What are the Merits of Cost Accounting?

Cost Accounting has the following merits:

a) Fixation of selling price: Generally cost regulates selling price. Cost Accounting determines actual or calculated cost of production. Adding a margin of profit to the cost, price can be fixed.

b)Preparing estimates:” Cost Accounting accumulates statistical information regarding manufacture and sale. All expenditure in the factory, office and] sales department can be known in advance and it is possible to make reasonable estimates for preparing quotations and submitting tenders.

c)Evaluating profitability: The preparation of schedules of comparative cost of different jobs under different conditions of manufacture is facilitated to detect the profitable method of manufacture. It also reveals unprofitable methods of manufacture with their causes and remedial measures.

d)Establishes standard: Statistical data regarding cost and income help management to fix standard for different items of cost and income and to detect variances, if any, for corrections.

e)Controlling and reducing cost: Cost Accounting reveals expenses contributing towards production cost. It also detects weaknesses of the organisation and checks wasteful expenditure of material and labour due to inefficient workmanship and management.

f)Ascertainment of importance: It helps in ascertaining the degree of importance each element of cost has in the total cost of production and the scope for economy in operation.

g)Control over financial records: Cost Accounting helps to locate the exact cause of decrease or increase in profit or loss, reflected by financial accounting to exercise control over them.

h)Inventory Control: It has an efficient store accounting system for effective check on inventories – material, work in progress, finished goods, stores and spares.

i)Comparison: Installation of uniform costing system helps management to make inter-firm and intra-firm comparison on various aspects of operation.

j) Aid to Government: It provides data to government for price control, wage fixation and settlement of labour disputes.

k) Decisions and Policies: Cost Accounting provides facts and figures for formulating policy and taking decisions on the matters like:

i) Level of output: Quantity to be produced,

ii) Make or buy requisite material and assets,

iii) Acceptance of special order,

iv) Replacement of labour with machinery,

v) Introduction of new product,

vi) Replacement or modernisation of old equipment,

vii) Shut down or continue production during depression,

These merits broaden the applicability of Cost accounting .Now it is not restricted to manufacturing activities only. Institutions like hospital, transport undertaking, local authorities, offices, banks, schools and colleges, etc. are also using Cost Accounting in determining cost of their day-to-day activities.