Management Notes

Reference Notes for Management

Importance of Cost Accounting -4 Major Importance | Introduction to Cost and Management Accounting

Importance of Cost Accounting

Management has realized the importance of cost accounting due to the limitations of financial accounting. Any type of business requires expenditures on labour, materials, and other items needed to manufacture and dispose of the product. Each stage of the process should be managed to avoid waste. This requires ensuring that no machine remains idle, that efficient labour is appropriately rewarded, that byproducts are properly utilized, and that costs are accurately determined.
A good costing system benefits not only the management, but also creditors and employees. The cost accounting system increases the productivity of an organization and contributes to the prosperity of the nation. Hence, the following are the reasons why cost accounting is important: 

(a) Costing as an Aid to Management 

Costing as an Aid to Management 

Management benefits from the use of cost accounting. The management receives detailed cost information to maintain effective inventory and store control, increase efficiency, and prevent waste and loss. This enables delegation of responsibility for important tasks and employee ratings. In order to do all of this, the management must be able to make proper use of the information provided by cost accounts. As a result of a good costing system, a company’s management is able to gain the following benefits:

  • a) Cost accounting helps during periods of trade depression and trade competition:

During periods of trade depression, the organization cannot afford to let losses pass unchecked. In order to increase efficiency, economies must be sought, waste must be eliminated, and waste must be reduced. Organizations must fight not only for survival but also for continued growth.For the management to reduce the price of its products, it must first know the actual costs. This can be achieved with an efficient costing system.

  • b) Cost accounting aids price fixation :

While most of the price of an article is determined by the law of supply and demand, the cost to the producer also plays a significant role. The producer can make use of his costing records if he is in the position to set or change the price charged.

  • c) Cost accounting helps in making estimates:

For estimating and quoting, accurate cost records are essential.

  • d) Cost accounting helps in channelising production on right lines:

The management can distinguish between profitable and non-profitable activities with proper costing information. It is possible to maximize profits by focusing on the profitable operations and eliminating the non-profitable ones.

  • e) Cost accounting eliminates wastages:

Due to the fact that cost accounting is concerned with the detailed breakdown of costs, it is possible to detect various types of wastages.

  • f) Cost accounting makes comparisons possibles:

The proper maintenance of costing records provides a variety of costing information for comparison, which in turn assists management in formulating future directions.

  • g) Cost accounting provides data for periodical profit and loss account :

By maintaining adequate costing records, the management can prepare the profit and loss account and balance sheet at the intervals the management desires.

  • h) Cost accounting helps in determining and enhancing efficiency:

Analyzing the various operations involved in the production will reveal losses due to waste of materials, idle time of employees, poor supervision, etc. You can measure efficiency, control costs, and take a variety of steps to improve efficiency.

  • i) Cost accounting helps in inventory control:

Management requires cost accounting to keep track of stock of materials, work-in-progress, and finished goods. 

(b) Costing as an Aid to Creditors

Costing as an Aid to Creditors

In the case of a business concern, investors, banks, and other money lending institutions have a stake in the success of the business concern and are, therefore, greatly benefited by an efficient costing system. On the basis of the costing records, they can determine whether or not the enterprise will be profitable and profitable in the future. 

(c) Costing as an Aid to Employees 

Costing as an Aid to Employees

The enterprise in which an employee works has a vital interest in its employee. By implementing an efficient system of costing, they are able to reap numerous benefits. As a result of continuous employment and higher wages as a result of incentives, bonus plans, etc., they benefit. 

(d) Costing as an Aid to National Economy 

Costing as an Aid to National Economy

A system of costing that works effectively brings prosperity to the business enterprise, which is then reflected in an increase in government revenue. An increase in production efficiency contributes to the overall economic development of a country. The advancement of the industry and as a consequence of the nation as a whole was due to the control of costs, elimination of wastages, and improvements in efficiency.  

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