MY UNDERSTANDING OF COST AND MANAGEMENT ACCOUNTING, SO FAR.

Those that have read my blog posts would have noticed an improvement in my understanding of basic accounting. From the guy scared of the subject of accounting to one now curious about the intricacies of accounting.

In the previous topic, financial accounting, information is provided to investors, stockholders, external auditors, and regulators, mainly external users. Management accounting also provides information for company insiders. This helps managers manage the entity better and make better decisions.

Cost is an expenditure incurred in producing a product or service. Cost can be either actual or notional.

Actual costs are those costs we can see and touch, while notional costs are those which are implied.

For example, you sell food by the roadside, buy your rice (material), cook it with the help of others, and pay them (cost of labor). If you buy a generator to make your work easier by supplying electricity (direct expense) and many other expenses to get the rice ready for the customers. Next, you take the food to the market to sell. On your way to the market, a car might hit you. The risk you bear by staying at the roadside to sell is also a cost to you. This cost is known as the notional cost. It is said that most accountants don’t pay much attention to this cost. When calculating cost, we must include both the actual and the notional cost.

Costing is the technique used to determine cost.

Cost accounting is a subset of management accounting that focuses on the costs of products and services. It has to do with the recording of cost data and analyzing them so we can communicate them to management.

However, the term ‘cost accounting’ is often used to mean management accounting. They are used interchangeably.

Cost can be classified into nature, behaviour, function, control, traceability, and more. See below what the few listed represent:

Nature: material cost, labor cost, and expenses.

Behaviour: fixed cost, variable cost, or mixed cost.

Function: production cost, administrative cost, and selling cost.

Control: controllable cost and non-controllable cost.

Traceability: direct cost or indirect cost.

The concept of cost is such that we can look at cost from many angles.

Relationship between CFA and CMA.

Financial accounting provides information for external users about the company’s financial performance and position. Management accounting provides information for managers and employees to help them make better decisions for the company.

Also, financial accounting looks at historical reporting. It reports on past performance. Meanwhile, management accounting is forward-focused. It can also look at historical performance, but the focus is always on the future.

Unlike financial accounting, which must adhere to general external regulators such as the SEC, management accounting is self-regulated by the company.

Lastly, Financial accounting information is not prepared as frequently as management accounting, its usually generated in a month, quarter, and year. The Management account, however, is prepared more often. It can be available in real-time, hourly, daily, weekly, or monthly, depending on the manager’s needs.

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