competitive business environment selling prices are 
determined by external factors but cost accounting system provides a basis 
for price fixation and rate negotiation.  
(iii) Cost Control: Maintaining discipline in expenditure is one of the main 
objectives of a good cost accounting system. It ensures that expenditures 
are in consonance with predetermined set standard and any variation 
from these set standards is noted and reported on continuous basis. To 
exercise control over cost, following steps are followed: 
(a) Determination of pre-determined standard or results: Standard cost or 
performance targets for a cost object or a cost centre are set before 
 2. 
Objectives of Cost Accounting
Ascertainment of 
Cost
Determination 
of Selling Price 
and Profitability
Cost Control
Determination of pre-determined standard
Measurement of actual performance
Comparison
Analysis of variance and action
Cost 
Reduction
Assisting 
Management in 
Decision Making
© The Institute of Chartered Accountants of India
1.5
 
INTRODUCTION TO COST AND MANAGEMENT 
ACCOUNTING  
   
 1.5 
initiation of production or service activity. These are desired cost or result 
that need to be achieved.   
(b) Measurement of actual performance: Actual cost or result of the cost 
object or cost centre is measured. Performance should be measured in 
the same manner in which the targets are set i.e., if the targets are set up 
operation-wise, and then the actual costs should also be collected and 
measured operation-wise to have a common basis for comparison. 
(c) Comparison of actual performance with set standard or target: The actual 
performance so measured is compared against the set standard and 
desired target. Any deviation (variance) between the two is noted and 
reported to the appropriate person or authority.  
(d) Analysis of variance and action: The variance in results so noted is further 
analysed to know the reasons for variance and appropriate action is 
taken to ensure compliance in future. If necessary, the standards are 
further amended to take developments into account.  
(iv) Cost Reduction: It may be defined "as the achievement of real and 
permanent reduction in the unit cost of goods manufactured or services 
rendered without impairing their suitability for the use intended or 
diminution in the quality of the product." 
Cost Reduction is an approach of management where cost of an object is 
believed to have a scope of further reduction. No cost is termed as lowest 
and every possibility of cost reduction is explored. To do cost reduction, the 
following action is taken: 
(a)  Each activity within an entity is segmented to analyse and identify value 
added and non- value added activities. All non-value added activities are 
eliminated without affecting the essential characteristics of the product 
or process. Value Chain Analysis, a strategic tool, developed by Michael 
Porter, is one of the method to do value analysis. 
(b)  Conducting continuous research and study to know the most optimal 
way to manufacture a product or render a service. 
The three-fold assumptions involved in the definition of cost reduction may 
be summarised as under: 
(a) There is a saving in unit cost. 
© The Institute of Chartered Accountants of India