Need For Cost Accounting | Limitation of Financial Accounting
by
Admin
·
June 19, 2021
Need for Cost Accounting
- No clear idea of operating efficiency: Sometimes, an organization’s profits may be less or more because of inflation or trade depression and not due to efficiency or inefficiency. However financial accounting does not give a clear reason for profit or loss.
- Collective results do not spot weaknesses: Financial Accounting shows an organization’s net result. When an organization’s profit and loss account shows less profit or a loss, it does not explain why or show where the weakness lies.
- Does not help in fixing the price: In Financial Accounting, we get the total cost of production but it does not aid in determining prices of the products, services, production orders, and lines of products.
- No classification of expenses and accounts: In Financial Accounting, we don’t get data relating to costs incurred by departments, processes separately, or per unit cost of product lines or costs incurred in various sales territories. Further, expenses are not classified as direct or indirect, controllable or uncontrollable overheads, and the value added in each process is not reported.
- No data for comparison and decision making: It does not supply useful data to management for comparison with the previous period and for taking various financial decisions such as the introduction of new products, replacement of labor by machines, price in normal or special circumstances, producing a part in the factory or buying it from outside market, production of a product to be continued or given up, priority accorded to different products, investment to be made in new products or not, etc.
- No control on cost: Financial Accounting does not help to control materials, supplies, wages, labor, and overhead costs.
- Does not provide standards to assess the performance: Financial Accounting does not help in developing standards to assess the performance of various persons or departments. It also does not help in checking that costs do not exceed a reasonable limit for a given quantum of work of the requisite quality.
- Provides only historical information: Financial Accounting records only the historical costs incurred. It does not provide day-to-day cost information to the management for making effective plans for the future.
- No analysis of losses: It does not provide a complete analysis of losses due to defective material, idle time, idle plant and equipment, etc. In other words, no distinction is made between avoidable and unavoidable wastage.
- Inadequate information for reports: It does not provide adequate information for reports to outside agencies such as banks, government, insurance companies, and trade associations.
- No answer for certain questions: Financial Accounting will not help to answer questions like:-
(a) Should an attempt be made to sell more products or is the factory operating to capacity?
(b) if an order or contract is accepted, is the price obtainable sufficient to show a profit?
(c) if the manufacture or sale of product A were discontinued and efforts made to increase the sale of B, what would be the effect on the net profit?
(d) Why the profit of last year is of such a small amount even though output was increased substantially? Etc
Tags: Need for Cost Accounting
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