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INTER-RELATIONSHIP B/W FINANCIAL MANAGEMENT & COST ACCOUNTING.



There are mainly three branches of accounting:

1.Financial accounting

2.Cost accounting

3.Management accounting

Financial accounting tells us whether the business has earned profits or incurred losses during the accounting period i.e. Income statement and position statement . So, Financial statement is concerned with providing information to external parties .But we know management is also interested to know more and more information for internal decision making process. And for this purpose cost data is required which must be prepared and presented to management in such a manner , that the management is able to take managerial decisions on the basis of same cost data.

It became necessary for the manufacturers : (i) to identify costs to a product , job or contract, etc; (ii) to improve quality for varied reasons ; and (iii) to control costs . This could be achieved only with the help of cost accounting.

COST ACCOUNTING VS FINANCIAL ACCOUNTING

1.Objectives:

The major aims of financial accounting are to (a) find out the profitability of the undertaking; and (b) safeguard the interest of proprietors and creditors , etc . These objectives are achieved by preparing suitable information for the use of shareholders or partners, creditors or prospective creditors and others . On the other hand, cost accounting provides information for managerial planning, control and decision making.

2.Presentation

Accepted accounting principles are used in preparing financial accounts. Besides , they are prepared to comply with the requirements of the Companies Act, Income tax Act and excise and other laws. However , the maintenance of cost records and the form in which they can be kept are purely voluntary and discretionary.

3.RECORDING

Financial accounts ascertain profits earned or losses incurred by a business. Thus they record, classify and analysis of transactions in a subjective manner , i.e. , according to the nature of income or expenditure. However , in the cost accounts, there is a great emphasis on the planning and controlling aspects and thus transactions are recorded in an objective manner , i.e. according to the purpose for which costs have been incurred.

4. ANALYSIS OF PROFITS

Financial accounts reveal the profit or loss of the business as a whole , but cost accounts show and explain the profit made or loss incurred on each job, process, contract or product. This helps the management to take remedial steps, such as elimination of losing products lines, streamlining the production and other processes of a product , and concentration on more profitable lines.

5. PERIODICITY OF REPORTING

Financial accounting observes the accounting period convention , which is normally a year , since it is mainly concerned with transactions between the organization and third parties . Cost reports are submitted as frequently as once a week. Regular and frequent cost reports are necessary to control costs and performance.

COST ACCOUNTING VS MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING is concerned with accounting information that is useful to management. It is used for the purpose of policy formulation, planning , control and decision making by management.

Cost accounting and Management accounting both have the same objectives of helping management in planning , control and decision –making . Both are internal to the organization and use common tools and techniques like standard costing , variable costing, budgetary control etc. But there are some differences b/w two given below:

1. COST ACCOUNTING deals with ascertainment , allocation. Apportionment and accounting aspect of cost. MANAGEMENT ACCOUNTING deals with the effect and impact of costs on the business.

2. COST ACCOUNTING provides base for management accounting. MANAGEMENT ACCOUNTING is derived from both cost and financial accounting.

3.COST ACCOUNTING is helpful in collecting costing data for management . MANAGEMENT ACCOUNTING has greater degree of relevance and objectivity as management has clear idea of the types of costs and items requiring analysis .

4. COST ACCOUNTANT has narrow approach. He has to refer to economic and statistical data for analysis. MANAGEMENT ACCOUNTANT reports the effect of cost on the business along with cost analysis.

5. COST ACCOUNTING does not include financial accounting , tax planning and tax accounting. MANAGEMENT ACCOUNTING includes financial and cost accounting, tax planning and tax accounting .

1. COST ACCOUNTING can be installed without management accounting. MANAGEMENT ACCOUNTING needs financial and cost accounting as its base for its installation.

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