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used by the companies to allocate resources and evaluate divisional
INTRODUCTION TO COST ACCOUNTING
INTRODUCTION
Accounting is the language of business. As such, accounting is considered to
have different “dialects.” Financial accounting is the “dialect” often
characterized as the primary focus of accounting. Financial accounting
focuses on the preparation and provision of financial statements: statement of
financial position (balance sheet), statement of comprehensive income
(income statement), statement of cash flows, and statement of changes in
owner’s equity. The other “dialect” of accounting is that of management and
cost accounting. Management accounting is concerned with providing
information to parties inside an organization so that they can plan, control
operations, make decisions, and evaluate performance.
FINANCIAL, MANAGEMENT, AND COST ACCOUNTING
Financial Accounting
The use of financial accounting is to provide information to external parties,
including investors and creditors. Financial accounting requires compliance
with generally accepted accounting principles (GAAP), which are primarily
issued by the Financial Accounting Standards Board (FASB), the International
Financial Reporting Standards (IFRS) issued by the International Accounting
Standards Board (IASB) which is adopted by the accounting standards in the
Philippines, and the Securities and Exchange Commission (SEC). The
information provided by financial accounting is historical, quantitative,
monetary, and verifiable which usually reflects activities of the whole
organization.
The primary source of information for evaluating business operations in the
early 1900s was financial accounting. Return on investment (ROI) is often
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performance. ROI is computed by dividing income with total assets. Using a
single measure such as ROI for decision making was considered reasonable
when companies engaged in one type of activity, operated only domestically,
were primarily labor intensive, and managed and owned by a small number of
people who were very familiar with the operating processes.
Management Accounting
This is used to gather the financial and non-financial information needed by
internal users. Managers concern is to fulfill corporate goals, communicate and
implement strategies, and coordinate product design, produce and market
products while simultaneously operate distinct business segments.
Management accounting information commonly addresses individual or
divisional concerns rather than those of the organization as a whole.
Management accounting is not required to adhere to GAAP but provides both
historical and forward-looking information for managers.
Managers were often no longer owners but, instead, individuals who have
been selected for their positions because of their skills in accounting, finance,
or law during the mid-1900s. These managers frequently lacked in-depth
knowledge of a company’s underlying operations and processes. Additionally,
companies began operating in multiple states and countries and began
manufacturing many products in a non-labor-intensive environment. Trying to
manage by using only financial reporting information sometimes created
dysfunctional behavior. Managers needed an accounting system that could
help implement and monitor a company’s goals in a globally competitive,
multiple-product environment. Introduction of affordable information
technology allowed management accounting to develop into a discipline
separate from financial accounting. Under these new circumstances,
management accounting evolved to be independent of financial accounting.
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Below are the primary differences between financial and management

accounting:

FINANCIAL MANAGEMENT
ACCOUNTING ACCOUNTING
Prime Users External Internal
Key
Organizational Whole (combined) Parts (segmented)
Focus
Information Must be: May be:
characteristics · Historical · Current or forecasted
· Quantitative · Quantitative or qualitative
Figure 2. Various Types of Costs Associated with Products
· Monetary · Monetary or nonmonetary
· Verifiable · Timely and, at a Cost Accounting
minimum, reasonably
estimated
Overriding criteria - Generally Accepted - Situational relevance
Accounting (usefulness)
Principles - Benefits in excess of costs
- Consistency - Flexibility
- Verifiability
Recordkeeping Formal Combination of formal and
informal

Financial accounting became less appropriate for satisfying management’s

information needs for growing companies that are organized thru multiple
locations. To prepare plans, evaluate performance, and make more complex
decisions, management needed forward looking information rather than only
the historical data provided by financial accounting. The upstream costs
(research, development, product design, and supply chain) and downstream
costs (marketing, distribution, and customer service) that companies incurred
were becoming a larger percentage of the total costs. When making pricing
decisions, managers needed to add these upstream and downstream costs to
the GAAP-determined product cost. (Raiborn & Kinney, 2013)
Figure 1. Relationship of Financial, Management, and Cost Accounting
Cost Accounting can be viewed as the intersection between financial and
management accounting. This addresses the informational demands of both
financial and management accounting by providing product cost information to
external parties (stockholders, creditors, and various regulatory bodies) for
investment and credit decisions and for reporting purposes, and internal
managers for planning, controlling, decision making, and evaluating
performance.
Product cost has the information based on generally accepted principles
needed in preparing financial statements used by external parties. While it can
also be prepared out of GAAP for internal purposes, such as for the use of
management in making strategic decisions.

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As companies expand operations, managers recognize that a single cost can

no longer be computed for a specific product. For example, a company’s Asian
operations could be highly labor intensive, whereas North American
operations could be highly capital intensive. Product costs cannot be easily
compared between the two locations because their production processes are
not similar. Such complications have resulted in the evolution of the cost
accounting database, which includes more than simply financial accounting
measures.

References:

de Leon, N. D., & de Leon, Jr., G. M. (2014). Cost Accounting. Manila City:
GIC Enterprises & Co., Inc.
Guerrero, P. (2015). Cost Accounting: Principles and Procedural Applications,
2014-2015 Edition. Manila: GIC Enterprises and Co. Inc.
Horngen, C. T., Datar, S. M., & Rajan, M. (2013). Cost Accounting; A
Managerial Emphasis. New Jersey, New Jersey, United States of
America: Pearson Prentice Hall.
Raiborn, C. A., & Kinney, M. R. (2013). Cost Accounting . Pasig City: Cengage
Learning Asia Pte Ltd (Philippine Branch).
Rante, G. A. (2016). Cost Accounting. Mandaluyong City: Millenium Books,
Inc.

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