Differences Between Cost Accounting and Financial Accounting

Both allow the management to make good decisions through the nature and scope of both these accounts.

Cost accounting tells us the expenses of each unit of each product. For example, if a company sells three products – product A, product B, and product C; cost accounting helps us determine how much material, labor, etc., are expended in each unit of product A, product B, and product C.

On the other hand, financial accounting helps us understand how profitable a company is through financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. For example, if a company has sold $100,000 worth of products in a year and expended $65,000 for making the sales (cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more plus other operating expenses), then the company’s profit for the year is $35,000.

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Cost Accounting vs Financial Accounting Infographics

Key Differences

  • Cost accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more deals with the internal aspect of the business. As a result, cost accounting helps improve the flaws of a company. On the other hand, financial accounting handles the external aspect of the company. How much profits the company makes, how much cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more the company brings in, in a given year, etc. As a result, the goodwill of a companyThe Goodwill Of A CompanyIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more depends on financial accountingCost accounting is used to reduce costs and improve the efficiency of business processes. It acts as a tool for management. On the other hand, financial accounting doesn’t concern itself with controlling anything; instead, its objective is to create an accurate and fair picture of the company’s financial affairs.Cost accounting is a lot about knowing the pixel view of a business. On the contrary, financial accounting shows us the big picture.Cost accounting is not mandatory and applicable to all organizations. Only the organizations engaged in manufacturing activities are bound to report through cost accounting. On the other hand, financial accounting is mandatory for all organizations.Since cost accounting is used to control costs and make prudent management decisions, cost accounting is performed every short interval. On the other hand, financial accounting is bound to report the company’s financial affairs at the end of the year.In cost accounting, estimation has a great value in determining and comparing the cost of sales per unit. In financial accounting, every transaction and reporting is based on actual data.

Comparison Table

Conclusion

From the above discussion, it’s clear that both accounting is quite different.

The organizations that are not performing cost accounting don’t get any benefits of cost accounting since they don’t have data points to look at each unit.

But the manufacturing organizations involved in cost and financial accounting, data points of cost accounting help create financial accountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.read more at the end of the day. And they also get a comprehensive tool to look at their business internally and externally.

This was the guide to Cost Accounting vs. Financial Accounting, infographics, and a comparison table. You may also have a look at these articles to learn more about these accounting topics –

  • List of Objectives of Cost AccountingList Of Objectives Of Cost AccountingCost accounting measures the total cost of production of a business by measuring every variable cost at each production phase along with the fixed costs. The significant objectives of cost accounting are - Cost allocation, Examine the costs, Prepare budgets, Comply with legalities, Decision making.
  • read moreCompare – Accounting vs CPACompare - Accounting Vs CPAAccounting is the process of recording, maintaining, and reporting the financial affairs that show the company’s clear financial position. In contrast, CPA is the designation given to those individuals who clear the CPA examination by the American Institute of Certified Public Accountants.read moreManufacturing vs ProductionManufacturing Vs ProductionThe key difference between Manufacturing vs. Production is that Manufacturing is when raw material is converted into tangible products. The production creates utility, as is how an article is made for consumption by combining the different resources.
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