cost accounting vs financial accounting

cost accounting vs financial accounting

A Comprehensive Comparison of Cost Accounting and Financial Accounting

1. Introduction to Cost Accounting and Financial Accounting

The corporation nearly exists all over the world. As an important method for business administration and decision-making, accounting has been applied more and more widely in all corporations’ management. It mainly includes cost accounting and financial accounting. Although artificial distinction is carried out in their names, the content presented on accounting statements is very similar. Their purpose is to collect money, relevant materials, and information of human resources and to supply indispensable and complete information for the owners of the corporation, the executives, and the salient financial class. Between them, the differences on involved account classification and involved information appear like the mysterious subject of the accounting world.

What does cost accounting have to do with financial accounting? Are they the same? Can they help each other? These are the questions we often talk about. And we have different answers for them. However, the truth can be obtained only from a careful study of them. This article will give you the exact answer, especially on their differences. The contributions in both new practices and theory from this study are substantial. We not only provide the enterprises and accounting staff insight into how to simplify cost accounting and financial accounting in daily use but also provide some reference to the improvement of cost accounting and financial accounting system.

2. Key Differences in Objectives and Focus

Many economic problems and assumptions faced by financial accounting alter when examining firm decisions through the eyes of cost accounting. The agency costs assumed away in most economic decisions considered by financial accounting mean that the problems of decentralized decision makers using affect-based rewards show up regularly. By failing to use operations deflated earnings levels or by ignoring expenses with short-term benefits but long-term sacrifice with competitive positioning, controllers can make assumptions with decision models already built into information displayed for the agent benefit of those who can design and operate non-price controls. These considerations of cost accounting and financial accounting related problems and issues are raised as consequences of different decision situations, such as whether standard setting prioritizes the use of resources, the key inputs, or outputs of business enterprise.

Financial accounting measures performance in relation to the origination and investment of capital, whereas cost accounting relates operations to the use of labor and other resources. The orientation of concern of financial reports is with ownership rights and wealth; cost accounting relates to the efficiency of resource usage. Status and action principles guide the inferences of user groups for financial accounting. Cost and profit functions are the primary influences on decisions generated by cost accounting data. The inherent risks of undertaking economic activities suggest that objectives are sometimes necessary at the expense of verifiable periodic income criteria when monitoring performance of entities is of interest.

3. Variances in Reporting and Analysis Methods

(2) Financial accounting uses a largely historical approach to both the flow of information documented and reported. To the trained analyst or manager, its financial data can sometimes also provide insights as to patterns, trends, and future possibilities for future results. Cost accounting, on the other hand, is primarily a forecast and needs information system that relates costs to tasks and activities. Its levels of aggregation and coding will always tend to support gradations of value judgments, leading to some future “cost accounting” dissidence in the amounts of analysis (forecast versus historic) required by management. Overall, traditional cost accounting has a much closer affinity with the institutional needs of management than with those of outside financial statement users.

(1) The primary emphasis in financial accounting is on determining and reporting what has already transpired. The decision problem it addresses involves the choices of what transactions have taken place and how they are to be valued for reporting purposes. The primary emphasis in cost accounting is on providing the detailed data and analysis needed for both good short-run and long-run decisions, particularly those related to the substitution and evaluation of alternative activities. The decision problem it addresses involves incurring the selected high costs to accomplish specific tasks.

4. Impact on Decision-Making and Strategic Planning

Both financial and management accounting are closely related in the sense that they both serve the overall purpose of providing useful information for decision-making. However, they differ in terms of the audience they cater to. Financial accounting, although part of the backbone of management decision-making, is restricted in the amount of detail it supplies to the management. In order to achieve the best outcomes from decision-making, more detailed and quality information is required that is neither relevant for nor can be broadcast to the investors and the public. This is where management accounting plays its role by providing management with the tools needed to ensure the company runs efficiently.

To execute plans and make decisions, the managers require cash-flow information that is specific to the company’s cost structure and revenue stream. The failure of most of the dot-com companies during the technology bubble can largely be attributed to the absence of a business model tied to a profit. Financial accounting reports contain summary information about an organization’s financial performance, whereas cost accounting reports contain information down to the department or product level provided in formats to help management determine whether it is doing things right. As a result, one significant difference between the two systems is that financial accounting cannot alter the company’s future, whereas cost accounting, if used properly, can. According to the allocation theory in cost accounting, all costs, whether classified as managerial costs or financial costs, are both variables as well as behavior cost drivers since they play varying key roles depending on the situation at hand of interest.

5. Conclusion and Future Trends in Accounting Practices

5.2. Future Trends in Accounting Practices In response to these weaknesses of current accounting practices, the IMA has set up a Management Accounting Alliance (MAA), which consists of several prestigious international professional bodies, to lead the management accounting profession forward and transfer knowledge to future professional accountants. It aims to develop three qualifications, a foundation, practitioner, and advanced certificate in management accounting, aiming to provide accounting professionals with updated tools, techniques, and knowledge. The IMA has also recognized that the role of management accounting has been widened in recent years, with more professionals being involved in white-collar criminal investigations, business analytics, corporate sustainability, intellectual property identification, governance, risk management, technology, and financial costing. In addition, the MAA tries to find common ground between the different management accounting qualifications under different professional bodies, including content, structure, and examination formats. Expectations on the accounting profession have rapidly increased accompanying the increasing original and complex tasks within global companies and the financial reporting environments. When CPAs update their integrated professional capabilities and satisfy these public expectations, companies will benefit from better performance, expanded business opportunities, and stronger reputations. Therefore, the AICPA provides a roadmap for defining the professional accountant expectations, meeting diverse stakeholder needs, and aligning the CPA learning ecosystem with the career needs.

5.1. Conclusion During a challenging and complex global economic environment, multiple accounting professions (APs), such as cost accounting and financial accounting, play different roles in accounting information systems and recognize the inherent limitations of financial statements. This study conducted a thorough analysis of the unique features of various accounting professions from both theoretical and practical perspectives. Although cost accounting focuses on satisfying the requirements of internal users with a high degree of flexibility and cost and profit emphasis, supporting planning, decision-making, and performance evaluation, it is constrained in emphasizing physical quantity units or dealing with potential conflicts among various performance measures. The new cost accountant is expected to overcome these weaknesses and invest time in providing additional management information, supporting the balanced scorecard or corporate social responsibility, obtaining higher recognition and authority, and broadening the role of the management accountants.