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What are the advantages and disadvantages of Cost Accounting?

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posted Jul 7 by Sherlyn Mishra

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Advantage Of cost accounting

(i) The cost accounting system provides data about profitable and unprofitable products or activities. By studying and interpreting cost data, the management can take corrective measures to improve the profitability of the concern.
(ii) Production methods may be changed or improved so that costs can be controlled to increase profits.
(iii) Cost data helps the management in minimising the loss and wastages.
(iv) Cost data and information are provided to the management to determine the price of the product.
(v) Cost data can be compared with the standard costs by the introduction of standard costing. Inter-firm comparisons will enable the management to study the causes of unfavorable developments and to institute procedures for their elimination.
(vi) Inefficiencies in plant operation are very costly. The inefficiencies do occur due to wastage of materials, use of obsolete machinery and wrong man power planning. Proper use of cost accounting may remove these inefficiencies.
(vii) Cost accounting helps the management in knowing the costs of different alternatives and selecting the most advantageous course of action. Decisions like produce or buy, continue or drop a product, operate or shut down, etc. and other short-term decisions can be made easily with the help of cost accounting data.
(viii) More reliable and accurate financial accounts can be prepared with the help of perpetual inventory system of stock control.
(ix) The introduction of effective costing system prevents manipulation and fraud.
(x) An effective cost accounting system ensures maximum utilization of physical and human resources and helps the employees in achieving their basic goal of earning higher wages. It also helps the employer in maximising the profit of the concern.

Dis-Advantage Of cost accounting

  1. Lack of uniformity:

The greatest limitation of cost accounting is its failure to conform to any uniform procedure. No cost can be said to be exact as they involve a large number of conventions and flexible factors like, materials issue pricing based on FIFO, LIFO, Average or Standard costs; arbitrary allocation of overheads to cost centres; arbitrary allocation of joint costs; adoption of Marginal costs and Standard costs etc.

  1. Large number of conventions:

The existence of a large number of conventions and practices in regard to the valuation of stocks, materials issued to different cost centres, apportionment of joint costs stands in the way of finding out ‘time cost’ of a product. Cost—as ascertained by the application of costing principles—is not a true cost but an estimate.

  1. Applicability:

In small and medium sized industries, it becomes impractical to introduce costing since it becomes too expensive for the unit.

answer Jul 8 by Shubham Rajput
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