What is cost accounting?
Cost accounting is the process of recording, analyzing and reporting on the costs incurred in a business. Cost accounting takes both indirect and direct expenses as input. The objective of cost accounting is to ensure that costs are properly accounted for in order to make financial decisions based upon them. It’s also used by individual managers in their day-to-day work. Cost accounting is often used in conjunction with performance measurement.
Costs might include materials, labor, manufacturing costs, administrative expenses and selling expenses. Accounting systems combine the cost data into reports that show how much money an organization has spent on a particular type of expense or activity during a specific period. Cost accounting systems are generally used by businesses to record and report on the costs associated with an organization’s product or service. They allow management to assess how well they are performing, how much money they are spending, where that money is being spent, and what impact it has on their profits.
Most important uses of cost accounting
Cost accounting systems are used for many purposes:
- Financial analysis: Cost accounting can be used to analyze financial data from different sources such as sales, purchases, freight costs and production costs to determine profitability and cash flow.
- Resource management: Cost accounting can help determine which products need to be produced and purchased when so that resources can be allocated efficiently for maximum profit.
- Procurement management: In procurement management, cost accounts are used to allocate scarce resources such as raw materials and labor between competing suppliers.
What is financial accounting?
Financial accounting is the measurement and analysis of a company’s financial position, performance and cash flows. Financial accounting is used to track the flow of funds through a business enterprise over time. It provides information about a company’s assets, liabilities, owners’ equity, income and expenses.
Also known as corporate accounting, financial accounting is a subdiscipline of accounting that deals with financial transactions and events. It is the study of how to measure and record economic activity through recording, reporting, analyzing, and communicating financial information. Financial accounting has three main functions: to provide information about the economic performance of an entity (usually a business), to permit analysis of this information, and to express it in terms of numbers that can be communicated effectively. In simple terms, financial accounting deals with the recording and reporting of financial transactions and events in a manner that helps an organization make better decisions. It also enables management to evaluate the performance of the organization, assess its liquidity and manage its risks.
A major difference between cost accounting and financial accounting is that financial accounting is concerned with all aspects of recording, reporting and communicating information about transactions within an organization. This information is used by managers, investors and regulators to assess an organization’s performance as well as its ability to manage risk.
Most important uses of financial accounting
Some of the most common uses of financial accounting include:
- Investment analysis, which involves identifying and analyzing investment opportunities.
- Mergers and acquisitions (M&A), which involves analyzing acquisitions, including how to value acquired assets, how to account for acquisition related costs such as legal fees, and how to account for goodwill.
- Income statement analysis, which involves analyzing income statement data and preparing reports on performance measures such as profit margins, operating margins, and return on equity (ROE).