“Striving for success without hard work is like trying to harvest where you haven’t planted.

”
– David Bly

Introduction to Cost and Management Accounting

Accounting is the financial information system that provides relevant information to anyone
who owns, manages or uses economic resources or engages in economic activity. This
accounting system can be divided into financial accounting and cost and management
accounting.

Financial accounting is a field of accounting that provides information for exxternal users such
as shareholders, creditors, government and other regulatory bodies. The financial information
provided by financial accounting helps external users to assess management stewardship and
assist them in investment and credit decisions.

Cost Accounting is a method of collecting, recording, classifying and analysing the information
related to cost. It deals primarily with cost data and focuses on techniques or methods for
determining the cost of a project, process, products and services. Cost accounting provides
information for both management accounting and financial accounting. The major objective of
cost accounting is to supply information for control and decision-making.

Management Accounting (managerial accounting) is a field of accounting that provides

economic and financial information for managers and other internal users. Managerial
accounting provides tools for assisting management in planning, making decisions and for
evaluating the effectiveness of those decisions.

Comparing Managerial and Financial Accounting

Similarities:
 Both managerial and financial accounting deals with the economic events of a business. For
example, determining the unit cost of manufacturing a product is part of managerial
accounting. Reporting the total cost of goods manufactured and sold is part of financial
accounting.

 both managerial and financial accounting require that a company’s economic events be
quantified and communicated to interested parties.

Differences:
In relation to…. Financial Accounting
Primary users of External users- investors,
information creditors, owners, tax authorities,
regulators
Purpose To provide external users with
useful information about the
financial position and operating
Management Accounting
Internal users – managers and officers
of the business
To provide managers with information
useful in planning and controlling
 In relation to…. Financial Accounting Management Accounting
results of a business entity to assist business operations, and in making
with investment and credit magaerial decisions.
decisions.
Types of Reports Financial statements. (Mandatory) Internal reports – many different
reports depending on the nature of the
business. (Not mandatory)
Scope (content) Highly aggregated (condensed) Very detailed
of Reports
Frequency Quarterly and annually. As frequently as needed by managers
of Reports (daily, weekly, quarterly)
Reporting Entity Usually the company is viewed as Usually a subdivision, department,
a whole. product, line or country.
Standards for Required to follow Generally No specific rules - Not required to
Presentation Accepted Accounting Principles follow GAAP.
(Regulations) (GAAP)
Verification Audited by an independent No independent auditors.
Process auditor.
Time Periods Hstorical/focus on past events e.g. Futuristic - focus on the future e.g.
Covered by the 2015 actual performance reported 2016 budget prepared in 2015
information in 2016
Nature of Accurate, objective and verifiable Subjective, relevant and flexible
Information
(Data)

Cost and Management System

A cost management system is a set of formal methods developed for planning and controlling an
organization’s cost activities relative to the goals and objectives of the organization. A cost
management system should determine how effective and efficient the organisation’s activities
are and identify the cost of resources consumed in performing these activities. The system
should also identify and evaluate any new activities that may improve future performance of the
organization while being aware of the changing environment in which the business operates.

The primary goals of a cost management system are to:

 Develop fairly accurate product costs
 Assess product and service life-cycle performance
 Improve understanding of activities and processes
 Control costs within the organization by highlighting inefficiencies in terms of labour,
materials, equipment and processes.
 Identify unprofitable products and services
 Measure and evaluate performance
 Pursue organizational strategies.
 Differences between cost and management accounting

Basis Management Accounting Cost Accounting

To provide information to assist
Objective managers with formulating policies
and decision-making.
It deals with cost and revenue. It
Scope
includes financial and cost accounting.
Deals with future policies and courses
Nature
of action. It is futuristic in nature.
Accounting No set principles are followed.
principle
Uses both quantitative and qualitative
Data used
information.
To determine and record the cost of
producing a product or service.
It deals with only costs. It is limited to
cost determination and record
Concerned with both past and present
datal
Certain principles are followed in cost
determination and allocation.
It uses only quantitative information.

Role of Cost and Management Accounting in Manufacturing and Service Industries

Cost and Management Accounting play an important role in service industries by:
 providing managers with data on the efficient use of resources
 computing the cost of providing a service.

One difference in cost accounting practices for service companies is the terminology and
construction of the cost of goods sold account. A manufacturing company's cost of goods
manufactured is the sum of its material, labour and overhead costs. A merchandising company's
cost of goods sold consists of the net purchase price it paid for the products. A service company's
cost of services provided is primarily labour wages, overhead costs and a small amount of direct
materials.

In the service industry, cost accounting helps managers to

 Determine the cost per service transaction
 Labour rate per hour
 Analyse the services provided
 Review the optimal service mix
 Plan the cost of the service (budgeting)

In the manufacturing industry, cost accounting helps managers to:
 Determine unit cost of goods manufactured
 Set price and inventory values
 Control/compare actual and budgeted costs