FEDERAL POLYTECHNIC OFFA

THE DEPARTMENT OF BUSINESS

ADMINISTRATION

COURSE CODE: ACC 211

COURSE TITLE: COST ACCOUNTING

BY:

SULYMAN ISWAT ADESHEWA

BA/ND/F22/5322

SERIAL NO: 160

QUESTION:
THE DIFFERENCE BETWEEN COST ACCOUNTING
AND FINANCIAL ACCOUNTING WITH EMPIRICAL
EXAMPLES

SUBMITTED TO:
MR SANNI
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In the bid to answer the question, the following concept would be reviewed first:
Cost Accounting
Financial accounting

Accounting

Accounting is a crucial discipline that involves the systematic recording, analysis,

interpretation, and communication of financial information about an organization's economic
activities. It serves as the language of business, providing a standardized framework for
reporting financial data to various stakeholders, including internal management, investors,
creditors, and regulatory bodies. The primary objectives of accounting are to facilitate
decision-making, ensure accountability, and provide a basis for assessing the financial health
and performance of an entity.

Concept of Cost Accounting

Cost accounting is defined by the institute of management accountants as "a systematic set of
procedures for recording and reporting measurements of the cost of manufacturing goods and
performing services in the aggregate and in detail. It includes methods for recognizing,
allocating, aggregating and reporting such costs and comparing them with standard costs".
Often considered a subset of managerial accounting, its end goal is to advise
the management on how to optimize business practices and processes based on cost
efficiency and capability. Cost accounting provides the detailed cost information that
management needs to control current operations and plan for the future. Cost accounting
information is also commonly used in financial accounting, but its primary function is for use
by managers to facilitate their decision-making.

Cost accounting is a branch of accounting that focuses on the identification, measurement,

accumulation, analysis, interpretation, and reporting of costs associated with the production
of goods or services. The primary objective of cost accounting is to provide detailed
information about the cost of production processes, products, and services within an
organization. This information is crucial for internal management decision-making, cost
control, performance evaluation, and determining the profitability of specific products or
services.

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Key Features of Cost Accounting:

1. Internal Focus: Cost accounting is primarily used by management within the

organization for planning, control, and decision-making purposes.

2. Cost Elements: It involves the categorization of costs into various elements such as
direct materials, direct labor, overhead, and other indirect costs.

3. Allocation and Apportionment: Cost accountants use various methods to allocate

and apportion costs to products, departments, or processes.

4. Budgeting: Cost accounting plays a significant role in the budgeting process, helping
organizations plan and control costs effectively.

5. Variance Analysis: It includes the analysis of variances between actual and budgeted
costs to identify areas of improvement and control.

Concept of Financial Accounting

Financial accounting is the branch of accounting that involves the preparation, analysis, and
reporting of financial information to external users, such as investors, creditors, regulatory
bodies, and the general public. The primary purpose of financial accounting is to provide a
comprehensive and accurate overview of an organization's financial performance, position,
and cash flows. Financial statements, including the income statement, balance sheet, and cash
flow statement, are prepared in accordance with generally accepted accounting principles
(GAAP) to ensure consistency and comparability.

Key Features of Financial Accounting:

1. External Focus: Financial accounting is oriented towards external stakeholders,

providing information for investors, creditors, analysts, and regulatory authorities.

2. Financial Statements: It involves the preparation of key financial statements,

including the income statement (profit and loss statement), balance sheet, and cash
flow statement.

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 3. Historical Perspective: Financial accounting reports past financial transactions and
events, providing a historical perspective of the organization's performance.

4. Legal Compliance: Financial statements must comply with accounting standards and
regulations, ensuring accuracy, transparency, and reliability.

5. Decision-Making by External Parties: External users rely on financial statements to

make investment decisions, assess the creditworthiness of a company, and evaluate its
overall financial health.

THE DIFFERENCE BETWEEN COST ACCOUNTING AND FINANCIAL

ACCOUNTING
Feature Cost Accounting Financial Accounting
Objective Determine the cost of production Provide information on overall
and aid in decision-making financial performance
Users Internal management for planning External stakeholders (investors,
and control creditors, regulators)
Timeframe Short-term focus Emphasizes long-term financial
health
Scope Specific processes, products, or Encompasses the entire
departments within the organization
organization
Focus Detailed analysis of costs related Provides an overall picture of
to production activities the company's financial health
Reporting Internal reports for management External reports such as
use financial statements
Reporting Format Tailored to specific needs of Follows standardized formats
internal management (income statement, balance
sheet)
Detail Includes detailed breakdowns of Summarizes financial
costs by activity, product, or information for external
process stakeholders
Integration with Information used in financial Financial accounting
Financial accounting for decision-making incorporates cost information for

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 Accounting and external reporting reporting consistency

EXAMPLES BETWEEN COST ACCOUNTING AND FINANCIAL ACCOUNTING

Cost Accounting Examples:

Direct Materials Cost:

The cost of materials that can be directly traced to the production of a specific
product.
In a furniture manufacturing company, the cost of wood, screws, and varnish
used to produce a particular type of chair.
1. Direct Labor Cost:
 Definition: The cost of labor directly involved in the production of goods or
services.
 Example: Wages paid to assembly line workers involved in assembling
electronic gadgets.
2. Overhead Cost:
 Definition: Indirect costs not directly attributable to a specific product or
service.
 Example: Factory utilities, depreciation on machinery, and maintenance costs
allocated to the production department.
3. Job Order Costing:
 Definition: A cost accounting system where costs are accumulated and
assigned to specific jobs or projects.
 Example: Customized yacht manufacturing, where costs are tracked for each
individual yacht project.
4. Activity-Based Costing (ABC):
 Definition: Allocates costs based on the activities that drive the costs in the
production process.
 Example: In a software development company, the cost of programming,
testing, and documentation activities for a specific software project.

Financial Accounting Examples:

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 1. Revenue Recognition:
 Definition: Recognizing revenue when it is earned and realizable.
 Example: A software company records revenue when it delivers software to a
customer and the customer can use it.
2. Asset Recognition:
 Definition: Recording assets at their historical cost or fair market value.
 Example: A company purchasing a building and recognizing it as a long-term
asset on the balance sheet.
3. Liability Recognition:
 Definition: Recording obligations or debts that a company owes.
 Example: Accrued expenses, such as wages payable or interest payable, are
recognized as liabilities.
4. Income Statement:
 Definition: Summarizes revenues and expenses to determine the net income or
loss for a specific period.
 Example: A quarterly income statement displaying sales revenue, cost of
goods sold (COGS), and operating expenses.
5. Balance Sheet:
 Definition: Presents a snapshot of a company's financial position at a specific
point in time.
 Example: A year-end balance sheet showing assets (e.g., cash, inventory),
liabilities (e.g., loans, accounts payable), and equity.

THE INTEGRATION BETWEEN COST ACCOUNTING AND FINANCIAL

The integration between cost accounting and financial accounting plays a pivotal role
in providing comprehensive insights into an organization's financial performance. Horngren,
Datar, and Rajan (2020) assert that these two branches of accounting are interconnected, each
serving distinct yet complementary purposes. Cost accounting focuses on internal processes
and helps management make informed decisions, while financial accounting is concerned
with external reporting and compliance.

Kaplan and Cooper (2015) highlight the complementary roles of cost accounting and
financial accounting in their book "Cost and Effect." Cost accounting allows organizations to

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track and analyze the costs associated with production, services, or projects. Financial
accounting, on the other hand, ensures accurate reporting to external stakeholders, such as
investors and regulatory bodies. The integration between cost and financial accounting
facilitates strategic decision-making. Managers utilize cost accounting data to understand the
cost structure of products or services, enabling them to set prices competitively (Horngren et
al., 2020).

Financial accounting ensures that these decisions align with regulatory requirements
and financial goals. Budgeting and Planning: Weygandt, Kimmel, and Kieso (2021)
emphasize the role of integrated accounting in budgeting and planning. Cost accounting
provides detailed insights into costs, aiding in the formulation of realistic budgets. Financial
accounting ensures that these budgets align with financial reporting standards, providing a
comprehensive view for stakeholders. Performance Measurement: The integration between
cost and financial accounting is instrumental in measuring performance. Managers rely on
cost accounting metrics for internal performance evaluation, while financial accounting
provides external stakeholders with a standardized view of the organization's financial health
(Kaplan & Cooper, 2015).

The concept of product costing is central to the integration between cost and financial
accounting. Horngren et al. (2020) argue that cost accounting methods, such as activity-based
costing, help assign overhead costs accurately, contributing to the determination of product
costs for financial reporting purposes. Resource Allocation: Integrated accounting systems
aid in effective resource allocation. Managers, armed with cost accounting data, can allocate
resources efficiently to maximize profitability, and financial accounting ensures that these
allocations are transparently reported to external stakeholders (Kaplan & Cooper, 2015). Risk
Management: The synergy between cost and financial accounting enhances risk management
strategies. Cost accounting allows organizations to identify potential risks associated with
cost fluctuations, while financial accounting ensures that risk exposure is accurately disclosed
in financial statements (Weygandt et al., 2021).

The regulatory landscape emphasizes the need for accurate financial reporting. The
integration between cost and financial accounting assists organizations in complying with
accounting standards and regulations, promoting transparency and accountability (Kaplan &
Cooper, 2015). Continuous Improvement: Integrated accounting systems promote continuous

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improvement. Horngren et al. (2020) suggest that organizations can use feedback from both
cost and financial accounting to refine their processes continually, adapt to changing market
conditions, and enhance overall financial performance.

Variance Analysis: Integrated accounting systems facilitate detailed variance analysis,

allowing organizations to compare actual costs against budgeted costs. Cost accounting
identifies the root causes of variances, while financial accounting ensures that these variances
are appropriately communicated to external stakeholders, maintaining transparency
(Weygandt et al., 2021).

Capital Budgeting: The integration between cost and financial accounting extends to capital
budgeting decisions. Cost accounting aids in evaluating the costs and benefits of capital
investments, while financial accounting ensures that these investments are accurately
reflected in financial statements over their useful life (Horngren et al., 2020).

Cash Flow Management: Understanding the relationship between cost and financial
accounting is crucial for effective cash flow management. Cost accounting helps predict and
manage cash outflows related to operational activities, while financial accounting ensures that
cash flow information is accurately presented in financial statements (Kaplan & Cooper,
2015).

Auditing and Assurance: Integrated accounting systems contribute to the efficiency of

auditing processes. Cost accounting data assists internal auditors in assessing operational
efficiency and compliance, while financial accounting supports external auditors in verifying
the accuracy of financial statements (Weygandt et al., 2021).

Benchmarking and Best Practices: The integration between cost and financial accounting
allows organizations to engage in benchmarking against industry best practices. Cost
accounting helps identify areas for improvement and cost-saving opportunities, while
financial accounting ensures that these improvements are reflected in financial disclosures
(Kaplan & Cooper, 2015).

Tax Planning and Compliance: Both cost and financial accounting play crucial roles in tax
planning and compliance. Cost accounting assists in identifying tax-deductible expenses and

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optimizing tax positions, while financial accounting ensures that tax liabilities are accurately
reported in compliance with tax laws (Horngren et al., 2020).

Environmental and Social Reporting: With increasing emphasis on sustainability,

integrated accounting systems also address environmental and social reporting. Cost
accounting may identify the costs associated with sustainable practices, while financial
accounting ensures that these efforts are transparently communicated to stakeholders
concerned with corporate social responsibility (Weygandt et al., 2021).

Decision-Relevant Information: The integration ensures the provision of decision-relevant

information for both management and external stakeholders. Cost accounting focuses on
providing detailed information tailored for internal decision-makers, while financial
accounting delivers summarized and standardized information for external users (Kaplan &
Cooper, 2015).

Technological Integration: As technology advances, integrated accounting systems leverage

software solutions for seamless data integration between cost and financial accounting
modules. This technological integration enhances data accuracy, reduces manual errors, and
facilitates real-time decision-making (Horngren, 2020).

Education and Training: Organizations should invest in the education and training of their
accounting professionals to ensure a deep understanding of both cost and financial accounting
principles. Continuous learning programs can enhance the skills required to manage
integrated accounting systems effectively (Kaplan & Cooper, 2015).

Classification of costs[edit]

Important classifications of costs include:

1. By nature or traceability: Direct costs and indirect costs. Direct costs are
directly attributable/traceable to cost objects, while indirect costs (not being
directly attributable) are allocated or apportioned to cost objects.
2. By function: production, administration, selling and distribution, or research
and development.
3. By behavior: fixed, variable, or semi-variable. Fixed costs remain unchanged
irrespective of changes in the production volume over a given period of time.

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 Variable costs change according to the volume of production. Semi-variable
costs are partly fixed and partly variable.
4. By controllability: Controllable costs are those which can be controlled or
influenced by conscious management action. Uncontrollable costs cannot be
controlled or influenced by conscious management action.
5. By normality: normal costs and abnormal costs. Normal costs arise during
routine day-to-day business operations. Abnormal costs arise because of any
abnormal activity or event not part of routine business operations, such as
accidents or natural disasters.
6. By time: Historical costs and predetermined costs. Historical costs are costs
incurred in the past. Predetermined costs are computed in advance on basis of
factors affecting cost elements.
7. By decision-making costs: These costs are used for managerial decision
making:
1. Marginal costs: The marginal cost is the change in the total
cost caused by increasing or decreasing output by one unit.
2. Differential costs: This cost is the difference in total cost
resulting from selecting one alternative over another.
3. Opportunity costs: The value of a benefit sacrificed in favour
of an alternative course of action.
4. Relevant cost: The relevant cost is a cost which is relevant in
various decisions of management.
5. Replacement cost: This cost is the cost at which existing items
of material or fixed assets can be replaced at present or at a
future date.
6. Shutdown cost: Costs incurred if operations are shut down,
and which would not occur if operations are continued.
7. Capacity cost: The cost incurred by a company for providing
production, administration and selling and distribution
capabilities in order to perform various functions. These costs
are normally fixed costs.
8. Sunk cost: A cost already incurred, which cannot be
recovered.

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9. Other costs

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 REFERENCES

Horngren, C. T., Datar, S. M., & Rajan, M. V. (2020). Cost Accounting: A Managerial Emphasis.

Pearson.

Kaplan, R. S., & Cooper, R. (2015). Cost and Effect: Using Integrated Cost Systems to Drive

Profitability and Performance. Harvard Business Review Press.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Financial Accounting: Tools for Business

Decision Making. Wiley.

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