Financial Accounting, Cost Accounting, and Management Accounting

Introduction

Cost and Management Accounting is intended to prepare students with the requisite
knowledge which will enable them to perform at the professional and individual business
level effectively. In delivering this course online a number of factors will have to be
borne in mind. Among these will be:

Close attention will have to be paid to the content of the course outline.

Delivery may mot follow the pattern of the course outline. The intention is to move from
simple to more complex topics in an orderly manner.

It is imperative that all assignments etc. be completed on time.

In the event of any factors that may affect the completion of assignments, mid-module
exam etc. this be communicated in a timely manner.

Accounting is a universal discipline and any relevant text-book, etc can be used as
resource in addition to those named on the course outline.

Accounting requires diligent practice and rehearsal in order to feel comfortable.

As we proceed you will be provided with relevant lecturer materials and directed to
appropriate reading on a weekly basis to enhance and improve your accounting
knowledge. Cost and Management Accounting is both theoretical and practical and
requires a good understanding of Financial Accounting concepts so it is important that
you refresh yourself of Financial Accounting Concepts. What makes this course so
interesting is its relevance to everyday life and the need for proper accountability of
personal and business resources.

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Management Accounting, Financial Accounting and Cost Accounting

What is Managerial Accounting:

Managerial accounting is concerned with providing information to managers - that is,

people inside an organization who direct and control its operation. Managerial accounting
provides the essential data with which the organizations are actually run. Managerial
accounting is also termed as management accounting or cost accounting.

What is Financial Accounting:

Financial accounting is concerned with providing information to stockholders, creditors,

and others who are outside an organization. Financial accounting provides the scorecard
by which a company's overall past performance is judged by outsiders.

Managerial accountants prepare a variety of reports. Some reports focus on how well
managers or business units have performed-comparing actual results to plans and to
benchmarks. Some reports provide timely, frequent updates on key indicators such as
orders received, order backlog, capacity utilization, and sales. Other analytical reports are
prepared as needed to investigate specific problems such as a decline in the profitability
of a product line. And yet other reports analyze a developing business situation or
opportunity. In contrast, financial accounting is oriented toward producing a limited set
of specific prescribed annual and quarterly financial statements in accordance with
Generally Accepted Accounting Principles (GAAP). (Ray H. Garrison, Eric W Noreen).

Differences between Financial Accounting and Management Accounting

Financial Accounting

Mandatory for most companies. Financial reporting is required by law for public
companies. Private companies with debt are often required by lenders to prepare audited
financial statements in accordance with GAAP.

Follows Generally Accepted Accounting Principles (GAAP) and other uniform standards.

Backward-looking: focuses mostly on reporting past performance.

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Emphasis on reliability of the information

Provides general purpose information. Investors, stock analysts, and regulators use the
same information (one size fits all).

Provides a high-level summary of the business

Reports almost exclusively in dollar-denominated amounts. A recent exception is the

increasing (but still infrequent) use of the Triple Bottom Line.

Management Accounting

Mostly optional. However, it is inconceivable that a large company could operate without
sophisticated management accounting systems. Also, legislation such as the Sarbanes-
Oxley Act of 2002 sets minimum standards for public companies for their internal
reporting systems.

No general principles. Companies often develop management accounting systems and

measurement rules that are unique and company-specific.

Forward-looking: includes estimates and predictions of future events and transactions.

Can include many subjective estimates.

Provides many reports tailored to specific users.

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Can provide a great deal of detail.

Communicates many nonfinancial measures of performance, particularly operational data

such as units produced and sold by product type.

Cost Accounting

A branch of accounting that observes and calculates the actual costs of a company's
operations. Internal managers, rather than auditors, use cost accounting most of the time
to identify aspects of their company where costs can be cut. For example, a manager may
enlist a cost accountant to determine the most expensive aspects of his/her business that
is, where the money goes. The accountant may make a detailed report so that the manager
may make decisions based upon it. Because cost accounting is primarily internal, it need
not conform to the Generally Accepted Accounting Principles. It is also called
managerial or management accounting.

Cost Accounting Definition:

Different authorities have defined the term "cost accounting" which helps in reflecting the multi-
sided meaning the subject contains. The definition given by J. W. Neuner is considered more
satisfactory and concise which is as following:

"Cost accounting is an expanded phase of the general or financial accounting of a business

concern which provides management promptly with the cost of producing or selling each article
or of rendering a particular service". In other words, cost accounting is a step further to and a
refinement of financial accounting. in which cost of manufacturing and selling each product or
job or rendering service is determined, not at the time of accounting period but at the time when
the product is manufactured or any service is rendered. In simple words, costing is a systematic
procedure for determining the unit cost of output produced or services rendered. It provides for
an analysis of the expenditure which enables the management to know not only the total cost but
also its constituents.

In short, cost accounting is the process of accounting for cost, which begins with regarding and

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classifying of incomes and expenditures and ends with the preparation of periodical statements
and reports for ascertaining and controlling costs.

As predicted today, cost accounting may be defined as the process of measuring, analyzing,
computing, and reporting the cost, profitability and performance of operations.

Cost Accounting

System for recording and reporting measurements of the cost of manufacturing goods and
performing services in the aggregate and in detail. It includes methods for reorganizing,
classifying, allocating, aggregating, and reporting actual costs and comparing them with
standard costs. Determination of unit cost to make a product or render a service is needed
to establish a selling price or fee to be charged. Also, costs for manufacturing a product
for inventory valuation need to be known to prepare the balance sheet and income
statement. Cost accounting systems include job order, process, standard, and direct
costing.

The Differences between Cost Accounting and Financial Accounting are as follows:

Cost Accounting:

The main purpose of cost accounting is to analyze, ascertainment and control of cost.

Cost accounting presents cost information at frequent intervals.

Cost accounting records are generally kept voluntarily to meet the requirements of
management.

Cost accounting records transactions in an objective manner. It means the purpose for
which the cost in incurred.

Financial Accounting:

The main purpose of financial accounting is to record financial transactions, finding out
profit or loss and financial position.

Financial accounting presents financial information at the end of the accounting period.

Financial accounting is kept compulsory in such a way as to meet the requirement of the
Companies Act and income Tax Act.

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Financial accounting records transactions in a subjective manner. It means according to
the nature of expenses.