Difference Between Cost Accounting and Management Accounting

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The relationship between cost accounting and management accounting is that they're for internal use only. Unlike the accountant who prepares your balance sheet and income statement, cost and management accountants don't show their work to outsiders. The information is for you and your management team to use in your decisions.

TL;DR (Too Long; Didn't Read)

Cost accounting crunches numbers to figure out the cost of products, processes and products. Management or managerial accounting includes a lot of the same information, but emphasizes analysis more, to help management make informed decisions.

The Difference Between Management Accounting and Cost Accounting

Cost accounting breaks down the costs associated with your company's manufacturing or service operations. A big part of the job is calculating the unit costs of products: How much does Widget X cost to make when you figure in raw materials, labor and overhead? Cost accountants also figure out how to allocate overhead costs between different departments and projects and calculate the cost of goods sold.

Cost accounting started in manufacturing, but it's also useful to businesses that provide services. A bank, for example, can use cost accounting to determine the cost of processing checks, maintaining savings accounts and servicing loans. They can use that to set prices on various services.

Managerial accounting uses a lot of the same information about production costs. That's one of the similarities between cost accounting and management accounting. Managerial accounting, however, places more emphasis on analyzing the figures and making recommendations:

  • What is the breakeven point where sales revenue will equal the costs?

  • What bottlenecks and inefficiencies in the production process are driving up costs or reducing revenues?

  • How should management invest the firm's capital?

  • Forecasting costs and revenues for the coming quarters or years. 

Internal Information Only

One of the similarities between cost accounting and management accounting is that they're for internal use by management, not for investors or regulators.

When the financial accountants crunch information about costs to help prepare the balance sheet and the income statement, that's for outsiders to read. The results and the methods have to conform to Generally Accepted Accounting Principles (GAAP). That way there's no question about what the statements mean or how the accountant figured the company's net worth.

Cost accounting and management accounting can, therefore, be presented in any format that suits management. The presentation may differ between one company and another, whereas GAAP-regulated material will always be uniform.

An Accounting Team

Other similarities between cost accounting and management accounting are due to using a lot of the same information. The figures generated by cost accounting are essential for management accountants to analyze the company's finances and make recommendations or presentations to upper management. A difference between management accounting and cost accounting is that management accounting may employ financial data and metrics that go beyond cost.

Business Decision-Making

Another of the similarities between cost accounting and management accounting is that they're both important in business decision-making. However, management will usually distinguish between cost and management accounting and apply them to different purposes.

  • Cost accounting gives management information about how much products, projects, processes and services cost the company.

  • It helps management take steps to control costs.

  • Cost accounting helps management set prices. Once a company knows the cost of its goods, it can set prices based on the profits it wants.

  • Cost accounting helps management make other decisions, such as whether it's cheaper to make or buy a component, whether they can afford to cut the selling price in an economic slump or whether a project should shut down or keep going.

Management accounting can help with the same decisions, and more:

  • Has the company's strategy been effective at boosting profits?

  • Is a given market worth entering?

  • Do variations in income or spending indicate a problem that needs resolving?

  • Is the company meeting the projections in your budget forecasts? If not, what are the reasons?

  • Are there current trends in the industry the company should adapt to?

References

About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com

Photo Credits

  • Accounting and finance image by MAXFX from Fotolia.com