Cost Accounting vs Management Accounting | Top 9 Differences

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

Differences Between Cost Accounting and Management Accounting

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

In simple terms, cost accounting is one of the sub-sets of management accounting. As a result, the scope and reach of management accounting are much broader and 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. 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

Cost Accounting vs Management Accounting

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

What is Cost Accounting?

Cost accounting comes down to two words – “cost” and “accounting”.

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

What is “cost”?

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

What is “accounting”?

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

If you are new to accounting you can learn basic accounting 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, then you may want to look at 14+ hours of Cost Accounting Course

Functions of Cost Accounting

There are basically 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 sales per unit for a particular product.
  • Cost reduction: Cost computation helps the company reduce costs on projects and processes. Reduction in costs means more profits since the margin will naturally increase.

Direct costs & indirect costs

Direct costsDirect CostsDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more are directly involved in producing goods. That means direct costs can be directly identified as being used in the production of goods. For example, we can talk about direct materialDirect 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 that is used in producing goods. These costs we can identify as direct costs.

Indirect costs, on the other hand, are costs that can’t be identified easily. The reason these costs can’t be identified separately because these costs assist in functioning multiple activities. For example, the renting business pays for running a production operation would be called indirect costsIndirect 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 in the computation of the cost of sales per unit for a particular product.

Fixed Costs, Variable Costs, & Semi-variable Costs

Fixed costsFixed 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 are costs that 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 cost changes, per unit cost per unit, remain same irrespective of changes in production units. For example, the cost of raw material is a variable cost. The total cost of raw material changes if the production increases or decreases. But the per-unit cost of raw material 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. Let’s say that you pay $1000 per month as fixed salary to all your workers and the workers who produce more than 50 units of toys every month, they get an additional $5 for every additional unit produced. This sort 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 per unit cost of sales.

  • Raw Materials – Opening Stock: $50,000; Closing Stock: $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 just need to put the figures in the right place.

Statement of Cost of ABC Factory

ParticularsAmount (In US $)
Raw Materials – Opening Stock50,000
Add: Purchases during the period145,000
Less: Raw Materials – Closing Stock(40,000)
Cost of material consumed155,000
Add: Direct Labour100,000
Prime Cost255,000
Add: Works overheads40,000
Works Cost295,000
Add: Administration overheads20,000
Cost of Production315,000
Add: Selling & Distribution overheads30,000
Total Cost of Sales345,000
Finished Units100,000 units
Cost of Sales per unit$3.45 per unit

What is Management Accounting?

Management accounting is the process of collecting, analyzing, and understanding the financial statements, statistical, and qualitative information to make sense of how the business is going and what to do in the near future.

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 which can educate and inform the managers of the company to make effective decisions.

Even if management accounting is much different than financial accounting and cost accounting (cost accounting is one of the sub-sets of management accounting), it gathers information from both of these 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 –

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 toward the future. Management accounting propels management to ask – “What company should do in the near future – 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 to answer these valid questions and assists to start approaching the decision.
  • Forecast cash-flow: Without cash-flow business can’t move molehills, forget about the mountains. So understanding and predicting how much cash-flow the company would be able to generate in the near future is critical. Management accounting helps with budgeting, trend charts to estimate the future cash-flow for 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 are the differences 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 these days – 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 of these 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 Indicators
  • 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 and vaster. Since both of these 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 on helping management in strategizing well.
  • Cost accounting is used for 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 of the statutory audit of management accounting.
  • Cost accounting is solely based on quantitative data points. Management accounting, on the other hand, is based on both qualitative and quantitative data points.
  • Cost accounting has its own norms and its own 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.

The basis for Comparison  – Cost Accounting vs Management AccountingCost AccountingManagement Accounting
1.    Inherent meaningCost accounting revolves around cost computation, cost controlCost ControlCost control is a tool used by an organization in regulating and controlling the functioning of a manufacturing concern by limiting the costs within a planned level. It begins with preparing a budget, evaluating the actual performance, and implementing the necessary actions required to rectify any discrepancies.read more, and cost reduction.Management accounting helps management make effective decisions about the business.
2.    Application Cost accounting prevents a business from incurring costs beyond budget.Management accounting offers a big picture of how management should strategize.
3.    Scope – Cost Accounting vs Management AccountingThe scope is much narrow.The scope is much broader.
4.    Measuring gridQuantitative.Quantitative and qualitative.
5.    Sub-setCost accounting is one of the many sub-sets of management accounting.Management accounting itself is pretty vast.
6.    Basis of decision making Historic information is the basis of decision making.Historic and predictive information is the basis of decision making.
7.    Statutory requirement – Cost accounting vs management accountingStatutory audit of cost accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more is a requirement in big business houses.The audit of management accounting has no statutory requirement.
8.    DependenceCost accounting isn’t dependent on management accounting to be successfully implemented.Management accounting is dependent on both cost & financial accounting for successful implementation.
9.    Used forManagement, shareholders, and vendors.Only for management.

Conclusion – Cost Accounting vs Management Accounting

Both cost accounting vs management accounting help management makes 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 sub-set 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, to understand management accounting, it is imperative that you understand cost accounting well. That’s why it is important to understand the contrast between cost accounting and management accounting.

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

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Comments

  1. Patience Omphemetse Kaloobhai says

    This has been very useful, thank you so much… Much appreciated

  2. Hajra says

    Love this material …..

  3. Stefon Dsouza says

    I have learned more here!! very clearly and systematically explained concepts. Thanks for sharing

  4. Fedrick Williams says

    Great work!! Thanks for sharing this article, It has something really different concepts to understand, Each and everything is explained in detail. Thanks again!! Any article written on Cost Accounting and Financial Accounting? Then please share. Thanks in advance!!

      • Oladman says

        Good work. Your direct and easy to relate approach is highly commendable. This article has depeened my understanding of cost and management elements of accounting. Please keep the good work going. Cheers

        • Dheeraj Vaidya says

          Thanks for your kind words!