What is cost and management accounting?

Accounting is a business language. We can use this language to communicate financial transactions and their results. Cost accounting and management accounting are two important terms in accounting that are used to control and formulate the organization policies. Both are used for different purposes with different styles. Let’s look at the main differences between cost and management accounting.

What is cost accounting?

Cost accounting meaning

Cost accounting deals with the calculation and assessment of costs and expenses to purchase or produce something. It relates to calculation per unit cost using different costing techniques. Its primary purpose is to facilitate decision making for managers.

Scope of cost accounting

Figure 1: Scope of cost accounting

Budgeting

Cost accountants prepare various budgets that show cost, revenue, profit, production capacity, and efficiency of plant and machinery, as well as the efficiency of workers. They plan the budget in a scientific and systematic way that is often unique to the company, as reports do not need to follow the principles of Generally Accepted Accounting Principles (GAAP).

Classifying and breaking down costs

Classify and break down costs for external reporting and internal profit measurement. Calculating costs on a detailed level makes it easy to identify profitable and unprofitable items or activities.

Estimating future costs

Use information on costs and activities as a basis to estimate future costs when preparing and reviewing budget estimates.

Determining the fees or prices for goods and services

During tough market conditions or slump periods, costing helps to determine the selling price of the product at the optimum level to stay competitive.

What is management accounting?

Management accounting definition

Management accounting relates to the provision of appropriate information for decision-making, planning, cost control and performance evaluation. Management accounting turns data into information, knowledge, and wisdom about a business entity’s operations. This goes one step further than cost accounting.

Management accounting works to know the reasons of profit or loss and studies the factors which influence efficiency to assist in decision making. Therefore, cause and effect is an important feature of management accounting.

Scope of management accounting

Figure 2: Scope of management accounting

Reporting to management

It is the primary role of management accounting to inform and advise management about the latest position of the company. It covers information about the performance of various departments regularly, helping management make timely decisions. Management accountants also act as advisors to overcome existing financial or other organizational problems.

Aiding in decision-making

Accurate and effective decision-making, which is crucial for any organization’s success, relies on informational networks provided by managerial accounting. Applying techniques of differential costing, absorption costing, marginal costing, and management accounting provides useful data to the management to aid in their decision-making.

Planning and formulating policies

Management accountants provide necessary and relevant information to achieve the targets of the company. Management accounting uses regression analysis and time series analysis as forecasting techniques.

Controlling performance

To ensure effective control, management accountants use various techniques. These include budgetary control, standard costing, management audit, and more. Managerial accounting provides a proper management control system to the management. Reports are provided to the management regarding the effective and efficient use of resources.

Interpreting financial statements

Collecting and analyzing accounting data is a key role of management accounting. This provides relevant information in a systematic way that can be used by the management in planning and decision-making. Management accountants use tools like cash flow, fund flow, ratio analysis, trend analysis, and comparative financial statements to interpret and analyze accounting data.

Motivating employees

Managerial accounting provides a selection of best alternative methods of doing things. It motivates employees to improve their performance by setting targets and starting incentive schemes.

Coordinating among departments

Management accounting helps coordinate departments by applying thorough functional budgeting and providing regular reports to the management.

Administrating tax

Organizations must comply with the tax systems of their operating country, which is challenging. It is a challenge due to the ever-increasing complexity of the tax structure. Organizations need to file various kinds of returns with different tax authorities. They need to calculate the correct amount of tax and ensure timely deposits. Therefore, the management takes guidance from management accountants to comply with the law of the country.

Difference between cost and management accounting

Cost accounting follows a quantitative approach, focusing on precise cost calculation and control to minimize expenses within an organization. In contrast, management accounting integrates both quantitative and qualitative data to support strategic decision-making, formulate effective strategies, and set organizational goals.

While cost accounting specifically targets cost reduction and efficiency improvements, it could be considered as a subset of management accounting, which encompasses all aspects of financial management. This dynamic illustrates how cost accounting provides detailed financial insights, while management accounting leverages this information to optimize operational performance and strategic outcomes.