Cost Accounting Vs Management Accounting
In order to sustain profitability and improve efficiency, Business owners need to keep track of both financial and non-financial transactions of their firm. Doing so, they would be able to ensure overall growth and development of their Business operations and would improve their scope of generating more revenue.
However, to ensure it, they need to employ effective means of collecting and assessing data about all the transactions their firm is involved in. This is where both Cost Accounting and Management Accounting come in.
Let’s find out more about the two concepts and try to figure out the difference between Cost Accounting and Management Accounting in brief.
What is Cost Accounting?
Cost Accounting is a practice of Business in which we record, examine, summarize and study the Cost of a company which is spent on any of the company's processes, it's services, products or any thing of the company. In other words we can say that Cost Accounting is a process through which we can determine the Costs of goods and services of any organisation. It is used in financial Accounting and includes the recording, classification and allocation of various expenditures. Cost Accounting helps in calculating the Costs of various goods of any organisation. It eventually helps any organisation in controlling its Cost and plan their strategies along with preparing them for making efficient decisions regarding Cost improvement. It also helps the organization to understand the proper utilisation of Cost spent and to correct their wrong decisions.
Cost Accounting is a method wherein, firm owners collect, classify and analyse quantitative information pertaining to manufacturing Cost. With the help of the accumulated financial data, Business owners can develop required Business strategies.
Contrary to popular belief, Cost Accounting is not the same as financial Accounting and is not necessarily reported at the end of a fiscal year.
Notably, there are 3 essential elements of Cost Accounting –
Cost of raw material
Labour Cost
Overhead Cost
Hence, it can be said that Cost Accounting factors in the Cost accrued at each level of production along with fixed Costs to analyse their impact on a specific production level accurately.
Cost Accounting Functions
Cost Accounting helps the organization in ascertaining the per unit Cost of every product which it manufactures.
It also helps in analysing any wastages made in products, expenses, tools, etc. Along with it, it also suggests the ways for minimising these wastages.
Cost Accounting also helps in calculating the profitability of every product of the company. It also finds out the ways of maximizing their profits.
Cost Accounting is also responsible for the amount of orders being made of the raw material and to control them. So, it makes sure that the raw material must not be over ordered which results in the locking up of the capital.
Calculating Cost
Arguably, it is the primary function of Cost Accounting and serves as the source of other associated Cost Accounting functions. The said method is responsible for figuring out the Cost per unit of product produced by the firm.
Controlling Cost
Cost Accounting is also responsible for identifying the areas where operational Cost can be controlled, and helps firms to limit their expenses within the budget constraint. Such a function helps to allocate limited resources more optimally and helps improve efficiency.
Reducing Cost
With effective Cost Accounting, one can identify unwarranted expenses and build suitable strategies to lower them in the long run. In turn, it plays an essential role in maximising the profit margin per product significantly.
Test Your Knowledge: Which one of these is an objective of Cost Accounting?
Cost calculation
Computing selling price
Facilitating decision-making
Controlling and lowering Cost
All of the above
None of the above
Now that we have become familiar with this concept, let's proceed to the other equally important concept so that we can distinguish between Cost Accounting and Management Accounting easily.
What is Management Accounting?
Management Accounting or managerial Accounting can be defined as the process of preparing reports on Financial and Non-financial transactions with the help of available data. Such reports are made by accumulating, assessing and interpreting both Statistical and Qualitative and Quantitative data and are also heavily based on the firm’s financial statements.
Usually, a firm uses some of these tools to practice effective Management Accounting –
Accounting ratios
Key performance indicators
Key result areas
Financial modelling
The information compiled through this process is considered to be quite useful for formulating Business policies and strategies for the short-term. Notably, the reports formulated with the help of managerial Accounting are accessed and used by the firm’s Management. Resultantly, it is not mandatory to report the information compiled at every year-end.
Management Accounting is also known as Managerial Accounting. It is a process which provides financial information and the resources to the managers of the organization in making effective decisions. The only thing which makes Management Accounting different from Financial Accounting is that it is only used by the internal team of the organization. Management Accounting presents the Financial data along with Business activities for the Internal Management of the organization. Management Accounting also has a lot of benefits which includes decision making, planning, controlling the operations of the Business, organizing, understanding the financial data, identifying and managing the Business problems and Management of strategies.
Management Accounting Functions
Management Accounting helps in providing the necessary information and data so that we can plan for the operations of the organization.
It helps the Management team to organise the resources (both human and non - human) of the organization and analyses different functions and responsibilities along with assigning the responsibilities for making the working better.
Management Accounting helps in increasing the efficiency of the organization and to maximize its profits.
It also controls the performance of the organization by using budgetary control, standard Costing, Cost reduction programs etc.
Forecasting Cash Flow
With Management Accounting’s help, one can estimate a firm’s future cash flow. Notably, a company’s Management factors in financial trends uses budgeting measures to predict future cash flow effectively. Also, depending on such estimates, the firm plans its future endeavours in terms of investment and production.
Analysing Performance Variance
Management Accounting tends to incline towards predictive analysis and is subjected to variances, i.e. difference in estimated Cost and actual Cost.
However, by employing effective measures of Accounting Management, a firm can bridge the gap between estimated Cost and actual Cost significantly.
Facilitates Production-oriented Decisions
With the help of the data compiled through Management Accounting, Business owners can easily analyse the Cost and profits behind different managerial decisions. This, in turn, helps them to make a more informed decision as to whether they should create raw materials or outsource the same for a more Cost-effective production process.
With that being said, let’s move onto the basis of Cost Accounting vs Management Accounting to find out the prominent differences.
This table highlights the Cost Accounting and Management Accounting differences –
Difference between Cost Accounting and Management Accounting
Cost Accounting is all about the Cost and it includes things like Cost control, Cost computation and Cost reduction. Whereas Management Accounting is about managing the organization and making effective decisions.
Cost Accounting has a narrow scope whereas Management Accounting has much broader scope.
Cost Accounting helps the Business in preventing irrelevant spending which sometimes goes beyond the budget. Whereas Management Accounting gives an idea about how Management should strategize.
Cost Accounting is quantitative in nature whereas Management Accounting is both quantitative and qualitative in nature.
Cost Accounting is used for shareholders, Management and vendors whereas Management Accounting is only used for Management of the Business.
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FAQs on Difference Between Cost Accounting and Management Accounting
1. What is Cost Accounting?
Cost Accounting is the method which is mostly concerned with calculating, controlling and lowering expenses at each level of production. It aims to increase the profit margin on per unit of product.
2. What is Management Accounting?
Management Accounting is responsible for Collecting, Analysing and Interpreting Qualitative and Quantitative data to help formulate suitable plans and strategies for Business. It aims to sustain the profitability of a firm.
3. Give a Point of Difference between Cost Accounting and Management Accounting.
A basic difference between Cost Accounting and Management Accounting is - Data compiled through Cost Accounting can be accessed by the Management, shareholders and vendors. On the other hand, the data gathered through Management Accounting can only be accessed by the administration.
4. Do Cost control and Cost reduction are the same thing ?
No, both are different things. Cost control is a temporary process whereas Cost reduction is a permanent process in nature. The main focus of Cost control is on decreasing the total Cost of production while the focus of Cost reduction is on decreasing per unit Cost of a product. The guarantee of quality maintenance of production is 100 percent through Cost reduction whereas there is no guarantee in Cost control.
5. What is the importance of Management Accounting ?
Management Accounting helps in making effective decisions for Management which is very beneficial for the Business. It also helps in managing the budget and future cash flow. Management Accounting also helps in looking how much return it could produce which has been made earlier and this is considered to be the main importance of it. It also helps us to see the Cost and profits of raw materials and makes it clear whether to create it or to source it from a third-party.
6. Determine a few objectives of Cost Accounting ?
The main objectives of Cost Accounting are - It controls the Costs of different products that any Business company manufactures. It also analyses and corrects the Cost of process and operations. It discloses the wastage made in the Business and prepares the report for controlling them. It also facilitates reliable information to Management.
