What is the Relationship between Financial and Management Accounting?

Cost accounting is defined  as  “a  technique or method  for determining  the  cost of a project, process, or thing. This cost is determined by direct measurement, arbitrary assignment, or systematic and rational allocation.”

The appropriate method of determining cost depends on  the circumstances  that generate  the need  for  information. Central to a cost accounting system is the process for tracing various input costs to an organization’s outputs. This process uses the traditional accounting form of record keeping—general and subsidiary ledger accounts. Accounts containing cost and management accounting information include those dealing with sales, procurement, production  and  inventory, personnel, payroll, delivery, financing, and funds management.

Not all cost information is reproduced on  the  financial  statements, correspondingly, not  all  financial accounting information  is useful  to managers  in performing  their daily  functions. Cost  accounting  creates  an  overlap  between  financial  accounting  and management accounting. Cost accounting  integrates with  financial accounting by providing product costing  information  for  financial statements and with managementaccounting by providing some of the quantitative, cost-based information managers need  to perform  their  tasks.

The cost accounting overlap causes the financial and management accounting systems  to articulate or be  joined  together  to  form an  informational network. Because  these  two  systems  articulate,  accountants  must  understand  how  cost  accounting provides  costs  for  financial  statements  and  supports management  information  needs. Organizations  that  do  not manufacture  products may  not  require elaborate cost accounting systems. However, even service companies need to understand  how much  their  services  cost  so  that  they  can  determine whether  it  is cost-effective to be engaged in particular business activities.
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