A cost accounting system is used to determine the cost of doing something, such as manufacturing, rendering a service, or even conducting any activity or function. It is the objective of Cost Accounting to provide detailed and useful information to Management so that it can make informed decisions.
- An organization may have less or more profits because of inflation or trade depression, not because of efficiency or inefficiency. However, financial accounting does not explain the reason for profit or loss.
- An organization’s weaknesses cannot be identified based on its collective results: Financial Accounting shows the net result of the organization. A profit and loss statement of an organization that shows less profit or a loss does not explain why, or where the weakness lies.
- In Financial Accounting, we get the total cost of production, but it does not assist in determining the prices of the products, services, and production orders.
- There is no classification of expenses and accounts in Financial Accounting: We do not get information about costs incurred by departments, processes, per-unit costs of product lines or per-regional costs. Furthermore, there is no classification of direct or indirect expenses, controllable overheads, or value-added in each process.
- In the absence of useful data, management cannot compare it with the previous period and take different financial decisions, such as the introduction of new products, the replacement of labor by machines, pricing under normal or special circumstances, the manufacture of part or buying it from the outside market, whether to continue or discontinue production of a product, the priority assigned to different products, whether to invest in new products, etc.
- Having no control over costs: Financial accounting does not help control materials, supplies, wages, labor, and overhead expenses.
- Developing standards for assessing performance is not possible with Financial Accounting. Furthermore, it does not help in checking that costs do not exceed a reasonable limit for a given quantity of work.
- Contains only historical information: Financial Accounting records just the costing methods incurred in the past. The management does not receive day-to-day costING information for making effective future plans.
- It does not analyze losses due to defective materials, idle time, idle plant and equipment, etc. Therefore, there is no distinction between avoidable and unavoidable waste.
- Reporting information is inadequate: It does not provide enough information for banks, government and insurance companies to prepare reports.
- Answers to certain questions will not be provided by Financial Accounting:
(a) Should more products be sold or is the factory operating at capacity?
(b) in the event that an order or contract is accepted, is the price obtainable sufficient to show a profit?
(c) if product A sales were discontinued and efforts were made to increase sales of B, how would that affect the net profit?
The profit of last year was so small despite the fact that the output was substantially increased.
- A financial accounting services records, summarizes, and presents the financial transactions or events that can be expressed in terms of money over time. It was primarily responsible for record keeping, which resulted in Profit and Loss Accounting and Balance Sheet preparation.