About Cost Accounting & Financial Accounting
Both Cost Accounting and financing accounting are vital for managing the finances of a business firm. Each of them tends to play a distinct role in accounting and facilitates the process of handling and projecting the financial standing of a business firm. Therefore, neither of these should be overlooked in a business setup.
With that being said, let’s take a quick look at the points of difference between Cost Accounting and financial accounting and their area of expertise.
What is Cost Accounting?
Cost Accounting is a branch of accounting that deals explicitly with the costs which have been incurred through the course of a production. The information generated through Cost Accounting is used to keep track and adjust the operations effectively to maximise both profit and efficiency.
For instance, with the help of Cost Accounting firm owners identify and record allocation of resources and determine the cost involved with each level of production of goods and dissemination of services.
Therefore, it can be said that Cost Accounting enables business owners to analyse and classify the expenditure of a specific production unit. It also helps to determine the input cost required to appoint labour and purchase raw materials at each level. In turn, it allows firm owners to control and lower unwarranted expenses significantly.
Check Your Progress: Name three expenses that would be recorded and accounted for in Cost Accounting.
Objectives of Cost Accounting
These are among the significant objectives of Cost Accounting –
Determination of the cost per unit of goods that have been produced by the firm.
Accurate reporting of both operational and processing costs.
Formulating a report on cost-utility and recommendations to maximise profit on production.
Formulating data and guidelines to determine the accurate cost of manufacturing goods and rendering services.
Next, let’s move on to the perks that accompany Cost Accounting.
Types of Cost Accounting systems:
Cost Accounting systems are broad of two major types, that is, integrated accounting systems and non-integrated accounting systems. Both the financial data and cost data are maintained in a single set of books in an integrated accounting system whereas, in non - integrated accounting systems, separate books are maintained for information of cost-related data.
Types of costs involved in Cost Accounting
There are majorly five types of costs involved in Cost Accounting. These are
Direct costs: This includes the cost that is directly related to the production of a product. It involves costs related to the raw material of the product, labour, employee wages, and distribution costs.
Indirect costs: This includes costs that are not directly associated with the production of products such as electricity bills for a factory.
Variable costs: These include those costs that tend to increase or decrease with production volumes.
Fixed costs: These include costs that are necessary for keeping the company in a running state. These costs don’t fluctuate about sales and production volumes.
Operating costs: These costs include the cost that is involved in the day-to-day operations of the company.
Benefits of Cost Accounting
The following pointers offer an overview of the perks accompanying the cost of accounting –
Cost objects analysis.
Analysing trends to identify and lower associated expenses.
Cost determination.
Analysis of expansion capacity.
To move on to the next step of Cost Accounting vs financial accounting, let’s learn about the aspects of financial accounting in brief.
Cost Accounting - At A Glance
Cost Accounting refers to the analysis and reporting of the cost structure of a company.
Cost Accounting involves costs incurred in products, services, and activities involved in a business.
Cost Accounting helps the company analyze where they are spending extra money, what is their earning, and in what sectors the company is experiencing losses.
What is Financial Accounting?
Typically, financial accounting is that branch of accounting, which is responsible for recording the aggregate financial data of a firm. It helps to measure the financial outcomes of a given accounting period and further helps to evaluate the position of assets and liabilities held with an organisation accordingly. Such an endeavour helps to measure the precise financial standing of a business firm at any given point in time.
Hence, it can be said that financial accounting is the process, wherein, a business firm records, summarises and reports all the financial transactions that have taken place within a given period. Notably, such transactions are then compiled to work out crucial financial statements of the company, including – the cash flow, balance sheet, profit and loss account, etc.
Just like Cost Accounting, financial accounting also tends to follow specific objectives and strives to deliver the same. To gain a fair idea of financial accounting, you should make it a point to become familiar with them as well.
Objectives of Financial Accounting
The following are among the primary objectives of this branch of accountancy –
Recording all financial transactions within a given period in a systematic manner.
Evaluating the financial standing of the firm.
Analysing the outcome of business operations.
Analysing past performance.
Highlighting a firm’s prospects.
Methods of Financial Accounting
Financial accounting can be computed using either the accrual method or the cash method. Accrual method records transactions when they have already occurred and one can recognize the revenue whereas cash accounting records transactions only when the cash is exchanged, that is, the revenue is recorded only after receiving the receipt of the payment and similarly, the expenses are recorded only after the obligation of the payment.
Benefits of Financial Accounting
Now let’s take a quick look at these benefits of financial accounting to be able to provide the difference between Cost Accounting and financial accounting –
Helps to maintain business records.
Plays a vital role in formulating financial statements.
Helps to compare business outcomes.
Serves as legal and financial evidence.
Financial Accounting - At A Glance
Financial accounting can follow either of the accounting bases, that is, the accrual basis or the cash basis.
Financial accountants are generally used by corporations, nonprofits, and small businesses.
The reporting in financial accounting uses financial statements in five different areas.
Test your knowledge: Which of these would be studied under financial accounting?
Fixed cost
Balance Sheet
Overhead Expenses
Selling Price
Difference Between Cost Accounting and Financial Accounting
Take a look at this table below to learn about the Cost Accounting and financial accounting differences –
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FAQs on Cost Accounting vs. Financial Accounting
1. What is Cost Accounting?
Cost Accounting is a branch of accounting that deals with responsibilities like tracking different costs involved in a business venture at its various levels. It helps to figure out the cost per unit of a product and helps to lower it eventually. Cost Accounting is a type of accounting method that helps to secure and manage the total cost of production of a certain company by analyzing the fixed cost as well as a variable cost that occurs at each step of the production process.
2. What is Financial Accounting?
This branch of accounting is responsible for recording accurate information about all financial transactions of a firm. It helps to evaluate a firm’s financial standing at a given point in time. The transactions of a company are summarized in the form of financial statements like balance sheet, cash flow statement, and income statement that helps in recording and analyzing the company’s operating performance over a specific period. Therefore, financial accounting is a branch that includes not only recording a company’s performance but also summarizes and reports transactions that result from business operations in a specific period.
3. What is the difference between Finance and Accounting?
Accounting is mostly responsible for keeping track of the flow of money to and from a firm. On the other hand, finance is a broader concept that is responsible for managing assets and liabilities and adopting suitable plans for growth prospects. Accounting focuses on the daily flow of money in and out of an institution or company while finance focuses on the management of assets and liabilities. Finance talks about the company’s strategy while accounting talks about details of a company’s books. Finance looks after the plan of the company while accounting looks back at the past financial transactions of a company.
4. Differentiate between Financial Accounting and Management Accounting.
The primary point of difference between financial accounting and management accounting is that the former deals with the accurate collection and representation of financial data. On the other hand, the latter is concerned with those internal processes that are used to keep track of all business operations. The main aim of financial accounting is to provide information to outside parties like investors, creditors, and customers while the main aim of management accounting is to provide information for management and to make informed business decisions. Financial accounting is a necessity for every government public organization while there is no such necessity in the case of management accounting. Financial accounting is generally prepared based on ‘Generally Accepted Accounting Principles’ statements while there is no standard basis for management accounting. Financial accounting is prepared for external parties like shareholders, government, banks, and more while management accounting is prepared for internal parties like directors, managers, and CEOs. A financial accounting report contains balance sheets or profit and loss statements while management accounting reports include weekly, monthly or yearly analysis.
5. How does Cost Accounting differ from financial accounting?
Cost Accounting refers to a system of accounting that keeps a track of various costs that occur during the production activities of a business whereas financial accounting is a system that records the financial information about the business to analyze the financial status of a company. The information in Cost Accounting is related to material, labour, and overhead costs during the production process while monetary information is recorded in financial accounting. Cost Accounting not only includes historical cost but also predetermined cost whereas financial accounting includes historical cost only. The information curated by Cost Accounting is used by internal parties like managers, directors, and employees while the information curated in financial accounting is used by both internal and external parties.
