5/4/2017 CostAccountingvsFinancialAccounting|AccountingEducation

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Cost Accounting vs Financial

Accounting
4 VinodKumar September11,2012

Bothcostaccountingandfinancialaccountingarethepartsofaccounting.Bothprovideusefulinformationtothe
businessmanfordecisionmaking.Bothcanbeusedforreducingcostandincreasingtheprofitandwealthof
business.Buttherearelotsofdifferencesbetweencostaccountingandfinancialaccounting.Financial
accountingprovidestheinformationofexpensesonthebasisofhistoricaltransactions.Incostaccounting,we
showthedetailedinformationofexpenses.
Forexample:Wehave5products.Financialaccounting'sincomestatementwillshowjustthetotalmaterial
cost,directexpenses,indirectexpenses,saleandnetprofitbutitwillnotshowtheeachproduct'smaterialcost,
labourcost,overheadcost,saleandnetprofit.Alltheseinformationcanbeobtainedthroughcostaccounting.

Now,weareexplainingthedifferencesbetweencostaccountingandfinancialaccounting.

1.Meaning

CostAccounting :Costaccountingisthatpartofaccountingwhichishelpfultocalculatethecostandcontrol
thecost.Incostaccounting,wedeeplystudythevariablecost,fixedcost,overheadsandcapitalcost.

FinancialAccounting:FinancialAccountingisthatpartofaccountinginwhichwerecordthetransactionsand
wemakethefinancialstatements.Throughmakingthefinancialstatement,itprovideinformationofprofitability
andfinancialpositiontotheinterestedparties.

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2.Objective

CostAccounting:Wecannottakealldecisionsonthebasisofinformationwhichhavebeenprovidedby
financialaccounting.Aftermakingthefinancialstatementsunderfinancialaccounting,wecalculatethecostof
eachunitandusethetechniquesofcostaccountingforbetterdecisionmaking.

FinancialAccounting:Mainobjectiveoffinancialaccountingistoshowthefinancialstatementcorrectly.

3.Law

CostAccounting:Thereisnotanyrestrictiononthecostaccounts.Itcanbemadeaccordingtotheneedof
companybutsomecompanymustaudittheircostaccountsundercostaudit.

FinancialAccounting:Infinancialaccounting,therearelotsoflawrestrictions.Forexample,company
accountsandfinancialstatementsmustbeaccordingtotheformatofcompanylaw.Itshouldalsofollowthe
rulesofIFRSandincometaxlaw.

4.Controlling

CostAccounting:Incostaccounting,westudythetechniquesofcontrollingthecost.Allthecostsare
calculatedforthepurposeofcontrollingthecost.Forexample,CompanyproducesproductA,BandC.If
productCisgenerating30%butproductAandBisgeneratingjust5%.WewilltrytocontrolthecostofAandB
productthroughdifferenttechniquesofcostcontrol.

FinancialAccounting:Infinancialaccounting,wejustrecordthetransactionscorrectly.Wedonotcareto
controlthecost.

5.ProfitAnalysis

CostAccounting:Incostaccounting,tofindtheprofitperjoborperbatchorperserviceunitispossible.

FinancialAccounting:Infinancialaccounting.wemaketheincomestatementwhichshowsthenetprofitor
lossorwholeorganisationnotonejoborbatch.

6.Record

CostAccounting:Incostaccounting,bothactualtransactionsrecordandestimationsareused.Forexample
budgetarycontrolandvarianceanalysis,wesetthestandardcostwhichisbasedontheestimations.These
estimationsmaybedifferfromactualcost.

FinancialAccounting:Infinancialaccounting,weuseactualtransactionforrecordingpurpose.Wedonot
usetheestimationforpreparingincomestatementsandbalancesheet.

7.ValuationofInventory

CostAccounting:Incostaccounting,inventory'svaluationwillbeoncost.
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FinancialAccounting:Infinancialaccounting,inventory'svaluationwillbeonthecostormarketvaluewhich
willbelow.

8.Cycle

CostAccounting:Incostaccounting,wefirstcalculatetherawmaterialcost.Then,wecalculatethelabour
cost.Then,wecalculatethedirectmaterialcost.Afterthis,wecalculatetheoverheadcost.Allthesecostare
added.Aprofitmarginisadded.Anestimatedsalepriceiscalculated.Itswholecontrollingcyclewillberelating
tocontrolthecostofrawmaterial,labourcostandoverheads.

FinancialAccounting:Infinancialaccounting,wepassthejournalentries.Then,wemaketheledger
accounts.Then,wepreparethetrialbalance.Then,wemakethefinalaccounts.

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