MANGMENT ACC UNIT-3

COST MANAGMENT-
Cost management is the process of planning and controlling the costs associated
with running a business. It includes collecting, analyzing and reporting cost
information to more effectively budget, forecast and monitor costs. Cost
management practices can be applied to specific projects or to the company's
overall operating model. Cost management typically focuses on generating savings
and maximizing profits in the longer term.

What is Cost Management in Project

Management?
Cost management is the process of estimating, allocating, and controlling project costs. The cost
management process allows a business to predict future expenses to reduce the chances of budget
overrun. Projected costs are calculated during the planning phase of a project and must be approved
before work begins.

As the project plan is executed, expenses are documented and tracked, so things stay within the cost
management plan. Once the project is completed, predicted costs and actual costs are compared,
providing benchmarks for future cost management plans and project budgets.

Why is cost management important in project

management?
Cost project management is vital to an organization’s project planning process. Global services company
Accenture believes sustainable cost management should be “part of the company’s DNA.”

Without a detailed budget, you cannot effectively map out the resources needed for your project. For
example, if you are renovating an office building, you need to hire an architect, pay for building
materials, and agree upon hourly rates for construction workers. To do this, you need to accurately
estimate all costs and ensure you have the budget to cover them.

What are the benefits of cost management in

project management?
Project managers should not underestimate the business advantages of effective cost management. Here
are three of the key benefits:

Prevents overruns: By allotting costs in the early planning stages, project managers ensure they
don’t overspend on specific areas.

Avoids risk: A good budget will have a risk allowance to ensure project success is not compromised
if unforeseen costs arise.

Aids future planning: Cost reports can help with resource optimization. This can lead to more
accurate budgets in the future.

What are the challenges of cost management?

Cost project management can be tricky. Here are three challenges that frequently crop up:

Lack of resources: If a project budget is too small, it can be difficult to secure the required labor,
materials, etc., to complete the project successfully.

Inaccurate estimation: Poor forecasting can occur when a manager is inexperienced or doesn’t fully
understand the scope of the project. This can lead to cost overruns and affect overall profitability.

Outdated technology: Project managers need access to intuitive, up-to-date technology and tools to
manage costs accurately.
Who is responsible for cost management in a
project?
Project managers are responsible for cost project management. As part of their role, they must estimate
total costs, plan the budget, monitor spend, and prepare for potential risks. A project manager must
remain vigilant throughout the cost management process to ensure they stay within budget and improve
profitability.

Which project tools help with cost

management in project management?
Many tools can aid cost management in project management. The best option is to choose a
versatile project management platform with a variety of tools so that you can tailor the software to your
specific project needs.

Here are some of the most important tools:

Budgeting: For effective cost project management, you need an accurate budget. This requires a
budgeting tool to track costs using custom hourly rates and tailored financial fields.

Time tracking software: This is particularly useful when trying to estimate resource cost. When
team members log hours using a task timer, project managers can use this data to determine how long
a certain task takes, and allocate resources accordingly.

Reporting and analytics tools: For real-time insights into their cost management process, project
managers should generate weekly reports with detailed charts and graphs. Analytics dashboards can
also be created for a project portfolio overview.
THROUGH PUT ACCOUNTING-

Throughput is the amount of a product or service that a company can produce and deliver
to a client within a specified period of time. The term is often used in the context of a
company's rate of production or the speed at which something is processed.

What are the advantages of throughput costing?

The main advantage of throughput accounting is that it yields the best short-term incremental
profits if it is religiously followed when making production decisions.

What is the throughput of the process?

Throughput is the amount of time needed to get a product through the production
process. A product often encounters four steps that make up the total amount of time needed
for production.

One of the most important aspects of Throughput Accounting is the relevance of the information it produces.
Throughput Accounting reports what currently happens in business functions such as operations, distribution
and marketing. It does not rely solely on GAAP's financial accounting reports (that still need to be verified by
external auditors) and is thus relevant to current decisions made by management that affect the business now
and in the future. Throughput Accounting is used in Critical Chain Project Management (CCPM),[9] Drum Buffer
Rope (DBR)—in businesses that are internally constrained, in Simplified Drum Buffer Rope (S-DBR) [10]—in
businesses that are externally constrained (particularly where the lack of customer orders denotes a market
constraint), as well as in strategy, planning and tactics, etc.

COST ASCERTAINMENT AND PRINCING OF

PRODUCT AND SERVICES-
Objectives of Cost Accounting

The objective of the cost accounting is to determine the methods by which

expenditure on materials, wages and overhead are recorded, classified and
allocated. This is necessary so that the

cost of products and services may be accurately ascertained. Thus, the

following are the main objectives of cost accounting:

1. Ascertainment of the cost per unit of the different products that a business
concern manufacturers.
2. To correctly analyze the cost of both the process and operations.
3. Disclosure of sources for wastage of material, time, expenses or in the use
of the equipment and the preparation of reports which may be necessary to
control such wastage.
4. Provide requisite data and help in fixing the price of products manufactured
or services rendered.
5. Determination of the profitability of each of the products and help
management in the maximization of these profits.
6. Exercise effective control of stocks of raw material, work-in-progress,
consumable stores, and finished goods so as to minimize the capital
invested in them.
7. Present and interpret data for management planning, decision-making, and
control.
8. Help in the preparation of budgets and implementation of budgetary
control.
9. Aid management in the formulation and implementation of incentive bonus
plans on the basis of productivity and cost savings.
10. Organization of cost reduction programmes with the help of different
departmental managers.
11. To provide specialized services for cost audit in order to prevent errors
and frauds.
12. To facilitate prompt and reliable information to management.
13. Determination of costing profit or loss by linking the revenues to costs of
those products or services by selling which the revenues have arisen.

LIFE CYCLE COSTING-

What is life cycle costing?
Life cycle costing, or whole-life costing, is the process of estimating how much money you
will spend on an asset over the course of its useful life. Whole-life costing covers an asset’s
costs from the time you purchase it to the time you get rid of it.

Buying an asset is a cost commitment that extends beyond its price tag. For example, think of
a car. The car’s price tag is only part of the car’s overall life cycle cost. You also need to
consider expenses for car insurance, interest, gas, oil changes, and any other necessary
maintenance to keep the car running. Not planning for these additional costs can set you
back.

The cost to buy, use, and maintain a business asset adds up. Whether you’re purchasing a car,
a copier, a computer, or inventory, you should consider and budget for the asset’s future
costs.

Life cycle costing process

Conducting a life cycle cost assessment helps you better predict how much your business will
pay when you acquire a new asset.

To calculate an asset’s life cycle cost, estimate the following expenses:

1. Purchase
2. Installation
3. Operating
4. Maintenance
5. Financing (e.g., interest)
6. Depreciation
7. Disposal

Add up the expenses for each stage of the life cycle to find your total.

You might use past data to help you create a more accurate cost prediction. To simplify the
process, start with your fixed costs. Fixed costs for businesses are the expenses that stay the
same from month to month. Then, estimate variable costs, which are expenses that change.
Life cycle costing process for intangible
assets
You can also use life cycle costing to determine how much your intangible assets will cost.
Intangible assets are non-physical property, such as patents, your business’s brand, and your
reputation.

Although it is more difficult to add up the whole-life cost of an intangible asset than a
tangible asset (physical property), it’s still possible. Consider the total cost of acquiring and
maintaining an intangible asset.

For example, patents cost thousands of dollars. You might also need to hire a lawyer to help
you obtain one. And, you will need to pay fees to maintain your patent.

Or, consider your business’s brand. You might spend money on all the things that go into
creating your brand, such as developing a logo, registering your name, and setting up a small
business website. Further, you will spend money on marketing and maintaining your brand.

Life cycle costing assessment

example
Let’s say you want to buy a new copier for your business.

Purchase: The purchase price is $2,500.

Installation: You spend an additional $75 for setup and delivery.

Operating: You need to buy ink cartridges and paper for it, so you estimate you will spend
$1,000 on these supplies over the course of its useful life. And, you expect the total
electricity the copier will use to be $300.

Maintenance: If the copier breaks, you estimate repairs will total $450.

BACK FLUSH COSTING-

Definition: Backflush costing is an accounting system that waits until all of the
production processes are completed before recording any direct material usages. In
other words, as raw materials and work in process inventory are used during the
production process, no journal entries are created to record these expenditures.
Instead, one main journal entry is used at the end of the production process to
record all of the inventory that was used during the manufacturing process.

What Does Backflush Costing Mean?

Since journal entries were not made as inventory was used, accountants and must
use standard or normal costing to work backward to assign costs to finished goods.
In this sense, the costs associated with producing the products are “flushed back” in
the cycle after the fact and assigned to the proper goods and categories.

This costing system is particularly useful for more complex products that require
many different stages of manufacturing. Normally, each stage of manufacturing
would require a separate journal entry to keep track of costs throughout the
production process. This can add up to hundreds of entries for a single product. Now
imagine if the company produces a couple hundred products. It adds up to a ton of
bookkeeping that is somewhat unnecessary.

The backflush costing system eliminates unneeded journal entries throughout the
process and simplifies the bookkeeping and administrative duties without losing too
much detail or information. It does not however work well for all products or
manufacturing systems.

Example
For example, back flush costing shouldn’t be used for products that take a long time
to produce. As more time goes by, it becomes more difficult to assign costs
accurately. Think about it this way. You can easily look back at the cycle and assign
costs to a product that was produced in one day, but a product that was made over
the course of a year might be more difficult. Also, custom orders typically don’t use
this system as management would have to create a separate bill for each set of
materials used.

This costing system is best used for processes with short production
unit-4
balance score card-
What is a balanced scorecard (BSC)?
The balanced scorecard is a management system aimed at translating an
organization's strategic goals into a set of organizational performance objectives
that, in turn, are measured, monitored and changed if necessary to ensure that
an organization's strategic goals are met.

A key premise of the balanced scorecard approach is that the financial accounting
metrics companies traditionally follow to monitor their strategic goals are insufficient
to keep companies on track. Financial results shed light on what has happened in
the past, not on where the business is or should be headed.

The balanced scorecard system aims to provide a more comprehensive view to

stakeholders by complementing financial measures with additional metrics that
gauge performance in areas such as customer satisfaction and product innovation.

What are the four balanced scorecard perspectives?

The balanced scorecard approach examines performance from four perspectives.

Financial analysis, which includes measures such as operating income,

profitability and return on investment.

Customer analysis, which looks at investment in customer service and

retention.

Internal analysis, which looks at how internal business processes are linked to
strategic goals.

The learning and growth perspective assesses employee satisfaction and

retention, as well as information system.
 why use balance score card-
1. First, the scorecard brings together disparate elements of a company's
competitive agenda in a single report.

2. Second, by having all important operational metrics together, managers are

forced to consider whether one improvement has been achieved at the expense
of another.

simplified cost methoding-

Plastics processors are fortunate to have several options for managing and calculating costs.
In part one of this series, we discussed the benefits of a production profit contribution model.
This article introduces the simplified standard costing method (SSCM). A third costing approach
— managing profitability and cash flow — will be presented in the final installment of this series.

While production profit contribution provides fast and reliable quantitative profitability
information, the SSCM centers on qualitative information such as:

Tracking production setup times, production speed efficiency rates, and downtime percentages;
reporting on raw material efficiency and finished good yield rates;
actual versus predicted standard usage and rates for labor, material, and machines.

It’s important to understand that production profit contribution and SSCM models are not
mutually exclusive and may co-exist for plastics processors.

SSCM provides greater detail on a production run than any other costing method. This
information helps to confirm which production metrics are good while identifying those needing
improvement, such as inadequate production speed or adjustments to the machine or mold/die
relative to part weight. Moreover, this approach addresses other aspects such as examining the
costing rates in question.
Simplified standard costing

It is critical for plastics processors to avoid negative cash production and truly understand
profitability when an order is produced. This can be accomplished by applying the concept of
“direct costs” through the implementation of the SSCM.

In other words, only consider using the direct cost such as material, direct cost of labor, and
direct overhead costs. These should add up to the standard cost of your product and match the
cost of goods sold (COGS) in your financial statement. Below that level, you essentially lose
cash making this product with absolutely no profit or any help paying down your fixed indirect
costs below your COGS in your financial statemen

Traditional standard costing also includes making complicated costing variance analysis at
month’s end, which can be extended in its entirety into your general ledger. This variance
analysis can create a serious and costly administrative burden when you consider that the most
important aspects of standard costing are to:

Ensure product profitability on the production floor;

understand why it is not performing to expectations;
establish the appropriate product pricing to your customer.

CAPITAL BUDGETING AND COST

ANALYISING-
What is Capital Budgeting?

Capital budgeting refers to the decision-making process that companies follow with
regard to which capital-intensive projects they should pursue. Such capital-intensive
projects could be anything from opening a new factory to a significant workforce
expansion, entering a new market, or the research and development Research and
Development (R&D)Research and Development (R&D) is a process by which a
company obtains new knowledge and uses it to improve existing products and
introduce of new products.

Capital budgeting is made up of two words ‘capital’ and ‘budgeting.’ In this context,
capital expenditure is the spending of funds for large expenditures like purchasing
fixed assets and equipment, repairs to fixed assets or equipment, research and
development, expansion and the like. Budgeting is setting targets for projects to
ensure maximum profitability.

What are the objectives of Capital

budgeting?
Capital expenditures are huge and have a long-term effect. Therefore, while
performing a capital budgeting analysis an organization must keep the following
objectives in mind:

Selecting profitable projects

An organization comes across various profitable projects frequently. But due to

capital restrictions, an organization needs to select the right mix of profitable projects
that will increase its shareholders’ wealth.

Capital expenditure control

Selecting the most profitable investment is the main objective of capital budgeting.
However, controlling capital costs is also an important objective. Forecasting capital
expenditure requirements and budgeting for it, and ensuring no investment
opportunities are lost is the crux of budgeting.
 Finding the right sources for funds

Determining the quantum of funds and the sources for procuring them is another
important objective of capital budgeting. Finding the balance between the cost of
borrowing and returns on investment is an important goal of Capital Budgeting.

Capital Budgeting Process

COST ANALYSIS-
Cost Analysis
Definition: In economics, the Cost Analysis refers to the measure of the cost –
output relationship, i.e. the economists are concerned with determining the cost
incurred in hiring the inputs and how well these can be re-arranged to increase the
productivity (output) of the firm.

1. Cost Concepts Used for Accounting Purposes: Generally, the accountants use
these cost concepts to study the financial position of the firm. They are concerned
with arranging the finances of the firm and therefore keep a track of the assets and
liabilities of the firm. The accounting costs are used for taxation purposes and
calculating the profit and loss of the firm. These are:

Opportunity Cost
Business Cost
Full Cost
Explicit Cost
Implicit Cost
Out-of-Pocket Cost
Book Cost

2. Analytical Cost Concepts Used for Economic Analysis of Business

2. Activities: These cost concepts are used by the economists to analyze the
likely cost of production in the future. They are concerned with how the cost of
production can be managed or how the input and output can be re-arranged such
that the overall profitability of the firm gets improved. These costs are:

Fixed Cost
Variable Cost
Total Cost
Average Cost
Marginal Cost
Short-run Cost

UNIT 6

PERFORMANCE MEASURMENT-
What is performance measurement in management accounting?
Performance measurement is the monitoring of budgets or targets against actual results to
establish how well the business and it's employees are functioning as a whole and as
individuals. Performance measurements can relate to shortterm objectives (e.g. cost control)
or longerterm measures (e.g. customer satisfaction).

What are the measures of performance?

In technical terms, a performance measure is a quantifiable expression of the amount, cost,
or result of activities that indicate how much, how well, and at what level, products or
services are provided to customers during a given time period.

What does performance mean in accounting?

What Is Financial Performance? Financial performance is a subjective measure of how well a
firm can use assets from its primary mode of business and generate revenues. The term
is also used as a general measure of a firm's overall financial health over a given period.

• discuss the purpose of strategic and operational and tactical

objectives and their role in performance measurement •
discuss the impact of economic and market conditions on performance measurement •
explain the impact of government regulation on performance measurement •
discuss the relationship between shortterm and longterm performance •
discuss and calculate measures of financial performance
(profitability, liquidity, activity and gearing) and nonfinancial measures • discuss the importance of non-
financial performance measure • Perspectives of the balanced scorecard –
discuss the advantages and limitations of the balanced scorecard –
describe performance indicators for financial success,
customer satisfaction, process efficiency and growth –
discuss and establish critical success factors and key
performance indicators and their link to objectives and mission statements –
establish critical success factors and key performance indicators in a specific situation •
discuss the role of benchmarking in performance measurement

MULTINATIONAL CONSIDERATION-

Multinational Strategy
Definition (1):

A multinational strategy means standardizing products and services around the world
to gain efficiency. This marks the start of the multinational stage. At this stage, a
price-sensitive perspective is popular and cultural differences are less emphasized.

Definition (2):

Under a multinational strategy, the subsidiaries of a company have the benefit of

strong or powerful local autonomy for making business decisions.

Mainly, multinational firms use two types of multinational strategy for capturing
markets in other countries. These are:

Vertical Expansion: Vertical expansion takes place when multinational firms

expand processes for production to other countries. It allows them for taking
advantage of factors like low costs of raw materials and labor, lower
requirements for capital investment, and flexible local laws and regulations.
Multinational firms can also expand by developing sales units in other countries rather
than marketing products through local agencies. It allows the firms to ensure their
products’ reach to their buyers and the control of prices by the firm.