Fundamentals of Cost Accounting

Advantages of Cost Accounting

Cost accounting has now become the norm in most industries and firms. Almost all medium and large scale businesses rely on cost accounting to supplement the information that financial accounting provides. In fact, cost accounting is essential not only to businessmen and the management but also to the economy as a whole. Let us take a look at some of the advantages of cost accounting.

Advantages of Cost Accounting

Advantages of Cost Accounting

1] Measuring and Improving Efficiency

Cost accounting allows for data that enables the firm to measure efficiency. This could be efficiencies with respect to cost, time, expenses etc.

Standard costing is then used to compare actual numbers with the industry or economy standards to indicate changes in efficiency.

Say for example the cost of producing one unit increased from Rs.100/- to Rs. 110/-. Now was this due to an increase in prices or due to inefficiency and wastages. Cost accounting will help you measure this.

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Learn more about the Importance of Cost Accounting here in detail

2] Identification of Unprofitable Activities

Just because a firm is making overall profits, it does not mean all activities are profitable. Cost accounting will help us identify the profitable and unprofitable activities of the firm.

So activities that cause the firm losses can be made profitable or eliminated. This can happen due to the cost ascertainment done in cost accounting.

3] Fixing Prices

This is one of the important advantages of cost accounting. Many businesses price their products based on the cost of production of these products.

To enable this, we first need to calculate the actual cost of production of these products. Costing makes the distinction between fixed cost and variable cost, which allows the firm to fix prices in different economic scenarios. Prices that we fix without the help of cost accounting can be too high or low, and both cause losses to the business.

4] Price Reduction

Sometimes during tough economic conditions, like depression, the prices have to be reduced. In some cases, these prices are reduced to below the total cost of the product.

This is to help the company survive this tough period. Such decisions the management has to take are guided by cost accounting.

5] Control over Stock

Another important advantage of cost accounting is that it helps with restocking and control over materials. Cost accounting will help us calculate the most ideal and economic re-order level and quantities.

This will ensure that the firm is never overstocked or understocked. Also costing allows the management to keep a check over these raw materials, WIP etc.

6] Evaluates the Reasons for Losses

Every firm has to deal with periods of profits and losses. But now they must always evaluate or investigate the reasons for the losses suffered.

This will help to tackle the problem or overcome the cause by some other means necessary. So if you cannot eliminate the reason you can at least minimize the losses.

Cost accounting plays a huge role in determining the cause of any losses. Say, for example, your cost of production is low, and prices are high but yet losses persist. This can be due to low output levels due to inefficiency. Cost accounting helps us determine this.

7] Aids Future Planning

One of the biggest advantages of cost accounting is that it will help the management with future plans they may have. For any production or selling plans, it is important to have detailed data about the machines, the labour capacity, output levels, levels of efficiency of each process etc.

Say for example the management wishes to expand the production to accommodate sales, cost accounting will help determine if the current machines can handle these levels of production or not.

Solved Question for You

Q: _______ accounting helps keep a check on the accuracy of financial accounting.

  1. Management
  2. Human
  3. Cost
  4. None of the above

Ans: The correct answer is option C. Cost accounting is by itself an independent process. So it helps to keep a reliable check on the accuracy and correctness of financial accounting.

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