Cost Accounting: The Basics

Benefits of Cost Accounting

For Management

  • Helps in price fixation.
  • Helps in preparing estimate(s).
  • Supports channelising production on the right lines.
  • Assists in elimination of wastage.
  • Makes comparison possible across periods and across product lines.
  • Provides data for periodical profit and loss accounts.
  • Helps in determining and enhancing efficiency.
  • Helps in inventory control.
  • Facilitates cost reduction.
  • Assists in increasing productivity.

For employees

  • Makes available systems of incentives, bonus plans, etc.
  • Indirectly benefits through increase in consumer goods and directly through continuous employment and higher remuneration.

For creditors

  • Provides a base for judgement about the profitability and further prospects of the company.

For the economy

  • Facilitates control of costs, elimination of wastages and inefficiencies, leading to the progress of the industry and consequently the nation.

Criticisms of Cost Accounting

It is expensive: Unless benefits accruing from cost accounting are more than the costs involved, it should be avoided.

Different results from Financial Records: The results shown by cost accounts generally differ from those shown by financial accounts for a variety of reasons and requires the preparation of reconciliation statements to verify their accuracy. This leads to increase in work load.

Lack of standard formats and systems: This makes it impossible to apply cost accounting uniformly to all industries. Therefore, the systems must be adapted to different industries based on their nature/ nature of the products manufactured or services rendered.

It is complex and leads to duplication of work (preparation of financial accounts as well as cost accounts).

It uses secondary data: Cost accounting largely depends on financial statements. Therefore, limitations and errors in financial information directly affect cost results.

Further Reading:

Fundamentals of Cost Accounting, 3rd Edition, by Lanen, Anderson, and Maher

Principles of Cost Accounting, 15th Edition, by VanDerbeck

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