Functions of

Management
1. Allocate costs between cost of goods sold and
inventories for internal and external profit
reporting
3. Provide relevant information to help managers
make better decisions;
4. Provide information for planning, control and
performance measurement.
Limitations of Financial Accounting

It does not provide detailed cost information for

different departments, processes, products, jobs,
different services and functions.
It does not set up a proper system of controlling
materials, supplies.
It is difficult to know the behaviour of costs in financial
accounting as expenses are not classified into fixed
and variable, direct and indirect costs.
It does not proved cost data to determine the price of
the product being manufactured or the service being
rendered to the consumers.
It does not provide necessary information to
management in taking important decisions about
expansion of business, dropping of a product line,
alternative method of production, buy or make etc.
Financial Accounting Vs. Cost
Accounting
A firm manufactures three products A, B and
C whose costs and revenue figures are given
below:
product A Product B Product C
Total
Materials 8000 7000 8000 23000
Labour 5000 6000 4000 15000
Other
Expenses 3000 4000 3000 10000
Sales 20000 21000 12000 53000
Under Financial
Accounting
Rs.
Materials 23000
Wages 15000
Other expenes 10000
Total cost 48000
Sales 53000
Profit 5000
Under Cost Accounting
product A Product B Product C Total
Material 8000 7000 8000 23000
Wages 5000 6000 4000 15000
Other exp. 3000 4000 3000 10000
Total cost 16000 17000 15000 48000
Sales 20000 21000 12000 53000
Profit(loss) 4000 4000 (3000) 5000
Cost Accountancy
Chartered Institute of Management Accountants,
London(CIMA) defines Cost Accountancy as “ the
application of costing and cost accounting
principles, methods and techniques to the
science, art and practice of cost control and the
ascertainment of profitability as well as
presentation of information for the purpose of
managerial decision making”
Costing may be defined as “the techniques and
process of ascertaining costs”
Cost may be defined as (i) the amount of
expenditure (actual or notional) incurred on or
attributable to a given thing; or (ii) to ascertain
Assignment -1
Lily Shultz is a junior majoring in hotel and
restaurant management. She wants to work for a
large hotel chain with the goal of eventually
managing a hotel. She is considering the
possibility of taking a course in either financial
accounting or cost management. Before choosing,
however she has asked your to provide her with
some information about the advantages that each
course offers.
Required:
Prepare a letter advising Lily about the
differences and similarities between financial
accounting and cost management. Describe the
Financial Accounting and
Cost Management
 Classify each of the following actions as either being associated
with the financial accounting information system(FS) or the cost
management information system:
 Determining the future cash flows of a public corporation
 Filing a corporate income tax report
 Determining the cost of a product
 Issuing annual financial statements
 Reducing costs by improving quality
 Preparing a performance report that compares actual costs with
the budgeted costs.
 Preparing financial statement that conform to GAAP
 Determining the cost of a customer
 Using cost information to decide whether to keep of drop or
product
 Using future expected earnings to estimate the price of a share of
common stock
 Using cost information to decide whether to make or buy a
Information for planning, controlling,
continuous improvement and Decision
making
The cost and management accountant is

responsible for generating financial
information required by the firm for internal
and external reporting. This involves
responsibility for collecting, processing and
reporting information that will help
management in their :
Planning
Controlling
Continuous improvement
Decision Making
Flexibility of the cost
information system
A member of the board of directors for Stillwater’s
Mission of Hope a non profit shelter for the
homeless, asked his accountant how to value the
building used as the shelter. In other words, what
did it cost?
The accountant’s answer was: why do you
want to know? If you need to know the value for
insurance purposes– to determine how much
insurance to buy—then perhaps replacement cost
would be the answer. If you are trying to set a
price to sell the building (and build another
elsewhere), then current market value of the real
estate would be the answer. If you need the cost
for the balance sheet, then historical cost is