Page 9 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting
Notes
4 LOVELY PROFESSIONAL UNIVERSITY
4. Cost Audit: The terminology of ICMA, London, defines cost audit, as “the verifi cation of the
correctness of cost accounts and of the adherence to the cost accounting plan”. Cost audit
has a much wider role to play in an industry or organisation than people could imagine.
The aim of cost audit is to highlight the shortcomings inherent in the cost accounting
system.
5. Budgetary Control: According to Heiser, budgetary control can be defined as “an overall
blue print of a comprehensive plan of operations and actions expressed in fi nancial terms”.
According to him, budgeting process involves the preparation of a budget, comparison of
budgeted and actual expenditure and income, planning and coordinating for control, etc.
Self Assessment
Fill in the blanks:
4. ...................... is the guidance and regulation by executive action of the costs of operating
and undertaking.
5. The aim of ...................... is to highlight the shortcomings inherent in the cost accounting
system.
6. ...................... process involves the preparation of a budget, comparison of budgeted and
actual expenditure and income, planning and coordinating for control, etc.
1.3 Relationship between Financial Accounting and Cost Accounting
In a modern system of industrial accounting, there is no independent cost ledger or fi nancial
ledger, but the complete accounting system is amalgamated into one set of double-entry accounts.
In other cases, the figures posted to the cost ledger are reconciled at regular intervals, probably
monthly, with the figures shown in the revenue accounts of the fi nancial ledger.
Whichever system is adopted, the expenditure accounts and the cost accounts are interdependent.
The application of financial and cost accounting to the service of management should be planned
as one coordinated service, and for this purpose should be under common control. Integration
does not, therefore, imply only the amalgamation of two systems or accounts, but it also entails the
amalgamation of the accounting sections, including the cost office, into one unifi ed department.
It is, furthermore, desirable in the interests of the efficiency of the financial division that clerks
shall be given the opportunity of obtaining experience in both financial accounting and cost
accounting; in other words, in records of total expense heading and of breakdowns or analyses.
Differences between Cost Accounts and Financial Accounts
1. Financial accounts deal with all the items of expenses, losses, income and gains in total but
the cost accounts deal with items of cost alone.
2. In financial accounts, items of cost that are dealt with are expressed in totals. Therefore,
such accounts cannot disclose the cost per unit whereas in cost accounts all expenses are
analyzed very carefully and apportioned accordingly. Hence, cost per unit can be very
easily determined.
3. Financial accounts deal with facts alone whereas cost accounts deal with estimates as well
as facts. Therefore, the result of cost accounts does not always tally with fi nancial accounts.
4. Financial accounts cover a long period usually a year, but cost accounts cover comparatively
a short period say a week, fortnight or a month.
5. Cost accounts do not form part of the ordinary process of double entry systems. Whereas
the financial account must be invariably maintained according to double entry system.