January 26, 2022

SB-Accounting

Accounting + Finance Blog

Disadvantages of cost accounting: Five points you should know

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Cost accounting has earlier been defined as the application of costing principles, methods, processes, etc, to compute the cost of production or service and help management take the necessary economic decision. Although there are benefits of cost accounting, the disadvantages are not farfetch. However, such disadvantages shouldn’t discourage small businesses from incorporating a costing system.

Disadvantages of costing

It is expensive: Yes, to set up a cost accounting system will add to the cost of the already installed financial accounting system. Though part of the financial accounting system can be used for costing information system, it is more optimal to separate both systems. However, if the set-up cost outweighs the benefit, it is advisable not to include such until the entity can afford it.

It requires more accounting staff: In a small organization, it is possible for a single accountant to carry out both the job of a cost accountant and a financial accountant. This might be stressful! However, as the business grows, it becomes necessary to separate both systems. These require more accountants as well as auditors.

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It may be difficult to comprehend: The information provided by a cost accounting system may be difficult to understand by non-accountants. Especially those in managerial roles that do not have any background knowledge of accounting. To achieve comprehensiveness, the cost accountant will need to give a summarised explanation to these persons they can understand.

Use of estimates: Costing makes used of estimates. And as such, it may provide figures that are higher or lower than the actual figures. For example, in computing the cost of production, a firm can use the absorption costing method, standard costing method or marginal costing method. All these methods require the use of estimation. In absorption costing, computation will be made to know the value of the overhead cost, the amount arrived at may be approximated.

The use of budget and future cost: Cost accounting and it’s elder brother, management accounting, majorly use budgeted cost and future cost. These costs are based on assumptions. If the wrong one is utilized, the end result may be detrimental to the business.

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Despite the disadvantages of cost accounting, a good cost accounting system can increase sales and profits while reducing costs. Next, the difference between cost accounting and management accounting are explained.

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