Advantage of Cost Accounting

1. Controlling cost: Cost accounting helps to control the cost of the business by applying different
type of techniques and methods such as standard costing and budgetary control etc.

2. Fixing prices: Cost accounting also helps to fix the prices of product or service. It provides
detailed cost data of each product in aggregate as well as in per unit, which helps in fixation of
selling price. Cost accounting provides basis information for the preparation of tenders, estimates
and quotations.

3. Provides cost information: It provides necessary cost information to the management for
planning, implements and controlling.

4. Ascertains the total per unit cost of production: It ascertains the total and per unit cost of
production of goods and services that helps to fix the selling prices as well.

5. Discloses the profitable and non profitable activities: It discloses the profitable and non
profitable activities that enable management to decide to eliminate or control unprofitable
activities and expand or develop the profitable activities.

6. Provides information for the comparison of cost: It provides reliable data and information
which enable the comparison of cost between periods, volume of output, determent and
processes.

7. Checks the accuracy of financial accounts: It helps checking the accuracy of financial
accounts. This is done by preparing cost reconciliation statement.

8. Helps in investments for financial institutions: It is also advantageous to investment and

financial institutions since it discloses the profitability and financial position in which they intend
to invest.

9. Beneficial to workers: It is beneficial to workers as well since it emphasizes the efficient

utilization of labor and scientific systems of wages payment.

Limitations of Cost Accounting

1. The system is more complex: Cost accounting needs to identify the different types of expenses
and allocation of expenses is considered as a complicated system of accounting. It needs different
forms and formulas to collect the data and preparing the reports. Also it requires number of steps
in ascertaining such details. So it involves a more complex system. More complex and
complicated system of cost accounting is one of the limitations facing by the cost accounting.

2. It is expensive: In installing and maintaining cost accounting system requires more man power
and resources. More analysis, allocation and absorption of overheads requires considerable
amount of additional work. If the expenses incurred in ascertaining the cost is more than what is
derived from it, then the process of cost accounting is meaningless. In short, the expenses of cost
accounting should not be more than the profit derived from cost accounting. Many companies do
not adopt cost accounting owing the fact that it is more expensive and not economical.
 3. Inapplicability of costing method and technique: Technique and methods of cost accounting
differ from organization to organization. One standard method is not adequate for all the
requirement of different organizations. It depends on the nature of business and the type of
service/product manufactured by the firm. If wrong technique or method is used, it will affect the
result. So inapplicability of same costing method and technique is the one of the main limitation
of cost accounting.

4. Not suitable for small scale units: One of the limitation faced by the cost accounting in
installing it in all types of business is that it is not applicable to small scale units. Through the
traditional accounting, small scale units can control the cost effectively.

5. Lack of Accuracy: Use of notional cost such as standard cost, estimated cost etc would not bring
out the actual cost of the product. So the cost accounting lacks the accuracy of its results.

6. It serves the information need of the management: We cannot depend on cost accounting for
the financial information required by the share holders, creditors, employees and the society at
large. It only serves the requirement of information needed by the management.

7. Not useful for determining the tax liabilities: We cannot treat cost accounting as a basis for
determining the tax liabilities of the business. Financial accounting is required for the
determination of tax liabilities.

Concept of Cost
According to the Chartered Institute of Management Accountants, cost is “the amount of expenditure
(actual or notional) incurred on or attributable to a specified thing or activity.”

Cost Unit
Cost unit is a unit of quantity of products, service or time or combination of these in relation to which cost
may be expressed. “Cost unit is a device for the purpose of breaking up costs into smaller sub divisions.”

Cost Centre
According to CIMA, London, Cost Centre means “a location, person or item of equipment or group of
these for which costs may be ascertained and used for the purpose of cost control”

Types of Costs
1. By Nature or Element

a. Material Cost

b. Labour Cost

c. Expenses
2. By Functions

a. Production Cost

b. Selling Cost

c. Distribution Cost

d. Administrative Cost

e. Research & Development Cost

f. Pre Production Cost

3. As Direct or Indirect:

a. Direct Cost

b. Indirect Cost

4. By Variability

a. Fixed Cost

b. Variable Cost

c. Semi Variable Cost

5. By Controllability

a. Controllable Cost

b. Uncontrollable Cost

6. By Normality

a. Normal Cost

b. Abnormal Cost

7. Opportunity Cost

8. Implicit Cost/ Imputed Cost