What are the Limitations of Financial Accounting?

(i) No detail information about cost:

Financial Accounting provides information as a whole in terms of income, expenses, assets and liabilities. It does not provide detail of cost involved by departments, processes, products, services or other unit of activity within the organisation.

(ii) No cost control method:

It does not have proper mechanism to control expenditure on various elements of cost, viz, material and labour. As a result, misappropriation, wastage and losses of materials are left unchecked. Proper utilization of labour becomes impossible and suitability of different labour incentive plans goes without evaluation.

(iii) No information on efficiency:

It does not have a system to judge the» efficiency in the use of material, labour and overhead costs of the organisation in comparison to the standard fixed for their use.

(iv) No classification of expenses:

It does not classify expenses as direct and indirect or fixed and variable. Besides, these are also not allocated to different stages of production or departments or processes to show the controllable and uncontrollable items on overhead cost.

(v) Historical in nature:

It is prepared at the end of the accounting ♦period. It fails to provide day-to-day information to pre-determine cost.

(vi) Not helpful in price fixation:

It does not provide adequate cost information to fix up the price of products manufactured and service rendered by the organisation.

(vii) No analysis of losses:

It does not provide detail information about the reasons of losses. It also does not help to determine the variations in the cost between different working times, idle time and seasonal conditions of the industry.

(viii) No technique to evaluate alternative methods:

In planning expansions contraction of plants, equipments, products and processes it is not poses to calculate and compare the profitability of alternatives with the help Financial Accounting.

(ix) No cause and effect analysis:

As financial account fails to provide o and profit information product-wise, the causes of profit or loss cannot effectively determined and analysed.

(x) No data for comparison:

It does not provide data to facilitate compare of costs of operation of the firm with other firms in the industry.

Cost Accounting is developed from within the accounting process to overcoat the limitations of Financial Accounting and it helps in calculating, controlling and reducing cost.