Which of the following declares the difference between financial and managerial?

The key difference between Cost Accounting vs. Management accounting is that Cost accounting gathers and analyzes the information related to cost, which provides only quantitative information to the users of the reports. In contrast, Management Accounting is the preparation of financial and non-financial information, i.e., it involves both quantitative and qualitative information.

Management accounting includes a lot of aspects of business such as decision making, strategizing, planning, performance management, risk management, etc. On the other hand, cost accounting only revolves around cost computation, cost control, and overall cost reduction of business.

In simple terms, cost accounting is one of the subsets of management accounting. As a result, the scope and reach of management accounting are much broader and more pervasive than cost accounting. So, we can say that management accounting can provide a helicopter view of the business by looking at each aspect qualitatively and quantitatively. On the other hand, cost accounting only gives a pixel view of the cost of each product, service, or process.

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In this article, we discuss Cost Accounting vs Management Accounting in detail –

Cost Accounting vs Management Accounting [Infographics]

There are many differences between cost accounting vs. management accounting. Let’s glance at these distinctions.

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Now that we look at a snapshot of Cost Accounting vs. Management Accounting’s key differences, let us understand them in detail.

What is Cost Accounting?

Cost accounting comes down to “cost” and “accounting.”

So first, let’s understand what “cost” is. Then we will look at “accounting.”

What is “cost”?

Cost is an expense incurred by a particular unit. In another way, the cost is what the business sacrifices to produce one product unit.

What is “accounting”?

Accounting is the art and science of recording, classifying, summarizing, and analyzing inputs to make sense of the information related to financials, management, or cost.

If you are new to accounting, you can learn basic accountingAccounting is the formal process through which a company attempts to present its financial information in a way that is both auditable and usable by the general public. read more here.

What is “cost accounting”?

Cost accounting is the art and science of recording, classifying, summarizing, and analyzing costs to help management make prudent business decisions.

If you want to learn Cost Accounting professionally, you may want to look at 14+ hours of Cost Accounting Course

Functions of Cost Accounting

There are three functions of cost accounting –

• Cost control: The first function of cost accounting is to control the cost within the budgetary constraints management has set for a particular product or service. This is important since management allocates limited resources to particular projects or production processes.
• Cost computation: This is the main function of cost accounting, and this is the source of all other functions of cost accounting. In the section below, we will see how we can calculate the cost of salesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more per unit for a particular product.
• Cost reduction: Cost computation helps the company reduce costs on projects and processes. A reduction in costs means more profits since the margin will naturally increase.

Direct costs & indirect costs

Direct costsDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more are directly involved in producing goods. That means direct costs can be directly identified as being used in producing goods. For example, we can talk about direct materialDirect materials are raw materials that are directly used in the manufacturing process of a company's goods and/or services and are an essential component of the finished goods manufactured.read more and direct labor used to produce goods. These costs we can identify as direct costs.

On the other hand, indirect costs are costs that can’t be identified easily. These costs can’t be identified separately because these costs assist in functioning multiple activities. For example, the rent business pays for running a production operation would be called indirect costsIndirect cost is the cost that cannot be directly attributed to the production. These are the necessary expenditures and can be fixed or variable in nature like the office expenses, administration, sales promotion expense, etc.read more since we can’t identify how much portion of the rent is used for the production of goods, how much is used for preparing the raw material, how much is used to install the simulation systems that can train the workers.

Understanding these two types of costs is important since we would be using these costs to compute the cost of sales per unit for a particular product.

Fixed Costs, Variable Costs, & Semi-variable Costs

Fixed costsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more don’t change with the increase or decrease of production units. That means these costs remain similar within a broad range of the spectrum. Plus, the per-unit fixed cost changes as the production increases or decreases. For example, rent is a fixed cost. Even if the production increases or decreases, the business needs to pay the same rent month in and month out.

Variable cost is the exact opposite of fixed cost. Variable cost changes as per the increase or decrease of production units. But even if the total variable costTotal variable cost is the total of all variable costs that would change in proportion to the output or the production of units and helps analyze the company's overall costing and profitability. Total variable cost formula = number of units produced x variable cost per unit.read more changes, per unit cost per unit, remain the same irrespective of changes in production units. For example, the cost of raw materials is variable. The total cost of raw materials changes if the production increases or decreases. But the per-unit cost of raw materials remains the same even if the production increases or decreases.

In semi-variable costs, both components are present. Semi-variable costs are a combination of fixed costs and variable costs. For example, you pay $1000 per month as a fixed salary to all your workers, and the workers who produce more than 50 units of toys every month get an additional $5 for every additional unit produced. These sorts of wages will be called semi-variable wages.

Cost Accounting Statement – Example and Format

Cost accounting is much more than a cost statement. But still, the cost statement will give us an idea about how to calculate the cost of sales per unit for a particular product –

MNC Factory has the following information, and from the below-furnished information, you need to calculate the per-unit cost of sales.

• Raw Materials – Opening Stock: $50,000; Closing Stock:Closing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more $40,000.
• Purchases during the period: $145,000.
• Direct labour – $100,000
• Works overheads – $40,000
• Administration overheads – $20,000
• Selling & distribution overheads – $30,000
• Finished units – 100,000.

Find out the cost of sales per unit.

In this example, every input is given. We need to put the figures in the right place.

Statement of Cost of ABC Factory

What is Management Accounting?

Management accounting collects, analyzes, and understands the financial statements and statistical and qualitative information to make sense of how the business is going and what to do shortly.

Management accounting helps to make short-term decisions and also helps strategize for future big events. The idea behind management accounting is to prepare periodical reports that can educate and inform the company’s managers to make effective decisions.

Even if management accounting is much different than financial accounting and cost accounting (cost accounting is one of the subsets of management accounting), it gathers information from both of this accounting in producing periodical reports for management.

What can we expect to find in those periodical reports?

The exact motto of these reports is to help management get all the information at their fingertips and use the information to make effective decisions for the business.

Since there is no statutory requirement, these reports are articulated as per the need of the management.

Here are the characteristics of these reports –

• Quantitative and qualitative data points: Financial accounting and cost accounting solely revolves around quantitative data. But only quantitative information isn’t able to portray the whole picture of the business. Rather we should also look at qualitative information to make sense of what’s happening within the business. For example, the absenteeism rate doesn’t depend on quantitative information; rather, it’s purely psychological. Management accounting looks at all aspects of the business – both quantitative and qualitative data points to create reports.
• Predictive information: If you look at financial accountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.read more and cost accounting, you will see that these two accounting systems are based on historical information. But in the case of management accounting, the focus is both on historical and predictive information. Since historical information only solves part of the problem, estimated information helps management see the big picture and makes financial statementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more forward-looking. In management accounting reportsAccounting reports are created using a company's accounting data to check ledger-by-ledger transactions over a given time period. Accounting reports also include financial statements such as cash flow statements, profit and loss statements, and balance sheets.read more, predictive information is one of the biggest circle-in areas.
• Used for internal purposes: These reports contain very sensitive information about the business and management. That’s why it is only provided to the management to make effective use of these reports and strategize based on the information provided in these reports.

Importance of management accounting in business

Since we know that management accounting periodical reports serve a great purpose in making effective decisions for management, we need to know the importance of management accounting in business. Here are the top-most factors –

• Forecast the future: As mentioned earlier, the sole focus of management accounting is not on the past but the future. Management accounting propels management to ask – “What should a company do shortly – should it buy more plants? Or should it acquire a few small companies which are experts in producing the raw materials for the company?” Management accounting helps answer these valid questions and assists to start approaching the decision.
• Forecast cash-flow: Without cash flow, businesses can’t move molehills; forget about the mountains. So understanding and predicting how much cash flow the company will be able to generate shortly is critical. Management accounting helps with budgeting and trend charts to estimate the future cash flow for the business.
• Return on investment: One of the main functions of management accounting is to see how much return it could produce on the investments it has made earlier. Looking at the past gives management an idea about where they went wrong and what to correct in the next investments.
• Understanding performance variances: Since management accounting is more about predictive analysis, naturally, there will be variances. Variances differ between estimated costs/profits and actual costs/profits. The purpose of management accounting is always to create positive variances and try to learn from the negative variances.
• Create/outsource decision: This is an important question for every business – whether to create raw materials/a part of the product or outsource it to a third party. Management accounting helps to see the costs and profits of both options and choose the best one among the two.

Tools used in management accounting

There are many tools used in management accounting. Following are top-most which are frequently used –

• Simulations
• Guides to Financial modeling
• Ratios
• Game theory
• Management Information System
• Key Performance IndicatorsKey performance indicators (KPIs) help a company evaluate its overall business performance against the set goals over a period. These can differ depending on the types of firm or industry and the assessment criteria. Also, most firms employ these indicators to stay ahead of the competition.read more
• Key Result Areas
• Balance Scorecards etc.

Cost Accounting vs Management Accounting – Key differences

There are many differences between cost accounting vs. management accounting. Let’s have a look –

• The scope of cost accounting is much narrower. The scope of management accounting is much broader. Since both help make management effective decisions, management accounting has many more tools than cost accounting.
• Cost accounting is the sub-set of management accounting. Management accounting itself is a stand-alone subject that helps management strategize well.
• Cost accounting is used by management, shareholders, and stakeholders also. Management accounting, on the other hand, is just for management.
• Statutory audit is mandatory for cost accounting in giant businesses since there can be chances of huge discrepancies. But there’s no requirement for the statutory auditOne of the most common types of audits is the statutory or financial audit. Its main purpose is to gather all relevant information so that the auditor may provide an accurate and unbiased assessment of the company's financial position.read more of management accounting.
• Cost accounting is solely based on quantitative data points. On the other hand, management accounting is based on both qualitative and quantitative data points.
• Cost accounting has its norms and rules and is not dependent on management accounting. On the other hand, to create effective reports, management accounting is dependent on both cost accounting and financial accounting.

Cost Accounting vs Management Accounting (Comparison Table)

The below table summarizes the key differences between cost accounting vs. management accounting.

Conclusion – Cost Accounting vs Management Accounting

Both cost accounting vs. management accounting help management make effective decisions. But their scope and tools are completely different. As management accounting depends a lot on cost accounting to prepare reports, cost accounting happens to be a subset of management accounting. But if we look at the usage, estimation process, data points used, and utility, cost accounting has a much narrower scope than management accounting.

At the same time, you must understand cost accounting well to understand management accounting. Therefore, it is important to understand the contrast between cost accounting and management accounting.

Recommended Articles

This has been a guide to Cost Accounting vs. Management Accounting. Here we discuss the top difference between cost accounting and management accounting and infographics and a comparison table. You may also have a look at the following articles –

• List of Objectives of Cost AccountingCost accounting measures the total cost of production of a business by measuring every variable cost at each production phase along with the fixed costs. The significant objectives of cost accounting are - Cost allocation, Examine the costs, Prepare budgets, Comply with legalities, Decision making. read more
• Management Audit ExamplesManagement audit refers to an audit of management in which multiple tools examine the management's performance and progress toward the process of best decision making. Instead of focusing on operational aspects, the emphasis here is on management's "Quality of Decision-Making."read more
• Types of Accounting ConventionAccounting conventions are specific guidelines for complicated and unclear business transactions, not compulsory or legally binding, but these generally accepted principles maintain consistency in financial statements. These conventions help in standardizing the financial reporting process, disclosure of transactions, and relevance.read more
• Accounting vs CPAAccounting is the process of recording, maintaining, and reporting the financial affairs that show the company's clear financial position. In contrast, CPA is the designation given to those individuals who clear the CPA examination by the American Institute of Certified Public Accountants.read more