 Hello and welcome to the session. This is Professor Farhad in which we would look at the difference between a cost accounting and a financial accounting information system. This topic is covered in a cost accounting course. As always, I would like to remind you to connect with me online then, if you haven't done so. YouTube is where you would need to subscribe. I have 1,800 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them and share them. If they benefit you, it means they might benefit other people, share the wealth. On my website, farhadlectures.com, you will find additional information to complement and supplement your discourse as well as other accounting and finance courses. I strongly suggest you check out my website. So what is the difference between a financial accounting and a cost accounting system? Let's start with financial accounting. Who are the users? The users are the decision makers who are not directly involved in the daily management of the firm. Whether they're not involved in the daily management, they must be outsiders. So those are often outsiders specifically, to be more specific, these are investors and creditors, people who have a vested interest, vested financial interest in the company. The information could be found if it's a publicly traded company on their website. Usually they have the quarterly report as well as the annual report. Those are the financial information. So this information is done to help them make comparable decision between companies not sufficient to run the company. So this information, financial accounting, is not the information that you use to run the company. On the other side, cost accounting, which is what we are learning in this course, is designed for managers. Why do they need this information to run the company, to make a decision on a day-to-day basis for the company? So the characteristic of financial information, it has to be comparable. So the information that they provide has to be comparable from one company to another. So Bank of America provide information about the revenue. It has to be comparable to someone else, like Wells Fargo. Why? Because you are addressing the investors. So that's an important characteristic of financial information. It has to be comparable across many firms. So that's important. Well, cost information, you don't need the information to be comparable to other organizations. So if I'm using one system, you don't have to use the same system. You don't have to account for your revenue the same way I do from a cost accounting perspective. You don't have to account for your cost of goods sold internally, the same I do for my cost of goods sold internally, from a cost accounting perspective. So the information must be only relevant for the decision that managers operating the business need. So it doesn't matter what the external think. I don't care about them. That's not my audience. My audience is my, actually my audience is the managers. So the cost accounting has to serve that. Financial accounting will follow specific sets of rules, like the generally accepted accounting principle in the US or the international financial reporting standard internationally. For cost accounting, the rules, you don't, I mean, literally the company make up the rules. I mean, there is a right way and the wrong way to do things, but the rules are relevant to managers. They don't have to follow what GAPS has or what the IFRS has because they are not publishing the information to outsiders that are using it internally. So who are the customers of cost accounting system? Well, obviously we already figured it out. It's the managers of the company because the cost information itself is a product with its own customers and those are the managers. And when we say managers, managers at all level at the production level where the product is assembled, you need cost information to control and improve operation like the defective rate. If it's, if yesterday was 1% versus 2% or it was 2% yesterday and today 1% we need to know this information because it's gonna help the production level, the production level manager adjust the production process. At the middle level management, cost information is used to identify problems by highlighting some aspects of operation that is different from expectations. So looking at budgeted and versus budgeted versus actual not expectation, I meant to say budgeted versus actual. So what did we plan to do and what actually happened? So what was our expectation, expectation in the budget? On, for example, managers get reviewed this middle management on a monthly basis to see if there's any deviation from the budgeted versus the actual, actual. At the executive level, at the higher level financial information is used to assess the company's overall performance. Here they could look at a quarterly report or semi-annual report on a really high level but still you are dealing with cost accounting. So we have to keep in mind that cost accountant must work with users, customers of cost accounting to provide the best possible information for managerial purposes. So you provide this information for the production level for the middle management level and the executive level. So the information has to be timely. It has to be relevant to them so they can make a decision. The most serious problem that companies face is when they try to use financial information developed for external reporting, they use it for decision making. Big mistake, your cost accounting information, it's, the information is prepared differently with a different motivation, with a different audience, with a different characteristic than external. So when companies rely on one accounting information system that they use for external reporting, they will make many mistakes. In the next session, we would look specifically at assessing a cost accounting system. What are some of its good characteristics? What do we look for? So we'll go look at the framework for assessing that. As always, I'm gonna remind you to like this recording, share it and don't forget to visit my website forhatlectures.com for additional resources for this course, cost accounting as well as other accounting courses. Good luck, steady hard and stay safe.