January 26, 2022

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Top six advantages of cost accounting to businesses

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Cost accounting is of advantage as a field of study and an integral part of businesses. The data and information provided by cost accounting can save costs, provide better prices for a product, among other things. Below are the top six advantages of cost accounting.

Six advantages of cost accounting

Identification of Profitable Products and Services: A good costing system provides information that helps a business identify products or services that are profitable and those that are not profitable. It can help to know the unprofitable products that can aid other products that can make a profit.

For example, product A is not profitable. However, adding product A to the firm’s product range can increase sales and profits of those products the firm deals with.

It provides comparative analysis: With costing data and information, a business can carry out a comparative analysis of various products, jobs or processes within a period. Comparative analysis can be done between product A and product B in a particular period, probably every three months. This helps to know which product performs better than others.

It aids Inventory control: With cost accounting, a firm can control how inventory goes in and out of the organization. Various methods can be used (this will be discussed later on in this course). With costing techniques, a firm can determine when to replenish stocks of goods.

It can be used to predict future cost and revenue: Costing techniques are available for use to predict the future cost and revenue for a product. These are basically used for planning and budgeting. Of course, knowing the future cost of a product and the expected revenue can aid management strategy, planning, and budgeting.

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Computing the cost of production: Cost accounting is of advantage in terms of determining the cost of production. In fact, that is what brings about costing, in the first instance. To determine this, the various elements of cost are added together to get the cost of production.

It helps identify efficient methods and processes: Costing data can be used to know which method used in producing goods or rendering service is more efficient. Therefore, inefficient methods are scrapped. Any method that creates idle time and wastage are eliminated.

Next, the disadvantages of cost accounting will be discussed.

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