Definition of Financial Accounting

Accounting is defined as “the art of recording, classifying, and summarizing in terms of money transactions and events of a financial character and interpreting the results thereof”.

Definition of Cost Accounting

The branch of accounting that deals primarily with accumulating detailed cost data needed by management for decision making, product pricing, and planning for the future.

Financial Accounting Vs. Cost Accounting

Financial Accounting Cost Accounting1. Provides information to external users i.e. shareholders, creditors, investors, financial analysts, government, etc.

1. Provides information to internal users i.e. management at different levels.

2. Financial statements are prepared on yearly, half yearly, or quarterly basis.

2. Cost accounting reports and statements are prepared whenever needed. Reports may be prepared on a monthly, weekly, or even daily basis.

3. Must conform to Generally Accepted Accounting Principles (GAAP).

3. It can use any accounting technique or practice that generates useful information.

4. All information under financial accounting is in terms of money.

4. Provides accounting data both in monetary and non-monetary terms.

5. Records the financial history of the organization.

5. Formal use of budgets as well as historical records.

6. Concern primarily with entity as a whole.

6. Concern about details of parts of the entity, products, departments, territories, etc.

Cost Accounting - Spring 2008 Omer Malik

Objectives of Cost Accounting

The main objectives of cost accounting are as follows:

1) To ascertain the cost per unit of the different products manufactured by a business concern.

2) To provide requisite data and serve as a guide to price fixing of products manufactured or services rendered.

3) To ascertain the profitability of each of the products and advice the management.

4) To advice management on future expansion policies and proposed capital projects.

5) To present and interpret data for management planning, decision making, and control.

6) To help in the preparation of budgets and implementation of budgetary control.

7) To organize cost reduction programmes with the help of different departmental managers.

8) To exercise control over stocks of raw materials, work-in-process, and finished goods in order to minimize capital blockage.

Advantages of Cost Accounting

The main advantages of cost accounting are as follows:

1) Profitable and unprofitable activities are disclosed and steps can be taken to eliminate or reduce those activities from which little or no benefit is obtained or to change the method of production in order to make these activities more profitable.

2) It helps in increasing profits by disclosing the sources of loss or waste and by suggesting such controls so that wastages, leakages, and inefficiencies of all departments may be detected and prevented. An adequate cost accounting system ensures maximum utilization of physical and human resources, checks fraud and manipulations.

Cost Accounting - Spring 2008 Omer Malik

3) Cost accounting helps management in knowing the costs of different alternatives and selecting the most advantageous course of action. Decisions like make or buy, continue or drop a product, operate or shut down.

4) Cost accounting assists in inventory management by keeping complete record of materials from the time they enter the premises till the time they are sold in the form of finished products. Quantitative models for materials planning and management developed by cost accounting enable management to keep stocks to a minimum level, at the same time, guard against being out of stock.

5) Cost accounting provides cost data and information to determine the price of the product. Pricing involves determination of prices of new products, adjustments in prices of existing products as well as determination of bid prices for contracts.

Cost Accounting - Spring 2008 Omer Malik