Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

Advantages And Disadvantages Of Cost Audit

Accounting , Business
What Is Cost Audit ?

Cost audit is conducted to ensure the correctness of the cost records maintained by the firm. It is a critical examination of costing system which helps to verify the arithmetical accuracy of cost accounts.  It provides correct cost data which helps the management to detect errors and loopholes in the accounting system. It helps to regulate manufacturing process, minimize wastage of materials and unnecessary expenses, provides suggestions to fix the price of the product etc. It provides useful data and information to the management, investors, government and to the public.

Benefits Or Advantages Of Cost Audit

The main advantages of cost audit can be described as follows:

1. Ensures Correctness Of  Cost Records


Cost audit is the examination of cost records and accounts maintained by the company. It ensures correctness or arithmetical accuracy and gives clarity about the cost accounting record. It provides valuable data and information to the management, government, investors and to the public.

2. Identifies Loopholes And Frauds

It helps to detect frauds, errors and irregularities in cost accounting books. It also identifies loopholes in the system and helps the management to discover wrong practice. So, appropriate actions can be taken to eliminate errors and irregularities.

3. Fixation Of Price

It determines the cost of production which helps the company to fix the selling price of the product.

4. Cost Control And Reduction

Cost audit provides accurate cost data which helps the management to take appropriate steps to control unnecessary costs and wastage in the production process. It helps to lower the cost of production which leads to increase in the profit.

5. Helpful To Make Decisions

It provides correct and reliable data and information about the cost of production, sales, inventory, operational efficiency etc. It helps the management to make proper decision to improve the performance.
advantages and disadvantages of cost audit
6. Beneficial For The Government

Government authorities use cost data and information to set reasonable price of essential products and services. Cost audit also helps to determine the tax rate.

7. Beneficial For The Investors


Shareholders get up-to-date date that helps them to understand the progress of the company. It ensures them that their money is utilized properly and generating good return.

Drawbacks Or Disadvantages Of Cost Audit

The main disadvantages of cost audit can be highlighted as follows:

1. Lengthy Process

It requires sufficient time, effort and resources to conduct cost audit. It may affect the daily routine work of the employees and organizational activities. 

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2. Expensive Process

Conducting cost audit may become very expensive because professional auditor charges higher price for his work.

3. Not Applicable For Small Business


Because of the consumption of more cost, time, effort and resources, it is not suitable for small firms having limited resources.

4. Chance Of Inaccuracy

Some portion of cost audit is based on the estimation which may give inaccurate data and information in the audit report.

Pros And Cons Of Cost Audit In Short

Pros:

- It verifies correctness and arithmetical accuracy of the cost of production, inventory etc.
- Helps the management to make pricing decision
- It is helpful in cost reduction and to eliminate wastage
- Provides suggestions to take suitable steps to eliminate wrong practice in the system
- It provides correct cost data to the shareholders
- Government can fix the tax rate with the help of data obtained from it.
- It is very suitable for big manufacturing companies

Cons:

- It is not suited to small manufacturers
- It is lengthy process that requires more time, cost and effort
- There is a possibility of inaccurate data because of the dependency on estimation
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Advantages And Disadvantages Of Hire Purchase

Accounting , Business

What Is Hire Purchase System ?


It is a method of acquiring expensive assets under which buyer get the right to use products without making the whole payment. He/she obtains the asset by making the partial payment and the remaining amount is paid periodically in installments (interest is added in installment amount). The ownership of the asset remains with the seller and it will be transferred to the buyer after the payment of final installment. Hire purchase is beneficial for both sellers and buyers but it has some drawbacks also. In this post we discuss about the pros and cons of hire purchase system.


Benefits Or Advantages Of Hire Purchase System


The main advantages of hire purchase can be highlighted as follows:


Benefits Of Hire Purchase To The Sellers


1. Market Expansion


Hire purchase allows the customers to use expensive items or products without making the full payment. So, it attracts more potential customers which helps the seller to expand the market.


2. Increased Sales And Profit


It encourages the customers to buy more goods because the payment can be made in installment. So, it helps to increase sales which leads to increase in the profit of sellers.


3. Extra Income


Another benefit of hire purchase to the seller is that he/she can earn some extra income in the form of interest which is added in the installment amount.


4. Less Riskier


Hire purchase system is less riskier than installment system because ownership of the asset is not transferred to the buyer until the final payment. The seller can acquire the product or asset if the buyer fails to make regular payment.


Benefits Of Hire Purchase To The Buyers


1. Suitable For Small Traders


It reduces the financial burden of small traders because they can acquire expensive items such as plant, machinery, vehicle etc. by making periodic payments. It eliminates the complexities of borrowing fund from other sources to run the business.


2. Easier To Buy


In hire purchase system, buyers make payments in installment. So, Customers having lower income can buy required products easily.


3. Immediate Use


Buyers can use the products immediately after the first installment.


4. Tax Benefit


Interest payable is deducted from taxable income which provides tax benefits to the buyers.


Drawbacks Or Disadvantages Of Hire Purchase


The main disadvantages of hire purchase system can be highlighted as follows:


Disadvantages Of Hire Purchase To The Sellers


1. Huge Capital Required


Sellers require huge amount of investment to acquire expensive assets such as car, plant, machinery etc. to run hire purchase business.


2. It Involves Risk


Although the seller can take back the item in case of default payment, he cannot recover the actual cost of the product because value of second hand product is decreased.


3. Increased Bad Debt


If customers do not pay the installment in time, it may increase the amount of bad debt.

   

      Also Read:

Advantages And Disadvantages Of Leasing

Features Of Hire Purchase System

Difference Between Hire Purchase And Installment


4. Work Load


Hire purchase may increase the workload of the seller because more clerical and paper work is required to maintain sales accounts.


Disadvantages Of Hire Purchase To The Buyers


1. No Ownership Of Assets


Ownership of item is not transferred to the buyer until the final installment. So, seller can repossess the asset in case of default payment.


2. Higher Cost


Sellers add extra cost (interest) in the selling price of the asset. So, buyer has to pay more than the actual price of the item.


3. Larger Duration


It takes very long time to make full payment which may create frustration to the buyer.


4. Risk Of Overspending


It attracts more audience because of the periodical payment system. It may create artificial demand for the product in the market. Buyer may be tempted to buy unnecessary and expensive items. So, higher purchase may encourage overspending.


advantages and disadvantages of hire purchase

Pros And Cons Of Hire Purchase System In Short


Pros:

- Sellers can attract more customers which helps to increase sales and profit

- Seller can earn extra income in the form of interest

- There is less risk for the seller because ownership of the good remains with him until the last installment.

- Buyer can obtain expensive item by making small initial down payment

- It may provide tax benefit to the buyer

- It is very beneficial to the small business firms to acquire valuable fixed assets


Cons:

- Large amount of capital is required to run hire purchase business

- There is a risk of default payment

- There exists a chance of increase in bad debts

- Because of the interest, buyers have to pay more than the actual amount

- It encourages overspending to the buyers

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Advantages And Disadvantages Of Partial Audit

Accounting , Business
What Is Partial Audit ? 

Partial audit refers to the examination of certain suspicious parts of accounting. It does not check the entire books of accounts. It is conducted to clear the doubt of the owner or management. Generally, auditor conducts this audit to ensure the accuracy of cash record, stock level, debtors etc. There are some benefits and limitations of partial audit which we are going to discuss in this post.

Benefits Or Advantages Of Partial Audit

The main advantages if partial audit can be pointed out as follows:

1. Consumes Less Time And Cost

In partial audit, auditor checks only suspicious areas of the books of accounts to clear the doubts of management. So, it can be performed in less time with less cost and effort.

2. Detection Of Errors 


Partial audit detects fraudulent activities and errors of selected area which helps the client to take appropriate measures to prevent such errors in the future.

3. Helpful For The Management


Auditor provides suggestion after conducting the audit of specific area of the books of account. It provides information regarding capital mobilization, inventory level, debtors, creditors etc. 

4. Helps In Final Audit


It makes easier to conduct final audit because some parts of the books of accounts are checked in partial audit. So, final audit can be performed with less cost in less time.

Drawbacks Or Disadvantages Of Partial Audit


The main disadvantages of partial audit can be pointed out as follows:


1. No Legal Evidence


It is conducted to examine specific area of accounting to clear the doubt of the management. It is not a legal document and cannot be presented as evidence.


2. No True Picture


Partial audit is performed for specific area only. It does not show the actual financial position of the firm.

3. For Internal Use Only


It is not statutory and conducted to help the management only. So, it is suitable for internal purpose only and not useful for external users such as investors, trading partners, tax authority etc. 

4. Waste Of Time And Cost

Final audit is mandatory and should be performed by all companies to show the true financial picture at the end of the accounting period. But partial audit is not statutory, so it is waste of time, cost and effort.
advantages disadvantages partial audit
    Also Read:

Pros And Cons Of Partial Audit In Short

Pros:

- It is a simple process and can be conducted by using less time and cost
- It helps the management to detect errors and loopholes 
- It provides information about the capital mobilization in the organization
- It saves time and effort to conduct final audit

Cons:

- It is not statutory, so it is waste of time and cost
- Its report cannot be presented as legal evidence
- It is for internal use only, therefore it is not useful for external users
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Advantages And Disadvantages Of ABC Analysis

Accounting , Business

What Is ABC Analysis Method Of Inventory ? 


ABC analysis of a technique of categorizing the inventory or materials according to their value and importance. Highly valued items are categorized in  class 'A' , least valued materials in class 'C' and less profitable items than 'A' and more profitable than 'C' fall in class 'B'. A strict control is required for highly important and profitable items (group A materials). Average control is exercised for group B and least control is exercised for group C inventory.       


Benefits Or Advantages Of ABC Analysis


The main advantages of ABC inventory analysis can be highlighted as follows:


1. Better Control Over Inventory


ABC analysis system of inventory management gives focus on the control of high priority products (inventory categorized in group A). Strict control over such materials helps to minimize wastage and misuse of most valuable items.


2. Provides Views 


It provides up-to-date information about the quantity and value of stock. It helps the management for decision making and forecasting.


3. Saves Cost


Because of strict control and minimization of wastage, it helps to reduce inventory cost. Materials that falls in group A or high valued products are purchase in less volume which helps to decrease material purchase, handling and storage costs.


4. Better Stock Turnover


Better control, cost reduction and waste minimization leads to increase in stock turnover ratio of the firm.


5. Effective Cycle Counting


ABC analysis provides accurate data about the inventory fluctuations which helps the manager in cycle counting.


6. Economical System Of Inventory


It is more economical than others techniques of inventory management because it does not spend more cost and effort for those materials which are grouped in B and C category. 


7. More Profit


Proper classification of inventory, better handling and cost reduction helps to increase the profitability of the firm.


8. Suitable For Big Firms


ABC analysis system is suitable for big business companies which consumes different types of materials in larger volume.


advantages disadvantages ABC analysis

Drawbacks Or Disadvantages Of ABC Analysis


The main disadvantages of ABC analysis system of inventory management can be highlighted as follows:


1.  It Ignores GAAP


This method does not follow the rules of GAAP (generally accepted accounting principles). Therefore, it is suitable for internal use only.


2. Complex And Time Consuming


It is very complicated task to categorize materials in different groups. It consumes more resources such as time, labor and cost to group materials in case of large group of inventory.


3. Static In Nature


Value of materials may change according to the market trend. It means category A product may move to B and C may move to A with the change in dollar value of product in the market. In such situation, ABC inventory system may become outdated because of the lack of dynamism. 


4. Based On Financial Value


This analysis is based completely on the dollar value of materials and does not consider other important factors.


5. Not Suitable For


ABC analysis is not suitable for small business houses which does not require large volume of inventories. It is also not applicable for materials which cannot be standardized.


6. Possibility Of Loss


It gives less attention to B and C grouped materials. Therefore, there is a chance of loss because of over stock, damage and wastage of these items.


Pros And Cons Of ABC Analysis In Short:


Pros:

- It ensures better control of inventory by minimizing wastage and improper use of materials

- It is suitable for big manufacturing companies

- It improves stock turnover ratio

- It saves time and cost to store materials

- Because of effective control and proper utilization of materials, reduction in time and cost, it helps to improve the profitability of the business.


Cons:

- It is complex than other techniques of inventory control

- It lacks dynamism and flexibility

- It is not suitable for small firms because it consumes high resources

- It ignores GAAP

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Advantages And Disadvantages Of Leasing

Accounting , Business

Benefits Or Advantages Of Leasing

The main advantages of leasing can be described as follows:

1. It Promotes Entrepreneurship

While commencing a business it requires huge capital to purchase fixed assets such as land, building, machinery, plant etc. Leasing resolves this requirement by providing the right to use asset in exchange for periodic rental payment. So, leasing promotes entrepreneurship by minimizing initial cash outlay.


2. It Enhances Liquidity


Leasing saves huge amount of fund which increases liquidity of the firm. Saved fund can be used to fulfill working capital requirement or can be invested in other profitable activities.


3. It Provides Tax Benefit


A company can enjoy tax benefit because lease rental payments are operating expenses and deducted from taxable income. So, leasing saves costs.


4. Convenience Method Of Financing


Leasing is cheaper and convenience than other sources of financing. It does not require various steps and formalities like borrowing loan from banks and financial companies.


5. Suitable For Small And New Business


Leasing is beneficial for small and newly established business firms because it helps to acquire assets without huge capital expenditure and formalities.


6. Provides Protection Against Obsolescence


Another advantage of leasing is that it avoids the risk of obsolescence. Lease agreement is beneficial for lessee (user of asset) because he does not need to bear the risk of obsolescence during the leasing period.


7. Flexible Source Of Financing


Lease rentals and period can be structured, changed or terminated with the mutual understanding between lessor and lessee. So, it is flexible than other sources of long term financing.


8. Not Affected By Inflation


Another notable advantage of leasing is that lease rental is not affected by inflation. Lessee pays same amount of rental payments till the end of the agreement.


Drawbacks Or Disadvantages Of Leasing


Some of the major disadvantages of leasing can be described as follows:


1. Decreases The Return On Equity


Lease rental is deducted from the net income of the company. So, it reduces return on the equity shares.

    
       Also Read: 


2. No Ownership


Leasing does not provide ownership of asset to the user (lessee). Such assets cannot be pledge to obtain loan from banks and financial institutions.

advantages-disadvantages-leasing

3. It May Increase Cost


Although lessee is not a owner of the asset, he is responsible for repairing and maintenance . So, it increases the cost for the company.


4. No Alteration


Another disadvantages of leasing is, user cannot alter the asset in any situation. If the asset is bought, a company can modify it or make changes to improve its efficiency. But in case of , assets should not be altered by user.


Pros And Cons Of Leasing In Short


Pros:

- It helps to improve the liquidity of the firm

- It is a convenience, flexible and cheaper method of long term financing

- It saves costs because lease rentals are tax deductible

-  It saves the lesser from the risk of obsolescence


Cons:

- It reduces the return of equity shareholders

- It is costlier than debt financing

- Ownership of the asset remains with lessor
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