What is Analytical Accounting? and Differences With Financial Accounting

Analytical or cost accounting provides a series of tools that allow knowing in detail the state of income and expenses in a company. Hence crucial that organizations know how to apply their techniques to have a broad vision of the distribution of business costs. We explain all the advantages of using analytical accounting on a daily, monthly, or quarterly basis below.

What is analytic countability?

It is a branch of accounting that focuses on analyzing in detail the costs and expenses of a company to satisfy two main objectives:

1. Provide accurate and detailed information on production costs, operating expenses, and other economic aspects.
2. Improve business decision-making, such as raising or lowering prices or launching a new product.

Analytical or cost accounting applications

In practical terms, analytical accounting is based on the following processes related to the production and performance of organizations:

• Identification and classification of costs. This involves defining each of the business costs.
• Assignment of indirect costs. They need to be assigned to products or services appropriately. This is accomplished through allocation bases, such as labor cost or machine-hour cost.
• Production order costs. It determines the costs associated with each production order, including direct materials, direct labor, and indirect costs.
• Process costs. Refers to costs that accrue for each department or production process and are allocated to finished products based on certain bases, such as production time or material usage.
• Cost and performance analysis. For this, techniques such as variance analysis are used to identify deviations and areas that require attention or improvements.
• Preparation of reports to have a global vision of the results regarding the economic costs of the company.

Difference Between Analytical and Financial Accounting

Analytical accounting and financial accounting are branches used for different purposes and approaches within an organization. Next, we see what their main differences are:

Objective and focus

Financial accounting focuses on the recording and presentation of financial information for external users, such as investors, creditors, and regulators.

Analytical accounting, or cost accounting, focuses on the internal analysis of an organization’s costs and operational efficiency.

Users

Users of financial accounting are external to the organization, such as investors, lenders, suppliers, customers, and regulatory bodies.

The users of analytical accounting are mainly internal, such as company management, decision-makers, and departments related to planning and cost control.

Provided information

Financial accounting provides summary and general financial information, such as financial statements (balance sheet, income statement, statement of cash flows) and explanatory notes.

Analytical accounting provides more detailed and disaggregated information about the costs and operating results of the company.

Regulations and standards

Financial accounting is subject to accounting regulations and standards set by regulatory bodies, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP) in different countries.

In analytical accounting, there are no mandatory accounting regulations or standards. Companies have more flexibility in designing their cost accounting systems and allocation methods as long as they adhere to the principles of relevance and reliability.

What advantages does analytical accounting have for companies?

Among the main advantages of applying analytical accounting in companies is the possibility of obtaining a deep knowledge of the economic results stand out and, with it, better decision-making based on that detailed information, among other benefits:

Allows you to control income and expenses

It allows identifying the direct and indirect costs associated with each activity. It helps to detect areas where costs can be reduced. This, among other benefits, can be obtained through ERP software oriented to managing the analytical accounting of companies. With this, they can significantly improve their levels of productivity and efficiency.

Improve decision making

As we have seen, analytical accounting provides detailed information on the costs and benefits associated with each activity or product of the company. The information it offers can be decisive when making decisions in your business. This allows managers to set actions and goals like these:

• Decide whether or not to launch a new product.
• Set or raise the price of a service.
• Buy or not new machinery for production.
• Close or open a specific department.

Performance evaluation

It makes available metrics and measures to evaluate the performance of different company areas, products, projects, or departments. This makes it possible to identify which areas generate the most significant benefits and which require improvement.

Profitability evaluation

Allows you to calculate the profitability of products, customers, or lines of business. This helps to identify the most profitable products or customers and to make data-driven decisions to improve the company’s overall profitability.

Inventory control

Analytical or cost accounting also provides accurate information on inventory costs and the flow of goods within the company. This helps to control inventory more effectively, avoid overstocking or understocking, and optimize stock management.

In summary, analytical accounting provides accurate and relevant information on production costs and operating expenses, among other internal activities that impact the company’s annual accounts. Unlike financial accounting, which focuses on recording and reporting financial results for external purposes, analytical accounting focuses on analyzing costs internally to help managers better understand and control business operations.