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Limitations and techniques of Cost accounting management

Updated on November 11, 2013

Limitations of Cost accounting.


Cost Accounting is not an exact science like other branches of accounting but is an art which has 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 uniform procedure. Concepts, methods and techniques of cost accounting understood and applied differently by different industries. It is used only by big enterprises. The limitations of cost accounting are as follows:

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 preparing the reports. Also it requires number of steps in ascertaining such details. So it involves a more complex system. More complex and complicated system of cost accounting is one of the limitation facing by the cost accounting.

2. It is expensive: In installing and maintaining cost accounting system requires more manpower and resources. More analysis, allocation and absorption of overheads requires 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 does not adopt cost accounting owing the fact that it is more expensive and not economical.

3. Inapplicability of costing method and technique.
Technique and methods of cost accounting differ from organization to organization. One standard method is not adequate for all the requirement of different organizations. It depend on the nature of business and the type of service/product manufactured by the firm. If wrong technique or method is used, it will affect the result. So inapplicability of same costing method and technique is the one of the main limitation of cost accounting.

4. Not suitable for small scale units: One of the limitation faced by the cost accounting in installing it in all types of business is that it is not applicable to small scale units. Through the traditional accounting, small scale units can control 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. Lacks 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 unnecessary increase in workload.

8. Duplication of Work:
Many industrial units function effectively and control the cost effectively with the 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 bring out the possibility of areas which needs control. If the organization does not have an 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 an effective and efficient management to use it.

10. It is based on estimation and previous data:
Most of the data used by a cost accountant is based on 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 shortcoming 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. Non-cooperation or opposition from employees will affect the results.

13. It only bring 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 share holders, 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.

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    • profile image

      Ajay Dalia 5 years ago

      thanks for this help, this is very useful to me

    • profile image

      MMM 5 years ago

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

    • profile image

      haphy monad 5 years ago

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

    • profile image

      Vipasha 5 years ago

      God bless you sam..Xx

    • profile image

      Abdifatah 5 years ago

      I'm Accountant at ethiopia

    • profile image

      Gauri 5 years ago

      Gudeveninggg, thanxs it is useful n very much cleared

    • profile image

      Gauri 5 years ago

      Gudeveninggg, thanxs it is useful n very much cleared

    • profile image

      Bblonde 6 years ago

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

    • profile image

      aamir 6 years ago

      thx.. wz vry useful

    • profile image

      anil 6 years ago

      this very helpul for study

      thanx

    • profile image

      zee 6 years ago

      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

    • profile image

      sofia 6 years ago

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

    • profile image

      Shomail 6 years ago

      Its usefull and clearly explained. Thank you

    • Iamsam profile image
      Author

      Iamsam 6 years ago

      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

    • profile image

      Business Finance Man 6 years ago

      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...

    • profile image

      Fahad afridi 7 years ago

      thanks for the comment......

    • profile image

      iphie 7 years ago

      was helpfull

    • profile image

      chel 7 years ago

      hi..

    • Iamsam profile image
      Author

      Iamsam 7 years ago

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

    • Peggy W profile image

      Peggy Woods 7 years ago from Houston, Texas

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