Question

17) In full detail describe the differences between Cost Accounting and Financial Accounting. Provide a detailed example of how a company like Coca would use both

18) Describe in full detail Cost Behavior

19) If you were a Controller or Managerial accountant for a company, how would you make an impact on a company and its operations?

20) Say you are starting a job as a Cost accountant day 1 and they ask you to setup the entire costing system. How would you proceed?

Answer 1

Key Differences Between Cost Accounting and Financial Accounting

The following are the major differences between cost accounting and financial accounting:

1. Cost Accounting aims at maintaining cost records of an organisation. Financial Accounting aims at maintaining all the financial data of an organisation.
2. Cost Accounting Records both historical and per-determined costs. Conversely, Financial Accounting records only historical costs.
3. Users of Cost Accounting is limited to internal management of the entity, whereas users of Financial Accounting are internal as well as external parties.
4. In cost, accounting stock is valued at cost while in financial accounting, the stock is valued at the lower of the two i.e. cost or net realisable value.
5. Cost Accounting is mandatory only for the organisation which is engaged in manufacturing and production activities. On the other hand, Financial Accounting is mandatory for all the organisations, as well as compliance with the provisions of Companies Act and Income Tax Act is also a must.
6. Cost Accounting information is reported periodically at frequent intervals, but financial accounting information is reported after the completion of the financial year i.e. generally one year.
7. Cost Accounting information determines profit related to a particular product, job or process. As opposed to Financial Accounting, which determines the profit for the whole organisation made during a particular period.
8. The purpose of Cost Accounting is to control costs, but the purpose of financial accounting is to keep complete records of the financial information, on the basis of which reporting can be done at the end of the accounting period.

   Comparison Chart

   BASIS FOR COMPARISON	COST ACCOUNTING	FINANCIAL ACCOUNTING
   Meaning	Cost Accounting is an accounting system, through which an organization keeps the track of various costs incurred in the business in production activities.	Financial Accounting is an accounting system that captures the records of financial information about the business to show the correct financial position of the company at a particular date.
   Information type	Records the information related to material, labor and overhead, which are used in the production process.	Records the information which are in monetary terms.
   Which type of cost is used for recording?	Both historical and pre-determined cost	Only historical cost.
   Users	Information provided by the cost accounting is used only by the internal management of the organization like employees, directors, managers, supervisors etc.	Users of information provided by the financial accounting are internal and external parties like creditors, shareholders, customers etc.
   Valuation of Stock	At cost	Cost or Net Realizable Value, whichever is less.
   Mandatory	No, except for manufacturing firms it is mandatory.	Yes for all firms.
   Time of Reporting	Details provided by cost accounting are frequently prepared and reported to the management.	Financial statements are reported at the end of the accounting period, which is normally 1 year.
   Profit Analysis	Generally, the profit is analyzed for a particular product, job, batch or process.	Income, expenditure and profit are analyzed together for a particular period of the whole entity.
   Purpose	Reducing and controlling costs.	Keeping complete record of the financial transactions.
   Forecasting	Forecasting is possible through budgeting techniques.	Forecasting is not at all possible.

     ​​​​ 18)

   Cost Behavior

   The way a specific cost reacts to changes in activity levels is called cost behavior. Costs may stay the same or may change proportionately in response to a change in activity. Knowing how a cost reacts to a change in the level of activity makes it easier to create a budget, prepare a forecast, determine how much profit a new product will generate, and determine which of two alternatives should be selected.

   Fixed costs

   Fixed costs are those that stay the same in total regardless of the number of units produced or sold. Although total fixed costs are the same, fixed costs per unit changes as fewer or more units are produced. Straight‐line depreciation is an example of a fixed cost. It does not matter whether the machine is used to produce 1,000 units or 10,000,000 units in a month, the depreciation expense is the same because it is based on the number of years the machine will be in service.

   Variable costs

   Variable costs are the costs that change in total each time an additional unit is produced or sold. With a variable cost, the per unit cost stays the same, but the more units produced or sold, the higher the total cost. Direct materials is a variable cost. If it takes one yard of fabric at a cost of $5 per yard to make one chair, the total materials cost for one chair is $5. The total cost for 10 chairs is $50 (10 chairs × $5 per chair) and the total cost for 100 chairs is $500 (100 chairs × $5 per chair).

   Graphically, the total fixed cost looks like a straight horizontal line while the total variable cost line slopes upward.

   

   Total Fixed Costs Total Variable Costs 30,000 20,000 10,000 200 150 100 50 0 10 2030 40 0 10 2030 40 Units Units

   The graphs for the fixed cost per unit and variable cost per unit look exactly opposite the total fixed costs and total variable costs graphs. Although total fixed costs are constant, the fixed cost per unit changes with the number of units. The variable cost per unit is constant.

   

   Fixed Cost Per Unit Variable Cost Per Unit R 1,000 R 15 T 500 I 10 C 5 0 10 20 30 40 0 10 20 30 Units Units

   When cost behavior is discussed, an assumption must be made about operating levels. At certain levels of activity, new machines might be needed, which results in more depreciation, or overtime may be required of existing employees, resulting in higher per hour direct labor costs. The definitions of fixed cost and variable cost assumes the company is operating or selling within the relevant range (the shaded area in the graphs) so additional costs will not be incurred.

   

   Total Fixed Costs Total Variable Costs 30,000 $ 20,000 10,000 200 150 S 100 50 0 200,000 300,000 0 10 20 30 40 Units Units

   Mixed costs

   Some costs, called mixed costs, have characteristics of both fixed and variable costs. For example, a company pays a fee of $1,000 for the first 800 local phone calls in a month and $0.10 per local call made above 800. During March, a company made 2,000 local calls. Its phone bill will be $1,120 ($1,000 +(1,200 × $0.10)).

   

   2,000 1,500 1,000 500 Total Cost Line .. Variable Costs _ Fixed Costs 800 1,600 2,400

   To analyze cost behavior when costs are mixed, the cost must be split into its fixed and variable components. Several methods, including scatter diagrams, the high‐low method, and least‐square regression, are used to identify the variable and fixed portions of a mixed cost, which are based on the past experience of the company.

   Scatter diagram. In a scatter diagram, all parts would be plotted on a graph with activity (gallons of water used, in the example graph later in this section) on the horizontal axis and cost on the vertical axis. A line is drawn through the points and an estimate made for total fixed costs at the point where the line intersects the vertical axis at zero units of activity. To compute the variable cost per unit, the slope of the line is determined by choosing two points and dividing the change in their cost by the change in the units of activity for the two points selected.

   For example, using data from the following example, if 36,000 gallons of water and 60,000 gallons of water were selected, the change in cost is $6,000 ($20,000 – $14,000) and the change in activity is 24,000 (60,000 – 36,000). This makes the slope of the line, the variable cost, $0.25 ($6,000 ÷ 24,000), and the fixed costs $5,000. See the graph to illustrate the point.

   

   Gallons of January February March April May June Water Used 50,000 75,000 36,000 32,000 60,000 67,000 Total Cost $17,500 20,000 14,000 13,000 20,000 21,750 25,000 20,000 15,000 10,000 5,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 Units cliffsNotes article continues below

   High‐low method. The high‐low method divides the change in costs for the highest and lowest levels of activity by the change in units for the highest and lowest levels of activity to estimate variable costs. The high point of activity is 75,000 gallons and the low point is 32,000 gallons. The variable cost per unit is estimated to be $0.163. It was calculated by dividing $7,000 ($20,000 – $13,000) by 43,000 (75,000 – 32,000) gallons of water.

   Least‐squares regression analysis. The least‐squares regression analysis is a statistical method used to calculate variable costs. It requires a computer spreadsheet program (for example, Excel) or calculator and uses all points of data instead of just two points like the high‐low method. 19)

   Role of the Management Accountant

   Also known as corporate accountants, management accountants work within one specific company.

   The role of the management accountant is to perform a series of tasks to ensure their company’s financial security, handling essentially all financial matters and thus helping to drive the business’s overall management and strategy.

   Management accountants are key figures in determining the status and success of a company. Some choose to become a Certified Management Accountant (CMA), a similar credential to CPA, but with a greater focus on cost accounting, financial planning, and management issues.

   Job responsibilities can range widely. Depending on the company, your level of experience, the time of year and the type of industry, you could find yourself doing any of the following tasks:

9. Budgeting
10. Handling taxes
11. Managing assets to helping determine compensation and benefits packages
12. Aiding in strategic planning. 20) steps to set up a new entire costing system : installations of a costing system. The steps are: 1. Objectives to be Achieved 2. Study the Product 3. Study the Organisation 4. Deciding the Structure of Cost Accounts 5. Selecting the Cost Rates 6. Introduction of the System 7. A Follow-up. These are the steps to be followed.