Cost Accounting and Financial Account

Subject: Accounting
Pages: 2
Words: 450
Reading time:
2 min

Cost accounting refers to the branch of accounting that is concerned with costs incurred in the production of units of an organization, while financial accounting refers to the branch of accounting that deals with recording financial data of a company to show the business’s exact position. Cost accounting develops information to be able to keep track of operations with the aim of efficiency and profit maximization. In contrast, financial accounting determines financial results for the accounting period and the asset and liability status on the last day of the accounting period.

Cost accounting utilizes both predetermined costs such as standard costs and estimates and historical costs, while financial accounting only uses historical costs, which are made up of annual figures and costs. In addition to recording, cost accounting avails a system of cost control of material, labor, and overhead costs. Conversely, financial accounting emphasizes only the recording of transactions or data and its presentation in a given format. Cost accounting also records and summarizes data and information, including different overheads of the manufacturing process, materials, and labor.

In contrast, financial accounting records the financial information (relevant monetary data) of an organization. Additionally, cost accounting is only carried out by manufacturing firms, and it is rarely a mandatory exercise in most cases, while financial accounting is usually compulsory for all companies as every company has to keep a record of its monetary transactions. While cost accounting is both a normative and positive science, financial accounting is purely a positive science as there is a lot of rigidity associated with the process due to various legal requirements.

Cost accounting allows for a firm to get the profit or loss levels of single products, jobs, and processes, while financial accounting handles businesses in their entirety by providing the loss or profit for the whole entity. Furthermore, the information developed by cost accounting is meant for individuals within the firm only, such as employees and the management, while the information developed by financial accounting is for the internal users as well as the external users.

Cost accounting reveals the cost of each unit of every product. For example, if a firm sells two products- product X and product Y, cost accounting helps in determining how much input (labor, material, electricity, and other) was expended in each unit of product X and product Y. Meanwhile, financial accounting allows us to understand the profitability of a company through financial statements. For example, if a firm sold $20,000 worth of products in a year and expended $15,000 in making the sales, then the firm made a $5,000 profit for the year.