Advantages and Limitations of Cost Accounting

A cost accounting system, well designed and honestly operated, brings real benefits — but it also has genuine limitations, and a balanced view acknowledges both.

Advantages of cost accounting

• To management — it reveals the cost and profitability of each product, job and department; it discloses waste, inefficiency and idle capacity so they can be corrected; it provides the data for pricing, for make-or-buy and similar decisions, and for budgets and standards used to plan and control operations.
• To the business as a whole — it helps fix a fair selling price, guides the elimination of unprofitable activities, and improves overall efficiency and profitability.
• To workers — a sound costing system, especially where it supports incentive wage schemes, can reward efficient workers and link pay to performance.
• To the government and society — cost data assists the government in fixing prices of essential goods, in framing tax and tariff policy, and in awarding cost-plus contracts; efficient costing also reduces the wastage of a nation's resources.
• To creditors and investors — the improved efficiency and reliable information that a costing system brings give lenders and investors greater confidence in the business.

Limitations of cost accounting

• It is expensive. Installing and running a costing system involves extra records, extra staff and extra expenditure, which a very small business may find hard to justify.
• It is not an exact science. Cost accounting uses estimates and judgements — for example in apportioning overheads and in valuing stock — so the cost it produces is accurate only within limits, not to the last rupee.
• It can become complicated. An over-elaborate system with too many forms and returns can become an end in itself, consuming effort out of proportion to the benefit it gives.
• It is not by itself sufficient. Cost figures must be interpreted with judgement; the same cost data can point to different decisions depending on the circumstances, so the system supports but does not replace managerial judgement. …