The science of cost accounting has developed primarily to serve the needs of the management. The techniques of cost accounting are the best tools by which management may conduct a business towards profitable operations. It is so much allied to management that it is difficult to indicate where the cost accounting ends and managerial control begins.
Cost Accounting has many advantages. The following are the most important advantages of a good cost accounting system:
1. Profitable and unprofitable Activities:
In Cost Accounting profitable and unprofitable activities are disclosed. Management can take steps to eliminate or to reduce those activities from which little or no profit is earned. It can change the method of production in order to render such activities more profitable.
2. Classification and Subdivision of costs:
Costs are accumulated and classified by every possible division of business. In a good costing system data regarding costs by functions, departments, processes, jobs or orders, contracts and services can be easily computed. Thus it helps management to ascertain the profitability of each product, sales area, division etc. in order to improve profit.
3. Cost Finding and Price-Fixing:
It provides accurate cost data which help in the fixation of selling price and for submitting quotations. In periods of depression it enables the management to determine the extent to which prices can be reduced.
4. Control of Materials and supplies:
Since in all types of cost accounting, materials and supplies must be accounted for in terms of departments, processes, and units of production or services; a system of receiving, handling, and issuing materials and supplies is an essential part of cost control. This will eliminate or reduce misappropriation, embezzlement, obsolescence, and losses from scrap, defective, and spoiled materials and supplies.
5. Control of Wages and Salaries:
Cost Accounting activities encourage accounting for labour by jobs and by operations. In many manufacturing concerns daily summary reports are prepared to show the number of hours and minutes worked and the wage rate for each worker per job or operation.
Cost Accounting is a benefit to the employer by establishing standards to measure the efficiency of labour to assist in assignment of work to employees best fitted for it, and to determine the unit cost of labour arising from each activity.
6. Overhead costs:
The Cost accountant first separates costs into direct and indirect items. Direct costs consists of materials and labour that can be definitely
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