Advantages of Cost Accounting

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 25, 2021

Cost accounting system renders invaluable services to the manufacturers, management, employees, investors, consumers and Government. These services or advantages may be summarized as follows:

(A) Advantages to Manufacturers and Management

The main advantages of a sound cost accounting system to the manufacturers and management are:

1. Ascertainment of cost:

The principal object of cost accounting system is to ascertain scientifically the cost of production and this is also the main advantage of the cost accounting system. The cost accounting system enables the manufacturer to ascertain 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. Further, cost accounting system also discloses the extent to which each element of expenditure contributes to the total cost.

2. Disclosure of profitable and unprofitable activities:

Cost accounting system discloses the profitable and unprofitable activities of a business and thus affords valuable suggestion for a contraction or elimination of those which are less profitable or completely unprofitable, and for an expansion or adoption of those which are profitable. In case of non-availability of costing data, the profits of one department or product may be eaten away by the losses incurred in some other department or in respect of some other product and the businessman may have no idea that by closing down or improving the latter, his business can become highly profitable.

3. Provision of basis for determination of selling price:

By disclosing actual cost of production, cost accounting system provides the businessman with a reliable basis for fixing selling prices of his products. Thus it saves the manufacturer from losses which may arise due to injudicious fixation of prices without actually looking to the cost of production.

4. Calculation of tender price or quotation price:

Cost accounting system 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. Disclosure of the constitution of cost:

Cost accounting system reveals as to what proportion do material cost, labour cost and overhead bear to the total cost. Thus, it assists the manufacturer in ascertaining the importance of each element of cost and in determining where there is greater scope for economy.

6. Comparison of cost:

Cost accounting system furnishes reliable data for comparing costs in different periods, for different volumes of output, in different departments or processes and in different establishments.

7. Control of costs:

Cost accounting system serves as a means of controlling costs through—
(i) an efficient system of material control which provides for proper checks on purchasing, receiving, storage and issue of materials and also prevents wastages, leakages, pilferage and overstocking of materials by fixing stock levels;
(ii) an efficient system of labour control which provides for proper control over the arrival and departure of workers, analysis of the time of the workers and the payment of wages;
(iii) ensuring optimum utilization of plant capacity. Cost accounting system also develops standard costs of each element of cost to serve as a yardstick to measure the efficiency of actual operations. In case of variances, it gives rise to thorough enquiry into their causes so as to enable the manufacturer to take corrective action to eliminate the same.

8. Helpful in planning and decision-making:

The various cost records maintained under the cost accounting system provide valuable information
for the purpose of future planning and for decision-making. The costing records assist the management in making the following decisions:
(i) Manufacture or buy decisions;
(ii) Selection of the profitable product-mix;
(iii) Operate or shut-down decision;
(iv) Selection of the profitable method of production;
(v) Fixation of the selling price.

9. Check on the accuracy of financial accounts:

Cost accounting system provides an independent and most reliable check on the accuracy of financial accounts by means of the reconciliation of profits as shown by cost accounts and financial accounts.

(B) Advantages to Investors and Financial Institutions

Investors and financial institutions are always interested in making investment in and granting loans to those industrial concerns which have good profitability and sound financial position. Manufacturing concerns adopting cost accounting exercise cost control which, in its own turn, ensures higher profitability and sound financial position.

(C) Advantages to Workers

Cost accounting system aims at utilizing the labour force in the most efficient manner and does not involve the exploitation of workers. Cost accounting system stresses the classification of workers according to their efficiency and formulates plan of wage payment under which efficient workers get proper reward for their work and less efficient workers get an incentive to increase their efficiency. Thus, cost accounting system helps in increasing the efficiency of the workers of the business undertakings.
A good system of costing helps in maximizing the profits of any business concern, thus giving it a long and prosperous life. This factor is helpful in ensuring permanency of employment and fair reward for work to the workers.
Cost accounting system also helps in minimizing the possibilities of mis-understanding between workers and employers on the questions of fairness of profits and rate of wages. Thus, it minimizes the chances of labour disputes in business concerns.

(D) Advantages to Consumers and General Public

Cost accounting system provides for cost control through the utilization of the various factors of production in the most efficient manner. Cost control leads to a reduction in the cost of products and services. As a result of it, the various products and services are offered to the consumers at a lower price.
Thus, the consumers are in a position to enjoy quality goods and services at the most reasonable price. Further, permanency of the existence of business concerns due to high profitability as a result of cost control, ensures un-interrupted supply of goods to consumers and general public. Thus, the consumers are protected against the evils of hoarding and black-marketing.

(E) Advantages to National Economy

Present age is the age of planning. To bring about planned economic development, the Government of every country prepares economic plans. For proper economic and industrial development, the Government requires data relating to cost of production in various industries so as to decide about the various economic incentives and financial assistance to be given to them. The Government also requires these data for use in framing its various economic policies e.g., Business Policy, Industrial Policy, Import and Export Policy, Taxation Policy etc.
Further, the Government has also to take into account the total cost involved in any economic and industrial plan before it is implemented. It is possible only through cost accounting system.

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