Understanding Financial, Managerial, and Cost Accounting in Business
Understanding Financial, Managerial, and Cost Accounting
The information system of a company delivers multiple data and background information. This can take various forms, content, and purposes. The intent of this information depends on individual users that require the background necessary to make informed and appropriate decisions.
Financial Accounting: The Foundation
All enterprise information systems are based on fundamental financial accounting. This system owns and provides the best quantitative information in organizations. The information emanating from the financial accounts through the basic financial statements:
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Notes to these statements
This information is directed primarily at users outside the company.
Financial accounting is also an important source of information for making decisions within the company, which requires not only historical and explicit information but also information that helps illustrate projected future activities, performance analysis of personnel, machinery, materials, etc. This is implicit information necessary for decision-making. This information system is called administrative or managerial accounting.
Business Finance
Financial Accounting: A technique or tool of administration. Its function is to record the economic events of an enterprise and provide objective financial and economic information to the company and other users.
Management Accounting
Management Accounting: A technique that can identify, collect, prepare, analyze, plan, and evaluate all types of economic and financial information so that management can make decisions in the planning and control of operations, whether these are routine or special.
Cost Accounting
Cost accounting is a part of general accounting that records, analyzes, and interprets details of the costs needed for producing articles or providing a service.
Cost accounting is primarily responsible for the accumulation and analysis of relevant information for internal use by managers in planning, control, and decision-making.
Cost accounting is applicable to any type of company, whether it is manufacturing, commercial, or service-based. The following are three types of companies and the types of costs that can be found:
| Company Type | Type of Cost |
|---|---|
| Manufacturing | Manufacturing, Distribution, Collections |
| Commercial | Distribution, Collections |
| Services (University) | Teaching, Research, Extension |
Objectives of Cost Accounting
- Rate inventories
- Set the selling price
- Determine the most profitable items
- Deciding to make or buy
- Reduce or minimize costs
- Plan and control current operations
- Special decisions and long-term planning
Concepts of Costs, Expenses, and Losses
Cost: The portion of the purchase price of assets, property, or services that has been deferred or has not yet been applied to the realization of income. It includes disbursements and expenses necessary for the manufacture of any product or service that is part of its sale price but has not yet been realized through the sale. Fixed assets and stocks are examples of these deferred costs.
Cost is defined as the value sacrificed to purchase goods or services, measured by the reduction of assets or liabilities incurred at the time that you get the benefits. At the time of purchase, the cost is incurred to achieve present and future benefits.
Expenses: Defined as a cost whose benefit has expired. The unexpired costs to future benefits may be classified as assets. These costs are applied against income or sales for the period during which they are earned but were not directly identified with the production of a product or service that helps generate income.
Loss: Reductions in the share of wealth for which no compensable value has been received. The destruction of an asset by a fire is an example of loss.
Elements of Cost
The cost elements of a product or its components are direct materials, direct labor, and manufacturing overhead costs. This classification provides management with the information needed for the measurement of income and product pricing.
The elements of a product are defined as follows:
Materials: The main resources used in production. They are transformed into finished goods with the addition of direct labor and manufacturing overhead costs.
Labor: The physical or mental effort used in the manufacture of a product.
Indirect Manufacturing Costs: This cost pool is used to accumulate indirect materials, indirect labor, and other indirect manufacturing costs that cannot be directly identified with specific products.
Costing Approaches
In defining the cost elements, we find that there are two approaches or methods of costing, which lead us to find two classifications of the elements differently. These approaches, to be defined below, are the absorption approach (traditional or full) and the variable approach (straight or marginal).
Classification of Elements According to the Absorption Costing Approach
Direct Materials: Raw materials and materials that are easy to identify and assign, in economic terms, to a product, process, or product batch, such as wood to make a table or leather in the manufacture of shoes. They are all that can be identified in the manufacture of a finished product, easily associated with it, and represent the major cost of materials in the development of the product.
Materials