Areas of concern in Cost Accounting
Cost accounting is that branch of accounting which establishes actual cost of operations as well as budgets, processes, variance analysis, products or departments as well as social utilization of funds or profitability. In general, cost accounting is utilized for supporting activities related to decision-making. These are the decisions associated with decrease of an organization’s costs and improvement in profitability. Since cost accounting is basically useful to the internal management, it does not need to comply with the accounting standards like the GAAP (Generally accepted accounting principles). Moreover, one can also consider cost accounting to be a translation of supply chain (the sequence of events during a production process which result in a particular product) into the financial values.
Different managerial accounting approaches are used within cost accounting. They include lean accounting, activity-based accounting, standard or standardized cost accounting, throughput accounting, resource consumption accounting and cost-volume-profit analysis or marginal costing.
Despite the benefits arising from different techniques of cost accounting, there are several cost accounting issues also. For instance, the method of historical costs is subject to criticism because it only considers acquisition cost of a particular asset. Moreover, the method fails to recognize the present market value. Besides this, the method focuses on allocation of costs and not on the value of asset. Apart from these, a major drawback of this method is related to inflation. The method assumes a currency to remain stable over a specified time-period. However, economists work according to the principle of time value of money. Since the impact of inflation is not same on all the companies existing in the market, the historical cost accounts are irrelevant for comparison of corporate performance.
There are several cost accounting issues associated with other techniques. The method of marginal costs also suffers from certain limitations because it utilizes historical data while the decisions taken by the management are associated with future events. Moreover, it fails to recognize that fixed costs might become variable over a longer time-period.
Apart from the specific issues, there are several general cost accounting issues. Accountants are not able to estimate the price of assets at their present values. Moreover, manipulations are still present in the books of accounts. Besides this, the accounting standards vary from business to business.