 Namaste, welcome to the new course that is a course on cost and management accounting. In this course, this is a short course just for 10 hours, we are going to discuss about certain important conceptual aspects as to what cost accounting is. In very very brief, we will discuss about the types of costs, the methods of cost accounting and then we will go to management accounting part of it or the techniques of cost accounting part. So, techniques include marginal costing or break even point analysis or cost volume profit analysis, then standard costing, budgetary control. So, we will be also taking into consideration various cases of CVP analysis or of standard costing or budgetary control. As far as the methods or the introductory part is concerned, we will only go through the conceptual part. I hope the course will be very much useful. Those who in short in just 10 hours want to just get a glimpse of cost and management accounting, the course will be very much useful. Myself, Varadraja Bapad, I am a faculty in accounting and finance in school of management IIT, Mumbai, I am a rank holder, chartered accountant and cost accountant, then I have done EMCOM, DISA and I have done PhD in finance from IIT, Bombay. My major teaching interests include financial cost accounting and also Indian economic and financial model. My research interests are also accounting, financial inclusion, corporate finance. I am also into various extracurricular but very important activities like yoga, spirituality or Sanskrit, Bharatiya Sanskriti, ABVP and so on. Let us move to cost accounting now with this discussion. So, in the beginning we will, this particular PPT will talk about what is cost accounting, what is a distinction between cost and other streams of accounting, then what is cost and classification of costs. There are 3 major streams, financial, cost and management accounting. Some of you might be knowing about financial accounting. There are 3 important steps in financial accounting. First is recording of financial transactions, so every financial transaction as and when happens is recorded in the financial accounting system, then it is summarized in ledger and report is prepared which is in the form of financial statements. The target users for financial accounting system is external users, so it is meant for shareholders, it is meant for employees, it is meant for government, internal users also use it but major target is external users. Now in relation or in comparison with this, let us see what is cost accounting. In cost accounting, again the first step is similar, recording of costs. In financial accounting also it was recording of financial transactions, here it is recording of cost, you may feel it is duplication but it is not so, because in cost accounting costs are recorded with lot more details. For example, if salary bill for an organization is 5 crore, in financial accounting total amount of 5 crore will be included, but in cost accounting for each type of employees how much is paid, what where the activities done by them on daily or hourly basis, for what that salary is paid like those details are recorded, that is why this is a more detailed recording of cost that is involved. Next is analysis of costs, so each of the costs are now broken down, so suppose we were talking about salary costs, they would be broken down as to what are factory related salary costs, how much are admin related, how much are selling related, how much is a overtime, how much is paid as incentives, what was the nature of work being done for that by that employee, how much is a direct cost in the salary, how much is a indirect cost in the salary, like that detailed analysis is made, comparisons are made, sometimes projections are made, in financial accounting these are only the actuals, you are not allowed to make projections, but in cost accounting we make estimates and those estimates are also used to make budgets or to make future projections. Based on all these analysis, the cost statements are prepared as per the needs of users and here the users are internal users, so managers, decision makers within the organization right from supervisor level to mid management to CEO and even to board of directors. This is a confidential data, so it is normally not shared with external users except for a few statements, so this is in brief what is cost accounting, now this is a definition of cost accounting, it involves recording, estimating, controlling and reporting of costs, so you would observe estimating is also involved and controlling is also involved, so cost accounting does not just stop at recording, it tries to keep those costs in check, tries to control the cost. Now this process begins with the recording and also the basis on which they are calculated and ultimately we prepare the cost statements, now the objectives of cost accounting system is ascertainment of cost to know the cost, but it is not the total only, to know the cost for the product, for a process category wise, plant wise, function wise, so it is a detailed ascertainment of cost. Now this detailed assessment is, ascertainment is used for cost control, so certain standards are set or budgets are laid down, then actuals are compared with the norms or the standards and efforts are made to see that actual cost does not exceed what is permitted or what is budgeted. So cost control exercise is done, cost reduction is also done, so that we have permanent benefit of lesser costs, then a variety of information is generated to help in decision making, that could be for pricing decisions, so if we know correct information about costs, we will be able to price our product or service properly. Customers might ask for some extra things, we may have to give a delivery, we may have to incur certain risk like giving guarantee, all those aspects are calculated and built into cost, so that proper pricing can be done. It is also useful for other decisions like profit planning, because entity should know how much units it should produce or up to what level it should extend its service, then budgeting is done, so that a systematic allocation of resources can be done, like that variety of management decisions are catered and they would be taken much in a much better way if accurate and timely cost data is available, so these are the objectives of cost accounting system. Now, the advantages, since we know detailed cost record, it helps us in identifying losses and efficiencies, so unprofitable activities can be weeded out, then certain cost reduction techniques can be used or value analysis can be done, so that wasteful costs can be eliminated altogether and more value can be provided from whatever resources which we are using. And the third part which we already discussed that a better information helps in much improved decision making, it could be profit planning, it could be make or avoid decision or instead of we making we can go for outsourcing that product or going for outsourcing of a particular service, all these types of decisions are made in much better way because of cost accounting system. Now, management accounting, this is a kind of umbrella concept where both financial and cost data are taken together and it is mainly targeted to internal users. As the name suggests, it is called management accounting because it is mainly for internal users. So, here in this figure, we are seeing a comparison of management versus financial accounting. In management accounting, variety of decision making is done for better control and for a good decision making. In financial accounting, financial statements are prepared and target are external stakeholders. In this particular course, we are going to focus on cost and management accounting. Now, the definition of cost, now in business or even in other activities other than business, the cost is usually a monetary valuation of any of these things, maybe of effort or of material, resources, time, risk involved and opportunities foregone for production or delivery of any goods or service. So, for any activity we are doing, normally we have to sacrifice some resources either to we have to give up opportunities or we have to spend on material or we have to give our time or we have to give our resources, all this will be included in the cost. We will try to give a monetary valuation to it and go on adding it for calculations of cost. Normally, this is how business functions, some production may be done, then we will go for supply chain or distribution and the product is supposed to reach the customer. Now, the costs are incurred at all these stages and accordingly the costs are also classified related to production, related to marketing and distribution, related to consumer service or related to administration for looking after all these activities and there can be other costs like research and development costs and so on. This is one more definition of cost. It can be defined as amount of resources given up in exchange of any goods or services. So, suppose we want to buy material, we will have to pay the supplier that is called as a material cost. When we pay salaries or overtime or incur on perquisites of the employees, it will be included as a labor cost or as a salary cost or human resource cost. When we buy various services like electricity or like insurance on which the costs are incurred, all these are included as an examples of costs. There are also other type of costs known as capitalized cost. Now, this is a cost incurred on fixed assets like purchase of machinery or like installation of machinery. Now, these costs are going to give us long term benefits. These are not costs just for that period. If a machinery has a life of 5 years, we will get the benefit for 5 years. So, we will charge depreciation on that asset for 5 years period and that depreciation is included on day to day cost. So, the whole of capitalized cost is not considered as cost of that period, but a proper proportion of that in the form of depreciation or amortization is included in the cost. Now, very important part that is cost classification. Now, these will tell us different chapters in cost accounting because these is a detailed analysis on the lines of the classification, we can go for more detailed study of a cost for a particular item or for a particular product. So, first way of classifying is by elements. First in a sense that is one of the most traditional ways, then by functions or by direct indirect, by controllability, variability, relevance and so on. Now, let us go for first classification that is cost classification by elements. Do you know what are the important elements of cost? There are 3 important elements, the first one is material, labor and expenses. Now, the material cost, this is the cost incurred on any tangible substance or a thing. Best example could be purchase of raw material, it can also be purchase of any of the components. Suppose you are purchasing any other tangible item that will be included in the material cost. Next is employee cost, this is the cost on all human resources will include salary, wages, bonuses, perquisites, retirement benefits, any other incentives or ESOPs, all this is included in the labor cost or employee cost. Third are services, so when we purchase any outside service, the cost incurred on the same like electricity, like insurance, like rent that is all included in the expense. This is also a residuary head, so what is not included in material and labor will be included in the expense. Now, this is the most traditional way of classifying as material, labor and expense. But to know more details or to try to control the cost, further type of classifications were also evolved and that led to classification by function. So, as per the important business functions, the costs also are classified. So, what are the important business functions, just think over it, I think most of you are getting it can be production, it can be selling and distribution, it can be administration and so on. According to that the costs are also classified. So, we have got production costs, admin costs, selling costs, there can be other functions like R and D, those according to them the costs will be classified. Now, what is the advantage of this cost classification? Because now it is as for the function, so it helps us in better control of the costs. So, whatever is a material, labor or overheads consumed for production, we can hold production manager responsible for it. We can set a target for the same according to the level of output. We can make admin manager responsible for admin costs and go on adding the cost related to office or related to administration. This is how functional costs help us in better control. That does not mean element wise costs are not important, this is overlapping. That is one way of classifying, this is another way we are going to learn further different ways. The third important function is selling and distribution. So, we the classification helps us in whether we should outsource a function, whether we should go for better control, whether we should give more focus, is it our strength, weakness, we come to know from cost classification by function. Now next important classification is cost classification by direct and indirect. So, the direct costs are those costs which can be easily identified. So, different costs can be divided as per cost centers or as per products. If we can identify a cost to a cost center, we can consider it as a direct cost. For example, cost of fruits in fruit pulp production. So, if we are making fruit pulps, we know that raw material in the form of fruit will be purchased. We also know that for which product, let us say if you are making mango juice, the mangoes which are purchased can be charged to mango juice production unit. If we are making some juice of some other product, let us say gavas, we can go for identifying that purchase to that particular unit. Then those costs that is purchase of raw material will become a direct cost because it can be easily traced or identified. As against this, there are certain cost, there is one more example given over here that if you are into business of hardware of computers. Suppose you are assembling PC, you know that hard disk goes into making of PC. So, the cost of hard disk you can easily identified with the particular PC which is getting assembled. So, you call it a direct cost. As against this, there are several costs which are common in nature. They may not be for a specific product, then those are called as indirect costs. Let us say we are in we are a small unit making hardware. So, we make, we assemble PCs, we assemble certain other things, we also do some small service or repair work. Now, number of engineers or technical personnel either work for servicing maintenance or they also work for assembling of PCs or certain items. Now, we exactly do not know the salary paid to a particular person and its linkage to any one particular product or a service job. Because different work is being done simultaneously in our office or in the workshop. So, salary costs cannot be as easily identified as we are able to know the cost of hard disk. Are you getting? So, cost of hard disk for a particular PC is a direct cost, whereas the salary cost becomes a better example of indirect cost. Can you think of any other example of indirect cost? For example, rent, if we are paying rent for our shop or for our factory, can we identify it to for any one product that would not be possible. Because rent is for the whole system, in that we are making several products, we are also doing certain service related jobs. So, rent remains an indirect cost. Earlier we took example of fruit pulp manufacture. So, we know that the raw material that is fruits purchased are for making of particular type of pulp, it is a direct cost. Can you think of any indirect cost? For example, if we are if we have a maintenance team or even one person for maintenance of these machines, same person whenever there is any problem services or maintains different machines. So, it would not be possible for us to know exactly with accuracy the salary of the person to be charged to which unit of pulp manufacture. So, it is an example of indirect cost. Are you getting me? So, here is an example given maintenance support group or security. So, outside the factory there is a security. That security is for let us say there are 10 units inside the factory. Security is common for all the 10 units. We will not know exactly the salary of security to be charged to which unit. That is why it is considered as indirect cost. In way storage costs in go downs or in showrooms these also become indirect cost. There is another name for indirect cost which is more popular and you might have heard it that is overheads. Now, the overhead cost being common in nature cannot be charged directly or cannot be charged cannot be attributed directly like a direct cost. So, many times a rate per hour is calculated. We take the total for that type of overhead divided by number of hours. Suppose here is an example of maintenance. If we have a maintenance and support group, we calculate their total cost divided by number of hours for which they have worked which will give us rate per hour. Now, whenever maintenance person is called and suppose works for 5 hours and rate per hour is 2000, then 5 into 2000 we will be able to charge 10,000 for the unit which has used maintenance facility getting it. So, overheads are charged using rate for hour. Sometimes composite or departmental rates are calculated. There are also some techniques like activity based costing which are little advanced techniques for charging of overheads. Later on we will go into it. But right now let us understand that this particular classification direct versus indirect is very much useful for better control of costs. It helps us in ascertainment of costs for a particular product or for particular cost center. It also helps us in better control because we will know that for this product, this is a direct cost and we will be able to give more attention or make a budget or a standard for more and a more suitable control of that particular cost. So, here we will stop at whatever classification we have discussed and we are going to continue this and discuss some more types of classifications in the next session. Namaste. Thank you.