Advantages Of Cost Accounting

Following are the most important advantages of a
good cost accounting system:
1) Classification and Subdivision of Costs:
In the contrast to a single profit or loss figure
supplied by general accounting, the cost
accounting classifies costs and income by every
conceivable subdivision of the business enterprise.
In a good costing system data regarding costs by
departments, processes, functions, products,
orders, jobs, contracts and services can easily
computed. This detailed cost information for
managerial control is one of the most important
contributions of cost accounting.
2) Adequacy or Inadequacy of Selling Prices:
Unit cost of production, administration and safe
made possible by cost accounting aids
management in deciding the adequacy or
inadequacy of selling prices i.e. neither too high
detracting business, nor too low resulting in
losses to the concern.
In period of depressions, slumps, or in case of
competition management forced to lower prices
even below cost of production and sale. In such
circumstances, cost accounting will help
management in deciding the proper reduction.
3) Disclosure of profitable Products:
Cost Accounting will disclose activities,
departments, products and territories, which bring
profit and those that result in losses.
Management to determine what products because
of profit margin the sales department because of
their greater profit margin should emphasize will
use this information. What products arte
unprofitable or less profitable and might be
eliminated or lesser sales pressure be given to
them. What activities or territories are not
producing sufficient profit and should be either
further improved or eliminated and what methods
of production and distribution are most profitable
for the firm. This will increase the overall profit of
the concern.
4) Control of Material and Supplies:
In a good costing system materials and supplies
must be accounted for in terms of departments,
jobs, units of production or service. This will
eliminate altogether or reduce to the minimum
misappropriations, embezzlements, deterioration,
obsolescence, and losses from defective, spoiled,
scrap and out of date materials and supplies.
5) Maintenance of Proper Investment in
Inventories:
A costing system will help in the maintenance of
various inventory items of materials and supplies
in line with production and sale requirements. If
these quantities are too small, production may
stop or sales may be lost. On the other hand, if
quantities of such materials and supplies are in
excess of the production and sales requirements,
too much working capital may unnecessarily tie
up in inventories. The detailed quantity
information furnished by the cost accountant at
all times will go a long way in reducing or
eliminating this possibility.
6) Correct Valuation of Inventories:
Cost Accounting plays a basic role in the correct
valuation of inventories of finished goods, work in
process, materials and supplies. The book
inventory method (as opposed to physical
inventory method) made possible by cost
accounting system will involve the operation of
the various inventory control accounts in such a
manner that the balances of these accounts well
be inventory valuations required for periodic
financial statements. This enables the preparation
of monthly financial statements without the
trouble and expense of taking monthly physical
inventories.
Further, the value of inventories shown by the
book inventory will be more accurate than
inventory values shown by the physical inventory
method. If no cost system is in use and inventory
values computed by physical inventory method,
then the value of these inventories must either
bean estimate of cost or be determined at market
values. But in a cost accounting system accurate
procedures and techniques are available by which
inventory values can be computed in a relatively
more exact fashion. The requirements of
management, stockholders, creditors, employees
and other groups interested in the financial
statements of the firm naturally attach more
emphasis on this objective of cost accounting. In
most cases, this objective of cost accounting
dominates the formal cost records and routines.
7) Whether to Manufacture or Purchase from
Outsiders:
Cost records furnish information regarding the
cost of manufacturing of different finished parts,
which assist management in making a decision
whether to purchase these parts from outside
manufacturers or manufacture them in the
factory.
8) Control of Labour Cost:
Orders, jobs, contracts, departments, processes,
or services record cost of labour. In many
manufacturing enterprises, daily time reports are
prepared showing the number of hours and
minutes spent and the wage rate for each worker
per job or operation. This enables management to
compare the current cost of labour per job or
operation with some previously incurred or
determined cost thus measuring the efficiency or
inefficiency of the labour force and assigning the
work to employees best suited for it.
9) Use of Company-wide Wage Incentive Plans:
When labour cost is accounted for by jobs and
operations, it is possible to use effectively wage
incentive plans or bonus schemes for the
remuneration of labour force. Carefully planned
and administered incentive schemes are an
effective means of enforcing superior performance
and cost reduction. Workers are more co-
operative, responsive and productive when some
form of incentive offered to them for surpassing
stipulated standards of perfection and
performance. Cost of accounting has developed
incentive plans, which are applicable not only to
factory workers but also to clerks, salespersons,
and other executives for above standard
performance.
10) Controllable and Uncontrollable Cost:
Cost accounting exhibits at each stage of
production and sale the controllable and
uncontrollable items in the manufacturing, selling
and administrative cost thus enabling
management to concentrate attention on those
costs, which can reduced of, eliminated. There is
very little the management can do to reduce such
uncontrollable items as idle time of machines and
labour, wastage in the use of materials, supplies
and power can controlled much more effectively.
11) Use of Standards for Measuring Efficiency:
A complete cost accounting system, generally, has
a well-developed plan of standards to measure
the efficiency of the organization in the use of
materials, incurrence of labour and other
manufacturing cost. Cora does this appraisal
paring the work of factory workers, office and
sales personnel and other executive with what
should have done in manufacturing and selling a
given quantity of units in a given period.
12) Reduction of Losses Due to Seasonal
Conditions:
Cost accounting provides data for making a
complete analysis of losses due to idle plant and
equipment or due to the use of plant and
equipment beyond normal capacity, irregular
employment of labour, wastes in the use of
materials. It indicates cost variations between
active and inactive periods and seasonal
conditions in the business or industry. Seasonal
fluctuations in business activity affect profoundly
the earnings of the concern. In many industries,
seasonal variations are responsible for higher
costs and lower profits.
13) Budgeting:
In a good cost accounting system, preparation of
various budgets periods in advance of actual
production and sale of goods is necessary. These
budgets include budgeted statement of profits,
budgeted cost of plant improvements, budgeted
cost of production, budgeted cash receipts and
payments, and so forth. These budgets show the
plans of the management for future periods and
they reflect the expected results of these plans.
They are of great help in getting the sales
manager, the works manager, and the treasurer
into agreement as to a plan that can sold,
manufactured and financed. In fact, the use of
budgets has made costing a preventive device for
the rectification of inefficiencies before they creep
into the business operations or as they occur
from day to day. In other words, budgeting,
inculcates the habit of thinking and calculations
before taking decisions.
14) Reliable Check on General Accounting:
Finally, an efficient and proper system of cost
accounting is a most reliable and independent
check on the accuracy of the financial accounts.
This check made effective through reconciliation
of the balance of profit or loss shown by the
costing profit and loss account and the balance
of profit of profit or loss revealed by the general
accounting profit and loss account.