Need, Importance and Advantages of Cost Accounting
The science of
cost accounting has developed primarily to serve the needs of the management. The
techniques of cost accounting are the best tools by which management may
conduct a business towards profitable operations. It is so much allied to
management that it is difficult to indicate where the cost accounting ends and
managerial control begins.
Cost Accounting
has many advantages. The following are the most important advantages of a good
cost accounting system:
1. Profitable and unprofitable Activities:
In Cost
Accounting profitable and unprofitable activities are disclosed. Management can
take steps to eliminate or to reduce those activities from which little or no
profit is earned. It can change the method of production in order to render
such activities more profitable.
2. Classification and Subdivision of
costs:
Costs are
accumulated and classified by every possible division of business. In a good
costing system data regarding costs by functions, departments, processes, jobs
or orders, contracts and services can be easily computed. Thus it helps
management to ascertain the profitability of each product, sales area, division
etc. in order to improve profit.
3. Cost Finding and Price-Fixing:
It provides
accurate cost data which help in the fixation of selling price and for
submitting quotations. In periods of depression it enables the management to
determine the extent to which prices can be reduced.
4. Control of Materials and supplies:
Since in all
types of cost accounting, materials and supplies must be accounted for in terms
of departments, processes, and units of production or services; a system of
receiving, handling, and issuing materials and supplies is an essential part of
cost control. This will eliminate or reduce misappropriation, embezzlement,
obsolescence, and losses from scrap, defective, and spoiled materials and
supplies.
5. Control of Wages and Salaries:
Cost Accounting
activities encourage accounting for labour by jobs and by operations. In many
manufacturing concerns daily summary reports are prepared to show the number of
hours and minutes worked and the wage rate for each worker per job or
operation.
Cost Accounting
is a benefit to the employer by establishing standards to measure the
efficiency of labour to assist in assignment of work to employees best fitted
for it, and to determine the unit cost of labour arising from each activity.
6. Overhead costs:
The Cost
accountant first separates costs into direct and indirect items. Direct costs
consists of materials and labour that can be definitely
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