Systems of cost accounting have significant advantages for manufacturers, managers, employees, investors, consumers, and the government. A summary of the advantages of cost accounting is given below.
A. Advantages for Managers Manufacturers
The main advantages of a sound cost accounting system to the manufacturers and management are:
1. Analyzing costs
The aim of a cost accounting system is to analyze and identify the cost of production in a scientific way. This is the main advantage of any cost accounting system.
Cost accounting enables manufacturers to ascertain the exact cost per unit, per job, or per contract—not only at the final stage of completion but also at the various stages of production or execution.
Significantly, cost accounting systems also disclose the extent to which each element of expenditure contributes to the total cost.
2. Identifying profitable/unprofitable activities
Cost accounting reveals the profitable and unprofitable areas within a business. As such, it can guide the elimination of less profitable (or completely unprofitable) activities or units and expand those which are profitable.
If costing data are not available, for example, the profits of one department or product might be used up by the losses incurred in another department or in respect of some other product. This would obscure the company’s financial position.
3. Basis for determining sales price
By disclosing the actual cost of production, cost accounting provides managers with a reliable basis for establishing sales prices.
This saves companies from losses that may arise due to an ineffective pricing strategy (e.g., if the sales price is decided without considering the cost of production).
4. Useful when quoting
Cost accounting provides a reliable basis for preparing tenders or quotations, at which the manufacturer agrees to supply goods to a prospective customer at some future date.
If the tenders are based on actual cost data, they are bound to be competitive and sure to be accepted by the prospective customer.
5. Identifying the elements of cost
Cost accounting helps to identify material cost, labor cost, and overheads, as well as their contribution to the total cost.
Thus, it assists manufacturers in ascertaining the importance of each element of cost and finding out where there is greater scope for economy and efficiency.
6. Comparing costs
Cost accounting provides reliable data for comparing costs in different periods, volumes of output, departments, processes, and establishments.
7. Controlling costs
Cost accounting systems are a means of controlling costs. This is achieved in three ways.
First, cost accounting serves as a system of material control, which provides for proper checks on purchasing, receiving, storage, and issuing materials and prevents wastages, leakages, pilferage, and overstocking of materials by fixing stock levels.
Second, cost accounting serves as an efficient system of labor control, which enables control over the arrival and departure of workers, analysis of timesheets, and wage payments.
Third, cost accounting helps to ensure the optimal utilization of plant capacity. This is because cost accounting systems aid in the development of standard costs for each element of cost, serving as a yardstick to measure the efficiency of actual operations.
If there are variances, cost accounting encourages a careful examination of the causes, enabling the manufacturer to take corrective action.
8. Helpful in planning and decision-making
The cost records maintained under a cost accounting system provide valuable information for future planning and for decision-making. The costing records assist management in making the following decisions:
- Manufacturing or buying decisions
- Choosing a profitable product mix
- Operating or shut-down decisions
- Choosing profitable production methods
- Selecting a selling price
9. Accuracy of financial accounts
Cost accounting systems provide an independent and reliable check on the accuracy of financial accounts. This is achieved by means of the reconciliation of profits, as reflected by cost accounts and financial accounts.
B. Advantages for Investors and Financial Institutions
Investors and financial institutions are always interested in making investments in profitable businesses. In particular, they often grant loans to businesses with good profitability and a sound financial position.
Therefore, since the use of cost accounting in a business helps to increase profitability and strengthen the financial position, its use also has a positive impact on investors and financial institutions in increasing their returns.
C. Advantages for Workers
Cost accounting systems aim to utilize the labor force in the most efficient way, without exploiting workers.
Cost accounting stresses the importance of analyzing employee efficiency. For example, incentive plans are devised in which efficient workers are rewarded for their work and less efficient workers are motivated.
In this way, cost accounting helps to increase the efficiency of employees, which has benefits not only for the company but also the workers.
A good system of costing helps to maximize the profits of a business, thereby giving it a long and prosperous life. This factor is helpful for workers, too, particularly in terms of ensuring stable employment and a fair reward for work.
Cost accounting systems also help to minimize misunderstandings between workers and employers regarding issues such as the fairness of profits and wages. Thus, it lowers the likelihood of labor disputes occurring within businesses.
D. Advantages for Consumers and General Public
Cost accounting enables cost control because it helps businesses to achieve the highest level of efficiency across all the factors of production.
Cost control, in turn, reduces the cost of products and services. Due to this, through cost accounting, consumers benefit from lower prices and higher-quality goods and services.
The long-term existence of businesses, which is also achieved through cost accounting, also benefits consumers and the general public. This is because it ensures an uninterrupted supply of necessary goods and safeguards against black-marketing.
E. Advantages for National Economy
Today’s “age” has been described as the age of information, the digital age, and others, but it has also been described as the age of planning.
In the age of planning, governments—to realize planned economic development—are continuously preparing economic plans.
For proper economic and industrial development, governments depend on data relating to the cost of production in various industries. This enables them to make decisions about the economic incentives and financial assistance to be awarded.
Governments also require data for use in framing their economic policies (e.g., Business Policy, Industrial Policy, Import and Export Policy, and Taxation Policy).
Governments must also consider the total cost involved in any economic and industrial plan before it is implemented. This is only possible if a system of cost accounting is applied.