Financial Accounting Versus Cost Accounting

8/4/2019 Financial Accounting Versus Cost Accounting

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Financial Accounting Versus Cost Accounting

Financial Accounting:

Financial Accounting is a systematical way to prepare the financial statements of an organization

is order to get the true and fair view profit or loss. These financial statements are organized fordecision making, stockholders, Banker, Supplier, Shareholders, Government Agencies, and other

stakeholders. The basic requirement to prepare financial statement is to examine and reduce the

dead expenses by measuring the expenses and income status and to reporting the result to

interested users. These statements are organized for outsiders who do not take part in day to day

organizational activities.

Simply we can say, "Financial accounting is the process which includes recording, interpreting &

summarizing date taken from financial records of an organization and bring it out in an annual

report for the benefit of people outside the organization".

In depth financial accounting contains some principles, Concepts & Equation.

Financial accountants organize financial statements based on Accounting Principles which are

generally accepted by a specific country. Financial statements must be prepared according to the

(I FRS) International Financial Reporting Standards.

Accounting Equation: (ASSETS = LIABILITIES + OWNER'S EQUITY).

Accounting Cycle:

1. Voucher.

2. General Journal.

3. General Ledger.

4. Cash Book.

5. Trail Balance.

6. Trading profit & Loss Account.

7. Balance Sheet. Cash Flow Statement.

First of all the transaction occurs and noted in the form called Voucher. All transactions are

available in vouchers. Then one specific form is created called General Journal. All transaction

recorded in one form. The next step is Called Posting in which all separate heads/accounting

recorded separately in different form/accounts called General Ledger. Cash Book is maintained

to record the payments and recipes or organization. By the help of General Ledger the Trail


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Balance prepared which provides the items of Trading, profit & Loss account and Balance Sheet

which shows the financial position and the health of the Organization. And lastly Cash Flow

Statement is prepared to drive the accrual inflow & outflow of cash.

Cost Accounting:

Cost accounting ascertains budget and actual cost of production, operations, departments,

process and the analysis of variance. Cost accounting is used to support decision-making to

reduce cost of organization and improve its profitability. Cost accounting does not require

standards as (GAAP) Generally Accepted Accounting Principles, as its primary use is for

internal management, rather than outside people. Some of managerial accounting approaches are

mentioned as under;

Managerial Costing. Activity based Costing.

Standard Cost Accounting.

Resource Consumption Accounting.

Three Classical Cost Elements:

Raw Material.

Labor.

Factory Over Head/Indirect Expenses.

Cost Accounting is being used to help the managers to understand & reduce the running cost of

an Organization. Most of Cost varied with the rate of production which is called "Variable Cost"

like money spent on labor, power to run a factory, direct material etc. Unlikely variable cost,

some costs remain the same even while busy period or during null production. These costs are

call "Fixed Cost" like Depreciation on Assets, Rent of building etc.

In cost accounting some statements are prepare. Majors are Income Statement, Cost of Goods

Sold Statement, and Cost of Production Report.

Income Statement:

Income statement is prepared to drive the net income/profit of the organization. In the process all

direct Expenses related to purchase of Goods/material are less from Sale and the retained amount

is called Gross Profit. Then all indirect expenses related to sales, Admin & Financial Charges are


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deducted from (GP) Gross Profit, retained amount after deduction is called (NP) Net

Profit/income.

(CGS) Cost of Goods Sold Statement:

Cost of Goods sold statement is prepared to drive the total cost which is spent on the purchasing

to sell the produced Goods. In the preparation process first of all the Closing Martial of last year

is added in purchase of Martial, which is called "Total Material Available for Use" and Material

Used is deducted from it. The remaining amount is called "Cost of Material Consumed". Then

the cost of Labor and (FOH) Factory Overhead added in cost of material consumed. The total of

this is called "Total Factory Cost" after that Opening stock of work in process is added and

closing stock of work in process is deducted from Total Factory Cost. The amount which drivesafter this is called "Cost of Goods Manufactured". Lastly the Opening Stock of Finished Goods

is added and Closing Stock of Finished Goods is deducted from Cost of Goods Manufacture and

the Answering amount is Called "(CGS) Cost of Goods Sold"

(Direct Material + Direct Labor= Prime Cost) (Labor + FOH= Conversion Cost)

In practice, cost accounting takes place before actual production and sale. The process can also

be dynamic and is often continuously implemented, that is it costing takes place through out the

process of production and sales. The process offinancial accounting on the other hand is just a

one time process that takes place post theproduction schedule and post the sales process.

The process of cost method of accounting, considers per unit cost. For example in a steel mill, the

cost of production of one tonne of steel is computed. The process of financial accounting on the

other hand records the comprehensive cost. For example it may record the cost of steel that is

produced for a month. Cost accounting takes into consideration all macro and micro details that

contributed to the production of one tonne of steel. The cost of one tonne of steel would thusinclude, the salary of the foreman that was involved in (proportion) in production of one tonne of

steel. Similarly, electricity, workman's salary, iron, power, coke and factory premise cost,

machinery cost, which were involved in the production of one tonne of steel are used in cost

accounting to define the unit cost of one tonne of steel. On the contrast, financial accounting

records, the total salary paid to foremen, total cost of machinery, sale cost of that one tonne of


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steel. On the whole, cost accounting is micro derivation of cost that is required to make one unit

of goods and services. Secondly, it points out to unnecessary costs, unproductive costs,

budgeting, etc. Another important advantage of the cost accounting is that it helps in reduction of

cost. Financial accounting has a more macro approach and records multiple transactions and

costs on the basis of their value and time constraint. The smaller costs are not included nor are

they calculated. This system gives a total picture with an eagle's eye view.

When we discuss cost vs financial accounting, please note that both accounting terms are

interdependent and their co-existence enables businesses to compute costs and sales realistically,

properly and most importantly helps them to avoid loss. Another very similar debate

is management accounting vs cost accounting vs financial accounting,

financial accounting) is the field ofaccountancyconcerned with the preparation offinancial

statementsfor decision makers, such asstockholders,suppliers,banks, employees,government

agencies, owners, and other stakeholders. Financial capital maintenance can be measured in

eithernominal monetary unitsorunits of constant purchasing power.[1]

The fundamental need for

financial accounting is to reduceprincipal-agent problemby measuring and monitoring agents'

performance and reporting the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the

organization or not involved in the day-to-day running of the company. Management

accountingprovides accounting information to help managers make decisions to manage the

business.

In short, Financial Accounting is the process of summarizing financial data taken from an

organization'saccounting recordsand publishing in the form of annual (or more frequent) reports

for the benefit of people outside the organization.

Financial accountancy is governed by both local and international accounting standards.

Cost accounting is an approach to evaluating the overall costs that are associated with conductingbusiness. Generally based on standard accounting practices, cost accounting is one of the tools

that managers utilize to determine what type and how much expenses is involved withmaintaining the currentbusiness model. At the same time, the principles of costaccounting can

also be utilized to project changes to these costs in the event that specific changes are

implemented.When it comes to measuring how wisely company resources are being

utilized, costaccounting helps to provide the data relevant to the current situation. By identifying
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production costs and further defining the cost of production by three or more successive business

cycles, it is possible to note any trends that indicate a rise in production costs without anyappreciable changes or increase in production of goods and services. By using this approach, it is

possible to identify the reason for the change, and take steps to contain the situation before

bottom line profits are impacted to a greater degree

Product development and marketing strategies are also informed by the utilizationof costaccounting. In terms of product development, it is possible to determine if a new product

can be produced at a reasonable price, considering the cost of raw materials and the labor and

equipment necessary to product a finished product. At the same time, marketing protocols canmake use of cost accounting to project if the product will sell enough units to make production a

viable option.

Cost accounting is helpful in making a number of business decisions. By weighing the actualcosts versus the anticipated benefit, cost accounting can help a company to avoid launching a

product with no real market, prevent the purchase of unnecessary goods and services, or alter the

current operational model in a manner that will decrease efficiency. Whether utilized to evaluate

the status of a department within the company or as a tool to project the feasibility of opening

new locations or closing older ones, cost accounting can provide important data that may impactthe final decision.

Cost Accounting: Financial Accounting

The main purpose of cost accounting is to

analyse, ascertainment and control of cost.

The main purpose of financial accounting is to

record financial transactions, finding out profit

or loss and financial position.

Cost accounting presents cost information at

frequent intervals

Financial accounting presents financial

information at the end of the accounting

period.

Cost accounting generally kept voluntarily to

meet the requirements of the management.

Financial accounting is kept compulsory in

such a way as to meet the requirement of the

Companies Act and income Tax Act.

Cost accounting records transactions in a

objective manner. It means the purpose for

which the cost in incurred.

Financial accounting records transactions in a

subjective manner. It means according to the

nature of expenses.

Budget

A budget (from oldFrenchbougette, purse) is a list of all planned expenses and revenues. It is a

plan for saving and spending.[1]

A budget is an important concept inmicroeconomics, which uses

abudget lineto illustrate the trade-offs between two or moregoods. In other terms, a budget is an

organizational plan stated in monetary terms.

In summary, the purpose of budgeting is to:
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1. Provide a forecast of revenues and expenditures, that is, construct a model of how ourbusiness might perform financially if certain strategies, events and plans are carried out.

2. Enable the actual financial operation of the business to be measured against the forecast.Budget types

Sales budget: The sales budget is an estimate of future sales, often broken down into both units

and dollars. It is used to create company sales goals.

Production budget: Product oriented companies create aproduction budgetwhich estimates the

number of units that must be manufactured to meet the sales goals. The production budget also

estimates the various costs involved with manufacturing those units, including labor and

material.

Cash Flow/Cash budget: Thecash flowbudget is a prediction of future cash receipts and

expenditures for a particular time period. It usually covers a period in the short term future. Thecash flow budget helps the business determine when income will be sufficient to cover expenses

and when the company will need to seek outside financing.

Marketing budget: The marketing budget is an estimate of the funds needed for promotion,

advertising, and public relations in order to market the product or service.

Project budget: The project budget is a prediction of the costs associated with a particular

company project. These costs include labor, materials, and other related expenses. The project

budget is often broken down into specific tasks, with task budgets assigned to each.

Revenue budget: The Revenue Budget consists of revenue receipts of government and the

expenditure met from these revenues. Tax revenues are made up of taxes and other duties that

the government levies.

Expenditure budget: A budget type which include of spending data item

Certain losses are inherent in the production process and cannot b eliminated.

These losses occur under efficient operating conditions and are referred to as Normal or

uncontrollable losses.

-In addition to losses which cannot be avoided, there are some losses which are not

expected to occur under efficient operating conditions, for example the improper mixing ofingredients, the use of inferior materials and the incorrect cutting of cloths. These losses

are not an inherent part of the production process and are referred to as abnormal or

controllable losses.

-Normal loss is the loss expected during a process. It is not given a cost.

-Abnormal losses is the extra loss resulting when actual loss is greater than normal or

expected loss ,and it is given a costs.

-Since an abnormal loss is not given a cost, the cost producing these units is borne by the
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good units of output.

-Abnormal loss and gain units are valued at the same rate as "good" units. Abnormal

events do not therefore affect the cost of good production. Their costs are analyzed

separately in an abnormal loss or abnormal gain account

Cost of Production Report (CPR):

Definition and Explanation of Cost of Production Report (CPR):

A departmental cost of production report (CPR) shows all costs chargeable to a department. Itis not only the source for summary journal entries at the end of the month but also a

most convenient vehicle for presenting and disposing of costs accumulated during the month. Acost of production report shows:

1. Total unit costs transferred to it from a preceding department.2. Materials, labor, and factory overhead added by the department.3. Unit cost added by the department.4. Total and unit costs accumulated to the end of operations in the department.5. The cost of the beginning and ending work in process inventories.6. Cost transferred to a succeeding department or to a finished goods storeroom.

It is customary to divide the cost section of the report into two parts: one showing costs for

which the department is accountable, including departmental and cumulative total and unit costs,

the other showing the disposition of these costs. A quantity schedule showing the total number ofunits for which a department is accountable and the disposition made of these units is also part of

each department's cost of production report. Information in this schedule, adjusted for equivalent

production is used to determine the unit costs added by a department, the costing of the ending

work in process inventory, and the cost to be transferred out of the department.

A cost of production report determines periodic total and unit costs. However, a report that

would merely summarize the total costs of materials, labor, and factory overhead and shows onlythe unit cost for the period would not be satisfactory for controlling costs. Total figures mean

very little; cost control requires detailed data. Therefore, in most instances, the total cost is

broken down by cost elements for each department head responsible for the costs incurred.Furthermore, detailed departmental figures are needed because of the various completion stages

of the work in process inventories.

Either in the cost of production report itself or in the supporting schedules, each item of material

used by a department is listed; every labor operation is shown separately; factory overheadcomponents are noted individually; and a unit cost is derived for each item. To condense the

illustrated cost of production reports, only total materials, labor, and factory overhead charged todepartments are considered; and unit costs are computed only for each cost element rather than

for each item

What is the difference between capital expenditure and revenue expenditure?


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Revenue expense are costs in the for day to day running of the business for example servicing a

machine, spare parts etc. Revenue expenditure is normally charged against profit in the Income

statement in the year it is expensed.

Capital expenditure is on an item that will help generate profits over the longer term (12 months

or more) so a purchase of a machine or van etc. The item is depreciated over the items useful lifeand each depreciateable amount is charged to the Income statement in the year the item has help

generate profit.

DIFFERENCE BETWEEN JOINT COSTS AND COMMON COSTS

Joint costs are costs incurred in a production process, involving more than one product, up to the

point when the products can be separated or distinguished as separate products.

Common costs are costs incurred, the benefit of which is enjoyed by more than one cost centre

(i.e. unit ) within an organisation.

Distinguish between fixed cost and variable cost?

A fixed cost is a cost (in the short-run) that does not change based on the production

output in a business; i.e. no matter how many products a company makes/sells, these

costs do not change. Examples include rent, salaries, and insurance.

A variable cost is a cost (in the short-run) that changes based on the amount of output in

a business; i.e. the cost increases if the company makes/sells more products, and vice-

versa. Examples include wages, cost of goods sold, and income tax

Fixed costs do not vary with the amount of whatever is being produced. An example

might be rent and rates, electricity, hire purchase costs of machinery.

Variable cost depends on the amount of output and is usually based on how many unitsare produced. eg if you produce a pair of trousers, then the material might cost you 2; if

you produce 1000 pairs of trousers then this would cost you 2000 (1000 x 2) without

taking into consideration any discounts you might be for the bulk purchase of the fabric

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Financial Accounting Versus Cost Accounting