Over the years, objections have been raised against the cost accounting system, with some critics highlighting its disadvantages.
However, the fact remains that there are no real disadvantages to the system itself. The disadvantages of the cost accounting system arise only if the system is not applied with caution and care.
Main Objections to Cost Accounting
The main objections to the cost accounting system are explained below.
1. Cost Accounting Is Unnecessary
It is often argued that maintaining costing records in a cost accounting system is unnecessary and duplicates the accounting work. However, this argument is not valid in the current age of fierce competition.
The management staff in any manufacturing concern, in order to cope with competition, need to know the exact costs of products and also the make-up of costs, its various elements.
Cost accounting systems provide invaluable services to the management in the following ways:
- Helps management to ascertain the accurate cost of products in a manufacturing concern, as well as the elements of costs
- Provides a reliable basis for management to fix reasonable and competitive selling prices and quotation prices
- Assists in controlling the costs of materials, labor, and overheads by eliminating or minimizing all types of wastage, leakage, and inefficiency
- Helps management to exercise cost control and maximize profits through standard costing and budgetary control techniques
- Provides invaluable data to assist and guide management decision-making
With these advantages in mind, it cannot still be claimed that cost accounting is unnecessary.
2. Cost Accounting Systems Cannot Be Adopted by Small Businesses
It is commonly claimed that adopting a cost accounting system is costly and, therefore, small businesses cannot adopt it and exploit its advantages.
However, it should be remembered that costing systems should be adopted not as a matter of fashion but as a matter of necessity.
If a small business concern needs a costing system, the system should be designed to ensure it can work within the firm’s financial capacity. The practical importance of the objection is, therefore, negligible.
3. Cost Accounting Systems Are Costly
The third disadvantage of cost accounting systems is that their installation and subsequent operation involve additional expenditures. This increases the cost of production and reduces business profitability.
However, a cost accounting system, being costly in itself, is no disadvantage provided that the system is a profitable investment for any business concern.
The cost accounting system should be economical, and the cost of its operation should be aligned with the advantages it generates. If this principle is faithfully observed, there is no possibility that the cost accounting system will be too costly.
4. Costing Results Are Misleading
It is often claimed that cost accounting systems involve the use of the estimated figures, and costing results may be misleading if errors somehow creep in.
However, this will only happen if the system is incorrectly applied (e.g., by someone who does not know the principles of cost accounting). Therefore, in this case, the fault lies with the accountant and not with the cost accounting system.
Objections to Cost Accounting FAQs
The commonest objections to accounts of this type are that they duplicate work already done on the financial records and that they are unnecessary. These objections will be discussed more fully below.
Yes, we think it is necessary. If a small business needs a system, the design of the system should ensure it works within its financial capacity and Cost Accounting systems provide invaluable data to assist and guide management decision-making.
Yes, we do not think that embodied costs will be less important as the division of labour increases, as more work is co-ordinated and as almost almost all businesses become larger.
The first disadvantage is that, in adopting a costing system, an extra expenditure has to be incurred and this will increase costs and reduce profitability. The second disadvantage is that costing results can be misleading if errors creep in. This will only happen if the system is incorrectly applied (e.G., By someone who does not know the principles of Cost Accounting).
Yes, we do think that people tend to overestimate the amount of control that a system like Standard Costs gives them. This is because, if these systems are incorrectly applied (e.G., By someone who does not know the principles of Cost Accounting), costing results can be misleading.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.