Accounting is a field that consists of various verticals and sub-verticals. There are a number of concepts, disciplines and roles that follow. Cost and management accounting are two terms in accounting that we will be deciphering today. Both these accounting types have different uses, scope and styles. Here’s a quick guide for you.
What Is Cost Accounting?
Cost accounting involves the calculation of the costs of a product or a service you are selling/providing. The main agenda of cost accounting is to correctly measure and classify costs, which in turn aid in decision-making. Some activities of cost accountants involve:
- Preparing budgets of all types with a focus on revenue, profit, the efficiency of the plant, production capacity etc.
- Understanding, classifying and breaking down the cost for decision making.
- Forecasting future costs based on existing data and budgeting.
- Determining the selling price of products based on costs
- Determining costs accurately in case the business wants to bid for tenders.
Benefits of Cost Accounting
Makes your business more efficient: It helps your business understand if your current cost is optimum and also provides opportunities to understand where you can save costs and be more efficient. It compares your current cost to that of the industry so that you can understand where you can optimize and reduce cost.
Find unprofitable activities: Although your business may be making profits in totality, some activities in your firm may not be profitable at all. Cost accounting finds out the unprofitable activities for you so that you can take appropriate corrective decisions.
Correct classification of cost: Cost accounting distinguishes between the fixed and variable cost of a product which in turn helps you understand what costs you can control and what you cannot. Generally, fixed costs cannot be controlled.
Reducing prices as and when required: There may be certain times when you need to reduce prices to maintain sales and sustain demand (Eg. Situations like Covid-19 when demand is low) If you have the correct cost calculations, you know how much profit you are making and how much buffer you have to reduce prices. In the absence of Cost accounting, you may arbitrarily reduce prices which may lead to irreversible losses.
Investigate reasons for loss: When you’re going into losses, you need to understand which factors have led to it. If one of the factors is high costs, cost accounting will tell you which costs were high when compared to previous years. This will tell you what exactly the problem is and then you could start working on solving it
Price escalations: Inflation is something which is inevitable and prices of raw materials may increase every year which in turn will increase your Product Cost. If you have proper data on cost, you can easily understand why your cost has increased and subsequently you can increase the price of your final product to your customer. If you do not have accurate data, you may end up increasing prices arbitrarily which may make you non-competitive.
What is Management Accounting?
Management accounting is a wide and strategic discipline of accounting that turns data and numbers into insightful information and knowledge which can be used for decision making. It deals with decision-making, planning, strategy, cost-control and performance of a business. While cost accounting helps you understand the cost, profit /loss, management accounting gives you an understanding as to why your company is going through it. It helps you understand the gaps and opportunities within your existing products/services, how can you reduce costs and increase revenue and how your firm is performing in every domain.
Benefits of Management Accounting
Helps in making decisions: Management accounting deciphers data into actionable insights. These insights help managers make decisions which actually matter and which in turn benefit the firm.
Planning: Management accounting helps managers understand sales trends and helps them forecast future sales. This in turn gives insights as to when sales may be down and when they can make more efforts and push more dollars into marketing to push sales. All in all, it helps managers plan well for the future.
Managing reports: Management accountants are responsible for creating internal and external reports which are often categorized as MIS or Management Information Systems. These reports give key insights which help in understanding the performance of the firm and the areas where it can improve.
Cost and management accounting are two completely different verticals. But, the end goal of both is the same: to assist the organisation in managing its finances strategically. Cost and management accounting go hand-in-hand in formulating the financial policies of a business. When you effectively manage both, you set your firm towards success.
Cost and management accounting can help you understand your performance with regards to costs, sales and profits. This in turn will let you know if an investment or expenditure is worth spending and how it will affect your products and services in the long run.
If you are looking to get these skills and services outsourced then you can get in touch with Business Guru. We help firms reduce accounting burdens and help them make strategic decisions through MIS reports. We’re always available for understanding your unique needs and also to help you grow by giving you various insights about your Business.