Cost and Management Accounting for Better Financial Decisions

Cost, Management and Financial Accounting

LIMITATIONS external accounting, Financial accounting emerged and evolved for three purposes: to record economic events between the company and the outside world; to report on the assets, rights, and obligations of the company; and to determine the overall result (profit or loss) of the company. Financial accounting merely reports the result of a period and changes in equity before and after that period.

Limitations of External (Financial) Accounting

However, the limitations of financial accounting are reflected in several shortcomings:

• A classification of expenses by nature does not distinguish between fixed and variable costs, or between direct and indirect costs.
• It does not offer information about where costs have been consumed; there is no information by expense sections or departments.
• The information is global and not broken down by product; only overall results are obtained.
• The information is historical and is obtained after the end of a period.

For these reasons, management accounting of costs emerged to try to address the limitations of financial accounting.

Cost Accounting, Management Accounting and Managerial Control

COST ACCOUNTING, MANAGEMENT ACCOUNTING AND MANAGERIAL CONTROL;

Cost accounting studies the formation of the cost of products, the allocation of costs to the period's income, and the valuation of inventories and other assets consumed in the production process. Cost accounting is located within management accounting, whose main objective is to develop information to maximize profits. There can be no management accounts without the prior implementation of cost accounting.

Information Produced by Management Accounting

The information generated by management accounting is focused on decision making and reports on:

• The organization of the production process.
• Optimization of existing capacity.
• Use of available resources.
• Human factors and labor considerations.
• Supply factors and production flows.
• Analysis of deviations and variances.

The data used by cost and management accounting are derived from financial information and are used to develop and provide information for planning and strategic control of the company (long term) in order to ensure the long-term survival of the organization.

Objectives of Cost Accounting

OBJECTIVES COST ACCOUNTING: To provide data to financial accounting for the valuation of inventories of finished goods and work in progress, and to provide information for planning and controlling the internal activities of the company. Specifically, this means:

• Knowing the costs and returns of divisions, sections, or workplaces.
• Calculating the cost of products manufactured by the company.
• Setting the margins of industrial and commercial products.
• Producing analytical results for the company.

In short, cost accounting oriented to decision-making generates information for operational and investment decisions, control, and profitability analysis.