The limitations of financial accounting have made the management to realize the importance of cost accounting. Whatever may be the type of business, it involves expenditure on labour, materials and other items required for manufacturing and disposing of the product. The management has to avoid the possibility of waste at each stage. It has to ensure that no machine remains idle, efficient labour gets due incentive, by-products are properly utilized and costs are properly ascertained. Besides the management, the creditors and employees are also benefited in numerous ways by installation of a good costing system. Cost accounting increases the overall productivity of an organization and serves as an important tool, in bringing prosperity to the nation. Thus, the importance of cost accounting can be discussed under the following headings
Costing as an Aid to Management
Cost accounting provides invaluable aid to management. It provides detailed costing information to the management to enable them to maintain effective control over stores and inventory, to increase efficiency of the organization and to check wastage and losses. It facilitates delegation of responsibility for important tasks and rating of employees. For all these, the management should be capable of using the information provided by cost accounts in a proper way. The various advantages derived by the management from a good system of costing are as follows:
- Cost accounting helps in periods of trade depression and trade competition: In periods of trade depression, the organization cannot afford to have losses which pass unchecked. The management must know the areas where economies may be sought, waste eliminated and efficiency increased. The organization has to wage a war not only for its survival but also continued growth. The management should know the actual cost of their products before embarking on any scheme of price reduction. Adequate system of costing facilitates this.
- Cost accounting aids price fixation: Although the law of supply and demand to a great extent determines the price of the article, cost to the producer does play an important role. The producer can take necessary guidance from his costing records in case he is in a position to fix or change the price charged.
- Cost accounting helps in making estimates: Adequate costing records provide a reliable basis for making estimates and quoting tenders.
- Cost accounting helps in channelizing production on right lines: Proper costing information makes it possible for the management to distinguish between profitable and non-profitable activities. Profits can be maximized by concentrating on profitable operations and eliminating non-profitable ones.
- Cost accounting eliminates wastages: As cost accounting is concerned with detailed break-up of costs, it is possible to check various forms of wastages or losses.
- Cost accounting makes comparisons possible: Proper maintenance of costing records provides various costing data for comparisons which in turn helps the management in formulation of future lines of action.
- Cost accounting provides data for periodical profit and loss account: Adequate costing records provide the management with such data as may be necessary for preparation of profit and loss account and balance sheet at such intervals as may be desired by the management.
- Cost accounting helps in determining and enhancing efficiency: Losses due to wastage of materials, idle time of workers, poor supervision, etc., will be disclosed if the various operations involved in the production are studied carefully. Efficiency can be measured, costs controlled and various steps can be taken to increase the efficiency.
- Cost accounting helps in inventory control: Cost accounting furnishes control which management requires in respect of stock of materials, work-in-progress and finished goods.