Cost Accounting Fundamentals

Cost Accounting is the process of determining and accumulating the cost of any activity performed by a firm. It is the start of the process for control of costs. It covers classification, analysis and interpretation of costs. It is an internal document that aids managerial decision making.
ICMA London defines it as"The process of accounting from the point at which expenditure is incurred or committed... to the establishment of the ultimate relationship with the cost centres and cost units."

OBJECTIVES OF COST ACCOUNTING

Determine selling price
Cost Control
Provide information for decision making
Determine costing profit
Aids preparation of financial statements

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

There are a number of differences between cost accounting and financial accounting, which are as follows:
  • Audience. Financial accounting involves the preparation of a standard set of reports for an outside audience, which may include investors, creditors, credit rating agencies, and regulatory agencies. Cost accounting involves the preparation of a broad range of reports that management needs to run a business.
  • Format. The reports prepared under financial accounting are highly specific in their format and content, as mandated by either generally accepted accounting principles or international financial reporting standards. Cost accounting involves creating reports that can be in any format specified by management, with the intention of including only that information pertinent to a specific decision or situation.
  • Level of detail. Financial accounting primarily focuses on reporting the results and financial position of an entire business entity. Cost accounting usually results in reports at a much higher level of detail within the company, such as for individual products, product lines, geographical areas, customers, or subsidiaries.
  • Product costs. Cost accounting compiles the cost of raw materials, work-in-process, and finished goods inventory, while financial accounting incorporates this information into its financial reports (primarily into the balance sheet).
  • Regulatory framework. The structure of financial accounting reports are tightly governed by either generally accepted accounting principles or international financial reporting standards. There is no regulatory framework governing cost accounting reports.
  • Report content. A financial report contains an aggregation of the financial information recorded through the accounting system. The information in a cost accounting report can contain both financial information and operational information. The operational information can come from a variety of sources that are not under the direct control of the accounting department.
  • Report timing. Financial accounting personnel issue reports only at the end of a reporting period. Cost accounting staff may issue reports at any time and with any degree of frequency, depending upon management's need for the information.
  • Time horizon. Financial accounting is only concerned with reporting the results of reporting periods that have already been completed. Cost accounting does this too, but also can be involved in a variety of projections for future periods.
In brief, the key differences between cost and financial accounting are that cost accounting is inwardly focused on management decisions, while financial accounting is focused on reporting financial statements to outside parties.

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