No business can sustain itself, let alone become successful, grow, and expand its operations without high-quality accounting. Keeping tabs on how every aspect of the operation impacts the company’s financial side is paramount in making informed decisions. Business owners and managers often require precise accounting data when dealing with resource allocation, project prioritization, implementation of systems and tools, adoption of new technology or equipment, and many other operational aspects.
While big businesses can establish dedicated accounting departments that can handle all of their accounting needs, such as auditing, tax, financial, and management accounting, this course of action may not be feasible for smaller enterprises running on tighter budgets. In these situations, it may be more financially sound to look for specialized accounting firms.
Companies can pick a service package that corresponds to their particular needs and available resources. These accountants in London can take the unique circumstances of the business and make sure that it is as tax efficient as possible, freeing additional resources for other essential projects or opportunities.
While the professionals are handling the practical side of accounting, business owners and people in higher management positions should still try to familiarize themselves with the basics of the accounting field. This could help them when it comes to interpreting the provided data and understanding what the numbers represent. One such key area is knowing the differences between cost and management accounting.
Why Is Accounting Important for a Successful Business?
The objective of accounting is to provide information that is useful in making business decisions by recording, classifying, and summarizing financial activities. The accounting data can be used in financial statements, which show the financial position, performance, and cash flow of a business.
While there are many different types of businesses, they all need to keep track of their income and expenses in order to make informed decisions about how to grow and improve their operations. For small businesses, knowing where their money is going is especially important since they often have limited resources.
There are several different accounting methods that businesses can use, but the most common is double-entry bookkeeping. This method involves recording each transaction in two places: as a debit in one account and as a credit in another account. The total of all the debits must equal the total of all the credits, which ensures that the books are balanced.
The purpose of financial statements is to provide information about a company’s financial position, performance, and cash flow. As a result, you can make better business decisions. Financial statements can be prepared using either the accrual basis or the cash basis of accounting.
Under the accrual basis, income is reported when it is earned, regardless of when it is received. This method provides a more accurate picture of a company’s financial position and performance because it includes all transactions, regardless of when the cash is actually exchanged.
However, on a cash basis, income is reported only when it is received. Expenses are reported only when they are paid. This method is simpler and easier to understand than the accrual basis, but it does not provide as accurate a picture of a company’s financial position and performance.
The choice of accounting method depends on the needs of the business and the decision-makers who will be using the financial statements. Generally, businesses use the accrual basis for external reporting (to shareholders, creditors, etc
Overview of Cost Accounting
Cost accounting deals with recording, analyzing, and summarizing information related to the various costs incurred by the organization. In short, cost accounting analyzes the company’s cost structure and is helpful in defining where the company allocates its money, how much it earns back, and where resources are being lost.
Some of the common costs covered by it include direct, fixed, indirect, variable, and operating costs. Management can utilize the condensed data received by cost accounting as part of their decision-making process.
Cost accounting also covers three major functions. First, it provides cost control. Through cost accounting, projects and teams can ensure that they remain within the set budgetary constraints and that their expenditures do not balloon to unsustainable levels. Next is cost reduction. It allows companies to find appropriate ways to reduce their current costs on projects and processes.
In turn, this will lead to more realized profits due to the increased margin. The main function of cost accounting, and the one that supports all others, however, is cost computation. It deals with calculating the cost of the provided service or one unit of a specific product.
This information is then used in decision-making, as it informs how much the company needs to charge for its services or products to make a profit.
Cost accounting usually follows the accrual basis of accounting. This means that revenues and expenses are reported on the financial statements when they are incurred, regardless of when the cash changes hands. The goal of cost accounting is to ensure that the company understands all its costs, both past, and current so that it can make informed decisions about pricing, budgeting, and strategic planning.
Additionally, while GAAP financial statements focus on historical costs, cost accounting often uses Future-Oriented Costing (FOC). This approach considers not only the current costs of inputs but also the expected future costs. This allows businesses to make more informed decisions about pricing, budgeting, and strategic planning.
Details About Management Accounting
This particular branch of accounting uses existing financial and cost data to support making both short-term decisions and setting broader strategies for expected future events. Typically, the decision-makers of the enterprise will receive periodical reports that will contain relevant data about the current state of the company and the way it is expected to develop within a set period of time.
Some of the frequently used tools in management accounting include simulations, financial modeling, management information systems, KPIs (key performance indicators), key result areas, and more.
The role of these reports is to make the essential data points readily available and easily digestible. They contain both quantitative and qualitative data. As such, they allow management to look at the business from different aspects in order to figure out the driving factors of certain processes that might be occurring – such as high levels of absenteeism or reduced productivity due to low morale among employees.
The reports are also characterized by having predictive information. The experts try to use existing data to pinpoint the most likely future outcomes and create forward-looking financial statements. It is important to note that the delivered reports are solely for internal use. They contain sensitive business information that is provided to the company’s management to assist them in the decision-making process.
Management accounting is a process that provides financial and non-financial information to managers for use in planning, controlling, and decision-making. The main purpose of management accounting is to help the enterprise achieve its strategic objectives. Therefore, it plays an important role in the strategic management of the company.
The information provided by management accounting is used by managers at all levels of the organization, from front-line supervisors to top executives. It helps them make decisions about individual projects, products, and business units, as well as to formulate and evaluate corporate strategies.
There are several key differences between cost and management accounting. Management accounting is actually a stand-alone subject that facilitates more informed strategizing by management. This is not true for cost accounting, which is classified as a subset of management accounting. Stemming from this classification, the scope of the two is also completely different.
Cost accounting has a much narrower focus and set of tools. The groups of people supported by the two types of accounting are also different. Management, shareholders, and stakeholders can all receive cost accounting information, while the reports created by management accounting are delivered to the management team only.
In general, management accounting can be an invaluable tool that helps companies get closer to the optimal utilization of their resources. It can provide top management with expert insight into the operations of the entire enterprise and pinpoint specific areas or processes that can be streamlined. However, to be effective in providing accurate information and making relevant models for the future, management accounting heavily relies on the data generated by cost and financial accounting.
Another foundational difference can be found in the information that is being used. Cost accounting consists entirely of historical and quantitative data points. Management accounting uses quantitative and qualitative information to make predictive suggestions.
Furthermore, statutory auditing of cost accounting is required from all big businesses, while there is no such requirement for audits of management accounting. This allows the reports from management accounting to be modified to fit the needs of their chosen recipients, resulting in potentially significant variation between reports from different companies or even between departments within the same organization.
Cost accounting and management accounting are two different approaches to financial analysis that can help business owners make informed decisions about their company. While there are some similarities, there are also key differences between the two methods. It’s important for business owners to understand the benefits of each type of accounting and know when it’s most appropriate to use them. Have you ever used cost accounting or management accounting in your own business?
Hasib Howlader is a director at Howlader & co., a firm of chartered accountants with 50 years’ experience assisting big and small UK businesses.