What limitations of Financial Accounting system gave birth to cost accounting system.Explain?|openbook247

Financial Accounting procedures are helpful to ascertain periodic Profit &Loss but there are certain important limitations and dificiencies in the financial accounting system.

What limitations of Financial Accounting system gave birth to cost accounting system.Explain?

Financial Accounting system is the oldest term of accounting system. It is concerned with keeping accounting records and preparation of Profit and Loss acount and Balance sheet. The profit and loss account shows the overall profitability of organisation where as Balance sheet shows the overall financial position of the organisation. But such overall profitability and general financial position of the organisation are not very much useful or helpful to the mangement to take different operating decisions or evaluating the managerial performance of the managers.

Limitations Of Financial Accounting To Develop Cost Accounting.

The Following Limitations of Financial Accounting led to the development of Cost Accounting System:-

i.Financial accounting system discloses the net result of the business as a whole. It doesn’t indicates P/L earned by each dept, each job, each process, or each contract. It doesn’t disclose the exact cause of P/L.

ii.Generally, we think P/L arrises due to operating efficiency or inefficiency of the organisation but they may accur due to some other reasons like inflation or trade depreciation etc. But these causes can’t be revealed by financial accounting system.

iii. Financial accounting system doesn’t provide the cost data for fixation of product price.

iii.Financial accounting system doesn’t provide the cost data for fixation of product price.

iv.In financial accounting system, there is no classification of costs. So we cannot get cost data by department, process, products, etc. In addition the expenses are not classified into directs and indirects.

v.Financial accounting system doesn’t provide necessary data to take different managerial decision sucha as introduction of new products, replacement of labour by machines, fixation of price in normal and special circumstances, producing a spare part in the factory or buying it from outside etc.

vi.Financial accounting system doesn’t provide any mechanism to have control over material cost, labour cost, overheads etc.

vii.Financial accounting doesn’t provide any standard to know the efficiency in the case of material, labour, overhead etc and also making performance appraisal of different employees.

viii.Financial accounting system provides only historical cost data but such historical cost data are not helpful to make plans for the future or making different estimate.

ix.Financial accounting system only reveals the amount of business loss it any but it doesn’t provide information regarding any such loss occured.(whether the loss is due to defective material, idle time, idle plant etc.) No distinction has been made between controllable assets.

x.Financial accounting system doesn’t completely satisfy the information need of outside agencies such as bank’s, government, insurance company etc.

Due to the above limitations of financial accounting system, Cost Accounting System was developed. 

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