Pass the CPA Exam - Financial versus Cost versus Management Accounting

When you are studying for the CPA, you have to keep in mind the different types of accounting that are out there and keep them separate in your mind. There are three areas of accounting to consider in modern day accountancy for business. These three areas are cost, finance and management accounting.

Financial accounting, is used mainly for discerning the results of any such business on a periodic basis, such as every year. This should help the company determine the future goals and plans in the long term. From an economic perspective, financial accounting treats money as a factor of production.

Management and cost accounting are basis of accountancy used to help the management of a company make decisions on a day to day basis. These are widely tested in the Business section of the CPA exam, and include efficiency and productivity. Is the business meeting budgeted goals? How much of a variance from stated goals and standards (in a positive or negative way) is there? Cost accounting's purpose is to measure the value of direct and indirect costs involved in production. From this information, management can make an informed decision on improvement in production performance. From an economic perspective, cost accounting measures economic performance. Thus, this information gives management a clearer indication of the performance of the product resources in the business.

Costing also helps the sales manage in setting the correct price. But, because costing is solely a measurement of economic performance, it can not be considered as an accurate basis for setting prices. This is because selling prices is more of an economic decision. It would not be wrong for me to mention that pricing is basically determined by market factors. Prices are influenced mainly by demand, supply and competition, less on costs. For i.e. high demanded plus lack of competition would result in the business charging higher prices for its product, well above the costs.

The third area is management accounting, which is related closely to cost accounting. Although it has essentially evolved from cost accounting, management accounting plays a much broader role in management decisions. It measures the performance, economically, of the whole business, vis-à-vis the economic environment that the business operates in. This area of accounting, seeks to combine both financial and cost information into a much broader function.

Lastly, management accounting, this area is instrumental in advising and assisting management in making vitally important business decisions. It essentially makes management more self aware of the economic implications and consequences of decisions made. From an economic perspective, it looks at the study of money as an economic resource, while at the same time, treating it as a measure of economic performance. This allows the management to measure it as an economic factor of production, for i.e. the rate of return on capital employment.

It is then seen that accounting plays a vital role in three distinct areas, which are equally as important for those wanting to pursue a career in accounting. With the advent of computerised accounting, it has made it much easy for management to monitor the accounting information. Financial accounting software, allows you to make financial statements and various cost and MIS statements almost instantly with just one push of a button, the only laborious aspect of accounting is data entry. A financial manager must bring it upon himself or herself to make sure that meaningful data is input into the system. Proper categorisation must be done and all key based errors avoided, in order to ensure management is receiving accurate financial information.