Md. Ataur Rahman,
Executive Director, BBTA
Management Accounting, Financial Accounting and Cost Accounting
(Definition, Objectives and Comparison)
Management accounting is a field of accounting that analyzes and provides cost information to the
internal management for the purposes of planning, controlling and decision making. Management
accounting refers to accounting information developed for managers within an organization.
Management Accounting is the process of analysis, interpretation and presentat ion of accounting
information collected with the help of financial accounting and cost accounting, in order to assist
management in the process of decision making, creation of policy and day to day operation of an
organization. Thus, it is clear from the above that the management accounting is based on financial
accounting and cost accounting.
CIMA (Chartered Institute of Management Accountants) defines Management accounting as “Management
Accounting is the process of identification, measurement, accumulation, analysis, preparation,
interpretation, and communication of information that used by management to plan, evaluate, and control
within an entity and to assure appropriate use of an accountability for its resources”. This is the phase of
accounting concerned with providing information to managers for use in planning and controlling
operations and in decision making.
Objectives of Management Accounting:
1) Planning: The success of any business depends upon the proper planning. Planning also involves
foreseeing the problem of arranging adequate funds or resources to implement the various plans. It can
render valuable information as to what should be the cheapest source in terms of cost involved.
2) Organizing: By following various techniques of it, each department of the organization can be examined
separately. It helps the management in performing this function by assigning specific responsibilities to
different people.
3) Controlling: Management Accounting helps the managements in controlling the performance of the
business. The actual results are compared to plan objectives. Budgetary control, cost variance, and
interpretation of financial statements are helpful in this direction.
4) Decision making: Decision-making is a very important function of management among all the functions
of the management, It can be very helpful in this regard. Under this function, to management finds various
alternatives, which should yield maximum profit. Marginal Costing, Break-even analysis etc. can help to
the managements in this regard.
5) Time saving: It is concerned with the analysis and interpretation of financial statements. It selects only
that information, which is useful to managements and hence save the time of the managements.
Page 1
6) Measuring performance: Management accounting measures two types of performance. First is employee
performance and the second is efficiency measurement. The actual performance is measured with the
standardized performance and a report of deviation from the standard performance is reported to the
management for the effective decision making and also to indicate the effectiveness of the methods in use.
Both types of performance management are used to make corrective actions in order to improve
performance.
7) Assess Risk: The aim of management accounting is to assess risk in order to minimize risk.
8) Allocation of Resources: is an important objective of Management Accounting.
9) Presentation of various financial statements to the Management.
Financial Accounting is the process of recording, summarizing and reporting the myriad (a countless or
extremely great number of people or things) of transactions from a business, so as to provide an accurate
picture of its financial position and performance. The primary objective of financial accounting is the
preparation of financial statements - including the balance sheet, income statement and cash flow statement
- that encapsulates the company's operating performance over a particular period, and financial position at a
specific point in time. These statements - which are generally prepared quarterly and annually, and in
accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting
Standards (IFRS) - are aimed at external parties including investors, creditors, regulators and tax
authorities.
Objectives of Financial Accounting:
The purpose of accounting can be summarized in the following manner:
1. Ascertain the results of operations during a period
2. Ascertain the financial position.
3. Maintaining a control over assets
4. Planning in respect of cash
5. Providing information to tax authorities and other government agencies.
6. To properly match income with expenses.
7. To provide a reliable set of data with which to prepare financial reports for analysis p urposes
(for owners, lenders, investors, etc).
8. To provide a reliable set of data with which to report income for tax purposes.
Page 2
Difference Between Financial Accounting and Management Accounting
Financial accounting is concerned with providing information to stockholders, creditors, and others who
are outside an organization. Managerial accounting provides the essential data with which organizations are
actually run. Financial accounting provides the scorecard by which a company’s past performance is
judged. In contrast, management accounting is concerned with providing information to managers i.e.
people inside an organization who direct and control its operations.
The differences between Financial Accounting and Management Accounting are given below:
Financial Accounting
Management Accounting
External vs.
Internal
A financial accounting system produces
information that is used by parties external to
the organization, such as shareholders, bank
and creditors.
Segment
reporting
Pertains to the entire organization or
materially significant business units.
Focus
Financial accounting focuses on history.
Format
Financial accounts are supposed to be in
accordance with a specific format, so that
financial accounts of different organizations
can be easily compared. (Formal
recordkeeping)
Planning and
control
Financial accounting helps in making
investment decisions, and in credit rating.
Information
Quantitative and monetary
Users
Financial accounting reports are primarily
used by external users, such as shareholders,
bank and creditors.
Reporting
frequency and
duration
Well-defined - annually, semi- annually,
quarterly. (Verifiable)
As needed - daily, weekly, monthly.
Optional?
Preparing financial accounting reports are
mandatory especially for limited companies.
There are no legal requirements to prepare
reports on management accounting.
Page 3
A management accounting system
produces information that is used within an
organization, by managers and employees.
May pertain to smaller business units or
individual departments, in addition to the
entire organization.
Management accounting focuses on future
& present.
No specific format is designed for
management accounting systems. (Formal
and informal recordkeeping)
Management accounting helps
management to record, plan and control
activities to aid decision- making process.
Quantitative and qualitative; Monetary and
non- monetary
Management accounting reports are
exclusively used by internal users viz.
managers and employees.
Financial Accounting
Objectives
Legal/rules
Accounting
process
The main objectives of financial accounting
are :i) to disclose the end results of the
business, and ii) to depict the financial
condition of the business on a particular date.
Drafted according to GAAP - General
Accepted Accounting Procedure or
International Financial Reporting Standards.
Follows a full process of recording,
classifying, and summarizing for the purpose
of analysis and interpretation of the financial
information.
Management Accounting
The main objectives of Management
Accounting are to help management by
providing information that used by
management to plan, evaluate, and control.
Drafted according to management
suitability.
Cost accounts are not preserved under
Management Accounting. The necessary
data from financial statements and cost
ledgers are analyzed.
Cost Accounting is a type of accounting process that aims to capture a company's costs of production by
assessing the input costs of each step of production as well as fixed costs such as depreciation of capital
equipment. Cost accounting will first measure and record these costs individually, then compare input
results to output or actual results to aid company management in measuring financial performance.
While cost accounting is often used within a company to aid in decision making, financial accounting is
what the outside investor community typically sees. Financial accounting is a different representation of
costs and financial performance that includes a company's assets and liabilities. Cost accounting can be
most beneficial as a tool for management in budgeting and in setting up cost control programs, which can
improve net margins for the company in the future.
Is Financial accounting cost accounting?
Cost accounting is usually involved with management accounting. Financial accounting tends to deal with
the past and presents information like statements for public and private use. Management accountants are
involved with the budgeting and costing sides of things and present information only for the sole users of
the business, so only internal uses like management, shareholders etc.
Financial accounting refers to the branch that prepared financial reports (kno wn as financial statements)
that are for general use. Primarily however, they are prepared for external users (owners, investors,
government, suppliers, creditors). The goal of financial accounting is to provide financial statements that
follow generally accepted accounting standards or GAAP. Cost accounting is the branch that focuses on
manufacturing costs, i.e. direct materials, direct labor, and factory overhead. It is often considered part of
management accounting, the branch that provides information for internal purposes and focuses on helping
management make decisions instead of strictly complying with GAAP. Cost accounting deals with
manufacturing concerns.
OBJECTIVES OF COST ACCOUNTING
The main objectives of cost accounting are:
1. To determine the cost of a product, process or service
2. To analyse, classify and record all expenditures with respect to the cost of product, process or
service in order to determine its cost
3. To provide necessary information to the management in time
Page 4
4. To provide data needed for periodical preparation of profit and loss account and balance sheets
5. To serve as a guide by providing actual data for comparison
6. To facilitate price fixation and offering quotations
7. To assist budgetary control
8. To assist cost control and cost reduction
9. To record the relative production results in each unit of plant to examine efficiency
10. To provide the basis for production planning and for avoiding wastages of materials and stores
11. To provide data for different periods and various volumes of output for effective planning and
future expansion of business
12. To provide the basis for making decisions such as:
1.
2.
3.
4.
To shut down or operate
To make or buy
To continue with existing plant/machinery or to replace it
To determine cost–volume–profit relationship
13. To assist the management in devising suitable policy decisions in other key areas
Difference between Cost Accounting and Manage ment Accounting:
Though Management accounting uses the tools of cost accounting like standard costing, marginal costing
etc. and many people think that both cost and management accounting are same which is not the case
because there are many differences between the two, here are some o f them –
Cost Accounting
Management Accounting
The main objectives of Management Accounting are
The main objectives of Cost
to help management at all level so that productivity
Objectives
accounting are the ascertainment of and efficiency can be improved through planning,
cost, cost control and cost analysis.
improved decision making and more effective
control.
Recording Of It records available cost data by
It uses both cost and financial information to advise
Data
operating a cost recording systems.
management in planning and controlling the
When this information is available it organization.
is ofter compared with an estimated,
budgeted cost.
Cost accounting focuses on current Management accounting is concerned with short
Concern
years activities.
range and long range planning.
Cost accounting is mostly historical Management accounting is futuristic in its
Approach
in its approach and it projects the
approach. It is more predictive in nature than cost
past.
accounting.
Management accounting has almost an unrestricted
Area of
Cost accounting operates in restricted
area operation since it is concern with the system as
Operation
areas .
a whole and the overall vitality of the organization.
Cost accounting is done for internal
parties like top management, owners Management accounting is done for top
Users
as well as external parties like management only
creditors, employees, government
Page 5
Cost Accounting
Scope
Management Accounting
management accounting is still evolving but its
Cost accounting was evolved many
scope is much wider than that of cost accounting
years back and it is limited in its
because it uses along with cost accounting other
scope.
principals of subjects like statistics, economics etc
Difference between financial accounting and cost accounting:
OBJECTIVE
NATURE
RECORDING OF DATA
USERS OF INFORMATION
ANALYSIS OF COSTS AND
PROFITS
TIME PERIOD
PRESENTATION OF
INFORMATION
FINANCIAL ACCOUNTING
COST ACCOUNTING
It provides information about
It provides information of
financial performance and financial ascertainments of costs to control
position of the business.
costs and for decision making
about the costs.
It classifies records, presents and It classifies, records, presents and
interprets transactions in terms of interprets in a significant manner
money.
materials, labour and overhead
costs.
It records historical data.
It records and presents estimated,
budgeted data. It makes use of both
historical costs and predetermined
costs.
External users like shareholders, Used by Internal management at
creditors, financial analysts,
different levels.
government and its agencies,etc.
It shows profit/loss of the
It provides details of costs and
organization.
profit of each product, process,
job,etc.
They are prepared for a definite
They are prepared as and when
period, usually a year.
required.
A set format is used for presenting There are no set formats for
financial information.
presenting cost informations.
Page 6