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 cost of each product, service, or process.
In this article, we discuss Cost Accounting vs Management Accounting in detail –
- Cost Accounting vs Management Accounting [Infographics]
- What is Cost Accounting?
- What is Management Accounting?
- Cost Accounting vs Management Accounting – Key differences
- Cost Accounting vs Management Accounting (Comparison Table)
Cost Accounting vs Management Accounting [Infographics]
There are many differences between cost accounting vs management accounting. Let’s glance at these distinctions
Now that we have look at 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 other way, 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 analysing 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 analysing costs to help management make prudent business decisions.
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 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 costs 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 material and direct labour that are used in producing goods. These costs we can identify as direct costs.
Indirect costs, on the other hand, are costs which 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 rent business pays for running a production operation would be called indirect costs since we can’t identify how much portion of rent is used for 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 computation of cost of sales per unit for a particular product.
Fixed Costs, Variable Costs, & Semi-variable Costs
Fixed costs 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 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 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 per unit cost of raw material remains same even if the production increases or decreases.
In semi-variable costs, both components are present. Semi-variable costs are the 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, cost statement will give us an idea about how to compute 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
|Particulars||Amount (In US $)|
|Raw Materials – Opening Stock||50,000|
|Add: Purchases during the period||145,000|
|Less: Raw Materials – Closing Stock||(40,000)|
|Cost of material consumed||155,000|
|Add: Direct Labour||100,000|
|Add: Works overheads||40,000|
|Add: Administration overheads||20,000|
|Cost of Production||315,000|
|Add: Selling & Distribution overheads||30,000|
|Total Cost of Sales||345,000|
|Finished Units||100,000 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 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 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 finger tips 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 any quantitative information; rather it’s purely psychological. Management accounting looks at all aspects of business – both quantitative and qualitative data points to create reports.
- Predictive information: If you look at financial accounting and cost accounting, you will see that these whole 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 statements forward-looking. That’s why in management accounting reports, predictive information is one of the biggest circle-in areas.
- Used for the internal purpose: 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 of 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 future. Management accounting propels management to ask – “What company should do in near future – should it buy more plants? Or should it acquire few small companies which are expert in producing the raw materials for the company?” Management accounting helps to answer these valid questions and assists to start approaching toward the decision.
- Forecast cash-flow: Without cash-flow business can’t move molehills, forget about mountains. So understanding and predicting how much cash-flow the company would be able to generate in 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 see the costs and profits of both of these options and choose the best one among two.
Tools used in management accounting
There are many tools used in management accounting. Following are top-most which are frequently used –
- Financial modeling
- 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)
Below table summarizes key differences between cost accounting vs management accounting.
|Basis for Comparison – Cost Accounting vs Management Accounting||Cost Accounting||Management Accounting|
|1. Inherent meaning||Cost accounting revolves around cost computation, cost control, and cost reduction.||Management accounting helps management make effective decisions about business.|
|2. Application||Cost accounting prevents a business from incurring cost beyond budget.||Management accounting offers a big picture of how management should strategize.|
|3. Scope – Cost Accounting vs Management Accounting||Scope is much narrow.||Scope is much broader.|
|4. Measuring grid||Quantitative.||Quantitative and qualitative both.|
|5. Sub-set||Cost 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 basis of decision making.||Historic and predictive information are basis of decision making.|
|7. Statutory requirement – Cost accounting vs management accounting||Statutory audit of cost accounting is a requirement in big business houses.||Audit of management accounting has no statutory requirement.|
|8. Dependence||Cost 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 for||Management, shareholder, and vendors.||Only for management.|
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 sub-set of management accounting. But if we look at the usage, estimation process, data points used, and utility, cost accounting has 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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