Relationship of Management Accounting,
Financial Accounting and Cost Accounting
Cost Accounting is a branch of accounting, which has been developed
because of the limitations of Financial Accounting from the point of view
of management control and internal reporting. Financial accounting
performs admirably, the function of portraying a true and fair overall
picture of the results or activities carried on by an enterprise during a
period and its financial position at the end of the year. Also, on the basis
of financial accounting, effective control can be exercised on the property
and assets of the enterprise to ensure that they are not misused or
misappropriated. To that extent financial accounting helps to assess the
overall progress of a concern, its strength and weaknesses by providing
the figures relating to several previous years.
Data provided by Cost and Financial Accounting is further used for the
management of all processes associated with the efficient acquisition and
deployment of short, medium and long term financial resources. Such a
process of management is known as Financial Management. The objective
of Financial Management is to maximize the wealth of shareholders by
taking effective Investment, Financing and Dividend decisions. Investment
decisions relate to the effective deployment of scarce resources in terms
of funds while the Financing decisions are concerned with acquiring
optimum finance for attaining financial objectives.
The last and very important ‘Dividend decision’ relates to the
determination of the amount and frequency of cash which can be paid out
of profits to shareholders. On the other hand, Management Accounting
refers to managerial processes and technologies that are focused on
adding value to organizations by attaining the effective use of resources,
in dynamic and competitive contexts. Hence, Management Accounting is a
distinctive form of resource management which facilitates management’s
‘decision making’ by producing information for managers within an
organization.
There are a number of differences between cost accounting and financial
accounting, which are as follows:
Audience: Financial accounting involves the preparation of
a standard set of reports for an outside audience, which may
include investors, creditors, credit rating agencies, and
regulatory agencies. Cost accounting involves the
preparation of a broad range of reports that management
needs to run a business.
Format: The reports prepared under financial accounting
are highly specific in their format and content, as mandated
by either generally accepted accounting principles or
international financial reporting standards. Cost accounting
involves creating reports that can be in any format specified
by management, with the intention of including only that
information pertinent to a specific decision or situation.
Level of detail: Financial accounting primarily focuses on
reporting the results and financial position of an entire
business entity. Cost accounting usually results in reports at
a much higher level of detail within the company, such as for
individual products, product lines, geographical areas,
customers, or subsidiaries.
Product costs: Cost accounting compiles the cost of raw
materials, work-in-process, and finished goods inventory,
while financial accounting incorporates this information into
its financial reports (primarily into the balance sheet).
Regulatory framework: The structure of financial
accounting reports are tightly governed by either generally
accepted accounting principles or international financial
reporting standards. There is no regulatory framework
governing cost accounting reports.
Report content: A financial report contains an aggregation
of the financial information recorded through the accounting
system. The information in a cost accounting report can
contain both financial information and operational
information. The operational information can come from a
variety of sources that are not under the direct control of the
accounting department.
Report timing: Financial accounting personnel issue
reports only at the end of a reporting period. Cost
accounting staff may issue reports at any time and with any
degree of frequency, depending upon management’s need
for the information.
Time horizon: Financial accounting is only concerned with
reporting the results of reporting periods that have already
been completed. Cost accounting does this too, but also can
be involved in a variety of projections for future periods.