Relationship of management accounting and cost

The Difference Between Cost Accounting and Management Accounting

relationship of management accounting and cost

Let's understand Cost Accounting vs Management Accounting, their meaning, key differences in simple and easy steps using practical illustrations. I explore the relationship between financial and management accounting as UK and the National Association of Cost Accountants in the US were formed in. The difference between cost accounting and management accounting is crucial as the users of both the accounting systems are the internal.

For example, the cost accounting raw materials account and the managerial accounting office supplies account are considered asset accounts.

relationship of management accounting and cost

Purchasing raw materials used in production increases the debit balance of the cost accounting direct materials account. Purchasing supplies used in your office increases the debit balance of the managerial accounting supplies account.

When you use direct materials, you record the amount as a credit and decrease the cost account balance.

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Likewise, the amount of office supplies used decreases the managerial account balance as a credit. Forecast Future Production Using cost accounting and managerial accounting information lets you forecast where your business is heading in the short term.

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A forecast estimates the number of units you expect to sell and produce. It does not forecast the dollar amount of your revenue or your expenses. For cost accounting, a forecast estimates the raw materials, indirect supplies and labor needed on the production line.

For managerial accounting, a forecast estimates the total number of units you expect to manufacture for each product and the number of units you expect to sell. The first function of cost accounting is to control the cost within the budgetary constraints management has set for a particular product or service. This is important since management allocates limited resources to particular projects or production processes.

Relationship between Management and Accounting

This is the main function of cost accounting and this is the source of all other functions of cost accounting. In the section below, we will see how we can calculate cost of sales per unit for a particular product. Cost computation helps the company reduce costs on projects and processes.

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Reduction in costs means more profits since the margin will naturally increase. That means direct costs can be directly identified as being used in the production of goods. For example, we can talk about direct material and direct labour that are used in producing goods.

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These costs we can identify as direct costs. Understanding these two types of costs is important since we would be using these costs in computation of cost of sales per unit for a particular product. That means these costs remain similar within a broad range of spectrum. Plus, the per unit fixed cost changes as the production increases or decreases.

relationship of management accounting and cost

For example, rent is a fixed cost. Even if the production increases or decreases, the business needs to pay the same rent month in and month out. Variable cost is exact opposite of fixed cost. Variable cost changes as per the increase or decrease of production units.