Therefore, cost called for a certain purpose will not be suitable for other purposes. Cost accounting does not provide ready-made solutions to managerial problems. For example, the cost accounting contribution to the heading futures situation has not been much; thus, no instrument for heading inflation has been created. The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". However, with the proper selection of ways and means, it will be applicable there also. Historical costs, however, have the following limitations: Though Costing System ensures a number of benefits to the company and contribute heavily to the managerial decisions, a number of objections have been raised against Costing System. 8. Published on 26 Sep 2017. A close study on the objections raised against cost accounting system would reveal that there is no merit in them. But the answer to this objection is that it is not expensive if its benefits exceed its expenditure cost. are not taken into consideration in Cost Accounting. It requires a complex system as well as responsible people who need adequate skills. Another argument is that, once a system of cost accounting is introduced, it is only a question of filling additional forms and rulings without any initiative or driving force behind it. Cost Accounting has certain limitations. The results shown by cost accounts differ from those shown by financial accounts. As such, filling of forms becomes a stereotyped mechanical reporting of cost data and is a monotonous work. All these expenditures are, Your email address will not be published. These objections, summarised by Sarkar, are the following: It is often argued that the efficiency of a business concern does not depend upon the installation of a cost accounting system since there have been in existence concerns which have proved themselves efficient even without cost accounting. Under cost accounting, budgets are prepared and standards are fixed for each activity. g)Does not include all items of expense and income: Items of purely financial nature such as interest, financial charges, discount and loss on issue of shares and debentures, etc. The practical importance of the objection is, therefore, negligible. Privacy Policy Estimations, conventions etc., are adopted in the system. It handles such situations and helps the firm to survive in the market. Many small firms consider the cost accounting system more complex, compared to others. It is not necessary that it should be the text book method only. Ascertaining the cost for every unit of product that a business entity manufactures. This objection comes from the business concerns which have installed a Costing System but failed to reap the benefits of the system. Reporting of the costing information to the management involves the use of a number of forms. However, we still find many limitations as follows: Complexity. There is no generally agreed concept of cost. It is charged to all the products and processes on the basis of estimates. Marginal cost accounting is an accounting method that examines the relationship between the level of production, costs, and expenses. Purposes and in all circumstances. Hence, all the decisions of the management are based upon the best judgment of the cost accountants who take into account the various factors while preparing the cost statements, which may not be the same with other cost accountants. These steps are considered as complicated and requires several forms and documents in preparing the reports. Moreover, cost accountant has a deep understanding of value-added and nonvalue added costs which are very important for business because it helps us to reduce any non-value cost, and it will scarify the products value to the customers. The cookies is used to store the user consent for the cookies in the category "Necessary". Answer: Cost accounting is the process of maintaining the cost and expenses of the business and how it has to be used for purchases while management accounting is the process of maintaining books for the decision making, evaluating the performance, and cost control. Necessary cookies are absolutely essential for the website to function properly. It is very expensive to build the proper management accounting system, and it requires both a complex system and responsible people who have enough skills. Sometimes certain objections are raised against cost accounting system and some disadvantages thereof pointed out. Not applicable to Small Concerns 9. The limited knowledge and experience of the management accountant can lead to prepare the data unreliable and undependable. It is not useful unless the action is taken on the various cost data or efficiencies/inefficiencies revealed. It does not meet the requirements of all types of firms, so many firms avoid this accounting method. : Cost accounting fixes a product price based on its production cost. The accounts presented using historical cost accounting do not show many effects that are due to the inflation gap. It is highly useful for the price fixation of a product. (3) It becomes Stereotyped and Mechanical: Limitations of Cost Accounting Necessity, Inapplicability, Organizational Issues, Failure in Many Cases, Cost and Mere Matters of Forms and Ruling, Limitations of Cost Accounting Unnecessary, Expensive, Inapplicable and Failure, Limitations of Cost Accounting Top 9 Limitations, Limitations of Cost Accounting It is Unnecessary, Inapplicable, Failure, Expensive and Becomes Stereotyped and Mechanical, Limitations of Cost Accounting Cost Accounting is Unnecessary, Cannot be Adopted by Small Business Concerns, Very Costly and Results are Misleading, Limitations of Cost Accounting Expensive, System is More Complex, Not Suitable for Small Scale Units, Lack of Accuracy and Lacks of Social Accounting. Because, there are many reasons for the failure of the system such as, failure to devise a suitable Costing System, indifferent attitude of management and others, lack of adequate facilities, lack of support and co-operation of supervisory and work staff, etc. Not Applicable to Many Industries: Limitation # 2. The limitations or disadvantages of cost accounting are listed below: 1. Strategic planning and management are not possible. However simple the system might be, if it can be worked well, even special types of industries are bound to reap the benefits of cost accounting. Two cost accountants draw different conclusions from the same cost data. Improves Efficiency: Cost accounting assures cost management, profit appreciation and less wastage which ultimately enhances the overall production and manufacturing process of products. 9. The unsuited costing system will naturally bring failure. The failure may be due to other factors such as lack of facility or dearth of appropriate data. Further, a number of accounting methods are available for each of a number of costing problems. Even in the case of absolute monopoly, substitutes may appear in the market. Hence, there is limitation to its application to all types of business. Cost accounting system was introduced during the time of globalisation. It focuses on economies of scale and the additional cost of each new unit of production. It is Expensive 2. Some of our partners may process your data as a part of their legitimate business interest without asking for consent. A modified costing system has to be devised to suit the concern and not the business to suit the system. But it does not ensure the result as result depends upon the action initiated by the management. Double set of account books has to be maintained and it is not economical for small concerns. Because this method estimates on the basis of data and information, not on imagination. . It is not merely one system of forms and statements. (b) Cost varies with purpose. 9. Cost accounting system renders invaluable services to the management in the following ways: (i) It helps the management in ascertaining the accurate cost of products of the manufacturing concern and how it has been made up. Add to cart. But argument against objection is that an integrated system of accounts should be introduced to remove this problem. The production department may raise some additional cost to represent the wastage and error, which is subjective to be discussed and find a reasonable acceptant rate. The success or failure of a system depends not merely upon the system designed but also the way it is worked. Therefore, Costing System shall be devised in such a way that it suits to the enterprise and it takes into consideration the requirements of the enterprise. For example, in order to calculate the product cost of goods sold, we can use job costing, process costing, absorption costing, activity-based costing and so on. Cost accounting needs to identify different types of expenses and . Here, it should be remembered that there is no readymade or a stereotyped system of cost accounting applicable to all industries regardless of their nature or the nature of the article produced or service rendered. Taking into consideration the benefits conferred by a modern cost accounting system, the argument that it is unnecessary does not hold good. Cost accounting system is more complex as compared to the other accounting systems. The reasons for its failure should be probed. Advantages Of Cost Accounting LoginAsk is here to help you access Advantages Of Cost Accounting quickly and handle each specific case you encounter. Cost Accounting Lacks Uniformity Some people oppose it because of lack of uniformity. However, before installing it, care must be taken to ensure that the benefits derived are more than the investment made on this system of accounting. The warehouse staffs need to allocate material to a specific job. Required fields are marked *. SCOPE OF COST ACCOUNTANCY Scope Costing Cost Accounting Cost Control Technique Budgeting Cost Audit. Whatever may be the type of business, it involves expenditure on labour, materials and other items required for manufacturing and disposing of the product. Cost accounting is a complex stream of accounting. Limitations of Cost Accounting - 6 Important Limitations: Expensive, Unnecessary, Not Applicable to Many Industries, Failure of Costing System, Reliable and a Few Others. Such being the case, if cost accounting is introduced without any regard to the nature of business and the system does not suit the business, it is but natural that the system should prove a failure. In business operations, management may face some situations such as make or buy decisions, discontinue a product line, discontinue operation, etc. Financial statements prepared under historical cost accounting are merely statement of historical facts. During the time of globalisation, cost accounting helped businesses in enhancing their production efficiency. Also, costs have no utility in themselves. The benefits of computerised accounting systems are still being discovered as this technology has only been in widespread use . Optimum use of resources is not possible even with cost accounting. Cost accounting is the process of collecting information about the costs incurred by a company's activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage.. The plea of inapplicability, however, is not very apt; what really is at fault is an attempt to foist an unsuitable system or to try to introduce or work a system suitable for a particular type of industry but in environments or on lines, relating to a particular factory, which are not suitable for that system. Dr. Shobhan Sen . Sometimes firms need to reduce the cost of a product, below its production cost. But cost accounting system being costly in itself is no disadvantage provided the system is a profitable investment for any business concern. The accountant will classify all the costs into each category and provides a proper report to management, which will help them make adequate decisions.if(typeof ez_ad_units!='undefined'){ez_ad_units.push([[250,250],'accountinguide_com-medrectangle-4','ezslot_3',141,'0','0'])};__ez_fad_position('div-gpt-ad-accountinguide_com-medrectangle-4-0'); When we know the total cost of product, it will be more precise to set the correct selling price. This causes the relevance of accounting information to be subjective, because the assets may be far less valuable today. More Complex 8. Save my name, email, and website in this browser for the next time I comment. COST ACCOUNTING 2. 7. Advantages and Disadvantages of Cost Accounting: Today accounting plays a major role in every business life. Failure in Some Industries Some people argue that costing system failed to give desired results in some industries, but this is not correct. Repeated failures on previous occasions is an indicator of more serious troubles to come and, hence, the need for an urgent installation of a proper system of cost accounting. Using historical cost-Using historical cost to measure assets fails to account for changes in values over time. These cookies ensure basic functionalities and security features of the website, anonymously. But when we install a system of costing, bearing in mind the requirements of the industry in the long run; with the active cooperation of the personnel of the costing organisation, benefits will be more than the initial cost. Cost accounting involves the use of varied forms, employment of qualified personnel, introduction of proper procedures and techniques. Although costing principles are the same, costing procedures being different, cost of production of two concerns may not be the same, in spite of their product being the same. Another objection is that the introduction of costing by itself does not control costs and contribute to the operating efficiency of the concern. Content Guidelines 2. So cost accountant plays an important role in ensuring that all the targets are achievable and there is no budget slack. If any unusual change, we will be able to identify them. It is right to say that introduction of costing system involves additional work. Just because of this reason, one cannot blame the system and say it is a failure. 5. Some of them are mentioned below: 1. The system of cost accounting involves additional expenditure to be incurred in installing and maintaining it. The performance of every activity is compared with standards to find out the deviations. The management team utilises such data and makes better decisions for the firm. Although there seems to be some justification in this argument, the environment in which a business operates is quite different from what it was some years ago. However, it has no such disadvantages, but there are few limitations of cost accounting. In other words, social accounting is outside the purview of cost accounts. All these lead to different cost results for the same operation. Hence, financial accounts do not leave any room . Building the right cost accounting system is very expensive. Copyright. Therefore, it is very hard to compare management report from one company to another. But this objection is worthless. Without any costing system, some industrial units work effectively. When time passes, the forms are to be revised to make them up-to-date and fewer in numbers. Cost accounting requires experts accountants and auditors. Then, it becomes necessary for every manufacturer to know what is his cost of production and how far he can mark down his selling price. the next 30, 60 or 90 days) will exceed a certain percentage of the costs or funds (e.g. It requires preparing the reconciliation statement to check its accuracy. Replace icons and image as per the need. If the installation and working of a suitable system of cost accounting are too expensive to be considered in the light of the expected benefits, this argument should certainly hold good. Although the formula above may appear complicated, the calculation is simply the discounted cash inflows divided by the discounted cash outflows. Cost accounting guides the firm in such crucial conditions. This calls for the information to take decisions about the price, price revision, acceptance or rejection of the offer, eliminating unnecessary costs, etc. It is an accounting method which measures a firms total cost of production, by deriving the cost of each production step. i = Discount rate. (iv) It helps the management in exercising cost control and maximising profits through the techniques of standard costing and budgetary control. These works lead to excessive workload increases. A number of bases are available for classification of costs. The expenses are not permitted beyond the budget amount. : Installation and maintenance cost of cost accounting is high. material, labour, expenses, etc. # 8 - Intangible Assets. It is not an exact science rather based on theories and accounting practices. Therefore, the results are not the same. The top 11 disadvantages or limitations of cost accounting are the following: The cost accounting systems and methods practiced by various organizations are not the same. Moreover, the purpose of costing is not only to find out the cost, but also to try to introduce cost reduction schemes, which bring adequate return to the firm. These create difficulty in determining the exact cost, because no one type of cost is suitable for all. Therefore, it is a must for progressing firms. Moreover, it also happens to direct labor too, how much does the worker spend their time on each product. The company will require to prepare annual budget to set the target for each department. The management has to avoid the possibility of waste at each stage. PreserveArticles.com: Preserving Your Articles for Eternity, 11 advantages of a good cost accounting system, Ascertainment of cost per unit is one of the main functions of cost accounting, Relationship between cost accounting, financial accounting, management accounting and financial management.
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