What are the advantages and Limitations of Cost Accounting?

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“It has been said that good costing system is an invaluable aid to the management” Enumerate your agrement in support of this statement.?

 

It has been rightly said that Cost Accounting is an invaluable aid to the management because of the following reasons:

• Cost accounting indicates the unprofitable activities, losses and inefficiency such as wastage of materials, inadequate utilisation of palnt capacity, wastage of labour and other resources.

• Cost accounting provides suitable data to management in order to take different vital decission such as; make or buy a particular component, accept an order below cost of price, replace old machinary by new one etc.

• Cost accounting helps the management in cost control by setting standards for different elements of cost and marketing comparision of actual cost with such standard cost.

• It provides cost figures to Govt. authority wage tribunals, labour unions etc for setting different issues sucha as price fixation price control, wage fixation, setting labour dispute etc.

• The perpetually inventory system helps the organisation to have effective control over the stock in the store and also gives correct stock figure for determining the interim profit or loss.

• Management is also able to formulate the expansion policy on the basis of estimates of cost of production at various levels provided by the cost announcement.

• The application of cost audit system will prevent different errors and frauds as a result management can yet from that reliable information.

• Cost accounting provides details and relevant cost figures for fixing sale prices of product or services under different situations/circumstances.

Example: During normal time the selling price of a product may be fixed above the costprice but during trade depression, the product price may be fixed even below total cost. At that time management will they to recover the variable cost only. Cost accounting helps in segregating the cost into fixed and variable cost.

Limitations Of Cost Accounting

For the  sake of clarification some of the most important limitations to know about cost accounting are highlighted below:

• Some people say that cost accounting is unnecessary. Rather it is a mere duplication of accounting work. They argue that in the past, manufacturing firms were doing  their business with costing techniques.

• Then, why it is not possible at present time? But they are not right, because now a days there is cut throat competition. Everyone is trying to reduce the cost of production in order to sell their products at minimum possible price. Control of cost can be possible only through costing techniques.

• Cost accounting is expensive because we have to maintain two sets of books ie: financial and costing records. Besides a separate cost accounting department will have to be created to implement in the organisation. Due to involvement of huge expenses, small firms can’t introduce it.

• Some people say that cost accounting results are not reliable  because it is based on estimates. It is may or may not be true.

• Cost accounting lacks uniform procedure. Two equally competent cost accounts may rechart different results from the some information.

• Cost accounting is in-applicable to many types of industries. For example: In trading concern it has of no use.

• In cost accounting, the overheads are to be segregated into fixed and variable. But such division is not easy in all cases.