The difference between cost accounting and financial accounting
/There are a number of differences between cost accounting and financial accounting, which are noted below. In brief, the key differences between cost and financial accounting are that cost accounting is inwardly focused on management decisions, while financial accounting is focused on issuing financial statements to outside parties.
Audience
Financial accounting involves the preparation of a standard set of reports for an outside audience, which may include investors, creditors, credit rating agencies, and regulatory agencies. Cost accounting involves the preparation of a broad range of reports that management needs to run a business.
Format
The reports prepared under financial accounting are highly specific in their format and content, as mandated by either generally accepted accounting principles or international financial reporting standards. Cost accounting involves creating reports that can be in any format specified by management, with the intention of including only that information pertinent to a specific decision or situation.
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Level of Detail
Financial accounting primarily focuses on reporting the financial results and financial position of an entire business entity. Cost accounting usually results in reports at a much higher level of detail within the company, such as for individual products, product lines, geographical areas, customers, or subsidiaries.
Product Costs
Cost accounting compiles the cost of raw materials, work-in-process, and finished goods inventory, while financial accounting incorporates this information into its financial reports (primarily into the balance sheet).
Regulatory Framework
The structure of financial accounting reports are tightly governed by either generally accepted accounting principles or international financial reporting standards. There is no regulatory framework governing cost accounting reports.
Report Content
A financial report contains an aggregation of the financial information recorded through the accounting system. This information is likely to be presented in a rigid format that varies little from period to period, so that financial results can be compared from one period to the next. The information in a cost accounting report can contain both financial information and operational information. The operational information can come from a variety of sources that are not under the direct control of the accounting department.
Report Timing
Financial accounting personnel issue reports only at the end of a reporting period. Cost accounting staff may issue reports at any time and with any degree of frequency, depending upon management's need for the information. In some cases, the report timing for a cost accounting report could be on a daily basis, such as a report on the output of a specific machine in the production area.
Time Horizon
Financial accounting is only concerned with reporting the results of reporting periods that have already been completed. Cost accounting does this too, but also can be involved in a variety of projections for future periods. Future projections are especially common for the cost accountant when reporting on expected changes in cost levels, such as a decline in a product’s cost due to a projected volume purchase discount that is expected as of a future date.