Table of Contents
Meaning
Cost accounting is that type of accounting in which in total we try for cost-effectiveness in the organization
Scope
• Cost analysis
It helps in determining the cost in an organization that how much cost is incurring in a financial year.
Example: Company looks over the costs department wise.
• Cost audit
Helps in assessing the cost sheets.
Example: In the end cost sheets are assessed by the company and auditing of the company is done by the accountants.
• Cost comparison
Help in comparing the costs may be in the different departments or the other competitors.
Example: Top firms do look over the cost sheets of their competitors.
• Cost control
Helps in further controlling the costs so that business operations are more successful and effective.
Example: Top management stops the production of the product which was incurring high cost with low profits.
• Cost report
In the end, helping in preparing a final cost report so that the top management could take some action on making the business operations effective.
Merits
• Elimination of losses and inefficiency
A good cost accounting system eliminates wastes, losses, and inefficiencies by fixing standards for everything.
• Cost reduction
New and improved methods of production are followed under the cost accounting system. It leads to cost reduction
• Decision making
Based on cost information, the management can decide whether to make or buy a product in the open market. The management can rightly choose the best out of many alternatives. Sometimes, spare capacity can be used profitably.
• Reason for profit and loss
A good cost accounting system highlights the reasons for increasing or decreasing profit. If so, the management can take remedial action to maintain the profitability of the concern. There is no possibility of shutting down of any product or process or department
• Price fixation
The total cost of a product is available in the costing records. It is highly useful for the price fixation of a product.
Demerits
• Expensive
Installing and maintaining a cost accounting system requires more manpower and resources. More analysis, allocation, and absorption of overheads require a considerable amount of additional work.
• Complex
Cost accounting needs to identify the different types of expenses and allocation of expenses is considered as a complicated system of accounting
• Lack of accuracy
The use of notional costs such as standard cost estimated cost, etc would not bring out the actual cost of the product. So the cost accounting lacks the accuracy of its results.
• Does not control cost by itself
Cost accounting will not control the cost. It only brings out the possibility of areas that needs control.
• Not suitable for small scale units
Small firms do not have much capital to invest in cost accounting so cost accounting becomes less suitable for them and also they have their own traditional methods control the costs effectively.
127 our experts are availableright now
