Objections to Cost Accounting
Sometimes certain objections are raised against cost accounting system and some disadvantages thereof pointed out. But the fact remains that there are no real disadvantages of the system itself. The disadvantages of the cost accounting system arise only if the system is not applied with caution and care.
Main Objections to Cost Accounting
The main objections against cost accounting system are as follows:
1.Cost Accounting Is Unnecessary:
It is generally argued that maintenance of the costing records for the purpose of operating the cost accounting system, is unnecessary and involves duplication of accounting work. But this argument cannot be treated as valid in this present age of cutthroat competition. The management of any manufacturing concern, in order to face competition, should know not only the exact cost of its products but also the constitution of cost or its various elements. Cost accounting system renders invaluable services to the management in the following ways:
a). It helps the management in ascertaining the accurate cost of products of the manufacturing concern and how it has been made up.
b). It provides a reliable basis to the management for fixing a reasonable and competitive selling price and quotation price.
c). It assists in controlling the costs of material, labour and overhead by eliminating or minimizing all types of wastages, leakages and inefficiencies.
d). It helps the management in exercising cost control and maximizing profits through the techniques of standard costing and budgetary control.
e). It provides invaluable data for the assistance and guidance of the management in the decision-making process.
Keeping in view the above-mentioned advantages of the cost accounting system, it can be said that cost accounting is not unnecessary.
2. Cost Accounting System Cannot Be Adopted by Small Business Concerns:
It is generally said that the adoption of cost accounting system is costly and hence the small business concerns are unable to adopt it and to enjoy its advantages. But it should be remembered that costing system should be adopted not as a matter of fashion but as a matter of necessity. If a small business concern needs the costing system, the system should be so designed that it is within the financial capacity of that business. The practical importance of the objection is, therefore, negligible.
3. Cost Accounting System Is Very Costly:
The third disadvantage of the cost accounting system is that its installation and subsequent operation involves additional expenditure which leads to an increase in the cost of production and reduces the profitability of the business concern. But cost accounting system being costly in itself is no disadvantage provided the system is a profitable investment for any business concern. The cost accounting system should be economical and the cost of its operation should be commensurate with the advantages accruing from it. If this principle is faithfully observed, there is no possibility of the cost accounting system being costly.
4.Costing Results Are Misleading:
It is generally said that cost accounting system involves the use of the estimated figures and costing results may be misleading if errors somehow creep in. But it may happen only in case of wrong application of the system by the persons who are not well-trained in cost accounting principles. Thus, the fault lies with the man and not with the cost accounting system.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.