Advantages and Disadvantages of Cost Accounting System with examples

Advantages and Disadvantages of Cost Accounting

In the process of converting the raw material into the finished goods, there are the no. of expenses which firm has to incur. Sometimes, it becomes very difficult to record all the expenses by the management. But with the help of Cost Accounting, Cost Accountant helps in tracking all the expenses and finding out the profitable costs. As there are advantages of Cost Accounting, it’s also have the disadvantages too. So, today we will talk about the Advantages and Disadvantages of Cost Accounting System in points.

So, Let’s start with the advantages of Cost Accounting in points.

Merits of Cost Accounting

  • Helps in Cost Control- The Main advantage of the Cost Accounting System is that it helps in controlling the cost by optimally utilizing all the cost information. Cost Accountant analyzes all the costs and also the benefits associated from each cost. This helps in prioritizing all the costs and remove the unnecessary one.

  • Helps in Decision Making- With the help of Cost Information, management get help in taking various decisions like whether to buy or make their own product, what expenses needs to be increased or decreased and many more. So, Cost Accounting helps the management to choose the best decision from the various alternatives.

  • Guides in Price Fixation- Cost Accountant records all the expenses incurred at every production level from the raw material to finished goods. Like in the process of the production of clothing, there are various steps like Laying, Marking, Cutting, Stiching, Checking, Finishing, Pressing and Packaging. By knowing the costs in each process step, it becomes easy for the management to fix the price to be charged from the customer by adding their own profit.
  • Assist the Trade Unions- Cost Accounting helps in providing the proper cost information. This becomes easy for the management to calculate the bonus easily for the trade union. It also helps in calculating the remuneration on the fixed basis of Cost Information system.

  • Finding out the Ideal Capacity of Business- Cost Accounting helps in knowing the Ideal Capacity of Business like what is the management budget, daily production level according to that they make the standards. Knowing the Ideal Capacity helps the management to properly utilize their money.

  • Remove the Wastes, Losses- The Best Advantage of Cost Accounting System is to remove wastes, losses and the inefficiency by comparing with the standards.

  • Helps in finding out the profitable and unprofitable operations- With the help of Cost Accounting, it is easy to find out what costs are incurring us profit or what are incurring losses. It helps the management to take the wise decision to invest their money in profitable operations.

  • Helps to prepare financial accounts- The things like Raw Material, Work in progress, closing stock is used in the financial accounts. This information is taken from the proper maintenance of cost records in the cost accounting which helps in preparing the financial accounts.

So, this is about all the advantages of Cost accounting in points. Now discuss the disadvantages too.

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Limitations or Disadvantages of Cost Accounting

Advantages and Disadvantages of Cost Accounting System with examples

As it’s been said, everything has its pros and cons. There are also disadvantages of Cost Accounting that are as follows-

  • System is more complex- Cost Accountant records all the types of Cost Information at every level of production. But Handling the Cost Accounting System is not an easy task. It involves various steps like Cost Ascertainment, Cost Reduction, Cost Control, ascertaining the profit and many more which make the cost accounting system complex.

  • Expensive- It is not easy for Every Company to install the Cost Accounting System because of the involvement of large investment. This is the biggest limitation of Cost Accounting because of its expensive cost.

  • Not Suitable for Small Scale Companies- Small Scale Companies don’t have the requirement of the Costing strategies to maintain, summarize their costing records and also it involves huge cost. That’s why, it is not suitable for small scale companies.

  • Use of Secondary Data- In Cost Accounting, standard costs are made by using the secondary past Costing Data. Due to this, so many times Companies are not able to record the latest Costing Data of the organization.

  • Based on Estimation- Cost Accountant estimates the future standard costs by their past costing records which makes the costing strategies not correct always. Estimation can be helpful for the organization or not. But sometimes, it is not correct.

  • Not helpful for ascertaining the tax liability.

  • Only Past Data is available- In this, only past performance is included in the cost accounting. From that, the management takes the decision for the future. So, having only the past data is not useful for including the latest happenings in the market.

  • Costs can’t be same every year.

So, this was about the Advantages and Disadvantages of Cost Accounting with examples in points.

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