Lecture # 1

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 Books
1. Matz, A., Uzry, M.F., dan Hammer. L.H., Cost Accounting - Planning
and Control 7th Edition

2. Cost Accounting-A Managerial Emphasis By: Charles T. Horngren George Foster

Srikant M. Datar

3. Cost Accounting: A Managerial Emphasis, 11th Edition ) by John K. Harris, et al

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Marking Criteria IU
 Quizzes ------------------------ 10%
 Assignments ------------------ 10%
 Final Report / Project-------- 15%
 Midterm test------------------ 25%
 Final Exam -------------------- 40%

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 Accounting
The systematic recording, reporting, and analysis of financial transactions of a business. The
person in charge of accounting is known as an accountant, and this individual is typically
required to follow a set of rules and regulations. Accounting allows a company to analyze the
financial performance of the business, and look at statistics such as net profit.

FINANCIAL MANAGEMENT
ACCOUNTING ACCOUNTING

Its focus is on reporting to external parties,

It measures and records business It measures and reports financial and
transactions, It provides financial non-financial information that helps
statements based on generally accepted managers make decisions to fulfill the
accounting principles. goals of an organization.

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Financial Accounting.
 It involves the recording and summarization of
business transactions and events. Financial
accounting relates to the preparation of financial
statements for external users such as creditors,
investors, and suppliers.
Management Accounting.
 Process of identification, measurement,
accumulation, analysis, preparation, interpretation,
and communication of financial information that is
used by management to plan, evaluate, and control
within an organization.....

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 Financial accounting refers to accounting refers to
accounting for revenues, expenses, assets, and liabilities.
It involves the basic accounting processes of recording,
classifying, and summarizing transactions. Financial
reports prepared under the generally accepted
accounting principles (GAAP) promulgated by standard
setting bodies are intended to be general purpose in
orientation. This means they are not prepared especially
for owners, or creditors, or any other particular user
group. Instead, they are intended to be equally useful
for all user groups. As such, attempts are made to keep
them free from bias (neutral).

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 Cost accounting is the branch of accounting dealing
with the recording, classification, allocation, and
reporting of current and prospective costs.
Measurement of Cost involves the methods and
techniques used in defining the components of cost
(materials, labour & overhead), determining the basis
of cost measurement, and establishing criteria for use
of alternative cost measurement techniques.

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 Managerial accounting is the branch of accounting
designed to provide information to various
management levels in the hospitality operation for
the purpose of enhancing controls. Managerial
accounting information is intended to serve the
specific needs of management. Business managers are
charged with business planning, controlling, and
decision making. As such, they may desire specialized
reports, budgets, product costing data, and other
details that are generally not reported on an external
basis.

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Cost vs Expense?
 A cost might be an expense or it might be an asset. An expense is a cost that has expired or
was necessary in order to earn revenues. We hope the following three examples will illustrate
the difference between a cost and an expense.

A company has a cost of $6,000 for property insurance covering the next six months. Initially
the cost of $6,000 is reported as the current asset Prepaid Insurance. However, in each of the
following six months, the company will report Insurance Expense of $1,000—the amount that
is expiring each month. The unexpired portion of the cost will continue to be reported as the
asset Prepaid Insurance.

The cost of equipment used in manufacturing is initially reported as the long lived asset
Equipment. However, in each accounting period the company will report part of the asset's
cost as Depreciation Expense.

A retailer's purchase of merchandise is initially reported as the current asset Inventory. When
the merchandise is sold, the cost of the merchandise sold is removed from Inventory and is
reported on the income statement as the expense entitled Cost of Goods Sold.

The matching principle guides accountants as to when a cost will be reported as an expense.
http://www.accountingcoach.com/blog/cost-expense-2
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Expense vs Assets ?
 Assets provide a future benefit to your business. They help bring in future
revenues and profits. Assets appear on the balance sheet. ~
 For example, inventory is an asset.
 Expenses are the cost of bringing in revenues. They were needed to bring in the
revenues and profits that you reported this year. Expenses appear on the income
statement.
 For example, just as inventory is an asset, “cost of goods sold” is an expense. This is the cost of
inventory that was sold during the year.
 The difference is really one of timing. An asset is expected to bring in a benefit
sometime in the future. When the benefit comes in, then the asset becomes an
expense.
 As it is sold, inventory is moved out of the inventory account on the balance sheet, and into the
cost of goods sold account on the balance sheet.
 Sometimes, an asset can lose value without ever providing a benefit. This would
be considered a loss, which is, like an expense, deducted in the income
statement.
 Suppose inventory is somehow damaged or rendered obsolete. Then it would be recorded as a loss
on the income statement.
 http://accountinator.com/2012/05/04/assets-vs-expenses/ M. Naveed Alam 10
Cost, Expenses & Assets
 Defines cost as the monetary value of goods and services
expended to obtain current or future benefits

 Expenses are the costs of goods or services that have

expired. i.e., used up in the process of creating goods or
services

 Costs incurred to receive future benefits are recorded as

assets

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 Major Differences Between
Financial & Managerial Accounting
Financial Accounting Managerial Accounting

Communicate financial position to

Purpose Decision making
outsiders

Internal managers who plan for & control

Primary Users External users make fin. Decisions
an organization

Focus/Emphasis Past /Historical -oriented Future-oriented

Objective financial information

Types of Information Financial and non financial information

Ultra current to very long

Time Span Historical monthly, quarterly reports
time horizons

Indirect effects on
Behavioral Issues Designed to influence employee behavior
employee behavior

Requirement Mandatory for external reports Not Mandatory

Recorder Keeping Formal Formal and informal

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Relationship of Financial, Management, and
Cost Accounting

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTING ACCOUNTING

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Cost Accounting?
 It provides information for both management
accounting and financial accounting.

 It measures and reports financial and non-financial

data.

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Management Functions

Vs

Management Accounting
objective

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Cost Accounting Main Objective
1. Ascertaining of Cost through cost accounting System
2. Planning & Controlling Of Cost.
1. Planning process of setting objective target & goals to achieve in
future.
2. Continuous comparison of actual result with those plan earlier.
3. Decision Making
1. Short & long term Decision Making.

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Cost Management...
– describes the activities of managers in short- run and long-run
planning and control of costs.
 It includes the continuous reduction of costs.
 It is a key part of general management strategies and their
implementation.
 Planning
 Monitoring, Controlling
 Report
 Decision Making & Feedback

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What is Planning?
 It is deciding on organization goals, predicting results
under various alternative ways of achieving those
goals, and then deciding how to attain the designated
goals.
 Planning requires setting objectives and identifying
methods to achieve those objectives.

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What is Control?
 Controlling is the managerial activity of monitoring a
plan’s implementation and taking corrective action as
needed.
 It is deciding and taking actions that implement the
planning decisions, and...
 deciding on performance evaluation and the related
feedback that will help future decision making.

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What are Budgets?
 They are quantitative expressions of a proposed plan
of action by management for a future time period and
an aid to the coordination and implementation of the
plan.

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What is a Performance Report?
 This is a report that compares actual results with
budgeted amounts.
 The performance report of the Seattle Specialty shop
for the month of July shows the following (Example)

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 Performance Report
Seattle Specialty Shop, July 2000
Budget Actual Variance
Revenues $57,000 $60,000 $3,000 F
Cost of goods sold 40,000 43,400 3,400 U
Wages 6,700 7,000 300 U
General 1,300 900 400 F
Fixed costs 5,000 5,000 -------
Operating income $ 4,000 $ 3,700 $ 300 U

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Performance Report
 The performance report indicates that although
actual revenues exceeded the budgeted amount by
$3,000, operating income was $300 less than
budgeted.
 The report could spur investigation and further
decisions.
 Did the purchasing department pay more than
expected for the merchandise?

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Performance Report
 Yes, actual cost of goods sold were 72% of revenues
instead of the budgeted 70%.
 Budget % Actual %
Revenues $57,000 100 $60,000 100
Cost of goods sold 40,000 70 43,400 72
Gross margin $17,000 30 $16,600 28

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Feedback...
– involves managers examining past performance and
systematically exploring alternative ways to make
better informed decisions in the future.
– Decision making is the process of choosing among
competing alternatives.

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What is a Cost?
Cost
is a resource sacrificed or forgone to achieve a specific objective.

Outlay Cost Opportunity Cost

past, present, or forgone benefit
future cash from best
outflow alternative
course of action

Expense

Cost charged against revenue

in an accounting period

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Cost Of your BBA
 Semester Fee
 Conveyance / Careen Cost
 Books & Printing Cost
 Canteen Expense
 Total Outlay Cost
 Opportunity Cost

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 Assignment # 1

How Cost Accountant can play

effective role to achieve
predetermined objectives of
company.
(Deadline is Wed 18th Oct 2023)

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