Contrasting Cost Accounting and Financial Accounting and Ethical Considerations Arising
from the Differences, Question 1
Timothy B. Caulder
School of Business, Liberty University
ACCT 311: Corporate Accounting
Instructor Marsha Baker
March 23, 2023
Contrasting Cost Accounting and Financial Accounting and the Ethical Considerations
Arising from the Differences
The purpose of this post is to draw a clear contrast between financial accounting and cost
accounting. Because of the differences in the nature of how these two distinct accounting
subdisciplines provide end users with information, there is an inherent ethical dilemma that
arises based on the timeliness of information presented. Not only will this post define both
subdisciplines, but a clear distinction will be drawn about how the information derived from each
is reported, an example of an ethical conflict will be presented, and a parallel to a parable in the
bible will be presented.
Cost Accounting and Financial Accounting Defined
Financial accounting is the branch of accounting that provides a snapshot of a firm’s
financial position at a fixed point in time. According to Garrison et al. (2021) the financial
accounting users are generally shareholders, creditors, auditors, or any type of external user of
that company’s information. An example of financial accounting in use would be a potential
investor examining the balance sheet, income statement, and statement of cash flows for a
company from quarter to quarter or year over year in an effort to determine trends so they can
make an informed decision about whether or not to buy that company’s stock or bond. In
contrast, Garrison et al. (2021) explains that cost accounting provides timely, fluid, and dynamic
information related to the various costs of producing a product or a service. For example, Ford
Motor Company uses Goodyear tires to outfit their vehicles, as well as a unionized workforce
and a factory with automation to produce a Ford F150 truck. The various costs inputs such as
labor, tires, and utilities are constantly changing and managers monitor this information in real
time so that decisions can be made about staffing projections, shopping competitor raw goods,
production quantities and inventory levels.
Ethical Impacts Arising from How Each Branch of Accounting is Presented
Because financial accounting information is reported as a snapshot of the companies’
overall health, combined with external shareholder pressure and stock performance incentives
tied to executive compensation in publicly traded firms, companies can find themselves in an
ethical dilemma about how to report certain cost accounting information. For example, the way a
company values and reports inventory can have an effect on cost of goods sold and inventory
accounts, thereby having a direct effect on the income statement. Cook et al. (2021)
demonstrates this concept by explaining how companies using the Last-In-First-Out (LIFO)
valuation method will tend to have decreased gross profit during times of rising prices because
they are selling the higher priced inventory at less of a margin. Conversely firms using First-InFirst-Out inventory valuation methods can benefit from rising prices because they are still selling
older inventory acquired at lower prices and will not feel the price increase immediately in their
margins. Suppose a manufacturing company only has private investors and is not subject to an
external audit. Changing inventory cost methods from LIFO to FIFO or vice versa can
potentially enable a company to manipulate earnings in the short term. It is imperative that
accounting, finance, and managerial personnel have a strong ethical foundation to avoid the
temptation in manipulating earnings.
Biblical Integration
Because cost accounting involves perpetual decisions around cost inputs, managers must
always be thinking of every single cost factor involved in manufacturing. Frequently when raw
materials costs rise companies sometimes engage in make or buy decisioning in an effort to
reduce manufacturing direct costs. Luke 14: 28-33 demonstrates the need to carefully consider
the costs of taking on a new project through Jesus’ parable about counting cost, stating “Suppose
one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you
have enough money to complete it? For if you lay the foundation and are not able to finish it,
everyone who sees it will ridicule you, saying, this person began to build and wasn’t able to
finish. Or suppose a king is about to go to war against another king. Won’t he first sit down and
consider whether he is able with ten thousand men to oppose the one coming against him with
twenty thousand? If he is not able, he will send a delegation while the other is still a long way
off and will ask for terms of peace. In the same way, those of you who do not give up everything
you have cannot be my disciples.” (New International Bible, 1978/2011). Although Jesus’
parable does not talk about manufacturing, it does indeed talk about the tremendous sacrifices
that disciples must make in order to be a faithful follower of Jesus. This principle draws a
meaningful parallel to the careful decisions that mangers must undertake when evaluation new
projects.
Conclusion
The differences in cost accounting and financial accounting are very clear. Financial
accounting is static and looks backward over a period, and cost accounting is dynamic, fluid and
ever changing based on rapid market forces. Because of real time changes in manufacturing
costs, a company can make rapid decisions about capacity, production volume, and staffing. In
other words, it an be said that cost accounting information gives managers insight into future
performance metrics of the company. Because cost accounting information has a direct impact
on financial accounting reporting, it is crucial that manager operate in a highly ethical manner
and do not engage in unethical behavior for short-term gains resulting from quarterly earnings
reports.
References
Cook, K. A., Huston, G. R., Kinney, M. R., & Smith, J. S. (2021). Just how much does the tail
wag the dog? Altering inventory to manage earnings. Decision Sciences, 52(1), 216261. https://doi.org/10.1111/deci.12425
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). In Managerial accounting (pp. 28–42).
essay, McGraw-Hill Education.
New International Bible. (2011). Zondervan. (Original work published 1978)