JAIIB AFM Module-D Unit 3 : An Overview Of Cost & Management Accounting

18/09/2023

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JAIIB Paper 3 AFM Module D Unit 3 : An Overview Of Cost & Management Accounting (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 3 (Accounting and Financial Management for Bankers) includes an important topic called “An Overview Of Cost & Management Accounting”. Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 3 (AFM) Module D (TAXATION AND FUNDAMENTALS OF COSTING ) Unit 3 : An Overview Of Cost & Management Accounting Aspirants must go through this article to better understand the topic, An Overview Of Cost & Management Accounting, and practice using our Online Mock Test Series to strengthen their knowledge of An Overview Of Cost & Management Accounting. Unit 3 : An Overview Of Cost & Management Accounting

Cost Accounting

Concept of cost

To a consume: cost means the purchase price.
For the producer of a product or provider of a service: the cost means the expenditure incurred for producing the product or providing the service.
Costing means ascertaining these costs incurred in producing this specific product or providing this specific service.
Cost may involve various elements like materials, labour, energy, transport, depreciation etc.

Meaning of cost accountancy

For an organisation producing only one product, the costing exercise may be simple as the cost per unit can be arrived at by dividing total cost by the number of units produced. But, for an organisation producing multiple products, the costing exercise may be a bit complicated as the
costs are to be allocated properly to each product.
For example, if the total cost on fuel and electricity is ₹ 20 lakh, and there are 5 types of products manufactured in the factory, it will be not be correct to allocate ₹ 4 lac to each type of the product group.
We will have to conduct proper study of the manufacturing process of each type of products and keep proper records for the correct allocation of cost.
Cost Accounting deals with this aspect.

Involves identifying, measuring, recording, allocating and communicating economic information, related to a product or service, in terms of money.

Objectives of cost accounting

The main objective of cost accounting is to ascertain the cost of each product manufactured or service provided by an organisation.

Advantages and scope of cost accounting

Cost accounting provides decision making information to the management in various areas.

Some of these are as under:

Elements of cost

There are various methods of classifying the cost elements of a product or service.

The classification of the elements of cost based on the nature of these elements is as under:

Material

In is of two types: direct material cost and indirect material cost.

Direct material Cost : Major part of the finished product.

For example: For producing a car, various components are purchased/manufactured.
The cost of these components is direct material cost.

Indirect material Cost: Ancillary to production and do not form part of the finished product.

For example: While manufacturing a car, machines consume lubricants and welding electrodes are used to weld steel sheets and components.
These consumables do not directly form part of the car but are necessary in producing it.

Labour cost

Also is classified into direct labour and indirect labour cost.

Direct labour cost: Wages paid to workers who are directly engaged in the production process and their time is traceable to units of products.
For example, wages paid to workers in the car factory for production of components and their assembly.
Indirect labour cost cost is the cost of labour employed for the purpose of carrying tasks incidental to production of goods or rendering the services.
For example: In a car factory, the cost of labour employed in the stores, administration, security etc. is classified as indirect labour cost.

Expenses

These also are classified as direct or indirect.

Direct expenses: incurred on a specific cost unit and are identifiable with the cost unit.
For examples: The cost incurred in designing a special car model can be attributed to the number of cars of that model produced.
Indirect expenses are those expenses which cannot be directly or conveniently allocated to a specific cost unit.
For examples: Expenses incurred on rent, taxes, insurance, lighting etc. in a car factory can be treated as indirect expenses as these cannot be attributed to a particular model of cars being manufactured in the factory.

The classification of the elements of cost based on their association with the volume of production is fixed, variable and semi-variable cost.

Fixed costs: These are the costs which, during a period, do not depend on the volume of production or the level of activity. For example: The insurance premium paid for the factory building and other fixed assets remains the same irrespective of the number of cars produced during the year.
Variable costs: These are the costs which, depend directly on the volume of production or the level of activity. For example: The cost of engines will be directly proportional to the number of cars produced during the year.
Semi-variable costs: Such costs qualities of both fixed and variable costs. Because of their partly variable nature, they increase with the volume but they do not increase in direct proportion to increase in output, due to their partly fixed nature. For example: If the production of cars doubles in the factory, the administrative department will also have to employ more staff but the increase will not be 100%.

Cost Centre

Cost centre is the smallest organisational sub-unit for which separate cost allocation can be made.
Chartered Institute of Management Accountants(CIMA), London, describes a cost centre as: “A production or service location, function, activity or item of equipment whose costs may be attributed to cost units”.
In other words, a cost centre is one of the many convenient units into which the whole production facility has been divided for the purpose of costing the goods produced.
Each such unit consists of a specific production centre, or a department or a sub-department or, specific type of machinery or a group of persons.
For example can be a bank branch where cash department can be considered as one cost centre while the loan department can be another cost centre.
Classified as Productive, Unproductive or Mixed Cost Centres.
Productive cost centre is actually engaged in making the products.
Unproductive cost centre does not directly contribute in making the product but provides essential support to the productive centres.
Mixed cost centre is sometimes involved directly in contributing to the manufacture of the product and sometimes in providing service to the productive departments.

Cost Unit

It refers to measure of cost.
For example, a transport company may quote its rate per kilometre while a sugar manufacturing company may quote the rate for each ton or kilogram.
CIMA defines a unit of cost as “a unit of product or service in relation to which costs are ascertained”.
Therefore, whenever we have to do costing of a product or service, we decide a unit of that product or service for which the costing will be done.
Thus, sugar manufacturer will find the cost of producing one ton or kilogramme of sugar while the transport company will add up all the cost elements involved in covering a distance of one kilo meter.

The cost units are usually the units of physical measurements like number, weight, area, length, value, time etc.
An example of time being the cost unit is finding the hourly cost of a machining centre. Similarly, if a factory is producing chemicals, its cost unit can be a litre or a gallon. In case of crude oil, the commonly used cost unit is barrel.

Methods of Costing

Depending on the type and nature of the product, the costing method adopted by organisations are different.

Technique of Costing

Cost Accounting Standards

As financial accounting standards protect the interests of outside users, they have gained wide and also statutory acceptance.
However, the cost accounting system generates information primarily for internal use and the primary users of cost information are the managers of the company.
Therefore, the principles and practices relating to cost accounting, which evolved over years, have not gained the acceptability and status enjoyed by the financial standards.
In India, the Cost Accounting Standards (CAS) have been issued by the Institute of Cost Accountants of India (ICoAI).
The Preface to Cost Accounting Standards issued by the ICoAI has set out the following objectives to be achieved through CAS
To provide better guidelines on standard cost accounting practices;
To assist cost accountants in preparation of uniform cost statements;
To provide guidelines to bring standard approach towards maintenance of cost accounting records under various statutes;
To assist the management to follow the standard cost accounting practices in the matter of compliance with statutory obligations; and
To help Indian industry and the government towards better cost management.

Difference Between Financial Accounting and Cost Accounting

Management Accounting

Meaning and evolution of Management Accounting

Management of any business organisation has to take various decision every day regarding transactions and events like sales, purchases, production volumes, outsourcing, pricing, controlling expenses, addition or disposal of fixed assets etc.
Most of these transactions and events can be measured and expressed in money values and affect the working and position of the organisation.
Therefore, these need to be reported to the management.
Management accounting relates to measurement, recording and analysing all those aspects of an organisation which are important for the management to take decisions on conducting the business of the organisation efficiently and effectively.
As per the definition of management accounting, given by Robert Anthony, “Management accounting is concerned with accounting information which is useful to management”.
The basic data for management accounting comes from the same accounting system which is established for financial accounting and cost accounting systems but the scope of providing information and reports is much wider.
Statistical and mathematical techniques are also used in management accounting in addition to the accounting techniques.
The evolution of Management Accounting has its roots in the industrial revolution of the 19th century, which placed new pressures on companies through capital markets, creditors, regulatory bodies, and taxation.
As the operations became more complex due to expansion of product lines, forward looking companies felt increasing need for

Objective of Management Accounting

The basic objective of management accounting is to assist the management in carrying out its duties efficiently by identifying, interpreting and presenting the relevant information. The information presented by management accounting can be broadly used for the following purposes (as mentioned by CIMA, London):

Formulating strategy;
Planning and controlling activities;
Decision taking;
Optimising the use of resources;
Disclosure to shareholders and others external to the entity;
Disclosure to employees;
Safeguarding assets.

Scope of Management Accounting

The scope of providing information and reports under management accounting is much wider than under the financial accounting and cost accounting systems. Statistical and mathematical techniques, including budgetary control, are also used in management accounting in addition to the accounting techniques. Some of the important tasks, which fall under the scope of management accounting, are as under:

Management accountancy involves developing financial accounting, cost accounting, tax accounting and information systems to meet the changing needs of management functions.
Management accountancy compiles, analyses, interprets and presents accounting and other data to make it understandable and usable to the management for planning.
Management accountancy helps in communicating management plans to the various levels in the organisation.
Management accountancy also helps in developing an effective system of feed-back reports. Such reports help in analysing the reasons and responsibilities for deviations so that appropriate corrective measures can be taken.
Management accounting also provides system of evaluating the performance of the management itself. This helps not only the owners and investors but also helps management in self-appraisal of their performance.

Tools and Techniques of Management Accounting

As the operations became more complex, the companies felt increasing need for management-oriented reports and improved tools and techniques in management accounting have been devised based on the new requirements.
This is a continuing process and improved tools and techniques continue to evolve with increase in complexity and needs of the businesses.

Presently, the main tools and techniques used in management accounting are as under: