COST & MANAGERIAL ACCOUNTING cost accounting book pdf

Direct costs are those that can be identified and traced to a specific product/job/service. Example: direct materials and wages of workers directly making the product.

Indirect costs cannot be conveniently traced to a single unit and must be allocated/apportioned. Example: factory rent, supervisor salary and depreciation of factory building (overheads).

Causes: low wages/benefits, poor working conditions, bad supervision/conflict, lack of training/growth, personal reasons.

Remedies: fair wage and incentive policy, better working conditions and welfare, training and career development, improved supervision and communication.

Standard costing is a technique in which standard (predetermined) costs are set for materials, labour and overheads under expected efficient conditions. Actual costs are then compared with these standards to compute variances.

Variance analysis is the process of calculating and analysing the differences between standard performance and actual performance. Variances may be favourable (actual cost < standard) or adverse (actual cost > standard).

Basics (what is done):

1. Set standards: standard quantity, standard price, standard time, standard overhead rates.
2. Record actuals: actual quantity, price, time, overheads.
3. Compute variances: cost variances and (at basic level) interpret favourable/adverse.
4. Investigate causes: price changes, wastage, inefficiency, poor planning, volume differences.
5. Take corrective action: improve purchasing, reduce wastage, train labour, revise standards if needed.

Why useful to management:

• Provides clear cost targets and benchmarks for performance.
• Acts as an early warning system to control costs.
• Helps responsibility accounting by fixing accountability to departments/managers.
• Improves planning, budgeting and decision-making by providing expected cost information.

Thus, standard costing and variance analysis convert raw cost data into actionable control information.