Difference Between Cost Accounting and 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 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 –

  1. Cost of raw material

  2. Labour cost

  3. 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

In a broad sense, there are three basic roles of cost accounting functions. Notably, these elements serve as a basis for the difference between cost and management accounting. 

  1. 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. 

  1. 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.

  1. 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?

  1. Cost calculation

  2. Computing selling price

  3. Facilitating decision-making

  4. Controlling and lowering cost 

  5. All of the above

  6. 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 Functions

To further analyse the difference between cost accounting and management accounting, let’s check out the basic functions of management accounting –

  1. 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. 

  1. 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.

  1. 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 decision. 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

Parameters 

Cost Accounting 

Management Accounting

Definition

The process of computing, controlling and lowering the cost at each production level.

The method of analysing and interpreting financial and non-financial data to make proficient decisions. 

Objective

It helps to control the operational cost so that it does not exceed the budget constraint.

It helps to formulate efficient management strategies.

Information grid

It uses quantitative information.

It uses both quantitative and qualitative data.

Scope

The scope is quite narrow.

The range is relatively broad.

Recording limit

It helps to compile both past and present data.

The focus is mostly on future projections.

Planning 

It is suitable for short-term planning.

It is valid for both short-term and long-term plan.

Dependency 

It can be practised without employing a management account.

It cannot be applied without cost accounting.

 

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FAQ (Frequently Asked Questions)

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.