Nature ,Scope,Advantages,Limitations,differences of Management accounting

Unit 1

Nature and Scope of Management Accounting

In ordinary language any system of accounting, which assists management in carrying out its functions more efficiently may be termed as management accounting. The Institute of Chartered Accountants of England and Wales has stated that “any form of accounting, which enables a business to be conducted more efficiently can be regarded as Management Accounting.”

On the same lines, Robert N. Antony has stated, “Management accounting is concerned with accounting information which is useful to management.” However, these definitions are very general in nature.

Some of the important specific definitions are as follows:

The Institute of Cost and Management Accountants, London has defined Management Accounting as the “application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formation of policies and in the planning and control of the operations of the undertakings”.

The American Accounting Association has defined as follows:

“Management Accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives in the making of rational decisions with a view towards these objectives.”

In the words of Brown and Howard, management accounting may be defined broadly as that aspect of accounting, which is concerned with the efficient management of a business through the presentation to management of such information as, will facilitate efficient and opportune planning and control.

The above definitions clearly indicate that management accounting is concerned with accounting information, which is useful to management. The common thread underlying these definitions is that management accounting is concerned with the efficiency of the various phases of management.

However, it should be clearly understood that it does not supplant financial or cost accounting systems; rather it supplements them in order to serve the diverse requirements of modern management.

Functions of Management Accounting:

The bask function of management accounting is to assist the management in performing its functions effectively.

The manner in which management accounting satisfies the requirements of the management for arriving at appropriate business decisions may be described as follows:

1. Modification of Data:

Accounting data as such are not suitable for managerial decision-making and control purposes. However, they may be used as the basis for making future estimates and projections.

In fact management accounting modifies the available accounting data by rearranging the same, by resorting to a process of classification and combination, which enable retention of the similarities of data without eliminating the dissimilarities.

For example, the sales figures for different months may be classified to know the total sales made during the period product-wise, salesman-wise, and territory-wise.

2. Analysis and Interpretation of Data:

The accounting data is analyzed and interpreted meaningfully for effective planning and decision-making. For this purpose the data is presented in a comparative form. Analytical tools such as Comparative Financial Statements, Common-size Statements, Trend percentages, and ratio Analysis are used and likely trends are projected.

3. Facilitating Management Control:

Management accounting enables all accounting efforts to be directed towards the attainment of goals efficiently by controlling the operations of the company more effectively.

Standards of performance and measure of variation there from are the essential elements of any control system. All these are made possible through standard costing and budgetary control systems, which are an integral part of management accounting.

4. Use of Qualitative Information:

Mere financial data and its analysis and interpretation are not sufficient for decision-making purposes. The management may need qualitative information, which cannot be readily converted into monetary terms.

Such information may be obtained from statistical compilations, engineering records, case studies, minutes of meetings, etc. Management accounting does not restrict itself to financial data alone for helping management; it also uses such [qualitative] information.

5. Satisfaction of Informational Needs of Different Levels of Management:

Different levels of management such as top level, middle level, and lower level managements need different types of information. The top management needs concise information covering the entire field of business activities at relatively long intervals.

The middle level management requires technical data regularly, and the lower level management is interested in detailed figures relating to the particular sphere of activity at short intervals.

Hence, the main function of management accounting is to process accounting and other data in such a way as to satisfy the needs of different levels of management.

Scope of Management Accounting:

The main concern of management accounting is to provide necessary quantitative and qualitative information to the management for planning and control. For this purpose it draws out information from accounting as well as non-accounting sources.

Hence, its scope is quite vast and it includes within its fold almost all aspects of business operations. However, the following areas may rightly be pointed out as lying within the scope of management accounting.

i. Financial Accounting:

The major function of management accounting is the rearrangement or modification of data. Financial accounting provides the very basis for such a function. Hence, management accounting cannot obtain full control and coordination of operations without a well-designed financial accounting system.

ii. Cost Accounting:

Planning, decision-making and control are the basic managerial functions. The cost accounting system provides necessary tools such as standard costing, budgetary control, inventory control, marginal costing, and differential costing etc., for carrying out such functions efficiently. Hence, cost accounting is considered a necessary adjunct of management accounting.

iii. Revaluation Accounting:

Revaluation or replacement value accounting is mainly concerned with ensuring that capital is maintained in real terms and profit is calculated on this basis.

iv. Statistical Methods:

Statistical tools such as graph, charts, diagrams and index numbers etc., make the information more impressive and comprehensive. Other tools such as time series, regression analysis, sampling techniques etc., are highly useful for planning and forecasting.

v. Operations Research:

Modern managements are faced with highly complicated business problems in their decision-making processes. O P techniques like linear programming, queuing theory, decision theory, etc., enable management to find scientific solutions for the business problems.

vi. Taxation:

This includes computation of income tax as per tax laws and regulations, filing of returns and making tax payments. In recent times, it also includes tax planning.

vii. Organization and Methods [O&M]:

O&M deal with organizations reducing cost and improving the efficiency of accounting, as also of office systems, procedures, and operations etc.

viii. Office Services:

This includes maintenance of proper data processing and other office management services, communication and best use of latest mechanical devices.

ix. Law:

Most of the management decisions have to be taken in a legal environment where the requirements of a number of statutory provisions or regulations are to be fulfilled.

Some of the Acts, which have their influence on management decisions, are as follows:

The Companies Act, MRTP Act, FEMA, SEBI Regulations, etc.

x. Internal Audit:

This includes the development of a suitable system of internal audit for internal control.

xi. Internal Reporting:

This includes the preparation of quarterly, half yearly, and other interim reports and income statements, cash flow and funds flow statements, scarp reports, etc.

Advantages of Management Accounting:

Management accounting has various advantages. Through an effective management accounting system, it is possible to enhance the overall performance of the company. Let us have a look at the advantages of management accounting.

1. Increases Efficiency of the company:

Companies opt for Management accounting as it increases the efficiency of company in performing operations. It contributes in striving for better performance by evaluating and comparing. Management accounting makes it easier to achieve various results. This indirectly motivates the employees to strive for better performance. As a result, they receive rewards in the form of promotions. Thus, management accounting indirectly increases the efficiency of the company at a whole.1

2. Increases the bar of Profitability1:

Management accounting includes budgetary control and capital budgeting. The use of this method makes it easier for the company to cut short the extra expenditure for performing vital operations. This indirectly increases the bars of profits for the company, as the company is able to reduce its pricing on the products.

3. Simplifies the decision making in Financial Statements:

Managerial decisions and other activities of management require a simplified report of the financial statement of the company. For this action, management accountant creates a detailed technical report with simpler interpretations. Here, he represents the key facts of the financial statements. This enables the managing officers to take up appropriate decisions for the betterment of the company.

4. Enables the fluctuation of business monetary fund:

One of the essential factors in business is the monetary fund. Management accounting enables a control over the fluctuation of this monetary fund. Management accounting studies the flow of the funds in detail. Moreover, it helps in maintaining the emergency fund in case of any urgency. Further, it also helps in eliminating any source within the company that misuses the fund. After all, emergency preparation should always be kept aside before setting up any business.

5. Cost transparency:

In the corporate world, majority of the costs come from the Information Technology (IT). The work of management accounting in the firm is to work with the IT department closely. This action ensures a within budget actions and provides cost transparency to the company.

6. Flexibility and freedom:

Management accounting system is of flexible nature. These reports do not require to be made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a perfect report.

7. Assist in goal completion1 (Objectives):

The objective of the report presented by the management accountant is to assist in achieving a long-term goal. It becomes possible to achieve the goal due to the detailed information of the management accountant, which highlights the strong and weak points of the company. In addition, this information helps to identify the weakness and takes measures to overcome them.

8. Future prediction from past result:

Every new system that evolves for the corporate world has a single motive. It is to attain success in the competitive market. With similar intend, management accounting system also strives for betterment in performance. Thus, with the help of given data of the past (of the company), it provides a chance to prepare for better future results.

9. Advanced technique and features:

The reasons because of which the management system seems reliable are the special tools and technique. To form an accurate and valid report special techniques like budget controlling, marginal costing, control accounting, etc are used. Use of the technique may differ according to the issue at hand. However, this technique makes it easier to make decisions in the favor of the company.

10. Marginal costing:

Marginal costing is possible with the aid of management accountant. It fixes the selling price of the products created in the organization. Further, it also suggests several ways to use the scarce materials and resources. It also recommends actions based on fixed cost, contribution and other extras.

Although management accounting does not promise perfect decisions, they do increase the chances of taking effective and efficient decisions.

Limitations of Management Accounting:

Management Accounting renders various services to management. Still it has got some limitations.

1. Based on Financial and Cost Records

Both financial and cost accounting information are used in the management accounting system. The accuracy and validity of management account is largely based on the accuracy if financial and cost records maintained. These records determine the Strength and weakness of management accounting.

2. Personal Bias

The analysis and interpretation of financial statements are fully depending upon the capability of the analyst and interpreter. Hence, personal prejudices and bias of an individual can affect the objectivity and effectiveness of the conclusions and recommendations.

3. Lack of Knowledge and Understanding of the Related Subjects

Financial accounting, cost accounting, statistics, economics, psychology and sociology are the related subjects of management accounting. The organization can derive more benefits of management accounting if the management accountant has thorough knowledge over related subjects. If not so, the success of management accounting system is questionable.

4. Provides only Data

Under management accounting system, many alternatives are developed to solve a problem and submitted before the management. Out of the many alternatives available, the management can select any one of alternatives or even discard all of them. Hence, management accounting can only provide data and not prescribe any course of action.

5. Preference to Intuitive Decision Making

Scientific decisions can be taken with the help of using management accounting techniques. But, majority of the management accountant and top level executives prefer their past experience and intuition in making business decisions. The reason is that an intuitive decision making is very simple and easy.

6. Management Accounting is only a Tool

The management accountant is using the management accounting system as a tool to give advice and facilitate the management for decision making. The actual decisions, their implementation and follow up action are the prerogative of the management.

7. Continuity and Participation

The decisions are taken by the management. Their implementation is vested in the hands of management accountant. The continuous efforts of management accountant and full participation of all levels of management are necessary for successful operation of management accounting system.

8. Broad Based Scope

The scope of management accounting is very wide since it considers both monetary and non-monetary transactions of the business organization. The limited knowledge and experience of the management accountant can lead to prepare the data unreliable and undependable.

9. Costly Installation

The cost of installation of management accounting system is very high. Hence, a small business organization can not bear the cost of such installation. Moreover, the utility of this system is restricted only to big and complex organizations.

10. Resistance to Change

The installation of management accounting system brings some changes in the organizational set up and accounting practice. The personnel concerned may resist such changes unless they are getting confidence.

11. Evolutionary State

Management accounting is a recent development discipline. The utility of management accounting is depend upon the intelligent interpretation of the data available for managerial use. Hence, it is presumed that the management accounting stands in evolutionary stage.

12. Unquantifiable Variables

Management accounting seeks to interpret and evaluate an objective historical event on record in terms of money. But, in practice, the business organization is facing many problems which cannot be exposed.

 

Key Differences Between Financial Accounting and Management Accounting

Definition of Financial Accounting

Financial Accounting is an accounting system which is concerned with the preparation of financial statement for the outside parties like creditors, shareholders, investors, suppliers, lenders, customers, etc. It is the purest form of accounting in which proper record keeping and reporting of financial data are done, to provide relevant and material information to its users.

Financial Accounting is based on various assumptions, principles and convention like going concern, materiality, matching, realisation, conservatism, consistency, accrual, historical cost, etc. The financial statement consists of a Balance Sheet, Income Statement and Cash flow statement which are prepared as per the guidelines provided by the relevant statute.

Normally, the statements based on the financial accounting are prepared for one accounting year, to enable the user to make comparisons regarding the financial position, profitability and performance of the company in a specific period. Not only external parties but internal management also gets information for forecasting, planning, and decision making.

Definition of Management Accounting

Management Accounting, also known as Managerial Accounting is the accounting for managers which helps the management of the organisation to formulate policies and forecasting, planning and controlling the day to day business operations of the organisation. Both the quantitative and qualitative information are captured and analysed by the management accounting.

The functional area of management accounting is not limited to providing a financial or cost information only. Instead, it extracts the relevant and material information from financial and cost accounting to assist the management in budgeting, setting goals, decision making, etc. The accounting can be done as per the requirement of the management, i.e. weekly, monthly, quarterly, etc. and there is no format set on the basis of which it is to be reported.

The following points explain the major differences between financial accounting and managerial accounting:

1. Financial Accounting is the branch of accounting which keeps track of all the financial information of the entity. Management Accounting is that branch of accounting which records and reports both the financial and nonfinancial information of an entity.
2. Users of financial accounting are both the internal management of the company and the external parties while the users of the management accounting are only the internal management.
3. Financial accounting is to be publicly reported whereas the Management Accounting is for the use of the organisation and hence it is very confidential.
4. Only monetary information is contained in financial accounting. As against this, management accounting contains both monetary and non-monetary information such as the number of workers, the quantity of raw material used and sold, etc.
5. Financial Accounting is done in the prescribed format, whereas there is no prescribed format for the Management Accounting.
6. Financial Accounting focuses on providing information about the functioning of the entity’s business to its users, whereas Management Accounting focuses on providing information to help them in evaluating the performance and devising plans for the future.
7. The Financial Accounting is mainly done for a specific period, which is usually one year. On the other hand, the management accounting is done as per the needs of the management say quarterly, half yearly, etc.
8. Financial accounting is a must for any company for auditing purposes. On the contrary, management accounting is voluntary, as no editing is done.
9. Financial accounting information is required to be published and audited by statutory auditors. Unlike, management accounting, which does not require information to be published and audited, as they are for internal use only.

Comparison Chart

BASIS FOR COMPARISON	FINANCIAL ACCOUNTING	MANAGEMENT ACCOUNTING
Meaning	Financial Accounting is an accounting system that focuses on the preparation of financial statement of an organization to provide the financial information to the interested parties.	The accounting system which provides relevant information to the managers to make policies, plans and strategies for running the business effectively is known as Management Accounting.
Is is compulsory?	Yes	No
Information	Monetary information only.	Monetary and non-monetary information
Objective	To provide financial information to outsiders.	To assist the management in planning and decision making process by providing detailed information on various matters.
Format	Specified	Not specified
Time Frame	Financial Statements are prepared at the end of the accounting period which is usually one year.	The reports are prepared as per the need and requirements of the organization.
User	Internal and external parties	Only internal management.
Reports	Summarized Reports about the financial position of the organization	Complete and Detailed reports regarding various information.
Publishing and auditing	Required to be published and audited by statutory auditors	Neither published nor audited by statutory auditors.

Difference Between Cost Accounting and Management Accounting

Cost accounting is that branch of accounting which aims at generating information to control operations with a view to maximizing profits and efficiency of the company, that is why it is also termed control accounting. Conversely, management accounting is the type of accounting which assist management in planning and decision-making and thus known as decision accounting.

The two accounting system plays a significant role, as the users are the internal management of the organization. While cost accounting has a quantitative approach, i.e. it records data which is related to money, management accounting gives emphasis on both quantitative and qualitative data.

Comparison chart

BASIS OF COMPARISON	COST ACCOUNTING	MANAGEMENT ACCOUNTING
Meaning	The recording, classifying and summarising of cost data of an organisation is known as cost accounting.	The accounting in which the both financial and non-financial information are provided to managers is known as Management Accounting.
Information Type	Quantitative.	Quantitative and Qualitative.
Objective	Ascertainment of cost of production.	Providing information to managers to set goals and forecast strategies.
Scope	Concerned with ascertainment, allocation, distribution and accounting aspects of cost.	Impart and effect aspect of costs.
Specific Procedure	Yes	No
Recording	Records past and present data	It gives more stress on the analysis of future projections.
Planning	Short range planning	Short range and long range planning
Interdependency	Can be installed without management accounting.	Cannot be installed without cost accounting.

Key Differences Between Cost Accounting and Management Accounting

Definition of Cost Accounting

Cost Accounting is a method of collecting, recording, classifying and analyzing the information related to cost. The information provided by it is helpful in the decision-making process of managers. There are three major elements of cost which are material (direct & indirect), labor (direct & indirect) and overhead (Production, Office & Administration, Selling & Distribution, etc.).

The main aim of the cost accounting is to track the cost of production and fixed costs of the company. This information is useful in reducing and controlling various costs. It is very similar to financial accounting, but it is not reported at the end of the financial year.

Definition of Management Accounting

Management Accounting refers to the preparation of financial and non-financial information for the use of management of the company. It is also termed as managerial accounting. The information provided by it is helpful in making policies and strategies, budgeting, forecasting plans, making comparisons and evaluating the performance of the management.

The reports produced by management accounting are used by the internal management (managers and employees) of the organisation, and so they are not reported at the end of the financial year.

Key Differences Between Cost Accounting and Management Accounting

1. The accounting related to the recording and analysing of cost data is cost accounting. The accounting related to the producing information which is used by the management of the company is management accounting.
2. Cost Accounting provides quantitative information only. On the contrary, Management Accounting provides both quantitative and qualitative information.
3. Cost Accounting is a part of Management Accounting as the information is used by the managers for making decisions.
4. The primary objective of the Cost Accounting is the ascertainment of cost of producing a product, but the main objective of the management accounting is to provide information to managers for setting goals and future activity.
5. There are specific rules and procedure for preparing cost accounting information while there is no specific rules and procedures in case of management accounting information.
6. The scope of Cost Accounting is limited to cost data however the Management Accounting has a wider area of operation like tax, budgeting, planning and forecasting, analysis, etc.
7. Cost accounting is related to ascertainment, allocation, distribution and accounting face of cost. On the flip side, management accounting is associated with impact and effect aspect of cost.
8. Cost accounting stresses on short-range planning, but management accounting focuses on long and short range planning, for which it uses high level techniques such as probability structure, sensitivity analysis etc.
9. While management accounting can’t be installed in the absence of cost accounting, cost accounting has no such requirement, it can be installed without management accounting.

Scope of Financial Accounting:

Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems.

In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions.

The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.

The nature and scope .of accounting is described in the traditional definition of amounting given 1961 b thy_, AI CPA as *Accounting  is the art of recording, classifying and • sum marising significant manner  and in terms of  money transactions and event with are part at least, of of a financial and interpreting the result thereof”

1.Identifying the Transaction and Events. Accounting identifies transaction and event, which can be expressed ion term of money and bring change in the financial position of a business unit. An event (whether internal or external ) is a happening of a consequence to an entity (e.g, use of raw material for production ) An entity means an economic unit that performs economic activities (e.g, Birla Industries Ltd. TISCO).

2.Measuring the identified Transaction and Events  Accounting measures the transaction and events in term of money.

3.Recording. It is the process of enetering the transaction and events in the books of original entry in the chronological manner e.g, date wise.

4.Classifying It is the process of posting of entries in the ledger so that transaction of similar type are accumulated at one place.

5. Summarising It is concerned  with the preparation of Financial Statement such as Income Statement, Balance Sheet and Cash Flow Statement.

6. Analysing  It is concerned with the establishment of relationship between the various item or group of items taken from Income statement or Balance Sheet or both. Its purpose is to identify the financial strengths and weakness of the enterprise. It provides the basis for interpretation.

7.Interpreting. Interpreting is the last stage of accounting process. It is concerned with explaining the meaning and significance of the relationship established by the analysis. In fact, interpretation is the main function of accountant in the present condition since the routine work of recording, classifying and summarising business transaction business transaction can be easily handled by the electronic devices like computers.

8. Communicating It is concerned with the transmission of summarised, analysed and interpreted information to the user to enable them to make reasoned decisions.

Define Cost accounting? Explain the scope of cost?

Accounting is a very old science which aims at keeping records of various transactions. The accounting is considered to be essential for keeping records of all receipts and payments as well as that of the income and expenditures. Accounting can be broadly divided into three categories.

Financial Accounting, aims at finding out profit or losses of an accounting year as well as the assets and liabilities position, by recording various transactions in a systematic manner.

Cost Accounting helps the business to ascertain the cost of production/services offered by the organization and also provides valuable information for taking various decisions and also for cost control and cost reduction.

Management Accounting helps the management to conduct the business in a more efficient manner.

As compared to the financial accounting, the focus of cost accounting is different. In the modern days of cut throat competition, any business organization has to pay attention towards their cost of production.

Computation of cost on scientific basis and thereafter cost control and cost reduction has become of paramount importance. Hence it has become essential to study the basic principles and concepts of cost accounting. These are discussed in the subsequent paragraphs.

Cost accounting is a branch of accounting that has evolved to overcome the limitations of financial accounting. It is the process of accounting for cost, which is concerned more with the ascertainment, allocation, distribution and accounting aspects of cost. It is that branch of accounting, which deals with the classification, recording, allocation, summation and reporting of current and prospective costs. Actually, it is the formal mechanism by means of which of products and services are ascertained and controlled.

It is an internal reporting systems that aims to assist the management for planning and decision-making it primary emphasizes on cost and deals with collection, analysis, interpretation and prospective for managerial decision making on various business problems.

Cost accounting is more concerned with short-tem planning and its reporting period is much losses that financial accounting. It deals with historic data but is also futuristic in approach. Cost accounting systems cannot be installed without proper financial accounting systems. Each organization can develop a costing systems best suited to its individual needs. In financial accounting the major emphasis is in cost classification based on types of transaction e.g., salaries, repairs, insurance, stores etc. but in cost accounting, the emphasis is laid on functions, activities, processes and on internal planning and control and  information needs of the organization.

Similarly, according to national association of accountants USA' 

From the above information definition, it can be concluded that cost accounting is accounting for cost aimed at providing cost data, statements and reports for the purposes to assists the managements in planning decision making and controlling.

Cost :- Cost can be defined as the expenditure (actual or notional) incurred on or attributable to a given thing. It can also be described as the resources that have been sacrificed or must be sacrificed to attain a particular objective. In other words, cost is the amount of resources used for something which must be measured in terms of money. For example – Cost of preparing one cup of tea is the amount incurred on the elements like material, labor and other expenses, similarly cost of offering any services like banking is the amount of expenditure for offering that service.

Thus cost of production or cost of service can be calculated by ascertaining the resources used for the production or services.

Costing :- Costing may be defined as ‘the technique and process of ascertaining costs’. According to Wheldon, ‘Costing is classifying, recording, allocation and appropriation of expenses for the determination of cost of products or services and for the presentation of suitably arranged data for the purpose of control and guidance of management. It includes the ascertainment of every order, job, contract, process, service units as may be appropriate. It deals with the cost of production, selling and distribution.

If we analyze the above definitions, it will be understood that costing is basically the procedure of ascertaining the costs. As mentioned above, for any business organization, ascertaining of costs is must and for this purpose a scientific procedure should be followed. ‘Costing’ is precisely this procedure which helps them to find out the costs of products or services.

Cost Accounting :- Cost Accounting primarily deals with collection, analysis of relevant of cost data for interpretation and presentation for various problems of management. Cost accounting accounts for the cost of products, service or an operation. It is defined as, ‘the establishment of budgets, standard costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds’.

Cost Accountancy :- Cost Accountancy is a broader term and is defined as, ‘the application of costing and cost accounting principles, methods and techniques to the science and art and practice of cost control and the ascertainment of profitability as well as presentation of information for the purpose of managerial decision making.’

If we analyze the above definition, the following points will emerge,

A. Cost accounting is basically application of the costing and cost accounting principles.

B. This application is with specific purpose and that is for the purpose of cost control, ascertainment of profitability and also for presentation of information to facilitate decision making.

C. Cost accounting is a combination of art and science, it is a science as it has well defi ned rules and regulations, it is an art as application of any science requires art and it is a practice as it has to be applied on continuous basis and is not a one time exercise.

Scope of Cost Accounting

The terms ‘costing’ and ‘cost accounting’ are many times used interchangeably. However, the scope of cost accounting is broader than that of costing. Following functional activities are included in the scope of cost accounting:

1. Cost book-keeping: It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments, products and services. Such recording is preferably done on the basis of double entry system.

2. Cost system: Systems and procedures are devised for proper accounting for costs.

3. Cost ascertainment: Ascertaining cost of products, processes, jobs,services, etc., is the important function of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing, planning and control.

4. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the budgeted costs and fixation of responsibility for cost increases.

5. Cost comparisons: Cost accounting also includes comparisons between cost from alternative courses of action such as use of technology for production, cost of making different products and activities, and cost of same product/ service over a period of time.

 6. Cost Control: Cost accounting is the utilisation of cost information for exercising control. It involves a detailed examination of each cost in the light of benefit derived from the incurrence of the cost. Thus, we can state that cost is analysed to know whether the current level of costs is satisfactory in the light of standards set in advance.

7. Cost Reports: Presentation of cost is the ultimate function of cost accounting. These reports are primarily for use by the management at different levels. Cost Reports form the basis for planning and control, performance appraisal and managerial decision making.