Cost Accounting Examine the Cost of Production.
Limitations and Techniques of Cost Accounting
Cost Accounting is not an exact science like other branches of accounting but is an art which have developed through theories and accounting practices based on common sense and reasoning. These practices are changing with time. There is no stereotyped system of cost accounting applicable to all industries. It lacks a uniform procedure. Concepts, methods, and techniques of cost accounting are understood and applied differently by different industries. It is used only by big enterprises. The limitations of cost accounting are as follows:
Limitations of Cost Accounting
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 prepare the reports. Also, it requires a number of steps in ascertaining such details. So it involves a more complex system. A more complex and complicated system of cost accounting is one of the limitations facing by the cost accounting.
It is Expensive: Installing and maintaining a cost-accounting system requires more manpower and resources. More analysis, allocation, and absorption of overheads require a 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 to the fact that it is more expensive and not economical.
In-applicability of Costing Method and Technique: Techniques and methods of cost accounting differ from organisation to organisation. One standard method is not adequate for all the requirements of various organisations. It depends on the nature of business and the type of service/product manufactured by the firm. If the wrong technique or method is used, it will affect the result. So the in-applicability of the same costing method and technique is one of the key limitations of cost accounting.
Not Suitable for Small-scale Units: One of the limitations faced by the cost accounting in installing it in all types of business is that it is not applicable to small-scale units. Through traditional accounting, small scale units can manage the cost effectively.
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.
Lack of Social Accounting: Social accounting is outside the scope of cost accounts. Cost accounting fails to take into account the social obligation of the business.
Need Preparation of Frequent Reconciliation to Verify Accuracy: Results shown by cost accounts differ from those of financial accounts. Preparation of reconciliation statements to verify the accuracy is frequently required. This leads to an unnecessary increase in the workload.
Duplication of Work: Many industrial units function effectively and control the cost effectively with financial accounting. Preparing cost accounting is unnecessary for them and it involves duplication of accounting work.
Does Not Control Cost by Itself: Cost accounting will not control the cost. It only brings out the possibility of areas that need control. If the organisation does not have efficient management, the reports and results brought out by the cost accountant is useless. So cost accounting will not control the cost by itself. It needs effective and efficient management to use it.
It is Based on Estimation of Previous Data: Most of the data used by a cost accountant is based on the estimation of indirect costs, assumptions, and previous data. Not using the actual data and costs is the limitation of cost accounting.
Use of Secondary Data: Cost accounting depends on financial statements for a lot of information. Any errors or shortcomings in the information will affect the results.
Lack of Cooperation of Employees: Cost accounting depends heavily on the cooperation of employees concerned. Lack of cooperation of employees will affect the overall performance of cost accounting. Noncooperation or opposition from employees will affect the results.
It Only Brings Out The Cost of Goods or Services: To find out the operational results, we need to depend on financial accounting. Cost accounting will not bring forth the financial status of the company.
It Serves The Information Need of The Management: We cannot depend on cost accounting for the financial information required by the shareholders, creditors, employees, and the society at large. It only serves the requirement of information needed by the management.
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.
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