The difference between Cost Management and Financial Accounting

FINANCE   |   3 minutes  |   February 1, 2016


In order to be competitive and profitable, your business needs access to today’s financial facts and tomorrow’s costing priorities.

The solution?

Use an accurate accounting system that integrates cost management and financial accounting.

Both accounting roles perform critical financial functions that ensure long-term profitability through the tracking of progress, achievements, and failures of any given organisation.

The University of Cape Town, in partnership with GetSmarter, offers online short courses in both disciplines: cost and management accounting and financial accounting.

Become familiar with their 7 key differences so that you can identify which course will best suit your business or career priorities.

1. What are the key responsibilities of cost management and financial accounting?

Cost and management accounting is for finance professionals and business managers or owners whose role it is to maintain records to identify where to cut costs for increased profitability.

Purpose: Ascertain business costs for day-to-day planning, cost control, and internal decision making.

Financial accounting is for accountants whose role it is to record all transactions and accurately report the entire financial picture and performance of a business.

Purpose: Secure overall business financial information and report on performance and position.

2. What recording systems are used for cost management and financial accounting?

Cost management professionals book actual transactions and compare them to estimates. They then base reports on the estimation of cost and on the recording of actual transactions.

Purpose: Cost of sale of product(s), addition of a profit margin and determination of selling price of the product.

Financial accounting professionals evaluate actual transactions only and do not use estimation in recording financial transactions.

Purpose: Journal entries, ledger accounts, trial balance, cash flow and financial statements.

3. Who is the target audience for cost management and financial accounting?

Cost accounting involves the preparation of a broad range of reports that management needs to run a business.

Purpose: The readers are exclusively internal management.

Financial accounting involves the preparation of a standard set of reports for an outside audience.

Purpose: The readers may include investors, creditors, credit rating agencies, and regulatory agencies.

4. What is the period of profit for cost management and financial accounting?

Cost management accounting is used as per the requirement of management or on an as-and-when-required basis.

Purpose: Profit is determined related to a particular product, job or process.

Financial accounting is required during the report period at the end of the financial year.

Purpose: Profit is determined for the whole organization made during a particular period only.

5. What regulatory framework is used in cost management and financial accounting?

Cost accounting involves creating reports that can be in any format specified by management. There is no regulatory framework governing cost accounting reports so they can be tailor made to suit a certain costing need or managerial demand.

Purpose: Cost accounting reports are voluntary and created with the intention of including only that information pertinent to a specific decision or situation.

The reports prepared under financial accounting are highly specific in their format and content. The structure of financial accounting reports is tightly governed by either generally accepted accounting principles or international financial reporting standards.

Purpose: Financial reports are a statutory requirement and ensure a business’s accounting standards are compliant.

6. What product costs are measured in cost management and financial accounting?

Cost accounting compiles the costs of raw materials, work-in-process, and finished goods inventory.

Purpose: Record the details for each product, process, job or contract.

Financial accounting incorporates this information into its financial reports, primarily into the balance sheet.

Purpose: To show overall costs and profit gains or losses.

7. What level of detail is expected in cost management and financial accounting?

Cost accounting usually results in reports at a much higher level of detail within the company.

Purpose: Record internal and external transactions for present and future, such as for individual products, product lines, geographical areas, customers, or subsidiaries.

Financial accounting’s primary focus is on reporting the results and financial position of an entire business entity.

Purpose: Record external transactions only, with a focus on historical data. One way of doing this would be to translate an annual accounting cycle from a source document into financial statements.