COST ACCOUNTING VS MANAGEMENT ACCOUNTING

(Sub. Cost Accounting)

Project Submitted to

Kets V.G.Vaze College of Arts, Science & Commerce

Mumbai University
For the Degree of Master in Commerce

By
CHINMAY .R. JADHAV
M.COM PART 1
2936A015
Under the Guidance of
Prof. Rajani Udaykumar
Prof. Kiran Pawar

ACKNOWLEDGEMENT

Firstly, I would like to thank the University of Mumbai to provide us

such a platform to prove our creativity through this project of Cost
Accounting.
I am also very grateful to our Principal Dr. B. B. Sharma for giving us
such a great opportunity to prove our self and to show our creativity by
this project.
I am also thankful to our Co-ordinator and my project guide Prof.
Prof. Rajani Udaykumar and Prof. Kiran Pawar for allotting me such a
project and also to guide me on the project which enhanced the quality
of my project work.
I also thank my family and friends who helped me in preparing my
project and co-operating with me during preparation of my project.

DECLARATION
I hereby declare that the Project titled A Study of COST ACCOUNTING
VS MANAGEMENT ACCOUNTING Submitted by me is based on actual
work carried out by me under the guidance and supervision of Prof. Kiran
Pawar and Prof. Rajani Udaykumar The contents of project are not copied
from any other source such as internet, earlier projects, text book etc. It is
further to state that this work has not been submitted for any other degree of
this or any other university.
Date: ______
Place: Mumbai

CHINMAY. R. JADHAV
Roll No.2936A015
.

Prof. Rajani Udaykumar

Prof. Kiran Pawar

Guide

Guide

CERTIFICATE
This is to certify that the project titled A Study of COST ACCOUNTING
VS MANAGEMENT ACCOUNTING is a bonafide Project work done by
Mr. CHINMAY.R.JADHAV under my guidance and supervision for the
degree of Master in Commerce Mumbai University.
I confirm that, this project work has not been previously submitted to any
other University for examination under my supervision.
I hereby authenticate and approve this project work.
Date:
Place: Mumbai
REMARKS

Guiding Teacher:
Signature:
External Examiner:
Signature:

INDEX
SR.NO

CONTENTS

ACCOUNTING

PAGE NO

INTRODUCTION TO COST

INTRODUCTION TO MANAGEMENT
ACCOUNTING

INTRODUCTION TO STANDARD COSTING

10

HISTORY OF STANDARD COSTING

11

INTRODUCTION TO BUDGETORY CONTROL

18

OBJECTIVES OF BUDGETORY CONTROL

22

STANDARD COSTING AND BUDGETORY

CONTROL

31

INTRODUCTION TO COST
ACCOUNTING
COST ACCOUNTING IS A TREM BROADER THAN COSTING.IT COVERS
COSTING PLUS REPORTING AND CONTROL OF COSTS.THUS COST
ACCOUNTING =COSTING+COST REPORTING+COST CONTROL.
COST ACCOUNTING CAN BE DEFINED AS THE TECHNIQUE OF
RECORDING ,CLASSIFICATION,ALLOCATION,REPORTING AND THE
CONTROL OF COSTS.

DEFFINATION

ICMA:THE INSTITUTION OF COST AND MANAGEMENT

ACCOUNTANT,ENGLAND(ICMA)HAS DEFINED COST ACCOUNTING
AS-THE PROCESS FOR ACCOUNTING FOR THE COSTS FROM THE POINT
AT WHICH THE EXPENDITURE IS INCURRED,TO THE ESTABLISHMENT
OF ITS ULTIMATE RELATIONSHIP WITH COST CENTRES AND COST
UNITS.

INTRODUCTION TO MANAGEMENT
ACCOUNTING
Today economic activities are complex and diverse. The market is wide and competition
becomes cut-throat. Hence the mere ascertainment of cost is of little use, as provided by
cost accounting. Besides, the modern management is interested in not only knowing the
cost of production, but also in controlling the costs. It is possible only if the management
is in a position to determine financial cost, managerial performance, planning etc., and
this gave birth to Management Accounting. Hence, new techniques were invented to
present the accounts periodically, not necessarily at the end of the year, before the
management. Such accounts should be prepared in such a way that the results could be
easily compared with the budgeted data and efforts be made to exercise control. Such
new techniques were termed as Management Accounting

Accounting Definitions:

There is no unanimity among the management accountants to define this subject. There
are various definitions on the concept given by different experts. Some of them are:

Any form of accounting which enables a business to be conducted more efficiently can
be regarded as Management Accounting The Institute of Chartered Accountants of
England and Wales.

Management Accounting is the presentation of accounting information in such a way as

to assist management in the creation of policy and in the day-to-day operations of an
undertaking The Anglo American Council on Productivity Report.

Management Accounting includes the methods and concepts necessary for effective
planning, for choosing among alternative business performances The American
Association.

SCOPE OF MANAGEMENT
ACCOUNTING
The scope of Management Accounting is very wide. Some of the areas included within
the ambit of Management Accounting are:

1. General Accounting (Financial accounting)

2. Cost Accounting
3. Budgeting and forecasting
4. Cost control procedure
5. Cost and statistics
6. Taxation
7. Methods and procedures
8. Audit
9. Office services
10. Legal Provisions

INTRODUCTION TO STANDARD
COSTING
Standard costing and activity based costing (ABC) are simple yet powerful techniques
used
to manage and improve the performance of an organisation. The two are very similar in
their approach yet proponents of ABC have often criticised standard costing as outdated
and lost its relevance. The truth is probably that each technique is suited to solving a
different problem but the best technique for cost control and routine performance
management is to combine the two and use the ABC approach to definition standards.
What I have tried to do in this paper is introduce the reader to the both techniques
describing their history, explaining the techniques and their benefits and showing how an
ABC approach to standard costing gives managers a practical and valuable tool for
performance management

10

HISTORY OF STANDARD COSTING

Standard costing has been used for over a 100 years. Early last century financial
accountants were interested in finding a better way of valuing stocks and workinprogress,
important elements the calculation of profit and the concept of standard costing
was born. Some historians say the origins of standard costing go back even further and
have found evidence it was used in the American Civil War by quarter masters as a means
of controlling costs. It doesnt really matter when the technique was invented what is
more
relevant is that it is still in use today.
A survey conducted in 1989 reported that standard costing was being used by more than
75% of British industrial companies and in a range of different industries e.g. brewing,
textiles, electronics and pharmaceuticals. The survey was conducted because many
articles and books had started to criticise the technique as being inappropriate as capital
intensive industries with high levels of fixed overheads. The survey in fact reported that
only a handful of respondents had abandoned their standard costing systems whereas the
majority had either introduced or enhanced their systems in the previous ten years.
Another survey of Australian and Japanese firms conducted in 1997 reported that 56% of
large firms use if for production costing.

11

Unfortunately there appear to be no more recent surveys but journal articles from the US
in the last couple of years indicate that the
technique is still very much in use and although a 100 years old has definitely survived th
test of time.

A simple example of standard costing

A standard cost is a pre-determined cost of a product, product part, operational activity or
service. An example of a standard cost for product P is given in Figure 1a and for vehicle
mileage costs in Figure 1b.
In both these examples the standard costs are expressed as a cost per unit. In Figure 1a it
is the standard cost of one unit of product P. In Figure 1b it is the standard mileage cost
for vehicle V to travel one mile.

12

Figure 1a: Standard cost of product P

PER UNIT

Raw material A

5.00

Raw material B

1.75

PER UNIT

6.75
Process I
Process II
Process III

1.50
2.25
7.00
10.75
17.50

Figure 1b: Standard mileage cost of vehicle V

per mile
Fuel

0.15

Oil

0.01

Tyres

0.03

Maintenance

0.04
0.23

13

In fact it is more common for the standards to be developed in terms of physical units and
standard cost calculated from the individual unit costs of each element. Figure 2
illustrates this for product P.

Figure 2: Standard cost of product P

Physical unit

unit cost

Raw material A

2.50 kg

2.00 per kg 3.00

Raw material B

.25 kg

7.00 per kg

1.75
6.75

Process I

0.10 hr

Process II

0.05 hr

45.00 per hr 2.25

0.75 hr

9.33 per hr

Process II

15.00 per hr

1.50

7.00
10.75
17.50

14

FINDINGS AND
RECOMMENDATIONS
There are quite a few misconceptions about standard costing that need to be refuted.
These are:
1. It is old fashioned and not suited to factories using advanced manufacturing
techniques or where the emphasis is on quality rather than costs.
False: Standard costing system is very flexible and can be designed to measure
any KPIs. An innovative variance for just-in-time manufacturing is a raw materials
inventory variance that measures the financial impact or purchasing more (or less) raw
materials than was actually used in production. A quality variance might be defined as the
standard cost of units produced that did not meet the quality specifications.
2. It has been overtaken by activity based costing.
False: Standards can be derived using activity based costing techniques. The two
types of costing are totally compatible.
3. It cant be implemented because actual costs arent recorded to the same degree of
detail as the standards.
False: See section 10. As long as both the cost and a physical measure of an activity are
collected a full variance analysis can be produced. Even if only the cost of an activity is
recorded there is the possibility of calculating a volume variance and then showing the
residual variance as either an efficiency or rate variance, whichever is deemed to be more
appropriate.

15

4. Standard costing require additional book-keeping entries to record all the standards and
variances.
False: Only if standard costing is being used to value stocks and work in progress do
some book-keeping entries need to be made. Using standard costing for management
reporting and variance analysis does not necessitate any entries into he books of account.

16

SUMMARY
Standard costing is not a fad. Its use has stood the test of time and as a technique it is
over 100 years old.
It can be used in all types of industries. Although it is best suited to organisations that
have many repetitive operations is not limited to manufacturing. Large organisations in
transportation, retailing, banking, healthcare, mining and service industries are all suitabl
candidates and indeed already use it.
The benefits it brings are varied ranging from the improved cost control and performance
management, more effective use of accountants and planners time to better dialogue and
understanding between accountants and operational mangers.

17

BUDGETARY CONTROL
Budget is a plan which is expressed in terms of definite members:
Eg. of a plan Production has to be increased in the next quarter
Eg. of a budget Production has to improve by 10000 units from the last quarter to the
next quarter.

Definitions:
According to ICMA budget is a financial & / quantitative statements, prepared &
approved prior to a defined period of time of the policy to be pursued during that period
for the purpose of attaining a given objective. They may include income, expenditure &
the employment of capital.

Budgetary Control It is the process of utilizing the various budgets like

production budget, sales budget, etc,. for the purpose of internal control. This is done
with intention of minimizing the wastage & maximizing the efficiency of various
departments.

According to ICMA terminology budgetary control as the establishment of budgets

relating the responsibilities of executives to the requirements of the policy & the
continuous comparison of actual with the budgeted results either to secure by individual
actions the objective of that policy to provide basis for its revision.

18

Steps

involved

in

the

Budgetary

Control

Techniques:

1. Fise the objectives clearly.

2. Formulating the necessary plans to ensure that the desired objectives are achieved.
3. Translating the plans into budgets.
4. Relating the responsibilities of executives to the budgets.
5. Continuous comparison of the actual results with that of the budget & the
ascertainment of deviations (Positive/negative).
6. Investigating into the deviations & establishing the causes.
7. Presentation of information to the management relating the variances to individual
responsibilities.
8. Corrective action of the management to present recurrence of variance

19

BUDGETARY CONTROL
Meaning of Budget:
According to Brown and Howard, A budget is a pre-determined statement of
management policy during a given period which provides a standard for comparison with
the results actually achieved.

Budgeting:
The act of preparing budgets is called budgeting. In the words of Batty, the entire
process of preparing the budgets is known as budgeting.

Meaning of Budgetary Control:

Budgetary control is a system of controlling costs through preparation of budgets.
Budgeting is thus only a part of budgetary control. According to CIMA, Budgetary
control is the establishment of budgets relating the responsibilities of executives of a
policy & the continuous comparison of the actual with the budgeted results, either to
secure by individual actions the objective of that policy to provide basis for its revision.

20

Forecast & Budget:

It is important to note carefully the distinction between a forecast and a budget.
A forecast is a prediction of what may happen as a result of a given set of circumstances.
It is an assessment of probable future events. A budget, on other hand, is a planned
exercise to achieve a target. It is based on the pros and Cons of a forecast. Forecasting
thus precedes the preparation of a budget.
Thus the main point of distinction between the two is that forecast is concerned with
probable events while budget relates to planned events. Furthermore, forecast can be
made by anybody, whereas a budget, being an enterprise objective, can be set only by the
authorized management.

21

Objectives of Budgetary Control

The following are the objectives of a budgetary control system:

1. Planning: A budget provides a detailed plan of action for a business over definite
period of time. Detailed plans relating to production, sales, raw material
requirements, labour needs, advertising and sales promotion performance, research
and development activities, capital additions etc., are drawn up. By planning many
problems are anticipated long before they arise and solutions can be sought through
careful study. Thus most business emergencies can be avoided by planning. In brief,
budgeting forces the management to think ahead, to anticipate and prepare for the
anticipated conditions.
2. Co-ordination: Budgeting aids managers in co-ordinating their efforts so that
objectives of the organisation as a whole harmonise with the objectives of its
divisions. Effective planning and organisation contributes a lot in achieving
coordination. There should be coordination in the budgets of various departments. For
example, the budget of sales should be in coordination with the budget of production.
Similarly, production budget should be prepared in co-ordination with the purchase
budget, and so on.
3. Communication: A budget is a communication device. The approved budget copies
are distributed to all management personnel which provides not only adequate
understanding and knowledge of the programmes and policies to be followed but also
22

gives knowledge about the restrictions to be adhered to. It is not the budget itself that
facilitates communication, but the vital information is communicated in the act of
preparing budgets and participation of all responsible individuals in this act.
4. Motivation: A budget is a useful device for motivating managers to perform in line
with the company objectives. If individuals have actively participated in the
preparation of budgets, it act as a strong motivating force to achieve the targets.
5. Control: Control is necessary to ensure that plans and objectives as laid down in the
budgets are being achieved. Control, as applied to budgeting, is a systematized effort
to keep the management informed of whether planned performance is being achieved
or not. For this purpose, a comparison is made between plans and actual performance.
The difference between the two is reported to the management for taking corrective
action.
6. Performance Evaluation: A budget provides a useful means of informing managers
how well they are performing in meeting targets they have previously helped to set. In
many companies, there is a practice of rewarding employees on the basis of their
achieving the budget targets or promotion of a manager may be linked to his budget
achievement record.

23

Advantages of Budgetary Control:

Budgetary control provides the following advantages:
1. Budgeting compels managers to think ahead i.e. to anticipate and prepare for
changing conditions.
2. Budgeting co-ordinates the activities of various departments and functions of the
business.
3. It increase production efficiency, eliminates waste and controls the costs.
4. It pinpoints efficiency or lack of it.
5. Budgetary control aims at maximization of profits through careful planning and
control.
6. It provides a yardstick against which actual results can be compared.
7. It shows management where action is needed to remedy a situation.
8. It ensures that working capital is available for the efficient operation of the business.
9. It directs capital expenditure in the most profitable direction.
10. It instills into all levels of management a timely, careful and adequate consideration
of all factors before reaching important decisions.
11. A budget motivates executives to attain the given goals.
12. Budgetary also aids in obtaining bank credit.
13. Budgeting also aids in obtaining bank credit.
14. A budgetary control system assists in delegation of authority and assignment of
responsibility.
15. Budgeting creates cost consciousness and introduces an attitude of mind in which
waste and efficiency cannot thrive.
24

16. Limitations of Budgetary Control

The list of advantages given above is impressive, but a budget is not a cure all for
organisational ills. Budgetary control system suffers from certain limitations and those
using the system should be fully aware of them.
1. The budget plan is based on estimates: Budgets are based on forecasting cannot be
an exact science. Absolute accuracy, therefore, is not possible in forecasting and
budgeting. The strength or weakness of the budgetary control system depends to a
large extent, on the accuracy with which estimates are made. Thus, while using the
system, the fact that budget is based on estimates must be kept in view.
2. Danger of rigidity: A budget programme must be dynamic and continuously deal
with the changing business conditions. Budgets will lose much of their usefulness if
they acquire rigidity and are not revised with the changing circumstances.
3. Budgeting is only a tool of management: Budgeting cannot take the place of
management but is only a tool of management. The budget should be regarded not as
a master, but as a servant. Sometimes it is believed that introduction of a budget
programme alone is sufficient to ensure its success. Execution of a budget will not
occur automatically. It is necessary that the entire organisation must participate
enthusiastically in the programme for the realisation of the budgetary goals.
4. Expensive Technique: The installation and operation of a budgetary control system
is a costly affair as it requires the employment of specialised staff and involves other
expenditure which small concerns may find difficult to incur. However, it is essential
that the cost of introducing and operating a budgetary control system should not
exceed the benefits derived therefrom.
25

Essentials of Effective Budgeting:

A budgetary control system can prove successful only when certain conditions and
attitudes exist, absence of which will negate to a large extent the value of a budget system
in any business. Such conditions and attitudes which are essential for effective budgeting
are as follows:
1. Support of Top Management: If the budget system is to be successful, it must be
fully supported by every member of the management and the impetus and direction
must come from the very top management. No control system can be effective unless
the organisation is convinced that the top management considers the system to be
import.
2. Participation by Responsible Executives: Those entrusted with the performance of
the budgets should participate in the process of setting the budget figures. This will
ensure proper implementation of budget programmes.
3. Reasonable Goals: The budget figures should be realistic and represent reasonably
attainable goals. The responsible executives should agree that the budget goals are
reasonable and attainable.
4. Clearly Defined Organisation: In order to derive maximum benefits from the
budget system, well defined responsibility centres should be built up within the
organisation. The controllable costs for each responsibility centres should be
separately shown.
5. Continuous Budget Education: The best way to ensure the active interest of the
responsible supervisors is continuous budget education in respect of objectives,
potentials & techniques of budgeting. This may be accomplished through written
26

manuals, meetings etc., whereby preparation of budgets, actual results achieved etc.,
may be discussed.
6. Adequate Accounting System: There is close relationship between budgeting and
accounting. For the preparation of budgets, one has to depend on the accounting
department for reliable historical data which primarily forms the basis for many
estimates. The accounting system should be so designed so as to set up accounts in
terms of areas of managerial responsibility. In other words, responsibility accounting
is essential for successful budgetary control.
7. Constant Vigilance: Reports comparing budget and actual results should be promptly
prepared and special attention focused on significant exceptions i.e. figures that are
significantly different from those expected.
8. Maximum Profit: The ultimate object of realizing the maximum profit should
always be kept uppermost.
9. Cost of the System: The budget system should not cost more than it is worth. Since it
is not practicable to calculate exactly what a budget system is worth, it only implies a
caution against adding expensive refinements unless their value clearly justifies them.
10. Integration with Standard Costing System: Where standard costing system is also
used, it should be completely integrated with the budget programme, in respect of
both budget preparation and variance analysis.

27

Standard costing and budgetary control

Standard costing and budgetary control have the common objective of cost control by
establishing pre-determined targets. The actual performances are measured and compared
with the pre-determined targets for control purposes. Both the techniques are of
importance in their respective fields and are complementary to each other.

Points of Similarity:
There are certain basic principles which are common to both standard costing and
budgetary control. These are:
1. The establishment of pre-determined targets of performance
2. The measurement of actual performance
3. The comparison of actual performance with the pre-determined targets.
4. The analysis of variances between the actual and the standard performance
5. To take corrective measures, where necessary.

28

Similarities:

1.Both the tools available to the management for the purpose of controlling the
costs

2.Both based on setting standard, comparison with actual and study the variance

3. If standard costing prevails in the company then budgetary control is effective.

difference1.Budgetory control can be operated without standard costing

2.Budgets gives the limits on expenses but standard costs are minimum targets to
be attained.

3.Budget can be prepared for various areas of activities but standard is used for
production and manufacturing cost

4.Budgetary variances may point out efficiency or inefficiency.But standard

costing goes beyond

The efficiency or inefficiency and find out the root cause for the variance.

5.Standard is always for improvement.

Budgets are based upon the future or estimated costs.But standard costs are ideal
costs under ideal situation.

29

Standard Costing and Budgetary Control

The systems of standard costing and budgetary control have the common objectives of
controlling business operations by establishment of pre-determined targets, measuring the
actual performances and comparing it with the targets, for the purpose of having better
efficiency and of reducing costs. The two systems are said to be inter-related but they are
not inter-dependent. Standard costing is introduced primarily to ascertain efficiency and
effectiveness of cost performance. Budgetary control is introduced to state in figures an
approved plan of action relating to a particular period. Both standard costing and
budgetary control have the following common features: Both have a common objective
of improving managerial control. Both techniques are based on the presumption that cost
is controllable. In both the techniques, results of comparison are analysed and reported to
management.

30

STANDARD COSTING
VS
BUDGETORY CONTROL

Standard Costing is revealed with the control of expenses and hence it is more
intensive.

Budgetary control is concerned with the operation of the business as a whole

and hence it is more extensive.

Standard costs are based on technical assessments.

Budgets are based on past actuals, adjusted to future trends.

To establish standard costs, some form of budgeting is essential as there is the

need to forecast the level of output and prescribed set of working conditions in the
periods in which the standard costs are to be used.

Budgetary control can be applied even without the help of standard costing.
(Standards are set mainly for production and production expenses.

Budgets are compiled for all items of income and expenditure.

Standard cost is the projection of cost accounts.

Budget is a projection of financial Accounts..

Standards set up targets that are to be attained by actual performance.

31

Budgets set up maximum limits of expenses above which the actual expenditure
should not normally exceed. :

In standard costing, variances are analysed in detail according to their

originating causes. It reveals variances through different accounts, such as,

material price variance, usage variance, etc.

In budgetary control, variances are not related through the related accounts

but are revealed in total.

Standard costs do not tell what the costs are expected to be, but rather what
the costs should be under specific conditions of production performance and

as such cannot be used for the purpose of forecasting.

Budgets are anticipated or expected costs meant to be used for forecasting
requirements of material, labour, cash, etc. Standard costs are used in
various management decisions, price fixing, value analysis, valuation of

closing stock, etc.

It aims in policy determination, co-ordination of activities in different
divisions and delegation of authority.

32

POINTS OF DIFFERENCE
In spite of so much similarity between standard costing and budgetary
control, there are some important differences between the two, which are as
follows:
Scope

Intensity
Relation
accounts
Usefulness

Basis

Projection

Standard Costing
Standard costs are developed
mainly for the manufacturing
function and sometimes also for
making
and
administration
functions
Standard costing is intensive in
application as it calls for detailed
analysis of variances
to In standard costing, variances are
usually revealed through accounts

Budgetary Control
Budgets are compiled functions of the
business such as sales, purchase, production,
cash, capital expenditure, research &
development, etc.,
Budgetary control is extensive in nature and
the intensity of analysis tends to be much
less than that in standard costing.
In budgetary control, variances are normally
not revealed through accounts and control is
exercised by statistically putting budgets
and actuals side by side.
Budgets usually represent an upper limit on
spending
without
considering
the
effectiveness of the expenditure in terms for
output.
Budgets may be based on previous years
costs without any attention being paid to
efficiency.

Standard costs represent realistic

yardsticks and, are therefore,
more useful for controlling and
reducing costs.
Standard cost are usually
established after considering such
vital matters as production
capacity, methods employed and
other factors which require
attention when determining an
acceptable level of efficiency.
Standard cost is a projection of Budget is a projection of financial accounts.
cost accounts

33

CONCLUSION
A PROJECT REPORT STATES THAT STANDARD
COSTING AND BUDGETORY CONTROL HAVE
THE COMMON OBJECTIVE OF COST CONTROL
BY ESTABLISHING PRE DETERMINED
TARGETS.THE ACTUAL PERFORMANCE IS
COMPARED WITH THE PREDETERMINED
TARGETS FOR CONTROL PURPOSES.BOTH THE
TECHNIQES ARE OF IMPORTANCE IN THEIR
RESPECTIVE FIELDS.ALSO BOTH TECHNIQUES
POSSESS THE DIFFERENCES IN THEIR SCOPE
,INTENSITY AND USEFULNESS.

34

BIBLIOGRAPHY

WWW.GOOGLE.COM
WWW.WIKIPEDIA.COM

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