Difference Between Cost Accounting vs Financial Accounting
In this article, we learn about the Difference Between Cost Accounting vs Financial Accounting in detail.
Cost Accounting:
Cost Accounting is a method that records and analyses the cost incurred (per unit) during the production of goods. It analyses input cost, individually, at every functional stage including production, administration, R&D, selling & distribution.
Example: Total cost of producing one unit of a pencil is Rs.30, the cost break up of various stages can be shown in figure 1:
Figure 1: Cost breakdown
Financial accounting:
Financial Accounting involves recording and analyzing all the financial transactions of a company for a specific period of time. It is then summarised into financial statements that show the profitability of a company or the outcome of operations.
Example: If the same pencil is sold for Rs.50 and the cost of making a pencil and other expenses sum up to Rs.40, then the profit would be Rs.10 as shown below.
Figure 2: Income & expenditure
Head to Head Comparison between Cost Accounting vs Financial Accounting
Below is the top 13 difference between Cost Accounting vs Financial Accounting
Key Differences Between Cost Accounting vs Financial Accounting
Let us discuss some of the major differences between Cost Accounting vs Financial Accounting:
1. Cost accounting focuses on assessing per unit cost incurred to produce and sell the products so that it can be sold at the right price while Financial accounting is focused on all monetary transactions so that it can determine the profitability and financial health of a firm
2. Cost accounting is an internal instrument for the management to measure efficiency and make a decision related to the operations of a company. On the other hand, Financial accounting prepares financial statements to show performance to the entities external to the company like investors and creditors, etc.
- Cost accounting: Management use it for budgeting, cost control, cost reduction, and inventory management among others so that it can improve margins
- Financial accounting: It is useful for people outside the firm to know if the company is operating efficiently and the money invested by outsiders will be able to generate returns or not
3. Cost accounting can be allocated and recorded under various categories such as direct cost, indirect cost, fixed cost, variable cost, operating and non-operating cost etc., whereas Financial accounting records items based on the nature of transaction such as income & expenditure, cash inflow and outflow, assets and liabilities under three statements profit & loss account, cash flow statement and balance sheet respectively
4. Decisions made on the basis of
- Cost accounting (internal):
- Whether new machinery should be bought?
- Should the old machinery be disposed of
- How costly/profitable can a new product become?
- Financial accounting (external):
- If the creditor should lend money and at what interest rate?
- Based on performance, how much should be invested in a firm?
Cost Accounting vs Financial Accounting Comparison Table
Let’s look at the topmost Comparison between Cost Accounting vs Financial Accounting
| The Basis of Comparison Between Cost Accounting vs Financial Accounting | Cost Accounting | Financial Accounting |
| Nature | Records the information regarding the cost incurred in the production activities including labor, overheads and material cost | Records information which is financial in nature alone |
| Cost-type | Records historical (eg: a cost of acquiring assets) as well as forecasted cost (eg: sales order) | Records only historical cost (accrued during the specified time) |
| Objective | To find out per unit cost of a project, fixing the selling price of a product | To assess the profitability and financial position of the company |
| End-users | Cost accounting is used by the management including employees, directors, managers among others for their internal assessment and management | Financial accounting is used by the external parties including shareholders, lenders and prospective investors, credit rating agencies in the market |
| Information | Monetary as well as non-monetary transactions are recorded such as units | Only monetary transactions are recorded |
| Frequency | It is prepared and reported to the management as and when required | It is prepared at the end of the accounting period, which is usually one year |
| Coverage | Analyses operations divided by segments (operational or geographical), division, contracts, etc | Analyses the operations of a company as a whole |
| Measurement of profit | It measures the profit for a product or process | It measures the profit for the whole entity for a combined entity |
| Reporting | It is not mandatory to prepare any statements for public | Public companies are obliged to announce results prepared as a part of Financial Accounting |
| Forecasting | Cost accounting is forecasted using budgeting technique | It is not possible to forecast financial accounting |
| Format | No specific format is used, the intention is to record all the important information | There are formalized principles such as GAAP and IFRS, designed and controlled by independent agencies |
| Reports | Variance analysis, marginal cost, break-even analysis | Profit & loss, Balance sheet, cash flow statement |
| Stock | The stock is valued at cost | The stock is valued at market price or cots, whichever is less |
Conclusion
Cost accounting is an indirect part of the financial accounting and direct part of management accounting. Both cost accounting vs financial accounting can be used together to reduce costs and increase the profitability of a firm.
On the basis of information recorded under cost and financial accounting, various analyses can be prepared such as ratios, growth & margin trends as well as industry comparison. Cost accounting information is used for comparing the cost with the revenue recorded under financial accounting. Both accounting types co-exist where cost accounting forms a small part of an analysis, the financial accounting is required as compliance under universally defined principles.
Cost accounting points out operational efficiencies or inefficiencies, which can be further captured under the financial statements as a whole. Both the branches help in making important decisions where cost accounting leads to an internal decision and direct effect on employees of the firm, financial accounting keeps the decision-making domain outside the firm which has an indirect effect on employees. It is important to keep financial and operational records of a firm, governed and classified under general accounting. Both branches show the profitability, cost accounting does on a unit basis and financial accounting shows in totality.
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