Introduction
Accounting is the system where you keep records of financial transactions. The process is followed up by small steps such as summarizing, analysing and reporting the collected data to the firm. Consider the result as a succinct report of overall financial transactions. This plays a vital role in decision-making, cost planning, estimate building, and measuring the economic performance of the firm.
And with this ever-growing demand for money in the market; accounting should be practised by every individual so that to be convenient with their available resources. And adjust; rather make a well-mannered budget for themselves and their family. And the same knowledge must be applied while working at the company to make effective & efficient decisions.
The functions of accounting make it effortless for company executives for decision-making. It could be handled by an individual accountant at small firms or groups of individuals and different departments at large firms. The report they provide to the company is a boon for helping management take well-settled decisions. The statements that are provided by the accounting team are to-the-point information on all the cash flows, analysis and performance, and cost-efficient methods to improvise. All those parameters are carried out by thousands and thousands of individual financial transactions along with some non-financial parameters.
Accounting is a necessary function irrespective of the size of the business for cost planning & decision-making. Accounting in the modern days has expanded to a variety of fields such as auditor, tax accountant, managerial accountant, cost accountant, financial accountant, controller, forensic accountant, information & technology accountant and so on.
Here in this article, we will be focusing on two types of accounting systems those are cost accounting and managerial accounting. How these two systems affect the decision-making and other parameters of the financial state of any firm.
Management Accounting Vs. Cost Accounting
As discussed above, we recalled how important accounting is for efficiently utilising the resources of the company. There are two major types of accounting used by large firms and companies for managing their finances: cost accounting and management accounting. Cost control is the one thing that everyone should be learning as their basic life skill. As it is not helpful for only business and company but also for managing family budgets and business planning for oneself.
Managerial and cost accounting is essential for management to make strategic plans for their respective firms. Cost accounting is a subset of management accounting. The key difference between both accounting systems is that cost accounting uses quantitative-based information in the reports, whereas management accounting reports are prepared with both financial and non-financial information, which is quantitative as well as qualitative.
Management accounting involves lots of other aspects such as predictive and historical statistics and data. The task of a managerial accountant is to analyse, summarize and make use of tactics to improvise the financial data structure of the company. On the other hand, cost accounting involves cost amounting, cost controlling and useful tactics to reduce the cost and make convenient changes as per demand.
Both accounting structures have their differences in functionality and both provide enough data for each business for decision-making and planning. Let’s take a deep dive into the differences between management accounting and cost accounting.
Difference between Management Accounting and Cost Accounting in Tabular form
| Parameters | Management Accounting | Cost Accounting |
| Meaning | This accounting system helps the management team make crucial decisions and plans for the business. | This accounting system helps to acknowledge the level of cost utilized and controlled and can be reduced by utilising available information. |
| Application | The advantage of this accounting system is that it shows a wide clear image of the business which helps them to start the plan effectively. | The advantage of having this accounting system is that it controls the flow of cash to go beyond the budget. |
| Information | The information provided by this system contains quantitative and qualitative data. | The information provided by this system is only quantitative. |
| Scope | The scope is much broader because there is a wide range of information. | The scope is much narrower as the information is short and so is efficiency. |
| Planning | The effectiveness of plans remains for the long term. | The effectiveness of plans remains for the short term. |
| Recording Limit | The plan is to strategies for the future. Hence, future projections are an important aspect. | The information from both the past and present is considered. |
| Dependency | The management account is dependent on cost accounting. | Cost accounting is not dependent on management accounting. |
| Used for | Management, shareholders, and vendors. | Used only for management |
What is a Management Accounting?
Management accounting is also known as managerial accounting. In this accounting system, the manager uses the information of accounting for decision-making and managing the performance of their respective company. To put it in simple words, management accounting holds the information of financial and non-financial for the manager to decide the best outcome for the next strategic plan.
The sub-items of management accounting include cost accounting, which contains data on the cost of goods sold and inventory values; performance evaluation, which requires consideration of several factors including profitability reports, process analysis, and evaluation of current plans; and planning and decision support, which also contains several interesting factors including strategic adaptations, enterprise optimizations, budgeting, and so on.
By distinguishing, examining, and extracting all the information there is from the respective firm, the manager then conveys all the information in an uncomplicated way to help the firm achieve its further goals and make further calculated planning. The accountant must be an expert in financial reporting and performance management systems.
The managerial accountant must consider all accounting and business parameters, as well as all financial events occurring in the world, and then focus all of his or her attention on presenting the best estimate for the firm.
The first step in the case of management costing is forecasting the cash flow; knowing where the expense is more or unnecessary, and the requirement of some product is not necessary for some seasons. Such factors could determine the cash flow for accounting. After the cash flow is settled the next step is to analyse performance variance i.e., to fill the gaps between the estimated cost and actual cost. And in the final step with all the acquired information, cost-effective and well-budgeted decisions are been made.
Some top companies even use management accounting by dividing it into subsets for a better vision of the future. The three different management accounting practices used by top companies are strategic management, performance management, and risk management. After considering all of the information presented in the presentations, developing policies and planning operations becomes second nature.
What is a Cost Accounting?
Cost accounting, as aforementioned, is a sub-item required for management accounting. In this case of accounting, the cost of the manufacturing, performing, and operating goods is examined, aggregated, and summarized. To put this case in simple words, cost accounting helps us understand the cost of goods and, with those goods, how the service of the organisation is carried out.
As it is known that cost accounting is a subset of management accounting, the costing information provided through this subset is of vital importance. 20–30% of the cost accounting information is used for decision-making by the manager while doing managerial accounting.
Cost accounting gives the current control status of the operation and manufacturing at the given cost. and further helps to plan for a better and more efficient way to use money. The reports should be given routinely as per the respective companies' schedules. Cost taken in consideration is classified based on functions, administration, products and procedure; depending on type of company.
The basic function of cost accounting is to calculate the cost of raw materials, labour costs, and overhead costs. This will help the leadership team to understand the average amount of money utilised per product. Secondly, comes the method of cost control; by completely acknowledging the first step, the second becomes easier. Cost control is a helpful way to optimise and improve the usage of money more effectively. And finally comes the cost-reducing step, where we have built up the report for unnecessary expenses and the best suitable strategy for maximising profits for the firm.
There are various ways one can conduct cost accounting those are as follow: Cost-volume-profit, Joint cost, target costing, life-cycle costing, resources consumption accounting, standard cost accounting, and so on. For more updates on each method do research on Wikipedia.
Main Difference between Management Accounting and Cost Accounting in Points
- The main key factor that differentiates one accounting system from the other is the parameters each system takes for generating reports. For management accounting, the parameters are financial and non-financial i.e., quantitative and qualitative. And cost accounting requires only quantitative-based parameters.
- Management accounting itself is a subject matter that helps management plan well, while cost accounting is a subset of management accounting. The data provided by cost accounting can be used in management accounting, but vice versa is not plausible.
- As aforementioned, cost accounting has a specific procedure and steps for reporting and does not depend on the management account. But the management accounting report is the collective data provided by cost accounting, financial accounting and performance evaluation.
- The statutory audit i.e., the audit mandated by the law to keep a check on books of accounts whether they are true and fair. Such audit is conducted for cost accounting as there can be a scope of cost discrepancies. And there is no requirement for such an audit in management accounting.
- The scope of cost accounting is narrower since the only parameters are cost analysis, cost control, allocation, distribution and reduction. But the scope in management accounting is much broader since there are umpteen parameters of financial and non-financial structure and also some performance analysis, and those help in managing, planning & strategizing.
- The planning period for management accounting can be both short & long-term considering all the data and parameters required for the accounting. The planning in cost accounting is only short-term since the required report has comparatively fewer parameters.
- The recording of past and present data is required in cost accounting to analyse and estimate budgetary expenses. Since management accounting is used for planning and strategizing, it focuses more on future projects' scrutiny.
- The application of management accounting is such that it offers a bigger picture of how management should lead and make effective decisions. Cost accounting has the application of preventing excess expense in business and making budgetary plans for the short term.
Conclusion
It would be obvious by now after repeating it numerous times. That is how each accounting system functions both inside and out. And how much does each accounting have to bring a huge change in the company's financial structure? Even if ten out of five companies possibly manage to make the best decision from the information provided by each accounting system, it has a huge impact on the respective company's financial status. Furthermore, it would also have an immediate impact on the nation's financial status.
While learning the difference between management accounting and cost accounting, we also came to an understanding of each system's functioning, requirements for data, application, and scope. Depending on both accounting, one could shift the allocation of financial resources to the correct location. Because a small change in a large-scale company is enough to make a change for at least 1% of the people. So, such systems should be adopted by every company, whether it be a small-scale, a start-up or a business. Every individual must adopt accounting for the betterment of their respective company.
Accounting includes both cost accounting and managerial accounting. They aid in guaranteeing the effective and efficient operation of the company. Various analyses are carried out based on the data provided by the two companies. Cost accounting strives to cut additional spending, get rid of wasteful expenses, and manage diverse expenditures. In contrast, management accounting seeks to establish policies, formulate strategies, define goals, etc.
References
- Management accounting - Wikipedia
- Cost accounting - Wikipedia
- Cost Accounting vs Management Accounting | Top 9 Differences (wallstreetmojo.com)