IMPORTANCE OF COST ACCOUNTING

The limitation of financial accounting has made the management to realise the importance of cost accounting. The importance of cost accounting are as follows:

1. Importance to Management

Cost accounting provides invaluable help to management. It is difficult to indicate where the work of cost accountant ends and managerial control begins. The advantages are as follows :

Helps in ascertainment of cost

Cost accounting helps the management in the ascertainment of cost of process, product, Job, contract, activity, etc., by using different techniques such as Job costing and Process costing.

Aids in Price fixation

By using demand and supply, activities of competitors, market condition to a great extent, also determine the price of product and cost to the producer does play an important role. The producer can take necessary help from his costing records.

Helps in Cost reduction

Cost can be reduced in the long-run when cost reduction programme and improved methods are tried to reduce costs.

Elimination of wastage

As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc., are in the use of machine equipment and material.

Helps in identifying unprofitable activities

With the help of cost accounting the unprofitable activities are identified, so that the necessary correct action may be taken.

Helps in checking the accuracy of financial account

Cost accounting helps in checking the accuracy of financial account with the help of reconciliation of the profit as per financial accounts with the profit as per cost account.

Helps in fixing selling Prices

It helps the management in fixing selling prices of product by providing detailed cost information.

Helps in Inventory Control

Cost furnishes control which management requires in respect of stock of material, work in progress and finished goods.

Helps in estimate

Costing records provide a reliable basis upon which tender and estimates may be prepared.

2. Importance to Employees

Worker and employees have an interest in which they are employed. An efficient costing system benefits employees through incentives plan in their enterprise, etc. As a result both the productivity and earning capacity increases.

3. Cost accounting and creditors

Suppliers, investor’s financial institution and other moneylenders have a stake in the success of the business concern and therefore are benefited by installation of an efficient costing system. They can base their judgement about the profitability and prospects of the enterprise upon the studies and reports submitted by the cost accountant.

4. Importance to National Economy

An efficient costing system benefits national economy by stepping up the government revenue by achieving higher production. The overall economic developments of a country take place due to efficiency of production.

Reference: 

Cost Accounting by Reddy and Hari Prasad Reddy

Cost Accounting by  Jain and Narang

ICAI