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Limitations and Techniques of Cost Accounting Management

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Helna is a postgraduate in Commerce who is working as a Manager. She loves sharing informative information with her readers.

Cost Accounting Examine the Cost of Production.

 Installing and maintaining a cost-accounting system requires more manpower and resources. More analysis, allocation, and absorption of overheads require a considerable amount of additional work.

Installing and maintaining a cost-accounting system requires more manpower and resources. More analysis, allocation, and absorption of overheads require a considerable amount of additional work.

Limitations and Techniques of Cost Accounting

Cost Accounting is not an exact science like other branches of accounting but is an art which have developed through theories and accounting practices based on common sense and reasoning. These practices are changing with time. There is no stereotyped system of cost accounting applicable to all industries. It lacks a uniform procedure. Concepts, methods, and techniques of cost accounting are understood and applied differently by different industries. It is used only by big enterprises. The limitations of cost accounting are as follows:

Limitations of Cost Accounting

  1. The System is More Complex: Cost accounting needs to identify the different types of expenses and allocation of expenses is considered as a complicated system of accounting. It needs different forms and formulas to collect the data and prepare the reports. Also, it requires a number of steps in ascertaining such details. So it involves a more complex system. A more complex and complicated system of cost accounting is one of the limitations facing by the cost accounting.
  2. It is Expensive: Installing and maintaining a cost-accounting system requires more manpower and resources. More analysis, allocation, and absorption of overheads require a considerable amount of additional work. If the expenses incurred in ascertaining the cost is more than what is derived from it, then the process of cost accounting is meaningless. In short, the expenses of cost accounting should not be more than the profit derived from cost accounting. Many companies do not adopt cost accounting owing to the fact that it is more expensive and not economical.
  3. In-applicability of Costing Method and Technique: Techniques and methods of cost accounting differ from organisation to organisation. One standard method is not adequate for all the requirements of various organisations. It depends on the nature of business and the type of service/product manufactured by the firm. If the wrong technique or method is used, it will affect the result. So the in-applicability of the same costing method and technique is one of the key limitations of cost accounting.
  4. Not Suitable for Small-scale Units: One of the limitations faced by the cost accounting in installing it in all types of business is that it is not applicable to small-scale units. Through traditional accounting, small scale units can manage the cost effectively.
  5. Lack of Accuracy: Use of notional cost such as standard cost, estimated cost, etc. would not bring out the actual cost of the product. So the cost accounting lacks the accuracy of its results.
  6. Lack of Social Accounting: Social accounting is outside the scope of cost accounts. Cost accounting fails to take into account the social obligation of the business.
  7. Need Preparation of Frequent Reconciliation to Verify Accuracy: Results shown by cost accounts differ from those of financial accounts. Preparation of reconciliation statements to verify the accuracy is frequently required. This leads to an unnecessary increase in the workload.
  8. Duplication of Work: Many industrial units function effectively and control the cost effectively with financial accounting. Preparing cost accounting is unnecessary for them and it involves duplication of accounting work.
  9. Does Not Control Cost by Itself: Cost accounting will not control the cost. It only brings out the possibility of areas that need control. If the organisation does not have efficient management, the reports and results brought out by the cost accountant is useless. So cost accounting will not control the cost by itself. It needs effective and efficient management to use it.
  10. It is Based on Estimation of Previous Data: Most of the data used by a cost accountant is based on the estimation of indirect costs, assumptions, and previous data. Not using the actual data and costs is the limitation of cost accounting.
  11. Use of Secondary Data: Cost accounting depends on financial statements for a lot of information. Any errors or shortcomings in the information will affect the results.
  12. Lack of Cooperation of Employees: Cost accounting depends heavily on the cooperation of employees concerned. Lack of cooperation of employees will affect the overall performance of cost accounting. Noncooperation or opposition from employees will affect the results.
  13. It Only Brings Out The Cost of Goods or Services: To find out the operational results, we need to depend on financial accounting. Cost accounting will not bring forth the financial status of the company.
  14. It Serves The Information Need of The Management: We cannot depend on cost accounting for the financial information required by the shareholders, creditors, employees, and the society at large. It only serves the requirement of information needed by the management.
  15. Not Useful for Determining The Tax Liabilities: We cannot treat cost accounting as a basis for determining the tax liabilities of the business. Financial accounting is required for the determination of tax liabilities.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2010 Helna

Comments

Ajay Dalia on October 11, 2012:

thanks for this help, this is very useful to me

MMM on June 20, 2012:

Thanks, this is a very nice contribution keep it up.

haphy monad on April 04, 2012:

Hallllooo, nyc wrk. how is financial administration important in public administration

Vipasha on March 19, 2012:

God bless you sam..Xx

Abdifatah on January 20, 2012:

I'm Accountant at ethiopia

Gauri on November 30, 2011:

Gudeveninggg, thanxs it is useful n very much cleared

Gauri on November 30, 2011:

Gudeveninggg, thanxs it is useful n very much cleared

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Bblonde on November 18, 2011:

Hi, how do one install a costing or an accounting system in an organization.

aamir on October 23, 2011:

thx.. wz vry useful

anil on October 18, 2011:

this very helpul for study

thanx

zee on October 06, 2011:

Hi do you have any thing to explain tender costing, specialy how to calculate labour cost i.e PAYE and NI contributions and holiday cover

sofia on March 29, 2011:

thanks for that ..it was really helpful for me ...thanks u so much for the matter

Shomail on March 22, 2011:

Its usefull and clearly explained. Thank you

Helna (author) on February 26, 2011:

There are many limitation to costing. Still we cannot run a business without costing. As stated above, you need to find out suitable costing for your business.

Costing has many advantages. Every one count the cost one way or the other. Without costing how would you know the profit?

Thanks all for your kind visit and comments

Business Finance Man on December 04, 2010:

It's true that there are many limitations to costing, but what's the alternative? Without attempting to cost your products, how would you know that you were going to make a profit (in time to do anything about it)? The trick - I think is to choose an appropriate costing system for the nature and complexity of business you operate. I found some further info about drawbacks over at http://www.smallbusinessfinancetips.com/standard-c...

Fahad afridi on October 23, 2010:

thanks for the comment......

iphie on October 04, 2010:

was helpfull

chel on September 17, 2010:

hi..

Helna (author) on September 14, 2010:

Yes, I Do. Thanks for your visit and comment.

Peggy Woods from Houston, Texas on September 14, 2010:

Judging from this article and many of the titles of your other articles you must work in the field of accounting. Am I correct?

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