Advantages and Disadvantages of cost Accounting
The advantages of cost accounting are:
Disclosure of profitable and unprofitable activities
Advantages and Disadvantages of cost Accounting: Since cost accounting minutely calculates the cost, selling price, and profitability of a product, segregation of profitable or unprofitable items or activities becomes easy.
Guidance for future production policies
Based on data provided by the costing department about the cost of various processes and activities as well as profit on it, it helps to plan the future.
Periodical determination of profit and losses
Cost accounting helps us to determine the periodical profit and loss of a product.
To find out the exact cause of the decrease or increase in profit
With the help of cost accounting, any organization can determine the exact cause of a decrease or increase in profit that may be due to higher cost of the product, lower selling price, or may be due to unproductive activity, or unused capacity.
Control over material and supplies
Cost accounting teaches us to account for the cost of material and supplies according to the department, process, units of production, or services that provide us control over material and supplies.
Relative efficiency of different workers
With the help of cost accounting, we may introduce a suitable plan for wages, incentives, and rewards for workers and employees of an organization.
Reliable comparison
Cost accounting provides us with a reliable comparison of products and services within and outside an organization with the products and services available in the market. It also helps to achieve the lowest cost level of product with the highest efficiency level of operations.
Helpful to government
It helps the government in planning and policy-making about imports, export, industry, and taxation. It is helpful in the assessment of excise, service tax, and income tax, etc. It provides readymade data to the government in price fixing, price control, tariff protection, etc.
Helpful to consumers
Reduction of price due to a reduction in cost passes to customer ultimately. Cost accounting builds confidence in customers about the fairness of the price.
Classification and subdivision of cost
Cost accounting helps to classify the cost according to department, process, product, activity, and service against financial accounting which gives just consolidates the net profit or loss figure of any organization without any classification or sub-division of cost.
To find out adequate selling price
In tough marketing conditions or slump period, the costing helps to determine the selling price of the product at the optimum level, neither too high nor too low.
Proper investment in inventory
Shifting dead stock items or slow-moving items into fast-moving items may help the company to invest in more proper and profitable inventory. It also helps us to maintain inventory at the most optimum level in terms of investments as well as the variety of the stock.
Correct valuation of inventory
Cost accounting is an accurate and adequate valuation technique that helps an organization in the valuation of inventory more reliably and exactly. On the other hand, valuation of inventory merely depends on physical stock taking and valuation thereof, which is not a proper and scientific method to follow.
Decision on manufacturing or purchasing from outside
Costing data helps management to decide whether in-house production of any product will be profitable, or it is feasible to purchase the product from outside. In turn, it is helpful for management to avoid any heavy loss due to wrong decisions.
Reliable check on accounting
Cost accounting is more reliable and accurate system of accounting. It is helpful to check results of financial accounting with the help of periodic reconciliation of cost accounts with financial accounts.
Budgeting
In cost accounting, various budgets are prepared and these budgets are very important tools of costing. Budgets show the cost, revenue, profit, production capacity, and efficiency of plant and machinery, as well as the efficiency of workers. Since the budget is planned in a scientific and systemic way, it helps to keep a positive check over misdirecting the activities of an organization.
Advantages and Disadvantages of cost Accounting
Disadvantages
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Lack Of Fixed Principles
Generally, cost accounting system is practiced on presumed notions. It does not follow fixed accounting principles. So, there is a lack of uniformity in this system.
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Costly System
This is another major drawback of cost accounting. There is a need of highly skilled and qualified manpower and resources to maintain cost accounting system in the organization. A lot of clerical works and various procedures make cost accounting more expensive.
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Complex System
It is very complicated system of accounting. It requires various formulas to record cost-related data. It needs specific knowledge to prepare different reports. Due to numerous steps and rules, it is considered a complex system of accounting.
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Not Suitable for Small Business
Small business firms with less production or transactions do not prefer cost accounting because of higher cost and complexity.
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Ignores Financial Items
The actual profit or loss of the business cannot be ascertained by cost accounting because it ignores income and expenses of financial nature.
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Lack Of Accuracy
Cost accounting avoids financial character expenses at the time of cost calculation. It does not follow a double entry system to check the accuracy. So, result obtained from cost accounting may lack accuracy.
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Not Helpful In Decision Making
Only cost-related past data and information can be obtained from cost accounting. So, top-level management cannot be benefited from cost accounting to make future decisions and plans. Delay in data and information may also hamper the decision-making process.
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Dependent
Cost accounting cannot be installed and maintained without another accounting system. It is totally dependent with other branches of accounting, especially financial accounting.