1 Dr Ataur Rahman Farooqi Assistant Professor (Management) Subject:Cost & Management Accounting Semester 2 nd, 2015MASTER SCHEDULE Lesson Plan UNI T-1 Class 1 Wednesday, 28 January,2016 Accounting for Management, Role of Cost in decision making, Class 2 Thursday, 28 January,2016 Accounting and Cost Accounting, types of cost Class 3 Friday, 29 January,2016 Cost concepts, Elements of cost Materials, Labour and overheads and their Allocation and Apportionment Class 4Saturday,30 January,2016 Preparation of Cost Sheet, Methods of Costing Class 5 Monday, 01,2016 Practical problems on cost sheet I & II II III Class 6Tuesday, 02,2016 Practical problems on cost sheet Class11Monday, 08,2016Practical problems on P/V ratio Class16Saturday, 13,2016 Differential Costing and Incremental Costing: Concept, uses and applications Class7Wednesday, 03,2016 Reconciliation of Cost and Financial Accounting Class12Tuesday, 09,2016Practical problems on P/V ratio Class 17Monday, 15,2016 Methods of calculation of Differential Costing and Incremental Costing costs and their role in management decision making like sales, replacement, buying etc Class8Thursday, 04,2016 Marginal Costing, Concept of marginal costing Class13Wednesday, 10,2016Concept and uses of Contribution Class18 Tuesday, 16,2016 Budgeting: Concept of Budget, Budgeting and Budgetary Control Class9Friday, 05,2016 Marginal Costing versus Absorption Costing Class14Thursda y, 11,2016Breakev en Point and their analysis for various types of decision Class 19Wednesday, 1,2016Types of Budget, Static and Flexible Budgeting Class10Saturday, 06,2016 Cost- Volume- Profit Analysis and P/V Ratio Analysis and their ClassFriday, 12,2016Decision making in product pricing, multi product pricing, replacement, Class 20 Thursday, 18,2016 Problems Static Flexible Budgeting on and
2 III Class 21Friday, 19,2016 Preparation of Cash Budget, Sales Budget, Production Budget, materials Budget, Capital Expenditure Budget and Master Budget Class 21 Friday, 26,2016Practical problem on Budgeting Class 22Saturday, 27,2016 Practical problem on Budgeting Class 23Monday, 29,2016Practical problem on Budgeting Class 24Friday, March 04,2016 Practical problem on Budgeting III & IV Class 25Saturday, March 05,2016Practical problem on Budgeting Class26 Tuesday, March 08,2016Advantages and Limitations of Budgetary Control Class 27 Wednesday, March 09,2016 Standard Costing: Concept of standard costs Class28Thursda y, March 10,2016Establis hing various cost standards Class 29Friday, March 11,2016 Calculation of Material Variance, Labour Variance, and Overhead Variance IV Class30 Saturday, March 12,2016 Practical problems on Material Variance, Labour Variance, and Overhead Variance Class31Monday, March 14,2016Practical problems on Material Variance, Labour Variance, and Overhead Variance Class32Wednesday, March 16,2016Practical problems on Material Variance, Labour Variance, and Overhead Variance Class33Thursda y, March 17,2016 Activity Based Costing, Cost Management, Value Chain Analysis, Target Costing & Life Cycle Costing Class 34Friday, March 18,2016 Concept, strategies and applications of Activity Based Costing, Cost Management, Value Chain Analysis, Target Costing & Life Cycle Costing IV & V Class 35Saturday, March 19,2016 Responsibility Accounting & Transfer Pricing:Concept and various approaches to Responsibility Accounting Class36 Monday, March 21,2016 Concept of investment center, cost center, profit center and responsibility center and its managerial Implications Class37Tuesday, March 22,2016Concept of cost center, profit center and its managerial Implications Class38Wednes day, April 06,2016 Concept of responsibility center and its managerial Implications Class39 Monday, April 11,2016 Absorption Costing
3 V V Class 40Tuesday, April 12,2016 Revision and practical queries Class 45Monday, April 18,2016 Revision and practical queries Class 41 Wednesday, April 13,2016 Revision and practical queries Class 46Tuesday, April 19,2016 WednesdayRevisio n and practical queries Class 42 Saturday, April 16,2016 Revision and practical queries Class 47 Wednesday, April 20,2016 Revision and practical queries Class 43 Monday, April 18,2016Revision and practical queries Class 44Tuesday, April 19,2016Revision and practical Note: Each unit covered with numerical practice and assignments. After completion of syllabus, the faculty will plan to solve minimum 03 years of Dr APJAKTU question papers. GENERAL INFORMATION Teaching Staff: Dr Ataur Rahman Farooqi Class Meetings: JIT Lecture Theater Building Goals and Objectives: Objective of the subject: Cost & Management accounting The objective of this subject is to expose the students to the applied aspect of accounting and making them familiar with the techniques of using Accounting information for decision making. Having been introduced to these techniques and having acquired the ability to understand accounting language, the students should be in a position to make effective use of accounting information in resolving the problems, which they may face as managers. Applied side of the subject will be given more emphasis and attentions compared to its conceptual aspect. Objectives of Cost Accounting The main objectives of Cost Accounting are as follows : (i) Ascertainment of cost, (ii) Determination of selling price, (iii) Cost control and cost reduction, (iv) Ascertaining the profit of each activity, (v) Assisting management in decision-making. These three important aspects of cost accounting will help student to excel as manager & entrepreneur. Objectives of Managerial Accounting
4 A basic objective of managerial accounting is to improve the effectiveness of both the management planning and control functions. Plans should be developed on the same information base as the mechanisms of control. Planning depends on the same reporting and control mechanisms that make central oversight possible and decentralized management feasible. Building the mechanism of control on one data base (financial accounting) and the planning process on another (program analysis) places too great a burden on the management system as the intermediary. Managerial accounting involves in the formulation of financial estimates of future performance (the planning and budgeting processes) and, subsequently, the analysis of actual performance in relation to those estimates (program evaluation and control. Reading Materials: Books consulted to complete the aforesaid syllabus includes : 1. Writer I M Pandey, titlemanagement Accounting, 2. Writer Jain & Narang, title Cost accounting, 3. Writer Khan and Jain, title Management Accounting 4. Writer K L Gupta,, title Management Accounting Expectations: This is a 5-unit graduate course. Accordingly, the course has been designed to demand approximately 5 hours per week of your time. It is expected that each student will prepare for and attend all of the class sessions assignment work will be given which you have to complete with the given time and class test will be also there which you have to attend regularly. If a student s fails to do so he will be given zero for that task which is going to reflect a draw down in your Session marks. 75% attendance criteria which is prescribed by Dr APJ AKTU ( Formerly UPTU). Grading: Based On Four Points: 1. Sessional Marks (2 hours paper/ 30 Marks) 2. Attendance (10 Marks) 3. Assignments (Total 5/5 Marks) 4. Class Test (Total 5 / Marks) Class Preparation and Participation: Reading assignments are given in the Class Schedule for each class session. You are expected to come to class prepared to discuss the readings and the suggested questions. Your individual class participation grade will be based upon your in-class remarks during discussions.
5 Classes and Topics Class 1 Introduction about Accounting for Management, Role of Cost in decision making The Management Accounting Perspective of the Business Enterprise The management accounting view of business may be divided into two broadcategories: (1) basic features and (2) basic assumptions. In management accounting, decision making may be simply defined as choosing a course of action from among alternatives. If there are no alternatives, then no decision is required. The process of making decisions is generally considered to involve the following steps: 1 Identify the various alternatives for a given type of decision. 2. Obtain the necessary data necessary to evaluate the various alternatives. 3. Analyze and determine the consequences of each alternative. 4. Select the alternative that appears to best achieve the desired goals or objectives. 5. Implement the chosen alternative. 6. At an appropriate time, evaluate the results of the decisions against standards or other desired results. Functions and objectives of cost and management accounting include the following: 1. Planning 2. Decision Making 3. Monitoring & Control 4. Accountability Class 2 Accounting and Cost Accounting, types of cost. This topic builds a foundation for developing an operational cost accounting system by describing the main components of such a system. In addition, the chapter includes discussions of the various functions of information systems and illustrations of the basic types of financial results that are obtained from cost accounting systems. More specifically, the purpose of this chapter is to: 1) describe the five major components of a cost accounting system, including the various alternatives associated with each component, 2) describe the four functions of information or cost accounting systems and 3) to illustrate the two major types of income statements that are generated from these systems. The chapter contains three main sections that are related to these three objectives. The emphasis in this chapter is still primarily conceptual, although several illustrations and practice problems require the preparation of income statements. Class 3Cost concepts, Elements of cost Materials, Labour and overheads and their Allocation and Apportionment Cost is the amount of expenditure (actual or notional) incurred on or attributable to, a specified thing or activity. Thus, material cost of a product will mean the expenses incurred in procuring,
6 storing and using materials in the product. Similarly, labour cost will represent that part of payment made to the workmen for time spent on the product during its manufacture. Class 4 Preparation of Cost Sheet, Methods of Costing It is a simple method to depict cost. It is based on the principles of cost accounting. We put costs in different categories and put it in a cost sheet. Typical cost sheet is divided in 4 parts : 1. Total direct cost or prime cost 2. Prime cost + factory cost = works cost 3. Works cost + admn. Exp + stock adjustment= Cost of production 4. cost of production+sales exp= cost of sales + profit =sales Class 5 Practical problems on cost sheet Class 6 Practical problems on cost sheet Class7 Reconciliation of Cost and Financial Accounting After the discussion students will learn reasons for the difference in the profit or loss as per financial and cost accounts; 1. The need for reliability of cost accounts; 2. To coordinate the activities of financial and cost accounts; 3. The method of reconciling the cost and financial profits; 4. The circumstances that lead to the difference between cost and financial profits. Class8 Marginal Costing, Concept of marginal costing The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for. Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs. Class9 Marginal Costing versus Absorption Costing Absorption costing It is costing system which treats all manufacturing costs including both the fixed and variable costs as product costs. Marginal costing It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost Class10 Cost- Volume- Profit Analysis and P/V Ratio Analysis and their implications
7 The profit /volume ratio,which is also called the contribution ratio or marginal ratio express the relation of contribution to sales and can be expressed as under P/v ratio = / The P/v Ratio,which establishes the relationship between contribution and sales is of vital importance for studying the profitability of operations of a business.it reveals the effect on profit in the volume. Higher the P/V Ratio, more will be the profit and lower the P/V Ratio lesser will be the profit. Class11 Practical problems on P/V ratio Class12 Practical problems on P/V ratio Class13 Concept and uses of Contribution The formula for contribution margin is the sales price of a product minus its variable costs. In other words, calculating the contribution margin determines the sales amount left over after adjusting for the variable costs of selling additional products. To better understand contribution margin, consider that the net income of a company is its revenues minus expenses. The term revenues is synonymous with sales, and expenses include fixed costs and variable costs. Fixed costs are expenses that typically do not change and are not heavily influenced by the quantity of products sold. Land and equipment are examples of fixed costs. Class14 Breakeven Point and their analysis for various types of decision In most cases, the business requires a financial investment before the business begins its operations. Even after the operations begin, it often takes time and many sales before the business achieves profitability. The point where the business is no longer operating with a loss but has yet to earn a profit is the business s break-even point. Break-even Point The break-even point is the point where the business s sales have generated enough income to cover all of its fixed costs and expenses. At that point, all of the business s incoming revenue is profit as long as the expenses and costs are not increased and the sales amounts are not reduced. Class 15 Decision making in product pricing, multi product pricing, replacement sales Class16 Differential Costing and Incremental Decision-making is essentially a process of selecting the best alternative given the available information for comparison of strengths and weaknesses of each alternative. If there exists no alternative to the current course of action, then there is no decision to be made. However, it is rare regarding any course of action for there not be alternatives. In personal decision-making, factors other than income and expenses such as
8 qualitative factors may be more important than cost in deciding. However, in business decisions are generally made by identifying the alternative with the most revenue or the least cost. Incremental analysis is a decision-making tool in which the relevant costs and revenues of one alternative are compared to the relevant costs and revenues of another alternative. Class 17 in this lecture students will learn methods of calculation of Differential Costing and Incremental Costing costs and their role in management decision making like sales, replacement, buying etc. Class 18 Budgeting: Concept of Budget, Budgeting and Budgetary Control After the completion of this lecture students will learn objective & importance of budgeting & budgeting control. A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers. Budgetary control is the process by which financial control is exercised within an organisation. Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances.managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive. Class 19 Types of Budget, Static and Flexible Budgeting. A flexible budget is developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period. A key difference between a flexible budget and a static budget is the use of the actual output level in the flexible budget.a static budget is a budget prepared for only one level of activity. It is based on the level of output planned at the start of the budget period. The master budget is an example of a static budget. Class 20 Problems on Static and Flexible Budgeting Class 21 In this lecture Preparation of Cash Budget, Sales Budget, Production Budget, materials Budget, Capital Expenditure Budget will be discussed with the students. Class 21 Practical problem on Budgeting Class 22 Practical problem on Budgeting Class 23 Practical problem on Budgeting
9 Class 24 Practical problem on Budgeting Class 25 Practical problem on Budgeting Class 26 Advantages and Limitations of Budgetary Control Advantages of budgeting and budgetary control There are a number of advantages to budgeting and budgetary control: 1. Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction. 2. Promotes coordination and communication. 3. Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control. 4. Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and noncontrollable factors. 5. Enables remedial action to be taken as variances emerge. 6. Motivates employees by participating in the setting of budgets. 7. Improves the allocation of scarce resources. 8. Economises management time by using the management by exception principle. The disadvantages of budgets are: 1. The major problem occurs when budgets are applied mechanically and rigidly. 2. Budgets can demotivate employees because of lack of participation. If the budgets are arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures, and will not be committed to them. 3. Budgets can cause perceptions of unfairness. 4. Budgets can create competition for resources and politics. 5. A rigid budget structure reduces initiative and innovation at lower levels, making it impossible to obtain money for new ideas. Class 27 Standard Costing: Concept of standard costs A standard, as the term is usually used in management accounting, is a budgeted amount for a single unit of output. A standard cost for one unit of output is the budgeted production cost for
10 that unit. Standard costs are calculated using engineering estimates of standard quantities of inputs, and budgeted prices of those inputs. Class 28 Establishing various cost standards When you select the standard cost calculation, you define the cost of ingredients in each inventory organization during a specific period of time. A positive cost of by-product means that you either sell or dispose it at a profit. A positive cost for a by-product reduces the cost of the co-products. The cost of the by-product is apportioned using the cost allocation factors that are defined in recipe and are applicable to co-products also. A negative cost of by-product means that you spend money to dispose off the by-product. For example, waste treatment costs for any toxic by-product. In this case the cost of the co-products are increased appropriately. Class 29 Calculation of Material Variance, Labour Variance, and Overhead Variance Class 30Practical problems on Variance Material Variance, Labour Variance, and Overhead Class 31 Practical problems on Material Variance, Labour Variance, and Overhead Variance Class 32 Practical problems on Material Variance, Labour Variance, and Overhead Class 33 Activity Based Costing, Cost Management, Value Chain Analysis, Target Costing & Life Cycle Costing Conventional management accounting systems include a range of financial performance reports and measures to provide managers with information for cost control. Contemporary management accounting systems also include various tools and techniques that provide information for cost management. What is cost management and how does it differ from conventional approaches to cost control? Cost management is the improvement of an organisation s cost effectiveness through understanding and managing the real causes of costs. Class 34 Concept, strategies and applications of Activity Based Costing, Cost Management, Value Chain Analysis, Target Costing & Life Cycle Costing Class 35 Responsibility Accounting & Transfer Pricing: Concept and various approaches to Responsibility Accounting An accounting system that collects, summarizes, and reports accounting data relating to the responsibilities of individual managers.
11 The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts, or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers. Class 36Concept of investment center, cost center, profit center and responsibility center and its managerial Implications Revenue centers Revenue centers usually have authority over sales only and have very little control over costs. To evaluate a revenue center s performance, look only at its revenues and ignore everything else. Revenue centers have some drawbacks. Their evaluations are based entirely on sales, so revenue centers have no reason to control costs. This kind of free rein encourages Al the concession manager to hire extra employees or to find other costly ways to increase sales (giving away salty treats to increase drink purchases, perhaps. Cost centers Cost centers usually produce goods or provide services to other parts of the company. Because they only make goods or services, they have no control over sales prices and therefore can be evaluated based only on their total costs. Profit centers Profit centers are businesses within a larger business, such as the individual stores that make up a mall, whose managers enjoy control over their own revenues and expenses. They often select the merchandise to buy and sell, and they have the power to set their own prices Class 37 Concept of cost center, profit center and its managerial Implications Class 38 Concept of responsibility center and its managerial A responsibility center is a part or subunit of a company for which a manager has authority and responsibility. The company's detailed organization chart is a logical source for determining responsibility centers. The most common responsibility centers are the departments within a company. Class 39 Absorption Costing A method of costing a product in which all fixed and variable costs are apportioned to cost centers where they are accounted for usingabsorption rates. This method ensures that all incurred costs are recovered from the selling price of a good or service. Also called full absorption costing. See also direct costing, marginal costing.
12 Class 40 Revision and practical queries After completion of subject I will revise whole subject for the students. References 1. Pandey I M - Management Accounting (Vikas, 2004, 3rd Ed.) 2. Vij-Management Accounting (Excel Books) 3. Balakrishnan _ Managerial Accounting (Wiley Dreamtech) 4. Alex Cost Accounting (Pearson) 5. Khan and Jain - Management Accounting (Tata McGraw-Hill, 2000) 6. Sinha- Accounting and Costing for Management (Excel Books) 7. Horngren et al - Introduction to Management Accounting (Prentice hall, 2002, 12th edition)