Difference Between Cost Accounting and Management Accounting

Through this article, you will learn the difference between cost accounting and management accounting. We will discuss the different aspects of these two branches of accounting.

Table of Contents

• Cost accounting
• Management accounting
• Difference between cost accounting and management accounting

All About Cost Accounting

Cost accounting is a branch of accounting associated with the cost structure of a company. It is the process of assigning costs to various business operations and activities of the company. Through this accounting branch, companies can identify the areas where they are spending more, facing losses and making profits. The process is meant to improve internal cost controls and in turn, improve efficiency. 

The cost accounting system helps with the following:

• Identifying costs and determining the selling prices 
• Helping the management with cost controls
• Identifying inefficiencies and taking measures to control costs
• Preparing more data-relevant financial statements 

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Types of Costs

There are different types of costs associated with any business. Let us discuss the following in detail:

1. Direct Costs

It is a direct cost of production related to the goods and services of a business. These are the variable costs that are directly related to the production facility. Manufacturing supplies, direct labour, fuel, direct materials, and staff wages are the types of direct costs. These are variable in nature since the unit cost can change over time depending on the quantity being used over time. They may also include certain fixed costs.

2. Indirect Costs

These are the expenses associated with business activities that may not be directly related to a project activity. However, these costs are still important for business operations. These are not directly accountable to a cost object. These may be either variable or fixed costs in nature. Fixed indirect costs refer to those activities fixed for a project. These may include the cost of transportation of labour to the site. Recurring indirect costs include activities that are repeated for the company such as salary payments. Administration, security, and personnel costs are some examples of indirect costs. 

3. Operating Costs

These are the cost associated with the maintenance and business administration on a daily basis. These costs are deducted from the revenue to identify the operating income. These are reflected on the income statement of the company. These include operating expenses known as selling, general and administrative (SG&A), and direct costs of goods sold (COGS). Rent, payroll, and overhead costs are included in the operating costs. 

4. Fixed Costs 

As the name suggests, these costs are not affected by the number of goods sold or produced. These costs are the expenses that the company needs to pay regardless of any business activity. These may be established through schedules and contract agreements and hence do not change until the timeline. 

5. Variable Costs

These are the corporate expenses that change according to production and sales. One variable example would include the cost of raw materials. As the sales go up, the requirement for raw materials goes up and hence the cost goes up. Variable cost can be calculated as the product of total output quantity and variable cost per unit of output. 

All About Management Accounting

Management accounting or managerial accounting is the process of identifying, assessing, and interpreting financial information for managers. The aim of this type of accounting is to achieve organizational goals. This is meant for internal purposes so that the company can make better business decisions. The aim is to deliver accurate information related to business operation metrics. Management accounting functions include forecasting and planning, organizing, coordinating, performance analysis, etc. This branch of accounting has the following objectives:

• Maximizing profits and minimizing losses in the business
• Identifying inconsistencies in finances to take better business decisions
• Observing current financial information to assess the impact of business decisions
• Using the information to set objectives, and plans and compare the performance of various departments

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Types of Management Accounting

There are different types of managerial accounting including the following:

1. Cash Flow Analysis

Managerial accounting uses this analysis to determine the impact of cash on business decisions. Different working capital management strategies are implemented to optimize the cash flow. This ensures that the company has sufficient liquid assets for covering short-term obligations.

2. Constraint Analysis

This is also a part of managerial accounting. The aim of constraint analysis is to review principal bottlenecks, causes, and impacts on profit, cash flow, and revenue. It involves the review of constraints within the production line and sale process. Through this financial data, management can improve the production and sales process efficiency and implement required changes.

3. Financial Leverage

Financial leverage indicates the use of borrowed capital for acquiring assets to increase returns on investments. Accountants can help the company study debt and equity mix to optimize the leverage. This can be done through the analysis of the balance sheet. 

Difference Between Cost Accounting and Management Accounting

Following are the difference between cost accounting and management accounting. 

Both branches of accounting have different purposes and one cannot subdue the importance of the other. Hope this article explains the difference between cost accounting and managerial accounting. You can further check out other articles to understand the difference between all three branches of accounting.