Relationship of Cost accounting and Financial accounting

The difference between cost and management accounting may be highlighted using a number of questions namely;

  1. Are there any unifying concepts to which enterprises will adhere?

For financial accounting the answer is “YES”. There are a number of accounting standards that are followed in producing accounting information. These are procedures established by the accounting profession to standardize and improve accounting methods and disclosure. For example, the International Accounting Standard No. 1 singles out for mention fundamental accounting concepts namely going concern, accruals and consistency.

For cost accounting and management accounting the answer is NO. However, there are a number of techniques, which are widely used e.g. budgeting, standard costing, marginal costing and cost-volume-profit analysis.

  1. May management choose whether or not to use the discipline?

The Companies Act requires a number of accounting records which by statute must be kept and made available. For a limited company, financial statements must be produced which in the opinion of the auditors, provide a true and fair view of the company’s affairs and comply with the Companies Act, Cap 486, 1962.In the case of cost and management accounting, the management of an enterprise may choose whether or not to create a cost and management accounting department and the extent to which any such department will be used.

  1. To what extent is the focus on segments of the enterprise?

In financial accounting, the main emphasis is on the performance of the business entity. The balance sheet is viewing the state of the business at a specific point in time expressed in monetary terms. The profit and loss account is comparing the revenue and expenses of the business for a specific period. Cost and management accounting will focus analysis by segments of the business in order to allow examination by job, process, product or service.

  1. To what extent does the analysis of information incorporate non-monetary measures?

In financial accounting the monetary base is predominant. Non-monetary measures are used in the interpretation of accounting statements. For example expressing net profit as a percentage of sales revenue.

In cost and management accounting there will be greater use of non monetary measures. Quantitative information may be useful in areas such ass material losses (kilos or as a percentage input), machine efficiency (as a percentage of a predetermined standard).

  1. To what extent is the emphasis on future trends?

In financial accounting there is the statutory requirement for provision of historical data from which accounting statements may be prepared.

Such statements may be used in the forecasting of future trends for use by potential investors or investment analysts

Cost and management accounting will tend to focus more on the future although analysis of historical information will be used. For example budgeting will focus on future plans but to some extent will use past performance as a guide to the structure of such plans

  1. What Degree of accuracy is required in the information analysis?

Basic financial accounting records must record transactions involving cash to the nearest cent. There will be an element of judgment however in areas such as provision for depreciation of fixed assets or valuation of stock and debtors.

Cost and management accounting information will tend to be as accurate as required in a given situation e.g. Management Reports may summarize figures to the nearest thousand shilling whereas the labour cost per product may be expressed to four decimal places.

  1. Is accounting a means to an end or an end in itself?

Financial accounting is an end in itself in so far as it fulfils the statutory requirements in relation to accounting records and the publication of financial accounting statements. It is also a means to an end in that it provides an overview of the business which may be interpreted by the various users of accounting information which the Companies Act seeks to protect.

Cost and management accounting is a means to an end. It may be used to assist management in future planning, control and decision making required for the efficient implementation of the objectives of the enterprise and the strategies which will best lead to achievement of these objects.

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