Chapter 1: Introduction to Cost and Management Accounting

1. Meaning of Cost Accounting

Cost Accounting is the branch of accounting that deals with recording, classifying, and analyzing costs incurred in the production of goods or services in order to find out the total and per unit cost and to help in cost control.

In simple words:
👉 it answers the question:
“How much does it cost to make this product?”

Example:
If a factory makes biscuits, cost accounting helps to calculate:

• Cost of raw materials (flour, sugar)
• Wages paid to workers
• Electricity and factory rent

So, we can find cost per packet of biscuits.

Easy definition (for exam):
Cost accounting is the system of accounting that records and calculates the cost of products and services.

2. Role / Importance of Cost Accounting

Cost accounting is very important for a business.

Main roles:

1. Cost Control – It helps to control unnecessary expenses.
2. Cost Reduction – It helps to reduce cost without reducing quality.
3. Fixing Selling Price – It helps in deciding the selling price of a product.
4. Profit Measurement – It shows profit or loss of each product.
5. Better Decisions – It helps in decisions like make or buy, continue or stop production.

3. Functions of Cost Accounting

Important functions:

1. Finding Cost – Calculates total and per unit cost of products.
2. Controlling Cost – Checks whether actual cost is more or less than expected cost.
3. Analyzing Cost – Studies material cost, labor cost, and overhead cost.
4. Preparing Cost Reports – Prepares reports for management.

4. Meaning of Management Accounting

Management Accounting is the branch of accounting that provides financial and non-financial information to management to help in planning, decision-making, and controlling the day-to-day operations of a business.

In simple words:
👉 It helps managers take good decisions.

Example:
Management accounting helps in:

• Preparing budgets
• Planning future sales
• Deciding whether to expand business or not

Easy definition (for exam):
Management accounting is the accounting system that helps management in planning, decision-making, and control.

5. Role / Importance of Management Accounting

Main roles:

1. Planning – Helps in making future plans through budgets.
2. Decision Making – Helps managers take correct decisions.
3. Control – Helps control costs and performance.
4. Performance Measurement – Measures work performance of departments.
5. Coordination – Brings coordination between different departments.

6. Functions of Management Accounting

Important functions:

1. Collecting Data – Collects data from cost and financial accounting.
2. Analyzing Data – Uses ratios and comparisons.
3. Preparing Budgets – Prepares sales, production, and expense budgets.
4. Reporting – Gives reports to management in simple form.
5. Helping Management – Helps management achieve business goals.

Difference between Financial Accounting, Cost Accounting and Management Accounting