FINANCIAL ACCOUNTING VS. COST ACCOUNTING

FINANCIAL ACCOUNTING VS. COST ACCOUNTING:

The main differences between financial and cost accounting are given as under:

FINANCIAL ACCOUNTING COST ACCOUNTING
It provides information about the business in a general way. It tells about the profit and loss and financial position of the business to owners and other outside parties.
These accounts are kept in such a way as to meet the requirements of Companies Ordinance and Income Tax Ordinance.
It classifies, records and analyses the transactions in a subjective manner i.e.
according.to the nature of expenses.
It lays emphasis on the recording aspect without attaching any importance to control.
5. It reports operating results and financial
position usually it the end of the year.
ô. Financial accounts are the accounts of the
whole business. They are independent in nature and disclose the net profit or loss of the business as a whole.
7. The costs are reported in aggregate in
financial accounts.
Financial accounts relate to commercial transactions of the business and include all expenses viz, manufacturing office,'
selling and distribution etc.
9. Financial accounts are concerned with
external transactions i.e. transactions between the business concern on one side and third parties on the other. These transactions form the basis for payment or receipt of cash.
10. Monetary information is only used (i.e. only monetary transactions are recorded).
11.. Financial accounts deal mainly with actual facts and figures.
12. In devising or operating a system of financial accounting reference can be made in case of difficulty to the company law, case decisions and to the cannons of sound professional practice.
13. Financial accounts do not provide information on the relative efficiencies of various workers, plants and machinery.
14. Stocks are solved at cost or market price whichever is less.
15. Financial accounting is a positive science because it is subject to legal rigidity with regard to the preparation of the financial. statements.
It provides information to the management for proper planning operation, control and decision-making.
2. These accounts are generally kept voluntarily to meet the requirements of the management. But now companies Ordinance has made it
• obligatory to keep cost records in some manufacturing industries.
It records the expenditure in an objective manner i.e. according to the
• purposes for 'which the costs are incurred.
4. It provides a detailed system of control
for materials, labour and overhead costs with the help of standard costing and budgetary control.
5. It gives information through cost reports to management as and when desired.
-
6.. Cost Accounting is only a part of the
financial acc6unts and discloses profit or loss of each product, job or service.
The costs are broken down on a unit basis in cost accounts.'
8. Cost Accounts relite to transactions
connected with the manufacture of
goods and services and include only
those expenses which enter into the production.
9. Cost Accounts are concerned with internal transactions which do not form the basis of payment or receipt of cash.
10. Non-monetary information like units is also used (i.e. it deals with monetary as well as non-monetary information).
11. Cost Accounts deal partly with facts and figures and partly with estimates.
12. No such reference is possible. Guidance can be had only from a body of conventions followed by cost accountants.
11. Cost accounts provide valuable information on the relative efficiencies of various plants and machinery.
14. Stocks are valued at cost.
15. Cost accounting is not only a positive science but also a normative science because it includes techniques of budgetary control and standard costing. Costing is an empirical science, that is to say, the rules which govern it are largely conditioned by the operations, personnel and policy of the undertaking with respect to which its techniques are to applied.

LIMITATIONS OF COST ACCOUNTING:

Cost accounting like other branches of accountancy is not an exact science but is an art which has developed through theories and accounting practice based on reasoning and common sense. Many theories can be proved or disproved in the light of conventions and basic principles of cost accounting. These principles are not static but changing with the change of time and circumstances. The following are the main limitations of cost accounting

(i)Cost accounting lacks a uniform procedure. It is possible that two equally competent cost accountants may arrive at different results from the same information.. Keeping in view this limitation, all cost accounting results can be taken as more estimates.

(ii)        There are a large number of conventions, and flexible factors such as classification of cost into its elements, issue of materials on average or standard price, apportionment of overhead expenses, arbitrary allocation of joint costs, division of overhead into fixed and variable costs, division of costs into normal and abnormal and controllable and non­controllable and adoption of marginal and standard costs due to which it becomes difficult to

exact costs. Moreover, no one cost is suitable for all purposes and under all circumstances. Virtually its calculation depends on the use to which the data are required to be put to; because of inclusion of some items of cost on estimated basis it is difficult to have actual true cost. On this basis when the valuation of stock is done, that will not be based on true facts and naturally the-profit calculated from the cost records will not be true.

(iii)       For getting the benefits of cost accounting many formalities are to be observed by a small and medium size concern due to which the establishment and running costs are so much that it becomes difficult for these concerns to afford its cost. Thus cost accounting can be used Only by big concerns.

(iv)      The contribution of cost accounting for handling futuristic situations has not been much. For example, it has not evolved so far any tool for handling inflationary situation. •

MEANING OF MANAGEMENT ACCOUNTING:

The term ‘management accounting’ is the modern concept of accounts as a tool of management. It is concerned with all such accounting information that is useful to management. CIMA London has defined management accounting as “the presentation of accounting information in such a way as to assist management in the creation of policy and in the day-to-day operation of an undertaking”. In simple words, the term management accounting is applied to the provision of information for management activities such as decision making, planning and controlling, etc. Thus, any form of accounting whic,1 enables a business to be conducted more efficiently can be regarded as management accounting.

The management accounting consists of four essential tasks:

  1. 1.  Cost determination — to compute the actual cost of producing a product or component which may help in control process and planning decisions.
  2. Cost control — to see the reasonableness of the cost incurred in relation to the tasks performed and to consider what cost should have been incurred and what corrective action should be taken when costs are excessive.
  3. 3.      Performance evaluation — to see whether assets are used efficiently. This requires a comprehensive reporting system to monitor the operation so the managers and to ensure that their performance is consistent with the overall goals of the organization.
  4. 4.  Supplying information for planning and decision making — to provide information for decisions such as; should the plant be expanded or should a new product line be added or should the method of production be changed and many other decisions.

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