Cost & Management Accounting Rev.

Cheatsheet Content

Cost & Management Accounting: Core Concepts 1. Concept of Cost 🔵 Definition: Sacrifice of resources for a specific purpose (e.g., acquiring goods/services). Monetary value of resources used for production or acquisition. 2. Types of Cost By Nature: Direct, Indirect By Function: Production, Administration, Selling, Distribution, R&D By Behavior: Fixed, Variable, Semi-variable By Controllability: Controllable, Uncontrollable By Normality: Normal, Abnormal For Decision Making: Sunk, Opportunity, Differential, Relevant, Incremental, Shutdown 3. Elements of Cost Direct Material: Raw materials forming part of the final product. Direct Labour: Wages paid to workers directly engaged in production. Direct Expenses: Expenses incurred specifically for a product/job (e.g., royalties, special tools). Overheads (Indirect Costs): All costs other than direct materials, direct labour, and direct expenses. Factory Overheads Administration Overheads Selling & Distribution Overheads 4. Classification of Cost (See "Types of Cost" above for detailed classifications) 5. Cost Objects, Cost Centers & Cost Units Cost Object 🔵: Anything for which a cost is desired (e.g., product, service, project, customer). Cost Center 🔵: A location, person, or item of equipment (or group of these) for which costs may be ascertained and used for cost control (e.g., a department, a machine). Cost Unit 🔵: A unit of product, service, or time in relation to which costs may be ascertained or expressed (e.g., per unit, per kg, per hour, per patient). 6. Cost Accounting & Ascertainment Cost Accounting 🔵: Process of recording, classifying, analyzing, summarizing, and allocating costs associated with a process, product, or service, and reporting this for management decision-making. Direct Material: Cost of materials identifiable with a specific cost object. Direct Labour: Wages for direct production effort. Direct Expenses: Specific expenses for a cost object. Overheads: Indirect costs. Prime Cost 🟡: Direct Material + Direct Labour + Direct Expenses Factory Cost (Works Cost) 🟡: Prime Cost + Factory Overheads Cost of Production 🟡: Factory Cost + Admin. Overheads (related to production) + Op. Stock of WIP - Cl. Stock of WIP Cost of Sales 🟡: Cost of Production + Selling & Distribution Overheads + Op. Stock of Finished Goods - Cl. Stock of Finished Goods ⭐ Exam Smart Tip: Understand the flow of cost accumulation from Prime Cost to Cost of Sales. This is fundamental for numerical problems and theoretical questions on cost sheets. 7. Stock Register Methods FIFO (First-In, First-Out) 🟡: Assumes first units purchased are first ones issued. 🟢 Matches physical flow. 🟢 Closing stock at recent prices. 🔴 Inflates profits in rising price periods. LIFO (Last-In, First-Out) 🟡: Assumes last units purchased are first ones issued. 🟢 Matches current costs with current revenue. 🟢 Tax benefits in rising prices. 🔴 Closing stock at older prices. 🔴 Not permitted by Ind AS/IFRS. Weighted Average Method 🟡: Issues stock at an average price calculated after each purchase. 🟢 Smoothes out price fluctuations. 🟢 Simple to operate. 🔴 Does not reflect actual physical flow. 8. Uniform Costing 🔵 Definition: Application of the same costing principles and practices by several undertakings in the same industry. 🟢 Facilitates inter-firm comparison. 🟢 Helps in price fixation and cost control. 🔴 May not suit all firms due to unique operations. 9. Different Methods of Costing Unit Costing (Output Costing) 🔵: Used where production is homogeneous and continuous (e.g., cement, brick, mining). Cost unit is a single unit of output. Process Costing 🔵: Used where production passes through distinct processes, and output of one process becomes input for the next (e.g., chemicals, textiles). Focus on process-wise cost. Batch Costing 🔵: A form of specific order costing where articles are manufactured in batches (e.g., pharmaceuticals, bakery). Cost unit is a batch. Job Costing 🔵: Used where work is done to customer's specific requirements (e.g., printing press, furniture making). Cost unit is a job. Operating Costing (Service Costing) 🔵: Used for service industries (e.g., transport, hospitals, hotels). Cost unit is a service rendered (e.g., passenger-km, patient-day, room-day). Cost accounting for Hotels: Focus on room-day, guest-day, meal-per-cover. Contract Costing 🔵: Used for large-scale construction or engineering works, often spanning multiple accounting periods (e.g., building, bridge construction). Cost unit is a contract. 10. Integrated and Non-Integrated Accounts Non-Integrated Accounts (Cost Ledger Accounting) 🔵: Maintains separate sets of books for financial and cost accounts. Cost Ledger Control A/c acts as a link. 🟢 Detailed cost information. 🔴 Needs reconciliation. Integrated Accounts 🔵: Maintains a single set of books that records both financial and cost transactions. No separate cost ledger. 🟢 No need for reconciliation. 🟢 Avoids duplication of effort. 11. Reconciliation of Cost & Financial Accounts Purpose: To explain the difference between profit/loss shown by cost accounts and financial accounts. Reasons for Differences: Items recorded only in financial accounts (e.g., interest received, donations, income tax). Items recorded only in cost accounts (e.g., notional rent, interest on own capital). Different methods of stock valuation (e.g., LIFO in cost, FIFO in financial). Different depreciation methods. Under/over-absorption of overheads in cost accounts. Process: Prepare a reconciliation statement starting with one profit figure and adding/subtracting items to arrive at the other. ⭐ Exam Smart Tip: A question on reconciliation often involves preparing the statement. Practice with numerical examples. 12. Cost Accounting Standards (CAS) 🟡 Issued by the Institute of Cost Accountants of India (ICAI). Purpose: To bring uniformity and consistency in cost accounting practices. Key CAS: CAS-1 (Planning & Determining Cost of Production), CAS-2 (Capacity Determination), CAS-3 (Production & Operation Overheads), CAS-4 (Cost of Production for Captive Consumption). Management Accounting 13. Meaning, Characteristics, Nature 🔵 Meaning: Application of accounting techniques and concepts for providing information to management to plan, control, and evaluate business operations. Characteristics: Future-oriented. Selective in nature. Deals with both quantitative and qualitative information. Internal reporting. Not statutory. Nature: Concerned with providing relevant information for internal decision-making. 14. Marginal Costing & Break-Even Analysis Marginal Cost 🔵: Variable cost of one unit of product or service (Direct Material + Direct Labour + Direct Variable Expenses + Variable Overheads). Marginal Costing 🔵: Technique where only variable costs are charged to products; fixed costs are treated as period costs. Contribution 🟡: Sales - Variable Costs. (Key for decision making). P/V Ratio (Profit-Volume Ratio) 🟡: (Contribution / Sales) $\times 100$. (Indicates profitability). Break-Even Analysis 🔵: Study of relationship between costs, volume, and profit. Break-Even Point (BEP) 🟡: Level of activity where total revenue equals total costs (no profit, no loss). $\text{BEP (Units)} = \text{Fixed Costs} / \text{Contribution per Unit}$ $\text{BEP (Sales Value)} = \text{Fixed Costs} / \text{P/V Ratio}$ Margin of Safety (MOS) 🟡: Excess of actual sales over break-even sales. $\text{MOS} = \text{Actual Sales} - \text{BEP Sales}$ $\text{MOS Ratio} = (\text{Actual Sales} - \text{BEP Sales}) / \text{Actual Sales}$ Assumptions of BEP: Costs are linear, fixed costs remain constant, selling price constant, sales mix constant. Uses: Pricing decisions, product planning, profit planning, make or buy decisions. ⭐ Exam Smart Tip: Marginal costing and BEP are critical. Practice formulas and their application in decision-making scenarios. 15. Decision Making Key Principle: Focus on relevant costs and revenues (future, differential costs). Types of Decisions: Make or Buy. Accept or Reject Special Order. Add or Drop a Product Line. Optimal Product Mix (when limiting factor exists - use Contribution per unit of limiting factor). Pricing Decisions. 16. Standard Costing & Variance Analysis Standard Costing 🔵: Preparation and use of standard costs, their comparison with actual costs, and analysis of variances to determine causes and responsibilities. Standard Cost 🔵: A predetermined cost for a unit of product or service, under specified working conditions. Variance Analysis 🔵: Process of analyzing differences between standard costs and actual costs. Material Variances 🟡: Price Variance, Usage Variance. Labour Variances 🟡: Rate Variance, Efficiency Variance. Overhead Variances 🟡: Variable OH (Exp. & Eff.), Fixed OH (Exp. & Vol.). 🟢 Aids cost control and performance evaluation. 🔴 Difficult to set accurate standards; can be demotivating if standards are too tight. 17. Budgetary Control Budget 🔵: A quantitative statement, for a defined period of time, of the policy to be pursued for the purpose of attaining a given objective. Budgetary Control 🔵: Establishment of budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision. 🟢 Aids planning, coordination, and control. 🔴 Can be rigid; time-consuming to prepare. 18. Types of Budgets Functional Budgets: Sales, Production, Material, Labour, Overheads, Cash, Capital Expenditure. Master Budget: Consolidated summary of all functional budgets. Fixed Budget: Prepared for a single level of activity. Flexible Budget: Prepared for various levels of activity. Zero Base Budgeting (ZBB): (See below) 19. Cash Budget Purpose: Forecasts cash inflows and outflows over a specific period. Components: Opening Balance + Cash Receipts (sales, collections) - Cash Payments (purchases, expenses, wages) = Closing Balance. 🟢 Helps manage liquidity, identify surplus/deficit. 🔴 Based on forecasts, so accuracy depends on assumptions. 20. Flexible Budget Definition: A budget designed to change in relation to the level of activity actually attained. Key: Separates costs into fixed and variable components. 🟢 More realistic for performance evaluation than fixed budgets. 🟢 Useful for variance analysis. 21. Zero Base Budgeting (ZBB) Definition 🔵: A method of budgeting where all activities are re-evaluated each time a budget is set. Starting from a 'zero base', managers must justify every item of expenditure. Process: Identify Decision Units. Analyze Decision Packages (identifying alternative ways to perform activity). Rank Decision Packages. Allocate Resources. 🟢 Encourages efficiency, re-evaluation of activities. 🔴 Time-consuming, requires extensive documentation. 🎯 ONE-DAY BEFORE EXAM QUICK REVISION PAGE 🎯 Key Formulas 🟡 Prime Cost: DM + DL + DE Contribution: Sales - VC P/V Ratio: (Sales - VC) / Sales OR Contribution / Sales BEP (Units): FC / Cont. per Unit BEP (Value): FC / P/V Ratio MOS: Actual Sales - BEP Sales Desired Sales (Units): (FC + Desired Profit) / Cont. per Unit Material Price Variance: (Std. Price - Act. Price) $\times$ Act. Qty Material Usage Variance: (Std. Qty - Act. Qty) $\times$ Std. Price Labour Rate Variance: (Std. Rate - Act. Rate) $\times$ Act. Hours Labour Efficiency Variance: (Std. Hours - Act. Hours) $\times$ Std. Rate Methods of Costing (Mnemonic: UP BJ CO) U nit - Homogeneous output P rocess - Multiple stages B atch - Groups of items J ob - Specific customer orders C ontract - Large projects O perating (Service) - Services Reconciliation - Common Differences Financial Only: Interest income, donations, income tax, abnormal losses/gains. Cost Only: Notional rent, interest on own capital. Different Valuations: Stock, Depreciation. Over/Under Absorption: Overheads. Budgeting Types Fixed: One activity level. Flexible: Varies with activity. ZBB: Justify from scratch. Cash: Inflows/Outflows. Management Accounting Nature Internal, Future-oriented, Decision-focused, Not statutory. ⭐ Exam Smart Tip: Answer Structure for 10-Mark Questions Introduction 🔵: Define the concept (1-2 lines). Body: Explain characteristics/features. List advantages/disadvantages (Green/Red points). Mention relevant formulas/standards (Yellow points). Use a small table or diagram if applicable (e.g., cost elements, BEP graph description). Conclusion: Summarize importance or application of the concept (1-2 lines).