Management Accounting vs Cost Accounting
Management accounting and cost accounting are of great importance to any business, as both forms of accounting help in the decision making process when analyzing how best to allocate a company’s scarce resources. Cost accounting is a crucial part of management accounting and makes up a vital component in managing a firm’s costs and assets allocation. However, the purpose of the two forms of accounting is easily confused. This article aims to provide the reader a clear distinction between the two forms of accounting, along with explanations on which purposes they are used.
What is Management Accounting?
Management accounting is about producing accurate information in aiding a company’s management in decision making. Management accounting is usually used as an input in the planning of projects, and as a technique for evaluating how well a firm has done in a given period. An important purpose for using management accounting would be to compare the current financial information with the previous period’s financials, in order to ascertain how well the set targets have been met or surpassed. Management accounting is particularly valuable for a firm in terms of strategy formulation, budgetary control and project planning, and evaluation.
What is Cost Accounting?
Cost accounting is an accounting method used to record and analyse various costs that are incurred by a firm. The costs that are analyzed under this form of accounting include the cost of wages for workers, the material costs, utilities, supplies, maintenance and other overhead costs. The purpose of cost accounting is to identify wastage, and unnecessary expenditure in order to improve the firm’s efficiency and cut down on costs, thereby increasing profitability. The importance in cost accounting lies in the need for modern organisations to keep their costs to a minimum, especially during times of economic slowdowns, where the revenues will be lower, and costs must be controlled more to ensure that the company remains profitable.
What is the difference between Management Accounting and Cost Accounting?
Both management accounting and cost accounting are essential to ensure the smooth running of the business through prudent decision making. Both management and cost accounting require inputs from various departments of the firm, but top managers, shareholders, and the company creditors use the output from cost accounting, whereas only personnel in management positions involved in the decisions making use management accounting information. While cost accounting focuses on analyzing and controlling the various expenditures that arise in a dynamic business setting, management accounting focuses on using the data for planning business projects, strategy formulation, budgetary control and target setting. Cost accounting is backward looking with a focus on the expenses incurred in the past, while management accounting is concerned with prediction for the use of future decision making.
In a nutshell,
Cost Accounting vs Management Accounting
• Management accounting is concerned with decision making, strategy formulation, planning and budgetary control, while cost accounting is concerned with analysis and evaluation of costs incurred in order to reduce inefficiencies and improve the firm’s overall productivity.
• The output of management accounting is for decision making at the top level whereas many internal and external to the organisation use the cost accounting information.
• Cost accounting is backward looking and evaluates past data, whereas managerial accounting is forward looking and involves planning and prediction for the future.
• Both forms of accounting are essential for the smooth running of a business and essential components in the decision making process.