[Commerce Class Notes] on Difference Between Cost Accounting & Financial Accounting Pdf for Exam

Both Cost Accounting and financing accounting are vital for managing the finances of a business firm. Each of them tends to play a distinct role in accounting and facilitates the process of handling and projecting the financial standing of a business firm. Therefore, neither of these should be overlooked in a business setup.

 

With that being said, let’s take a quick look at the points of difference between Cost Accounting and financial accounting and their area of expertise.

What is Cost Accounting?

Cost Accounting is a branch of accounting that deals explicitly with the costs which have been incurred through the course of a production. The information generated through Cost Accounting is used to keep track and adjust the operations effectively to maximise both profit and efficiency. 

 

For instance, with the help of Cost Accounting firm owners identify and record allocation of resources and determine the cost involved with each level of production of goods and dissemination of services. 

 

Therefore, it can be said that Cost Accounting enables business owners to analyse and classify the expenditure of a specific production unit. It also helps to determine the input cost required to appoint labour and purchase raw materials at each level. In turn, it allows firm owners to control and lower unwarranted expenses significantly. 

 

Check Your Progress: Name three expenses that would be recorded and accounted for in Cost Accounting.

Objectives of Cost Accounting 

These are among the significant objectives of Cost Accounting –

1. Determination of the cost per unit of goods that have been produced by the firm.

2. Accurate reporting of both operational and processing costs.

3. Formulating a report on cost-utility and recommendations to maximise profit on production. 

4. Formulating data and guidelines to determine the accurate cost of manufacturing goods and rendering services.

Next, let’s move on to the perks that accompany Cost Accounting.

Types of Cost Accounting systems:

Cost Accounting systems are broad of two major types, that is, integrated accounting systems and non-integrated accounting systems. Both the financial data and cost data are maintained in a single set of books in an integrated accounting system whereas, in non – integrated accounting systems, separate books are maintained for information of cost-related data.

Types of costs involved in Cost Accounting

There are majorly five types of costs involved in Cost Accounting. These are

1. Direct costs: This includes the cost that is directly related to the production of a product. It involves costs related to the raw material of the product, labour, employee wages, and distribution costs.

2. Indirect costs: This includes costs that are not directly associated with the production of products such as electricity bills for a factory.

3. Variable costs: These include those costs that tend to increase or decrease with production volumes.

4. Fixed costs: These include costs that are necessary for keeping the company in a running state. These costs don’t fluctuate about sales and production volumes.

5. Operating costs: These costs include the cost that is involved in the day-to-day operations of the company. 

Benefits of Cost Accounting

The following pointers offer an overview of the perks accompanying the cost of accounting –

1. Cost objects analysis.

2. Analysing trends to identify and lower associated expenses.

3. Cost determination.

4. Analysis of expansion capacity.

To move on to the next step of Cost Accounting vs financial accounting, let’s learn about the aspects of financial accounting in brief. 

Cost Accounting – At A Glance

• Cost Accounting refers to the analysis and reporting of the cost structure of a company.

• Cost Accounting involves costs incurred in products, services, and activities involved in a business.

• Cost Accounting helps the company analyze where they are spending extra money, what is their earning, and in what sectors the company is experiencing losses.

What is Financial Accounting?

Typically, financial accounting is that branch of accounting, which is responsible for recording the aggregate financial data of a firm. It helps to measure the financial outcomes of a given accounting period and further helps to evaluate the position of assets and liabilities held with an organisation accordingly. Such an endeavour helps to measure the precise financial standing of a business firm at any given point in time. 

 

Hence, it can be said that financial accounting is the process, wherein, a business firm records, summarises and reports all the financial transactions that have taken place within a given period. Notably, such transactions are then compiled to work out crucial financial statements of the company, including – the cash flow, balance sheet, profit and loss account, etc.

 

Just like Cost Accounting, financial accounting also tends to follow specific objectives and strives to deliver the same. To gain a fair idea of financial accounting, you should make it a point to become familiar with them as well. 

Objectives of Financial Accounting 

The following are among the primary objectives of this branch of accountancy –

1. Recording all financial transactions within a given period in a systematic manner.

2. Evaluating the financial standing of the firm.

3. Analysing the outcome of business operations.

4. Analysing past performance.

5. Highlighting a firm’s prospects.

Methods of Financial Accounting

Financial accounting can be computed using either the accrual method or the cash method. Accrual method records transactions when they have already occurred and one can recognize the revenue whereas cash accounting records transactions only when the cash is exchanged, that is, the revenue is recorded only after receiving the receipt of the payment and similarly, the expenses are recorded only after the obligation of the payment. 

Benefits of Financial Accounting

Now let’s take a quick look at these benefits of financial accounting to be able to provide the difference between Cost Accounting and financial accounting –

1. Helps to maintain business records.

2. Plays a vital role in formulating financial statements.

3. Helps to compare business outcomes.

4. Serves as legal and financial evidence. 

Financial Accounting – At A Glance

• Financial accounting can follow either of the accounting bases, that is, the accrual basis or the cash basis.

• Financial accountants are generally used by corporations, nonprofits, and small businesses.

• The reporting in financial accounting uses financial statements in five different areas.

Test your knowledge: Which of these would be studied under financial accounting?

1. Fixed cost 

2. Balance Sheet 

3. Overhead Expenses 

4. Selling Price 

Difference Between Cost Accounting and Financial Accounting

Take a look at this table below to learn about the Cost Accounting and financial accounting differences –

 

Learn more about the difference between Cost Accounting and financial accounting and other related topics in detail from App. Our study material and interactive live classes will not just benefit your subject knowledge but will, in turn, help you to prepare for your board examination more effectively.

 

Download the App now to experience quality learning first-hand!