COST

ACCOUNTI
NG
2ND NOTES ( 28/09/2020)
Advantages of
Costing System

 Cost accounting provide reliable cost data

with regard to different element of cost i.e.
Material, labour and expenses. This helps
the management in accurately determining
the value of inventory and cost of goods
sold.
 Cost system reveals unprofitable activities,
losses or inefficiencies occuring in any form
such as inadequate utilisation of plant and
machinery, wastages of manpower etc.
 Introduction of a cost reduction program
combined with operational research and
value analysis technique leads to
economies.
 As cost are accumulated by jobs,
processes, products and departments, the
management can distinguish between the
profitable and unprofitable activities.
Effective measures may be taken to remove
or reduce the unprofitable activities.
 Advantages of
Costing System
 Availability of accurate cost data help in
fixation by some price changes to be
affected with greater Reliance on the
outcome.
 Costing furnishes suitable data and
information in the management which
serves as a guideline in taking decision.
 Cost accounting provide the management
with valuable data for control of cost.
 Limitations of Cost
Accounting
1. It is Expensive
2. It is not necessary: costing is only
recently originated and that many industries
have prospered well and are still prospering
without cost accounting. Therefore, the
system is unnecessary.
3. Matter of Routine Forms and
Statements: Reporting of the costing
informa­tion to the management involves
the use of a number of forms. There is
unnecessary paper work.
4. Failure of Costing System: There is no
rigid system of cost accounting applicable
to all the industries of all types.
5. Not Applicable to Many Industries:
Modern methods of costing cannot be ap­
plied to certain type of industries. There is
no ready-made system of cost accounting
applicable to all concerns.
6. It is not Reliable : It is stated that cost
accounting is based on estimates and
therefore cannot be relied upon.
Difference between
Financial Accounting
& Cost Accounting.
Financial Cost
Accounting Accounting
 It aims at finding out  It aims at computing
results of accounting cost of production/
year in the form of profit service in a scientific
and loss account and manner and then cost
balance sheet. control and cost
 It is more attached with reduction.
reporting the results  It is an internal reporting
and position of system of an
business to persons organisation’s own
and authorities other management for
than management like decision making.
government, creditors,
investors, owners etc.
 It not deals with
 Financial accounting historical data but is
data is historical in also futuristic in
nature. approach.
 In financial accounting  In cost accounting,
the major emphasis is classification is basically
in cost classification
on the basis of
based on types of functions, activities,
transactions e.g. product, process and on
Salaries, repairs,
internal planning and
insurance, stores etc. control and information
needs of the
organisation.
 Financial Cost
Accounting Accounting
 In financial accounting,  Cost accounting uses
only those transactions both monetary as well
are recorded which are as quantitative
expressed in monetary information.
terms.  It aims at computing true
 It aims at presenting and fair view of cost of
true and fair view of production / services
profit and loss position offered by the firm.
as well as financial
position.
 Cost accounting subject
 Financial accounts are to cost audit which
subject to statutory verifies whether the cost
audit to verify whether accounts disclose true
they disclose a true and and fair view of the cost
fair view of profit and of production of the
loss as well as financial company.
position.