Accounting involves measuring, presenting and reporting of financial information of an enterprise. Accounting can further be segregated into types based on the information that they seek to report. These can include financial accounting, cost accounting, tax accounting and management accounting. These different types all have a similar theme that they revolve around disclosure of enterprise information but each of them have a unique and specific purpose.
This article looks at meaning and differences between two of these – cost accounting and management accounting more closely.
Definitions and explanations
Cost accounting is the process of measuring, recording and allocating costs associated with a function or process. Cost accounting also involves the following:
- Accumulating total costs incurred
- Bifurcating costs into specific categories
- Determination of cost drivers to allocate these costs across different products, functions or processes
- Analyzing these costs to assess cost efficacy of the function
- Determining steps to be taken to manage these costs
- Determining pricing based on allocated costs to earn required margins
Cost accounting involves bifurcation of costs into various categories such as:
- Direct costs which can be directly allocated to a particular product and indirect costs which cannot be specifically identified to a particular product and are thus allocated on the basis of a cost driver
- Material costs, labor costs and overheads to be allocated
- Fixed costs which are incurred irrespective of the level of production and variable costs which vary with the level of production
Cost accounting follows established cost accounting techniques:
Standard costing – this technique allocates cost based on a selected cost driver such as labor hours, machine hours etc. It analyses these allocated costs against predetermined standard costs to identify cost efficiencies and inefficiencies
Activity based costing – this technique allocates the cost of every activity undertaken to a specific product or service based on its level of consumption. This method is used primarily for allocating indirect costs and is preceded by a detailed activity analysis.
Marginal costing – this technique only considers the variable cost element. The key in this method is to determine the additional cost required to be incurred for each additional unit of production.
Management accounting is the analysis and presentation of accounting, financial and non-financial enterprise information with the intent of assisting management in policy formulation and prudent decision making.
Management accounting results in preparation of management reports which cover various aspects such as statistical analysis of financial information, budgeting analysis, forecasts, risk analysis, performance management etc. to help management in decision making.
These reports can be quantitative – reporting financial parameters such as sales volume, debtors and creditors ageing or qualitative – reporting non-financial parameters such as sustainability, employee matters etc
Management accounting deals with historic information as well as forecasts and estimates of how these parameters may evolve in the future.
Management accounting uses several tools whilst preparing its reports such as ratio analysis, use of key performance indicators and financial modelling theories.
All in all, these reports help management take stock of the state of affairs which helps them to strategize and plan further course of action.
Difference between cost accounting and management accounting:
The difference between cost accounting and management accounting has been detailed below:
- Cost accounting involves measurement, recording and allocation of costs associated with a function with intent to budget and control these costs.
- Management accounting is the process of analyzing and reporting financial and non-financial information of the enterprise to assist in decision making.
- The main purpose of cost accounting is to identify and control costs as well as to determine pricing based on the costs identified and allocated.
- The main purpose of management accounting is to assist management in decision making and policy framing.
- The scope of cost accounting is narrower as it primarily concerns itself with cost aspect – such as cost determination, cost allocation, cost control and pricing.
- The scope of management accounting is wider as it deals with several aspects of the business such as budgeting, sales management, policy making, risk management etc.
- The focus of cost accounting is on presentation and analysis of quantitative information on costs.
- The focus of management accounting is on analysis of both quantitative and qualitative information.
5. Regulated by
- Cost accounting in large enterprises is required to adhere to prescribed cost accounting standards. In fact, cost accounting may also be subject to cost audit.
- Management accounting is an internal function of the management and for the management. It is thus not regulated by any standards or law nor subject to any audit.
- Cost accounting is done independently on the basis of financial information of costs of the enterprise.
- Management accounting is dependent on both financial accounting and cost accounting as the source for its reports.
7. Used by
- While cost accounting is primarily meant for the benefit of management, in larger enterprises it may also be required by investors and vendors.
- Management accounting is meant solely for the management to assist in their decision making.
Cost accounting vs management accounting – tabular comparison
A tabular comparison of cost accounting and management accounting is given below:
|Measuring, recording and allocating costs for cost control and pricing||Analysis and presentation of financial and non-financial information to aid decision making|
|Cost control and pricing||Aid management in decision making|
|Narrower – related only to cost||Wider – covering many business aspects|
|Quantitative information||Quantitative and qualitative information|
|By cost accounting standards and subject to audit in some cases||Not regulated by any law or audit|
|Prepares cost reports on the basis of financial information of costs||Dependent on information reported in financial and cost accounting|
|Internal management as well as shareholders and vendors||Only internal management|
Conclusion – cost accounting vs management accounting:
Both cost accounting and management accounting are branches of accounting which assist in some aspect of management decision making. Both involve considerable amount of analysis and both forms of accounting are imperative to be undertaken to improve the efficiency and profitability of an enterprise.