Modern business enterprises and organizations, principally exist in order to produce and make profit. In some cases, production is replaced by trade. Price, which is the basis of money and economy is to be computed and considered by the firm.
Any person can follow the simple notion, that better control over the cost price means better chance of profit and more the sales price means more profit. Now the aim of every business entity is to use the least cost price and implement the best sales price.
Origins of Accounting
This deep calculation and consideration of the money-aspect by the business world came into prominence in the Renaissance and post-renaissance era. This led to the development of elementary accounting, which helped people to keep track of money, and also helped them to take decisions where money was involved.
The basic aspect was that accountancy helped business entities to keep a track of money. In the 16th century, Luca Pacioli came up with the idea of double entry system with a debit and credit system. Pacioli's system of accountancy was like a balance, that is every transaction was published with multiple opposing entries, which provided automatic checks and counter checks. This system of recording transactions is today what we broadly refer to as financial accounting.
In between the World Wars, production pace had to notched up. During the wars supply to the battlefield had to be even faster, and the concept of credit scale of goods and services became more and more prominent.
In such a scenario, financial accountancy become somewhat incompetent and people came up with unit cost or unit costing. Here using the same data the per unit production cost was computed, which facilitated the credit sale transactions. Apart from credit transactions, cost accounting, also ensured budgetary control financial planning and enlightened the management about the cost of producing every unit.
Cost Accounting vs. Financial Accounting
In practice, cost accounting takes place before actual production and sale. The process can also be dynamic and is often continuously implemented. Costing takes place throughout the process of production and sales. The process of financial accounting on the other hand is just a one time process that takes place post the production schedule and post the sales process.
The process of cost method of accounting, considers per unit cost. For example in a steel mill, the cost of production of one ton of steel is computed. The process of financial accounting on the other hand records the comprehensive cost. For example, it may record the cost of steel that is produced for a month.
Cost accounting takes into consideration all macro and micro details that contributed to the production of one ton of steel. The cost of one ton of steel would thus include, the salary of the foreman that was involved in (proportion) in production of one tone of steel. Similarly, electricity, workman's salary, iron, power, coke and factory premise cost, machinery cost, which were involved in the production of one ton of steel are used in cost accounting to define the unit cost of one ton of steel.
On the contrast, financial accounting records the total salary paid to foremen, total cost of machinery, sale cost of that one ton of steel. On the whole, cost accounting is micro derivation of cost that is required to make one unit of goods and services. Secondly, it points out to unnecessary costs, unproductive costs, budgeting, etc.
Another important advantage of the cost accounting is that it helps in reduction of cost. Financial accounting has a more macro approach, and records multiple transactions and costs on the basis of their value and time constraint. The smaller costs are not included nor are they calculated. This system gives a total picture with an eagle's eye view.
When we discuss cost vs. financial accounting, please note that both accounting terms are interdependent and their co-existence enables businesses to compute costs and sales realistically, properly and most importantly helps them to avoid loss.