Understanding the Difference between Cost Management and Financial Accounting
Every business needs to monitor its finances to grow and succeed. Two critical accounting practices used by companies worldwide are cost management and financial accounting. Although both serve the same purpose, they differ in their scope, objectives, and methods of implementation. Understanding the difference between these two accounting practices can help managers make informed decisions and allocate resources efficiently.
The Basics of Cost Management
Cost management primarily deals with the cost of a business’s inputs, such as labor, material, and overheads, and the output or revenue generated from its products or services. Cost management aims to identify, measure, and control costs to increase profitability.
In cost management, businesses use various techniques such as activity-based costing, target costing, and standard costing to allocate costs to products or services, analyze costs, and identify the areas where reduction or optimization is possible.
Cost management requires more detailed information about the specific product or service. Hence, it is more useful for product and service managers who are responsible for producing a particular commodity or delivering a particular service.
The Basics of Financial Accounting
Financial accounting, on the other hand, involves recording, classifying, and organizing the financial transactions of a business, such as sales, expenses, and payments, in a structured and understandable format. Financial accounting provides an overall view of a business’s financial position, including its balance sheet, income statement, and cash flow statement.
Financial accounting aims to provide relevant and timely financial information to stakeholders outside the company, such as investors, creditors, and government agencies. Financial statements give a summary of the company’s performance, its assets and liabilities, cash in and outflow, and profitability.
Financial accounting is mandatory for every business, and it follows a standard set of rules and regulations issued by regulatory bodies such as the Financial Accounting Standards Board (FASB) to ensure accuracy, consistency, and transparency in financial reporting.
The Key Differences
The primary difference between cost management and financial accounting is the focus of each method. Cost management focuses on identifying and controlling the cost of the inputs used to produce a product or service. Meanwhile, financial accounting aims to provide a comprehensive view of the company’s financial position and performance to external stakeholders.
Cost management is more useful for internal decision-making, while financial accounting caters more to external financial reporting needs. Cost management is more detailed and product or service-specific, while financial accounting provides a broader overview of the entire business.
In Summary
Cost management and financial accounting are both critical accounting practices that businesses use to monitor their finances. Although they serve similar purposes, they differ in terms of their scope, objectives, and methods of implementation. By understanding the difference between these two accounting practices, businesses can make informed decisions, allocate resources efficiently, and improve their overall financial health.
Table difference between cost management and financial accounting
| Cost Management | Financial Accounting |
|---|---|
| Focuses on identifying, analyzing, and minimizing costs of a business operation. | Focuses on recording, classifying, and summarizing financial transactions of a business. |
| Emphasizes on identifying different cost drivers and allocating those costs to different business activities. | Emphasizes on preparing financial statements such as income statement, balance sheet and cash flow statement. |
| Assists management in making informed decisions to reduce costs, improve the quality of the product or service, and increase profitability. | Helps stakeholders such as investors, creditors, and regulatory bodies in making insightful decisions based on financial performance and position of the company. |
| Involves planning, monitoring, and controlling costs to ensure efficient use of resources. | Involves maintaining accurate financial records, complying with accounting standards, and preparing financial reports for external and internal users. |
| Does not follow accounting principles and standards strictly, since the emphasis is on allocating costs to business activities rather than recording financial transactions. | Follows accounting principles and standards strictly to maintain the accuracy and reliability of financial statements. |