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Advantages and Disadvantages of Cost Accounting|

Advantages and Disadvantages of Cost Accounting
Advantages and Disadvantages of Cost Accounting

Advantages and Disadvantages of Cost Accounting

Meaning of Cost Accounting Cost Accounting is the classifying. recording, and appropriate allocation of Expenditure for the determination of the costs of product and services, and the presentation of suitably arranged data for purposes of control and guidance of management.

Importance or Advantages of Cost Accounting

The importance of cost accounting is increasing day by day with the development of industries in the country. It is beneficial not only to the producers, but other groups of society are also benefitted.

The benefits of cost accounting areas follows:

Advantages to producers and Managers

(1) Control on materials and labor: With the help of cost accounting, proper control can be kept over the purchase, storing and issue of materials to various departments. Similarly, due to accurate record of labor, miscue of labor can also be controlled.

(2) Knowledge of profitable and unprofitable work-In cost accounting cost of each job, process department, product or service is separately analyzed. It helps to know about the profits or loss of each-one of them. As a result, unprofitable activities are stopped and more concentration is laid on profitable activities and efforts can be initiated to improve them.

(3) Analytical and comparative study of production cost-In cost accounting, per unit cost is calculated by classifying total cost into direct and indirect, production, office and selling/distribution expenses, fixed and variable expenses etc. Such an analysis throws light over the changes in cost and its reasons during the two periods and thus, steps can be taken to control the increase in costs and decrease in profits.

(4) Helpful in determining the selling price and tender price – With the helps of cost accounting , it is easier to know about the total cost at various levels. As a result, selling price and tender price are calculated by adding appropriate margin of profits to cost.

(5) Comparison of standard cost – The estimation of the cost of manufacturing a product prior to its actual production, is known as standard cost. When actual costs are known, they are compared with standard costs. If actual costs are higher, then efforts can be initiated to analyze and control them.

(6) Proper management and control of business – With the help of cost accounting, managers get a lot of help in the management and control of business Cost accounts provide useful data regarding planning, budgeting and cost determination which will male the management to control over the business much easier.

Advantages of Workers

(1) Proper division of work: In cost accounting, division of work among the workers is done on scientific basis. Standards are determined their assigned work and idle time can be controlled.

(2) Less conflicts – The main cause of labor management wage determination. In cost accounting the wages are determined on scientific basis. Therefore. Labor conflicts get reduced.

(3) Incentive plans – A detailed record of each worker’s job is kept and incentives plans are used for the payment of remuneration. As a result. workers also get assurance of security of service. sufficient remuneration and better working facilities.

Advantages to Consumers and Society

(1) Lower prices : As costing removes all the types of wastages. shapes the by gets the products at lower price.

(2) Improvement in quality – Quality of product also improves because only standardized material and efficient laborer’s are used in production In production In addition to this consumers also remain assured that price charged from them is reasonable.

(3) Improvement in standard of living-The consumers are provided good quality product at lower cost with regular supply thus, their standard of living improve.

Advantages to Creditors and Investors

(1) Knowledge of earning capacity- The creditors feel secured where there is a good system of costing in concern because they can verify the creditworthiness by the concern. Thus, the creditors extend credit facilities on longer term which is benefited to the business.

(2) Safety of capital- The investor also feel secured it there is prosperity in a business as they feel that their money remains secured. Hence. more and more people are attracted to invest in the concern which further increase the prosperity of the business.

Advantages to Government

(1) Economic development- For the sake of economic development of the nation, the knowledge of cost accounts is must. A cost system provides ready figures for use by government, wage tribunal, trade union. for use in problems like price fixing, wages level fixation, settlement of industrial unions disputes.

(2) Helpful in preparing important policies – The govt. can plan its policies based on the techniques and procedures of cost account. For example – policies regarding price determination, price control, wage determination, payment of dividends, excise duty and income tax etc.

Conclusion – From the above discussion, it is clear that if cost accounts are maintained, not only the producer. but whole of the society is benefitted. These accounts provide benefit to all, laborer’s, consumers, government, investors and creditors etc. Thus, Cost accounting is a system of foresight and not of post mortem. It convert the losses in to profits males the activities dynamic and remove the wastages.

Disadvantages/Objections of Cost Accounting

Objections against cost Accounting and their Remedies- Cost accounting has become an important limb of management now-a-days. Some people, however do not agree with the view. The following objections are raised against the introduction of a system of cost accounting in an organization.

(1) Cost accounting system is unnecessary- Critics say when this system was not is use in old days, were not the industries running at that time ?Hence. Why should the work load unnecessarily be increases now by adopting this system.

Remedies- This objection reveals that there is no place for improvement. Earlier when men were living without light and modern medicines. why their need is felt these days? It is also definite that people criticize present medical facilities, and also user them when they are required.

In this modern competitive age, every producer should know about total cost of production so that he can know about how and up to what extent the selling price should be increased. Therefore. He wants to take the help of cost accounting.

(2) Cost accounting has failed in many cases- When cost accounting method has failed in various business. then why other industries should adopt it?

Remedies- Any method if failed in one business, then it does not mean that it will also fail in the other. The causes of failure may not be a shortcoming of this system but it can also be due to other factors like carelessness of management. Non-cooperation of employees, lack of proper facilities etc. In addition to this, some other external factors like political conditions, war and economic depression etc. may also be held responsible.

Therefore, it can be said that the failure of cost accounting system in various industries may not be the failure of cost accounting itself.

(3) Cost accounting system is expensive- Cost accounting system is itself so costly that instead of decreasing the costs, it starts increasing. In

other words, the amount spent in the operation of this system is more than the amount earned form it. Therefore, its adoption is a wastage.

Remedies- If in any organization, expenses are higher than the profit earned, then it is not a fault of the system. The expenses are higher only then the cost accounting system is not according to the nature and size of business In other words, this system believes in the smooth and economical running of the business.

(4) Cost accounting system is monotonous- Some critics say that this system is monotonous because may analytical documents and statements are to be used in this system.

Remedies- The argument that cost accounting is monotonous is not correct because interest and monotony are related with the nature of the individuals. For example: where on one side, the game of cricket is interesting for lakhs of people, on the other side, it is monotonous for so many people According to the experts of cost accounting, this system is not monotonous but very interesting and scientific.

(5) Cost accounting results are not accurate and reliable- In cost accounting, the costs are determined on the basis of estimates. Hence, the objection is that results of cost accounts are not accurate, and reliable.

Remedies- This objection is not right because the data used are not based on imagination rather on scientific basis. Secondly, the base of all conclusions is not estimates only but actual data are also used.

(6) Heavy clerical burden- Some experts say that cost accounting increases the burden of employees because a lot of formalities have to be complete even for a small transaction. For example, for the purchase of raw material, first a purchase requisition is to be sent to the purchase officer, the purchases are to be made. bin cards are to be maintained, Thus for a small transaction, the work load of employees tends to increase a lot.

Remedies- It may be stated that there should be lesser formalities and the work should be divided on scientific basis.


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