Cost Accounting Benefits

Benefits to Creditors and investors 

Creditors can ascertain the solvency and investors, the financial strength of the concern based on Cost Accounting reports.

Cost Accounting adds to stability of the organisation, which adds to confidence of the creditors

Benefits to Government 

Cost Accounting can help in assessment of excise duty, income tax. etc.

In case of essential commodities, cost records can help the government in wage fixation, sanction of quotes, ceiling on prices, etc.

Cost Accounting aids profitability, which results in greater revenues to the government.

Benefits to Society

Cost Accounting results in cost reduction, leading to lower prices to consumers

It helps in introducing new and improved processes of production and improved efficiency results in better supply.

Cost Accounting Basics – Benefits to Workers

Benelits to Workers

Cost Accounting helps in evaluation of standard of efficiency of workers and helps in objective merit rating.

Cost Accounting can help construction and implementation of incentive schemes that can reward efficient worken and encourage average workers to increase their efficiency

Cost Accounting Basics – Benefits to Management

Cost Accounting avoids wastage, increases profits and a part thereof is likely to be shared by the workers

Cost Accounting makes an organisation efficient, and fit to withstand competition

The stability of the organisation provides security of employment to the business

Cost Accounting Basics – Benefits to Management

Cost Accounting  

Application of costing and cost accounting principles, method and techniques to science; out, and practice o{ cost control and the ascertainment of the profitization, If Includes the presentation of Information derived for the purpose of managerial decision making”

Advantages of Cost Accounting  

Benefits to Management

Cost Accounting has become indispensable in modern industry. In these days of cutthroat competition, costing helps the management in avoiding wastage, increasing efficiency and exercising greater control over the cost. The advantages of costing may be summarised as follows:

01. Cost Accounting discloses the cost per unit or per job or per contract. If production passes through different departments or processes, then cost accounts reveal the cost of each department or process separately. 

Cost Accounting Basics: Planning and Forecasting

To disclose the source of economy in material, labour and overheads 

Planning and Forecasting :

Management requires information to look into the future. Moreover, it has to ensure that adequate resources are made available and plans are achieved at the least cost. Formulation of budgets, pricing of few products or investment in new projects or investment in new projects, etc. are all examples of costing information being an aid to planning. Thus, costing helps management plan the products to be produced in order to priority and quantity & of production, fixation of optimum selling price, associated costs and expected profits

Control and Assessment:

An important managerial task is to ensure that operations, departments, processes and costs are under control. The Cost Accounting system is the key financial control system and monitors the results of all activities as well as other control systems. The detailed analysis of all expenditure, calculation of job and production costs. analysis or lose” and scrap. monitoring of labour and departmental efficiency and other outputs of the costing system provide a sound basis of information for control.

Decision-Making :

Decision-making involves making a choice amongst alternatives. Intelligent decision making largely depends on various types of accounting data.

Objectives of Cost Accounting

The basic objective of Cost Accounting systems is to reduce the cost of production and maximization of profits. Specifically, the objectives are as follows:

  • To ascertains cost per unit of the product or service.
  • To provide a reliable analysis of costs.
  • To identify the sources of wastage.
  • To provide relevant information or determining the price
  • To ascertain the profitability of each product.
  • To exercise effective control on inventory
  • To disclose the source of economy in material, labour and overheads
  • To organize effective information system.
  • To advise the management on future expansion on programs formulation and implementation of incentive plans.
  • To organize the internal audit system
  • To undertake the cost reduction programs

Perpectual Inventory System

Perpectual Inventory System 

This system is also known as ‘Automatic Inventory System” This system is an important aid to material control. Its main object is to make available details about the quantity and value of stock of each item at all times. It provides a rigid control over stock of raw materials.It consists of mainiaining records for each type of material showing the quantities and value of material received, issued Bnd in stock. It also covering continuous stock taking.

Difference between Marginal costing and Absorption Costing

Marginal costing Vs Absorption Costing 

Absorption Costing 

  • All costs fixed and variable are included for ascertaining the cost 
  • Different unit costs are obtained at different levels of output because of fixed expenses remaining same
  • Difference between sales and total cost is profit
  • A portion of fixed cost is carried forward to the next Period because closing stock of working progress and finished goods is valued at cost of Production which is inclusive of fixed cost. In this way cost of a Particular period cost should be charged to the period concerned and should not be carried over to the next period
  • The apportionment of fixed expenses on an particular Y basis gives rise to over or under absorption of overheads which ultimately makes the product – cost inaccurable and unreliable.
  • Absorption costing is not very helpful in taking managerial decisions such as whether to accept the export order or not whether to buy or manufacture, the minimum price to be charged during the depression etc 

Standard Costing Limitations

Standard Costing Limitations

Difficult to set up reliable standards:

It is difficult to set up reliable and workable standards. Unless the standards are correctly fixed, the control the study of variances will not be effective

Expensive :

Revision of standards in the light of changed circumstances, become expensive. If the standards are not revised they become out dated.’Such standards are not reliable

Difference between Marginal costing and Absorption Costing

High degree of technical skill :

establishment of standards may be costly and may require high degree of technical skill

Fixing responsibilities is a difficult task:

For fixing responsibilities for an adverse variance, the controllable and uncontrollable periods of the variances should be segregated. This is a difficult task.

Cost Accounting Basics : Historical Costing and Standard Costing

Adverse psychological effects:

Sometimes, standards create adverse psychological effects. If the standard is set a high level, its non-achievement will lead to frustration and resistance. This acts as a discourgement rather than an incentive for better efficiency.

Unsuitable :

Due to unsuitably for jobbing type of industry, fixation of standards for each job becomes difficult and expensive. Non suitable for small industries Inslallalion ofstandard costing is an expensive affair. Hence small business concerns do nol show much interest in installing standard costing

Limitations of Cost Accounting

Limitations of Cost Accounting 

Lack of Uniformity : There js a lack of uniform principles and procedures in Cost Accounting.

For example, numerous methods are available for pricing of material issues or for absorption of overheads. Thus, different Cost Accountants may arrive at different conclusions in the same situation

Estimates : Cost Accounting works on the basis of estimates.The user does not receive the time or exact cost. An error in estimation may throw up totally different results.

Suitability: Cost data is required for decision making purposes. Thus, a cursory comparison may result in misleading conclusions

Role of Management : The usefulness of Cost Accounting is restricted to the ability, and willingness of management to take decisions based on information


Types of Standards Costing

Types of Standards 

Ideal standard

Ideal Standard is a standard, which:can be attained under the most favourable conditions. No provision is made e.g. for shrinkage. spoildqe or matching breakdowns. Users of this type of standard believes that the resulting unfavourable

Accountiug for Fixed Assets

variance will remind management of the need tor improvement in all phases of’operations. Ideal standard are rot widely used in practice because they may influence employee motivation adversely.

Normal Standard:

These standards are based on past average, adjusted with anticipated future changes. We can say these are the standard that may be achieved under normal operating condiiions. These siandard are however difficult to set because they require a degree ol forecasting. The variances thrown out under this system are deviation from normal efficiency, normal sales volume or normal productive volume. If the actual performance is found to be abnormal. large variance” may result and it is necessary to revise standard find out actual result. 

Cost Accounting Basics : Historical Costing and Standard Costing

Historical Costing: In this system, costs are ascertained

only after they are incurred and that is why it is called as historical costing system. For example, costs incurred in the month of April, 2007 may be ascertained and collected in the month of May. Such type of costing system is extremely useful for conducting post mortem examination of costs, i.e. analysis of the costs incurred in the past. Historical costing system may not be useful from cost control point of view but it certainly indicates a tend in the behavior of costs and is useful for estimation of costs in future

Standard Costing :- Standard costs are predetermined costs relating to material, labor and overheads Though they are predetermined, they are worked out on scientific basis by conducting technical analysis. They are computed for all elements of costs such as material, labor and overheads The main objective of fixation of standard cost is to have benchmark against which the actual performance can be compared.

This means that the actual costs are compared with the standards. The difference is called as ‘variance’ If actual costs are more than the standard, the variance is ‘adverse’ while actual costs are less than the standard, The.variance is favourable. The adverse variances are analyzed and reasons for the same are found out. Favorable variance may also be analyzed to find out the reasons behind the same. Standard costing, thus is an important technique for cost control and reduction.