Difference Between Cost Accounting and Management Accounting

Do you know the history of accounting is old as human civilizations? Right from human settlements began, accounting was implemented and it kept growing. Today, accounting is called the language of business as it makes it possible to record, analyze & report important financial information. Further, it is used to communicate the financial health of a business to all stakeholders.

In this article, you will learn the difference between cost accounting and management accounting in detail. Let’s dive in.

Cost Accounting

Cost accounting is all about the costs associated with a business operation.to determine the cost of producing its products/services.

The management makes use of this cost accounting information to make informed decisions on product pricing, production process, and other business operation. In finance and accounting services this is proven to improve efficiency and bring profit to the company.

Types of Cost Accounting:

• Job order costing: When a company produces custom-made products the costs are tracked for each item. For example a customized shoe or a bag. In this case, the total cost is divided by the number of units produced to determine the unit cost. This is job order costing.
• Process costing: It is useful for businesses mass producing similar products continuously — like manufacturing pencils. You can divide the total cost of production by the number of units produced to determine the unit cost.
• Standard costing: This method is a traditional cost accounting method that involves setting standard costs for each product or service and then comparing them to the actual costs incurred.
• Activity-based costing (ABC): Rather than assigning costs to products or services in this type the cost is assigned to specific activities to provide a more accurate picture of the cost of each activity.
• Variable costing: In this method, fixed costs like rent, salary, lighting, etc. are not included. Only the variable costs incurred during production (like materials and labor) are included in the unit cost.
• Marginal costing: This method is similar to variable costing but also takes into account the contribution margin, which is the difference between the selling price and variable costs.

Functions of Cost Accounting:

• Cost control: The primary function of cost accounting is of course to control costs. This involves researching the costs associated with the production of goods and taking steps to eliminate unwanted costs.
• Cost analysis: Analyze direct costs (materials and labor) and indirect costs (overhead) in the production process to provide insight to know the most cost-effective ways to produce goods.
• Pricing: Cost accounting provides information that helps to set prices at a level that allows businesses to make a profit. This is made possible by understanding the costs associated with producing goods.
• Performance evaluation: Evaluate performance by comparing actual costs to budgeted costs. Helps to identify areas where costs are higher than expected and reduce them.
• Financial reporting: Provides financial information to stakeholders like managers investors and other decision-makers to make future decisions.

Management Accounting

Is business accounting all about finance and accounting? No, there is also a few non-financial information that managers have to take care of. For example, service quality, company culture, resource utilization, and market orientation are some examples.

This is where management accounting comes in — providing both financial and non-financial information for executives. Many finances as a service providers ensure to deliver this. They use financial and operational data to create detailed reports, analyze trends, and make predictions about the future to make smart business decisions.

Types of Management Accounting:

• Budgeting: The process of creating a future financial plan by management accountants. They use budgeting to set goals and track performance against those goals.
• Performance management: Performance management monitors performance to identify areas for improvement and allocate resources.
• Decision support: By analyzing data, now management accountants can provide decision support and help managers make the right decisions backed by data.
• Risk management: Identity, assess, and mitigate risks that could impact the financial health of the business. With prior identification of potential threats, businesses can develop strategies to avoid them.
• Strategic planning: Management accountants can help to set long-term goals and create a plan with effective strategies to achieve them.

Functions of Management Accounting:

• Planning and Budgeting: Involves analyzing past performance and market trends to create a realistic projection for the future. It also involves setting goals, developing strategies, creating budgets, allocating resources, and more.
• Decision-making support: Management accounting provides both financial and non-financial information to support informed decision-making. This includes analyzing the pros and cons of alternative courses of action and assessing the risks associated with each.
• Product and service profitability analysis: With management accounting, businesses can determine the most profitable products and services helping them to allocate resources accordingly.
• Strategic management and planning: It plays a key role in the implementation of strategic plans and also assists in their development. This involves identifying market opportunities, assessing the competitive environment, and developing techniques to achieve long-term growth and profitability.

To Warp Up:

We hope you now have a clear understanding of the differences between cost accounting and management accounting. Overall, both are fundamental to the growth of any business. By providing accurate cost information and supporting informed decision-making, these two areas of accounting can help businesses to improve their operations, control costs, and achieve their strategic objectives.

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