Everything you need to know about the advantages of cost accounting. Cost accounting provides tremendous help to a business in its routine and non-routine decisions.
The primary advantage of cost accounting, of course, is that it shows precisely where costs are incurred, giving a realistic basis for cost-cutting. It enables management to attribute cost to those units responsible for incurring them.
To give management the cost information it needs, cost accounting supplies, periodic accounting summaries, including studies of costs by products, cost trends and inefficient production operations. Cost accounting determines the profitability of products being made and sold.
The advantages of cost accounting can be studied under the following heads:-
1. Advantages to the Management 2. Advantages to the Workers 3. Advantages to the Creditors 4. Advantages to the Investors 5. Advantages to the Customers 6. Advantages to the Society 7. Advantages to the Government 8. Advantages to Investors and Financial Institutions 9. Advantages to National Economy.
Some of the advantages of cost accounting are:-
(i) Helps in Controlling Cost (ii) Relates Expenses to their Functions (iii) Provides Useful Data (iv) Avoids Delay (v) Centralization of Purchasing (vi) Reveals Losses due to Idle Time (vii) Provides Information
(viii) Identifies Normal/Abnormal Losses and Gains (ix) Basis for the System of Standard Costing and Budgetary Control (x) Helps in the Performance Appraisal (xi) Useful for Planning Various Activities (xii) Reliable Check on Accuracy (xiii) Helps in Decision Making (xiv) Useful in Day-to-Day Affairs.
Advantages, Benefits and Utilities of Cost Accounting: To Management, Workers, Creditors, Investors, Customers and a Few Others
Advantages of Cost Accounting – To the Management, Employees, Creditors, Government and Public
It offers a number of advantages to the management and the following are the main advantages:
To the Management:
1. Guide in Reducing Prices – In certain periods it becomes necessary to reduce the price even below the total cost. This will be so when there is a depression or slump. Costs, properly ascertained, will guide management in this direction.
2. Measuring Efficiency – Cost accounting will enable a concern to measure its efficiency and then to maintain and improve it. This is done by comparisons and analysis of the differences that may be observed. For instance, material costs have been increased: the increase may be due to increase in price of materials or may be due to greater wastage or may be due to inefficiency at the time of buying or unnecessarily high price paid.
3. Action against Unprofitable Activities – It reveals unprofitable activities, inefficiencies such as wastage of materials—spoilage, leakage, pilferage, scrap etc. and wastage of resources—inadequate utilisation etc. The management is able to concentrate on profitable jobs and consider change or closure of the unprofitable jobs.
4. Facilitates Decision-Making – It provides necessary data along with information to the management to take decision on any matter, relating to the business.
5. Assists in Fixing Prices – The various types of cost accounting are much helpful in fixing the cost and selling price of a product. Thus the desired volume of production is secured at the minimum possible cost.
6. Improves Efficiency – Through the standard cost and budgetary control, remedial action can be chosen in order to improve the efficiency and implement new principles.
7. Facilitates Cost Control – It facilitates cost control possible by comparisons, product-wise or firm-wise.
8. Establishes Standard Cost – It enables the managers to find out the cost of each job and to know what it should have cost; it indicates where the losses and wastes occur before the work is finished. Standard cost is a pre-determined cost and offers a number of advantages to the management.
9. Inventory Control – An effective system and check are provided on all materials and stores. Interim profit and loss account and balance sheet can be prepared without checking the physical inventory.
10. Prevents Fraud – An effective costing system prevents frauds and manipulation, and supplies reliable cost data to the management.
11. Tool of Management Control – It provides systematic and comparative reports to the management; and in turn, corrective measures can be applied immediately. It aims to reduce waste, better selling, higher profits etc.
12. Measuring Rods – It records the performance of different groups of workers, plant, machinery etc. for measuring their comparative efficiency.
13. Future Prospects – The cost accountant not only provides the present trend, but future prospects also. On this basis, bankers, debenture holders, financial agencies etc., form an idea of the soundness of the firm before granting credits.
14. Budgeting – As cost accounting reveals actual cost, estimated cost and standard cost of products, preparation of budget is easy. Effective budget control is also possible. Thus “Cost accounting is a system of foresight and not a post-mortem examination; it turns the losses into profits, speeds up activities and eliminates wastes”.
15. Check on Accuracy – A good system of cost accounting affords an independent and most reliable check on the accuracy of financial accounts. The check operates through reconciliation of profits shown by cost accounts and financial accounts.
To the Employees:
1. Sound Wage Policy – Cost accounting introduces incentive wage schemes, bonus plans etc. which bring better reward to sincere and efficient workers. Cost data aid the management in devising a suitable wage policy for the workers. Time wage system and piece rate system can be blended to provide higher wages and at the same time increasing productivity rate.
2. Higher Bonus Plans – Cost accounting leads to an increase in productivity, lowering of costs and increase in profitability. Workers get their share in profits in the form of bonus. Higher profits naturally allow higher bonus distribution.
3. Distinction Between Efficient and Inefficient Workers – Cost accounting provides standards for the measurement of efficiency of workers. Efficient workers can be distinguished and their efficiency recognised and rewarded. Employees have been initiated and recommended for higher promotions. This means, increase in earnings, through the motion study and time study in doing jobs. Others get the encouragement to be more efficient and to earn more wages in the given time of work.
4. Security of Job – Employees get better remuneration, security of job etc., due to the increasing prosperity of the industries. Monetary appreciation of the efficiency of a worker is a good tonic which leads to higher rate of productivity.
To the Creditors:
Bankers, creditors, investors etc., can have a better understanding of the firm, as regards the progress and prosperity, before they offer financial landings.
To the Government:
1. The proper systems of cost accounting are of great use in the preparation of national plans, economic developments etc.
2. By studying the trend of cost, the government can make policies like taxation, import, export, price ceiling, granting subsidy etc.
3. Costing system has stability and cost reduction in industries. Cost audit is important and industries have to keep books of accounts to show the utilisation of materials, labour and other costs.
To the Public:
1. Cost accounting removes all types of wastages and inefficiencies. These will enable the consumers to get goods at better quality and cheaper rates.
2. The public feels that the costing system facilitates the customers to pay fair price.
3. Development and prosperity of industries will create employment opportunities.
4. Cost reduction will help in curbing inflationary trends in economy.
5. A steady progress is essential for an economic growth. There are many industries closed down because of inefficient and incompetent management. All these will be removed by cost accounting.
Advantages of Cost Accounting – To the Management, Workers, Creditors, Investors, Customers, Society and Government
A) Advantages to the Management:
i) Helps in Decision-Making – Decision-making is concerned with choosing between alternative courses of action. An important factor involved in the choice is the financial implication of the available alternatives. Cost Accounting is a decision-making tool. It provides suitable cost data and other related information to enable management to evaluate alternative courses of action.
ii) Supplies detailed Cost Information – Cost Accounting classifies cost and revenue by every possible division of the business and supplies management with detailed and regular cost information. Such information is useful for ascertaining the cost of product, process, department, division or unit of service.
iii) Guides in Price Fixation – Cost is one of the most important factor to be considered while fixing prices. It assists the management in fixation of selling price both in normal conditions and during the period of depression. With the help of costing, it is possible to prepare estimates, tenders and quotations.
iv) It reveals Operating Efficiency – Cost information reveals, profitable and unprofitable activities, so that steps may be taken to reduce or eliminate wastages and inefficiencies occurring in any form such as – idle time, under-utilisation of plant capacity, spoilage of materials etc.
v) It Facilitates Planning – It enables the management to know the future costs, so that appropriate plans and decisions can be made.
vi) It reveals Idle Capacity – A concern may not be working to full capacity due to reasons such as – shortage of demand, machine breakdown or other bottlenecks in production. A Cost Accounting system can easily find out the cost of idle capacity so that the management may take immediate steps to improve the position.
vii) Helps in Inventory Control – Perpetual inventory system which is an integral part of cost accounting, helps in the preparation or interim profit and loss account. Other inventory control techniques like ABC Analysis, Level setting etc., are also used in Cost Accounting.
viii) Helps in Cost Control – Cost Accounting helps in controlling costs with special techniques like standard costing and budgetary control.
ix) Helps in Cost Reduction – It helps in the introduction of cost reduction programme and finding out new and improved ways to reduce costs.
x) Checks the Accuracy of Financial Accounts – Cost Accounting provide a reliable check on the accuracy of financial accounts with the help of reconciliation between the two at the end of the accounting period.
xi) It Facilitates Cost Comparison – Cost Accounting enables management to make cost comparison of jobs, products, departments, sales territories etc., within the same concern. It provides inter-firm cost comparison also.
xii) It Prevents Frauds and Manipulation – It helps in preventing manipulation and frauds through cost audit system. Thus, reliable cost data can be furnished to management and others.
B) Advantages to the Workers:
From the cost records, we can find out the efficiency of the workers. Thus, the efficient workers are rewarded and the slow workers are given more incentives to come up to a certain level of efficiency. A sound costing system, therefore, increases the profitability and the workers get more wages. Workers are benefited by the introduction of incentive plans which is an integral part of a cost system.
C) Advantages to the Creditors:
The creditors feel secured, where there is a good system of costing in a concern because they can verify the creditworthiness of the concern. Thus, the creditors extent credit facilities on a longer term which is beneficial to the business.
D) Advantages to the Investors:
The investors also feel secured if there is prosperity in a business as they feel that their money remains secured. Hence, more and more people are attracted to invest in the concern which further increases the prosperity of the business.
E) Advantages to the Customers:
The customers always feel that the products which they are buying are the cheapest in the market but at the same time best in quality. Hence, when the prices are quoted in the products to the nearest paisa the customer feel that there is much accuracy in fixing the selling price.
F) Advantages to the Society:
As costing removes all the types of wastages, scraps the general public, gets the products at lower prices. Again when a unit grows in size its requirements also grow. For example, more man-power is needed, more raw material requirements arise, more sales are made etc. Hence, it leads to more employment of the local people; more suppliers of raw materials enter the markets etc.
When the sales are more, there can be large scale production and hence the advantages of economies of scale can be achieved, which in turn reduces the prices. Due to reduction in costs, inflation in the economy can be controlled. This is because people will have to pay less price for the products and hence, can save their income.
G) Advantages to the Government:
A cost system provides ready figures to use for Government, wage tribunals, trade unions etc., for use in problems relating to price fixing, wage level fixation, settlement of industrial unions disputes etc. The Government can plan its policies based on the techniques and procedures of cost accounting.
Cost accounting, therefore, promotes economic development. To reduce cost of production and sales price, the Government has introduced cost audit in most of the industries for e.g., the industries which are engaged in production, processing, manufacturing and mining activities. Such companies are now required to keep certain costing records and have to submit certain statutory returns to the Government periodically. By doing all these, the advantage to the Government is that there can be price stability in the economy.
Advantages of Cost Accounting – 14 Main Advantages of Cost Accounting
The following are the advantages of cost accounting:
(i) Helps in controlling cost – Cost accounting is very helpful in controlling expenditure and minimizing the manufacture cost of products.
(ii) Relates expenses to their functions – Cost accounting relates various expenses to their functions and provides an effective tool for control over such expenses.
(iii) Provides useful data – Cost accounting provides useful data not only about product costs but also about production efficiency and performances.
(iv) Avoids delay – It helps the management to initiate action to rectify delays, inefficiencies and wastage. Additionally, it determines normal levels of wastage of materials during storage or in process.
(v) Centralization of purchasing – It facilitates centralized purchasing. This results in economical purchasing.
(vi) Reveals losses due to idle time – Maintenance of time and job records for workers reveals losses incurred due to idle time. Such records assist in taking steps to minimize these losses.
(vii) Provides information – A cost accounting system provides information about the availability of materials, labour and machine capacity. In the absence of such information, proper production plans cannot be drawn up.
(viii) Identifies normal/abnormal losses and gains – Cost accounting entails identifying normal and abnormal losses and gains. This task becomes simpler when standards are set up. Although the setting up of physical standards is primarily the duty of the industrial engineering department, cost accounting also helps a great deal by providing relevant information in this regard.
(ix) Basis for the system of standard costing and budgetary control – Cost accounting lays the basis for the system of standard costing and budgetary control. These two are instrumental in the control of expenditure. Variance analysis and comparison of actual performance with budgets pinpoint area where economies can be effected.
(x) Helps in the performance appraisal – Cost accounting data help the management in appraising the performance of various units and managers. On the basis of such appraisal the management can encourage the concerned people with suitable rewards and incentives.
(xi) Useful for planning various activities – Cost accounting data are very useful for the management for planning various activities. A wise manager – takes a decision only after he has carefully studied the cost implication of various alternatives.
(xii) Reliable check on accuracy – A system of cost accounting provides an independent and reliable check on the accuracy of financial accounts through reconciliation of profits as ascertained by cost accounts and by financial accounts.
(xiii) Helps in decision making – Management is assisted in its process of routine and special decision making by various cost concepts viz., opportunity cost, relevant cost, marginal cost.
(xiv) Useful in day-to-day affairs – The cost department functions as a service department and provides useful and relevant information to various line managers such as a sales manager, production manager, etc., which immensely helps them in their day-to-day affairs.
Advantages of Cost Accounting
1. Helps to identify idle capacity
2. Helps inter-firm comparison
3. Helps to ascertain cost
4. Helps in price fixation
5. Helps to eliminate wastages
6. Helps to identify and eliminate unprofitable activities
7. Helps to check statement accuracy
8. Helps in inventory control
9. Helps for cost and revenue estimation
10. Helps to increase productivity and earning capacity
11. Helps investor’s, moneylenders and other financial institutions to know about the business
12. Helps in formulating efficient policy for day-to-day business activities
13. Helps cost control
14. Helps to increase production by comparing records of output
15. Helps to develop pricing strategy
16. Helps to generate information based on –
c. Departments/sections etc.
17. Helps to prepare production plan
18. Helps to identify and allocate overhead costs to respective departments/sections/products
19. Helps to reconcile cost and financial results
20. Helps in anticipating profits
21. Helps to provide proper performance records
Advantages of Cost Accounting – To Management, Workers, Creditors, Government and Public
Cost accounting system has been fully successful in achieving its objectives. Its importance is, therefore, continuously increasing. It is advantageous not only to the management but to others also.
The advantages of cost accounting may be summarised under the following heads:
1. A good cost accounting system helps in identifying unprofitable activities, losses and inefficiencies in any form. The management is able to concentrate on profitable jobs and consider change or closure of the unprofitable jobs.
2. It helps in controlling costs with specific techniques like standard costing and budgetary control.
3. It provides information to the management to serve as a guide in making decisions involving financial considerations. Guidance may also be given by the cost accountant on a host of issues such as whether to buy or manufacture a given component, whether to accept orders below cost, etc.
4. It provides such information that enables the management to formulate production and pricing policies and to prepare estimates of contracts and tenders.
5. It assists the management in the control of stock of raw materials, consumable stores, work-in-progress and finished goods so that the capital locked up in these stocks can be kept to the minimum.
6. It guides the management in the fixation of selling price particularly during depression period when prices may have to be fixed below cost.
7. It provides a reliable check on the accuracy of financial accounts with the help of reconciliation between the two at the end of the accounting period.
8. It enables the management to make cost comparison of various jobs, products, departments, etc. so as to improve performance.
9. It helps in the introduction of a cost reduction programme and ascertaining new and improved ways to reduce costs.
10. It advises management on future expansion and proposed capital outlays.
ii. Advantages to Workers:
1. Cost accounting introduces incentive wage schemes, bonus plans, etc. which bring better reward to sincere and efficient workers.
2. A good costing system is helpful to the management in increasing productivity and profitability of the organisation. This leads to prosperity of industries, better wages for workers and security of jobs.
iii. Advantages to Creditors:
Bankers, debenture-holders and other creditors study the information provided by cost accountants to ascertain the solvency, profitability and future prosperity of the business concern before they sanction loans. The reports of the cost accountants help them immensely to take the right decisions.
iv. Advantages to the Government:
1. The proper systems of cost accounting are of great use in the preparation of national plans, economic development, etc.
2. The study of cost trends is necessary to the government in matters like taxation, import and export, price ceiling, granting quota, subsidy, etc.
v. Advantages to the Public:
1. The public feels that the costing system facilitates the customers to pay a fair price.
2. Through cost reduction scheme, it helps in curbing inflationary trends in an economy.
3. Development and prosperity of an industrial enterprise will generate more employment opportunities to the members of the public.
Advantages of Cost Accounting – Significant Contribution of Cost Accounting to Various Spheres
Cost accounting provides tremendous help to a business in its routine and non-routine decisions. The primary advantage of cost accounting, of course, is that it shows precisely where costs are incurred, giving a realistic basis for cost-cutting. It enables management to attribute cost to those units responsible for incurring them.
To give management the cost information it needs, cost accounting supplies, periodic accounting summaries, including studies of costs by products, cost trends and inefficient production operations. Cost accounting determines the profitability of products being made and sold.
Apart from these, cost accounting contributes significantly in the following spheres:
1. Reducing costs by comparing budgeted costs with the actual
2. Increasing production by comparing records of output per man and per unit with predetermined standards
3. Developing sales and pricing strategies
4. Providing fair and accurate performance records
5. Creating a competitive spirit between organisational units
6. Balancing production between departments, and keeping materials flowing evenly throughout
7. Establishing quality standards
8. Determining anticipated profit from varying production levels
9. Locating appropriate operations for automation or mechanisation
10. Elimination of waste of idle time, machinery and equipment
11. Reconciliation of cost and financial results
12. Estimates and bids—based on past performance
13. Establishing comparative profitability of various products, processes, jobs, and indicating areas of losses
14. Cost control and cost reduction
15. Analysis of overhead costs between the various departments/sections, facilitate comparison, and highlighting possible cost savings
16. Cost information can be used as a basis for budgetary control and standard costing
17. Comparative cost information can be generated among- (a) products, (b) periods and (c) departments/sections
18. Budgeted information on sales, production requirements, material usage and labour hours can assist in the preparation of production planning schedules for the firm and various departments/sections
These are some of the advantages of cost accounting system. A cost accounting system continuously monitors profits, costs and areas of wastage. Managements can, therefore, be provided with up-to-date cost information to assist them in decision-making and cost control which can only improve a firm’s profitability in the long term.
Advantages of Cost Accounting – To Management, Workers, Outside Agencies and Creditors
Costing has many advantages which are discussed below. But all of these advantages do not automatically flow from the installation of a costing system. The nature and extent of these advantages depends upon the type, adequacy and efficiency of the costing system and the co-operation it receives from the various levels of management.
A sound system of costing provides the following advantages:
Advantages to Management:
1. Helps in Cost Control:
Cost accounting helps in controlling costs with special techniques like standard costing and budgetary control.
2. Reveals Profitable and Unprofitable Activities:
A system of cost accounting reveals profitable and unprofitable activities so that steps may be taken to reduce or eliminate wastages and inefficiencies occurring in any form such as- idle time, under-utilisation of plant capacity, spoilage of materials, etc.
3. Helps in Decision Making:
It supplies suitable cost data and other related information for managerial decision making, such as- introduction of a new product line, replacement of old machinery with an automatic plant, make or buy, etc.
4. Aids in Formulating Policies:
Costing provide such information as enables the management to formulate production and pricing policies and preparing estimates of contracts and tenders.
5. Guides in Fixing Selling Prices:
Cost is one of the most important factors to be considered while fixing selling prices. A system of cost accounting guides the management in the fixation of selling prices particularly during depression period when prices may have to be fixed below cost.
6. Helps in Inventory Control:
Perpetual inventory system, which is an integral part of cost accounting, helps in the preparation of interim profit and loss account. Other inventory control techniques like ABC analysis, level setting, etc., are also used in cost accounting.
7. Reveals Idle Capacity:
A concern may not be working to full capacity due to reasons such as- shortage of demand, machine breakdown or other bottlenecks in production. A cost accounting system can easily work out the cost of idle capacity so that management may take immediate steps to improve the position.
8. Checks the Accuracy of Financial Accounts:
Cost Accounting provides a reliable check on the accuracy of financial accounts with the help of reconciliation between the two at the end of the accounting period.
9. Facilitates Cost Comparison:
Cost accounting enables management to make cost comparisons of various jobs, products, departments etc., so as to improve performance.
10. Helps in Cost Reduction:
It helps in the introduction of a cost reduction programme and finding out new and improved ways to reduce costs.
Advantages to Workers:
Workers are benefited by introduction of incentive plans which is an integral part of a cost system. This results not only in higher productivity but also higher earnings for them.
Advantages to Outside Agencies:
A cost system produces ready figures for use by government, wage tribunals, trade unions, etc., for use in problems like price fixing, wage level fixation, settlement of industrial disputes, etc.
Advantages to Creditors:
Trade creditors, debenture holders, banks and other financial institutions form an idea about the financial soundness of the business on the basis of cost accounting records before extending credit facilities to the company.
Advantages of Cost Accounting – Legendary and Eloquently Summed up by Various Writers
Cost accounting offers a number of benefits to management, employees, creditors, government and society in general.
These benefits are somewhat legendary and eloquently summed up by various writers under the following heads:
1. Benefits to Management:
Cost accounting helps management in carrying out its functions efficiently and effectively thus:
Cost accounting ascertains costs of different courses of action and provides a sound basis for picking up a suitable course of action. It compiles up-to-date cost data, analysed by products, operations, elements functions and departments and presents them in a suitable form. Based on such data, management can plan its future operations in a competent way.
Cost accounting is not a post-mortem examination of past events. It is a system of foresight. It does not merely record actual costs incurred but works out estimated and standard costs for exercising control.
It prepares budgets for future operations based on past experience and likely changes in future. It helps management to make an objective assessment of organisational strengths, weaknesses, opportunities and threats (SWOT analysis) before undertaking a project.
iii. Decision Making:
Cost accounting compels management to arrive at decisions based on cost data, in place of hit-or-miss, or trial and error judgements. Valuable cost data enables management to decide issues such as – make or buy; expand or contract business activities; putting scarce inputs to effective use; evaluating the profitability of various alternatives; when to apply brakes during depression; selling below cost price etc.
Cost accounting requires that the work in an organisation must be logically divided, in the form of departments, cost centres and responsibility centres. Work is clearly earmarked for various departments such as purchasing, inspection, storage personnel and accounting departments. An efficient system of communication is also promoted between these departments using printed forms, rulings and statements.
Cost accounting serves as a means of control in the following ways:
a. A sound system of material control in the form of buying, receiving, inspection, storage, issue of materials prevents wastage, pilferage, under-and-over stocking of materials at various levels. The fixation of stock levels and inventory control ensures regular and adequate supply of materials of right quality and quantity whenever required.
b. A proper system of control over labour costs by job and time records helps management avoid idle time, defective work etc., and utilize human assets in the best possible way.
c. Plant capacity and other facilities are employed in the best possible manner.
d. It provides systematic and comparative records to management, facilitating the introduction of corrective measures at the right time
Cost accounting provides useful data for quoting appropriate prices for domestic as well as foreign markets (by employing techniques such as marginal costing, budgetary control) well ahead of production schedule. It also enables management to fix minimum prices during depression, by dividing expenses into fixed and variable components
vii. Effective Use of Resources:
Cost accounting conducts a continuous war against wastes of all kinds. The standards for measuring efficiency are established initially. Deviations are checked promptly, weak spots are identified, and remedial steps taken up earnestly. The reasons for profit or loss during a period are analyzed thoroughly for future guidance.
Every attempt is made to put resources to the best possible use. Unprofitable products, activities are dispensed with. Costs and revenues of two products, two periods, two departments etc. are compared from time to time with a view to improve efficiency continuously.
2. Benefits to Employees:
Cost accounting offers a number of benefits to employees in the following manner:
i. It facilitates the introduction of various incentive schemes and bonus plans and, thus, offers adequate rewards for efficient and sincere workers.
ii. Employee performance is appraised in a scientific manner, by setting standards of efficiency, and measuring the same through time and motion studies. Job and time cards help management in finding out people who are regular, productive and, therefore, deserve promotions from time to time.
iii. Workers get continuous employment, overtime incentive, better job security and larger compensation owing to the general prosperity of industries.
3. Benefits to Creditors:
Bankers, debenture holders and other creditors study the data provided by cost accountants to ascertain the solvency, profitability and future prosperity of an enterprise before they lend. The reports submitted by cost accountants immensely help them take right decisions.
4. Benefits to the Government:
The procedures and techniques of cost accounting are useful in preparing national plans aimed at achieving economic progress. In order to decide things pertaining to taxation, import and export policies, price ceiling, granting of quotas and subsidies, government requires cost data relating to various industries.
It is also interested in seeing that corporate funds are not squandered away in uneconomical activities. Cost audit, to a large extent, helps in achieving the above purpose(s).
5. Benefits to the Society:
Costing offers innumerable benefits to the society in the following ways:
i. It wages a war against all kinds of waste; facilities are put to good use and therefore, consumers get quality products at an economical price.
ii. It brings stability by improving managerial and operating efficiency.
iii. Cost saving and cost reduction efforts carried out by various firms help in curbing inflationary tendencies in the economy.
iv. Continuous employment opportunities are provided to various sections in society when cost accounting procedures, methods and practices are followed in different industries.
Advantages of Cost Accounting
The advantages of cost accounting are:
1. It highlights profitable and unprofitable activities, losses or inefficiencies in any form and helps management to make optimum utilisation of men, material and machines by eliminating idle time, under-utilisation of plant capacity, spoilage of materials etc.
2. If facilitates the preparation of periodical, final accounts accurately with the help of perpetual inventory system of stock control, ABC analysis, level setting, etc.
3. It establishes more accurate unit costs based on which fair selling prices are fixed. It is very helpful during period of depression when prices may have to be fixed below cost.
4. It provides data-base for use by the Government, wage tribunals, trade unions, etc., for solving problems like wage level fixation, price fixation, settlement of disputes, payment of dividend, etc.
5. It helps to form cost centres and responsibility centres to exercise control. It also controls cost with special techniques, e.g., standard costing and budgetary control.
6. The operation of a system of cost audit in an organisation prevents manipulation, fraud and assists in furnishing accurate and reliable cost data to the management and outsiders, e.g., the shareholders, the consumers and the government.
7. If facilitates use of specialised cost reduction techniques, e.g., value analysis, operations research, cost reduction, management by exception etc.
8. It helps management to take short-term decisions, e.g., adding a new product, make or buy, replacement of old machinery etc., by using techniques like marginal costing, etc., and also to formulate production and pricing policies and prepare estimates of contracts and tenders.
9. Unlike financial accounting, which shows profitability of the entire company, it shows the profitability of each product and service.
10. Cost comparisons, in respect of costs of jobs, processes or cost centres help to control costs. Such comparisons may be made from period to period, of the figures of the same unit or of several units in an industry using uniform costing and inter-firm comparison methods.
11. The cost of idle capacity of a concern not working to full capacity can be readily worked out,; which enables the management to take appropriate timely action to improve the position.
12. Value of the closing stock of raw materials, work-in-progress and finished goods can be readily obtained-from the cost records.
13. It checks the accuracy of financial accounts by reconciling the two accounts at the end of the accounting period.
14. Workers are benefitted by introduction of incentive plans which results in higher productivity and higher earning for them.
15. It helps to lower the cost of production and hence the prices of products or services.
Advantages of Cost Accounting – Cost Information for Stock Valuation and Profit Determination, Planning, Control and Decision Making
The various limitations of financial accounting are the benefits derived from cost accounting.
Day-to-day cost information is useful to management from the point of view of the following cost objectives:
1. Cost Information for Stock Valuation and Profit Determination:
a. Provides detailed cost information for ascertainment of cost of products, processes, departments, functions, activities, men, machines, services and every segment of the enterprise.
b. Cost information assists management in price fixation.
c. By supplying the relevant cost data, cost accounting helps preparation of financial statements. Information with regard to value of closing inventories is very useful for profit determination.
d. Besides disclosing operating efficiency, cost information is also useful in ascertaining loss due to idle capacity.
e. Cost information is also useful in making cost comparison, specially inter-period and inter-firm comparison.
2. Cost Information for Planning and Control:
a. Budgetary planning and budgetary control are rendered easy and effective through provision of day-to-day cost information.
b. Standards of performance may be laid down for judging operational efficiency and improving performance.
c. Cost accounting facilitates establishment of efficient material control system.
d. Cost information is also useful in establishing a proper labour cost control system.
e. Makes possible the introduction of company-wide system of wage incentives.
f. Overheads may be classified into controllable and uncontrollable heads for purpose of control.
3. Cost Information for Decision Making:
Besides enabling management to formulate the required business policies, cost information also assists the choice between alternatives for purposes of day-to-day decision making.
Advantages of Cost Accounting – To Manufacturers and Management, Investors and Financial Institutions, Workers, Consumers, General Public and National Economy
Cost accounting system renders invaluable services to the manufacturers, management, employees, investors, consumers and Government.
These services or advantages may be summarised as follows:
1. Advantages to Manufacturers and Management:
The main advantages of a sound cost accounting system to the manufacturers and management are:
i. Ascertainment of Cost:
The principal object of cost accounting system is to ascertain scientifically the cost of production and this is also the main advantage of the cost accounting system. The cost accounting system enables the manufacturer to ascertain exact cost per unit, per job or per contract not only at the final stage of completion but also at the various stages of production or execution. Further, cost accounting system also discloses the extent to which each element of expenditure contributes to the total cost.
ii. Disclosure of Profitable and Unprofitable Activities:
Cost accounting system discloses the profitable and unprofitable activities of a business and thus affords valuable suggestion for a contraction or elimination of those which are less profitable or completely unprofitable, and for an expansion or adoption of those which are profitable.
In case of non-availability of costing data, the profits of one department or product may be eaten away by the losses incurred in some other department or in respect of some other product and the businessman may have no idea that by closing down or improving the latter, his business can become highly profitable.
iii. Provision of Basis for Determination of Selling Price:
By disclosing actual cost of production, cost accounting system provides the businessman with a reliable basis for fixing selling prices of his products. Thus it saves the manufacturer from losses which may arise due to injudicious fixation of prices without actually looking to the cost of production.
iv. Calculation of Tender Price or Quotation Price:
Cost accounting system provides a reliable basis for preparing tenders or quotations at which the manufacturer agrees to supply goods to a prospective customer at some future date. If the tenders are based on actual cost data, they are bound to be competitive and sure to be accepted by the prospective customer.
v. Disclosure of the Constitution of Cost:
Cost accounting system reveals as to what proportion do material cost, labour cost and overhead bear to the total cost. Thus, it assists the manufacturer in ascertaining the importance of each element of cost and in determining where there is greater scope for economy.
vi. Comparison of Cost:
Cost accounting system furnishes reliable data for comparing costs in different periods, for different volumes of output, in different departments or processes and in different establishments.
vii. Control of Costs:
Cost accounting system serves as a means of controlling costs through:
a. An efficient system of material control which provides for proper checks on purchasing, receiving, storage and issue of materials and also prevents wastages, leakages, pilferage and overstocking of materials by fixing stock levels;
b. An efficient system of labour control which provides for proper control over the arrival and departure of workers, analysis of the time of the workers and the payment of wages;
c. Ensuring optimum utilisation of plant capacity. Cost accounting system also develops standard costs of each element of cost to serve as a yardstick to measure the efficiency of actual operations. In case of variances, it gives rise to thorough enquiry into their causes so as to enable the manufacturer to take corrective action to eliminate the same.
viii. Helpful in Planning and Decision-Making:
The various cost records maintained under the cost accounting system provide valuable information for the purpose of future planning and for decision-making.
The costing records assist the management in making the following decisions:
a. Manufacture or buy decisions;
b. Selection of the profitable product-mix;
c. Operate or shut-down decision;
d. Selection of the profitable method of production;
e. Fixation of the selling price.
ix. Check on the Accuracy of Financial Accounts:
Cost accounting system provides an independent and most reliable check on the accuracy of financial accounts by means of the reconciliation of profits as shown by cost accounts and financial accounts.
2. Advantages to Investors and Financial Institutions:
Investors and financial institutions are always interested in making investment in and granting loans to those industrial concerns which have good profitability and sound financial position. Manufacturing concerns adopting cost accounting exercise cost control which, in its own turn, ensures higher profitability and sound financial position.
3. Advantages to Workers:
Cost accounting system aims at utilising the labour force in the most efficient manner and does not involve the exploitation of workers. Cost accounting system stresses the classification of workers according to their efficiency and formulates plan of wage payment under which efficient workers get proper reward for their work and less efficient workers get an incentive to increase their efficiency. Thus, cost accounting system helps in increasing the efficiency of the workers of the business undertakings.
A good system of costing helps in maximising the profits of any business concern, thus giving it a long and prosperous life. This factor is helpful in ensuring permanency of employment and fair reward for work to the workers.
Cost accounting system also helps in minimising the possibilities of misunderstanding between workers and employers on the questions of fairness of profits and rate of wages. Thus, it minimises the chances of labour disputes in business concerns.
Cost accounting system provides for cost control through the utilisation of the various factors of production in the most efficient manner. Cost control leads to a reduction in the cost of products and services. As a result of it, the various products and services are offered to the consumers at a lower price. Thus, the consumers are in a position to enjoy quality goods and services at the most reasonable price.
Further, permanency of the existence of business concerns due to high profitability as a result of cost control, ensures un-interrupted supply of goods to consumers and general public. Thus, the consumers are protected against the evils of hoarding and black-marketing.
5. Advantages to National Economy:
Present age is the age of planning. To bring about planned economic development, the Government of every country prepares economic plans. For proper economic and industrial development, the Government requires data relating to cost of production in various industries so as to decide about the various economic incentives and financial assistance to be given to them.
The Government also requires these data for use in framing its various economic policies e.g., Business Policy, Industrial Policy, Import and Export Policy, Taxation Policy etc.
Further, the Government has also to take into account the total cost involved in any economic and industrial plan before it is implemented. It is possible only through cost accounting system.
Advantages of Cost Accounting – To Management, Employees, Creditors, Government and Society
A good costing system serves the needs of larger sections of people.
The advantages of cost accounting are discussed below:
1. Fixation of responsibility – Whenever a cost centre is established, it implies establishing a kind of relationship between superior and subordinates. Thus responsibilities are fixed on every individual who is concerned with incurrence of cost.
2. Measures economic performance – By applying cost control techniques such as budgetary control and standard costing helps in assessing the performance of business.
3. Fixation of price – By providing cost data it helps management to fix the selling price in advance. Hence, quotations can be supplied to prospective customers to secure orders.
4. Aids in decision-making – It helps management in making suitable decisions such as make or buy, replacement of manual labour by machines, shut down or continue operations based on cost reports etc.
5. Helps in the preparation of interim final accounts – By the process of continuous stock taking it enables to know the value of closing stock of materials at any time. This facilitates preparation of final accounts wherever desired.
6. Helps in minimizing wastages and losses – Cost accounting system enables to locate the losses relating to materials, idle time and underutilization of plant and machinery.
7. Facilitates comparison – It facilitates cost comparison in respect of jobs, processes, departments and also between two periods. This reveals the efficiency or otherwise of each job process or department.
8. Assists in increasing profitability – Costing reports provide information about profitable or unprofitable areas of operation. The management can discontinue that product line or that department which are responsible for incurring losses. Thereby only profitable line of activities alone are retained.
9. Reconciliation with financial accounts – A well maintained cost accounting system facilitates reconciliation with financial accounts to check the arithmetical accuracy of both the systems.
10. It guides future production policy – Cost data help management in determining future production policy. Any expansion or contraction of production for the future is based on past cost data.
1. Cost accounting system enables employees to earn better wages through overtime wages and incentive systems of wage payment.
2. By providing better facilities, it ensures job security to employees.
3. Employees benefit by merit rating techniques which is conducted by scientific process.
1. It increases the confidence of creditors.
2. The frequent preparation of reports and statements help in knowing solvency position of the business.
1. It helps government in formulating policies regarding export, import, taxation, price control measures, wage fixation, etc.
2. It helps in assessing excise duty, sales tax and income tax of the business.
3. Costing information helps in preparing national plans.
1. Cost reduction and cost control techniques will minimise cost of production of goods and rendering services. A portion of the reduced cost of production is shared by customers by paying less price for goods and services.
2. It offers employment opportunities in the cost accounting department in the capacity of cost accountants and cost clerks.
Advantages of Cost Accounting – 6 Benefits Provided by a Sound Costing System
Proper installation and efficient operation of the Costing System ensures a number of benefits (directly and/or indirectly) to all the parties having one or the other form of stake in the company. However, it should be noted here that the mere introduction of accounting system does not ensure any benefit to any party. It depends on the managerial decisions and their implementation based on the cost reports.
Because, cost reports and statements identify and draw the attention of the management to an aspect which requires management’s immediate attention and action. For instance, a cost report may reveal the fact that the company’s unit fixed cost is higher when compared to other firms in the industry. Further, the cost report may identify the reason for the higher unit fixed cost. The reason is the reduction in the capacity utilization.
Now it is for the management to take necessary action to increase the capacity utilization to produce more which results in the reduction in unit fixed cost and therefore, the reduction in total cost. This way, Cost Accounting serves the company. Further, it may be noted here that though Cost Accounting serves, directly or indirectly, all the parties in one way or the other, it is primarily designed to serve the management in its decision making task which in turn benefits the company and others.
Hence, a sound Costing System is expected to provide the following benefits:
1. By analyzing further the total expenses recorded in the Financial Accounting, Cost Accounting is able to ascertain the functional and departmental costs or process-wise costs and finally, to ascertain both the total and unit costs of the products.
This helps to identify the departments, processes, products, etc., which are incurring higher costs than the standards and to identify the probable reasons for the same. This facilitates the management to exercise control over the costs. This way, Costing System helps to ascertain and control costs.
2. By evaluating the performance of the departments, activities, products (both physical performance and financial performance; both cost effectiveness and revenue realisation, etc.), the system is able to identify the profitable and unprofitable, efficient and inefficient departments, functions, products, etc. On the basis of reports which contain this analysis and also the probable reasons and suggestions, management can take the appropriate steps to put them on the right path.
3. Cost Accounting, through its reports and evaluation, is able to identify the areas wherein the company is working below its capacity. Further, it draws the attention of the management about its impact on cost and profit. It, therefore, helps in optimum utilization of materials, human resources, plant capacity, etc.
4. Through stores ledger and material abstracts, it provides an effective check on the materials consumed.
5. By identifying whether the company’s performance is in accordance with the planned, and by identifying the reasons for poor performance, if any, Cost Accounting helps the management to take proper steps to improve profit and profitability.
6. By providing timely reports containing only the relevant information, Cost Accounting helps management in a big way in its decision making task.
The important decisions which are influenced, to a greater extent, by the cost reports are presented below:
i. Whether to diversify or not the company’s product lines,
ii. Fixation and/or revision of selling price,
iii. To decide about whether a ‘part’ shall be manufactured internally or purchased from outsiders,
iv. Whether the joint and/or by-products shall be sold at split-off point or after further processing,
v. About the profitable sales mix,
vi. About the optimal level of activity,
vii. To decide about the discontinuation of activities of a sales branch, temporarily, or to drop a product, purely on temporary basis, till the demand rises for the product,
viii. To decide about scarce resource allocation, etc.
This way, Cost Accounting helps management in its decision making task by providing only the relevant information and their accurate analysis whenever they are called for. Therefore, it is said, a good costing system is an invaluable aid to the management.