The limitations of financial accounting have made the management to realise the importance of cost
accounting. Whatever may be the type of business, it involves expenditure on labour, materials and other
items required for manufacturing and disposing of the product. The management has to avoid the possibility
of waste at each stage. It has to ensure that no machine remains idle, efficient labour gets due incentive, byproducts
are properly utilised and costs are properly ascertained. Besides the management, the creditors
and employees are also benefited in numerous ways by installation of a good costing system. Cost
accounting increases the overall productivity of an organisation and serves as an important tool, in bringing
prosperity to the nation. Thus, the importance of cost accounting can be discussed under the following
headings:
(a) Costing as an Aid to Management
Cost accounting provides invaluable aid to management. It provides detailed costing information to the
management to enable them to maintain effective control over stores and inventory, to increase efficiency of
the organisation and to check wastage and losses. It facilitates delegation of responsibility for important
tasks and rating of employees. For all these, the management should be capable of using the information
provided by cost accounts in a proper way. The various advantages derived by the management from a good
system of costing are as follows:
1. Cost accounting helps in periods of trade depression and trade competition – In periods of
trade depression, the organisation cannot afford to have losses which pass unchecked. The
management must know the areas where economies may be sought, waste eliminated and
efficiency increased. The organisation has to wage a war not only for its survival but also continued
growth. The management should know the actual cost of their products before embarking on any
scheme of price reduction. Adequate system of costing facilitates this.
2. Cost accounting aids price fixation – Although the law of supply and demand to a great extent
determines the price of the article, cost to the producer does play an important role. The producer
can take necessary guidance from his costing records in case he is in a position to fix or change the
price charged.
3. Cost accounting helps in making estimates – Adequate costing records provide a reliable basis
for making estimates and quoting tenders.
4. Cost accounting helps in making estimates – Adequate costing records provide a reliable basis
for making estimates and quoting tenders.
Cost accounting helps in channelising production on right lines – Proper costing information
makes it possible for the management to distinguish between profitable and non-profitable activities.
Profits can be maximised by concentrating on profitable operations and eliminating non-profitable
ones.
5. Cost accounting eliminates wastages – As cost accounting is concerned with detailed break-up of
costs, it is possible to check various forms of wastages or losses.
6. Cost accounting makes comparisons possible – Proper maintenance of costing records provides
various costing data for comparisons which in turn helps the management in formulation of future
lines of action.
7. Cost accounting provides data for periodical profit and loss account – Adequate costing
records provide the management with such data as may be necessary for preparation of profit and
loss account and balance sheet at such intervals as may be desired by the management.
8. Cost accounting helps in determining and enhancing efficiency – Losses due to wastage of
materials, idle time of workers, poor supervision, etc., will be disclosed if the various operations
involved in the production are studied carefully. Efficiency can be measured, costs controlled and
various steps can be taken to increase the efficiency.
9. Cost accounting helps in inventory control – Cost accounting furnishes control which
management requires in respect of stock of materials, work-in-progress and finished goods.
(b) Costing as an Aid to Creditors
Investors, banks and other money lending institutions have a stake in the success of the business concern
and are, therefore, benefited immensely by the installation of an efficient system of costing. They can base
their judgment about the profitability and future prospects of the enterprise on the costing records.
(c) Costing as an Aid to Employees
Employees have a vital interest in their employer’s enterprise in which they are employed. They are
benefited by a number of ways by the installation of an efficient system of costing. They are benefited,
through continuous employment and higher remuneration by way of incentives, bonus plans, etc.
(d) Costing as an Aid to National Economy
An efficient system of costing brings prosperity to the business enterprise which in turn results in stepping up
of the government revenue. The overall economic development of a country takes place as a consequence
increase in efficiency of production. Control of costs, elimination of wastages and inefficiencies led to the
progress of the industry and, in consequence of the nation as a whole.
