The Loopholes Present In Various Cost Accounting Techniques
Cost accounting describes the field of accounting that determines the actual cost of operations and budgets, variance analysis, processes, departments or products and profitability or social utilization of funds. Generally, this branch of accounting is used for supporting activities associated with decision-making. Such decisions are related to a decrease in costs of an organization as well as increase in profitability. Moreover, as cost accounting is primarily utilized by the internal management of an organization, it is not required to abide by the accounting standards such as the GAAP (Generally Accepted Accounting Principles).
Likewise, cost accounting can also be considered as the conversion of the conventional supply chain (i.e. the sequence of events in a production process that results in an end product) into financial values. Various approaches of managerial accounting are utilized in cost accounting. These include activity-based accounting, lean accounting, throughput accounting, marginal costing or cost-volume-profit analysis, standardized or standard cost accounting as well as resource consumption accounting.
Although there are several benefits that can be derived through different approaches to cost accounting, many cost accounting problems are also associated. Consequently, a cost accounting problem related to a particular method should not be considered an unimportant issue. Let us understand it through an example. The method of historical costing is considered to be disadvantageous since it recognizes the acquisition costs of specified assets. Besides this, the method fails to identify with the present market value. Moreover, the method emphasizes on allocation of costs rather than the value of assets. In addition, the method also suffers from an important drawback related to inflation. Under this method, the currency is assumed to be stable over a specific time-period while the economists follow the principle of time value of money. As the effect of inflation is not uniform across the market, all the organizations present within the market are not affected equally. Therefore, historical cost accounts are immaterial for comparing performance of organizations.
Apart from these, almost every technique of cost accounting has an associated cost accounting problem. Like the method of marginal costs also has its own limitations since it uses historical data while significant business decisions are related to future events.
Keeping aside the specific cost accounting problems, there are many general cost accounting issues. These include manipulation of books of accounts, variation of accounting standards from one industry to the other as well as inability to estimate the prices of assets at the present values.