Benefits-Drawbacks

Advantages Of Accounting Rate Of Return (ARR)

Main benefits or advantages of accounting rate of return method of evaluating investment proposals can be studied as follows:

1. Simple Method

Accounting rate of return (ARR) is simple and widely used technique of comparing capital projects which can be understood easily by everyone.

2. Easy Calculation

It is very easy to calculate ARR of different projects. It can be determined by using simple formula which is given below.

Accounting Rate Of Return (ARR) = (Average Net Income/Average Investment) x 100

3. Simple Decision Rules

It is easy to take decision regarding the suitable capital project. Project with higher ARR is selected and project with lower ARR is ignored.

Also Read:

Advantages And Disadvantages Of NPV

Advantages And Disadvantages Of Profitability Index

Advantages And Disadvantages Of Payback Period

4. Measures Profitability

ARR measures the profitability of a project which is beneficial for shareholders and owners.

Disadvantages Of Accounting Rate Of Return (ARR)

Main drawbacks or limitations of ARR can be studied as follows:

1. Ignores Time Factors

Accounting rate of return method does not consider time value of money. So, it is unscientific method of comparing capital projects.

2. Ignores Cashflow

ARR is calculated on the basis of profit earned by the project. It ignores cash-flows which is very important factor for every business.

3. Ignores Terminal Value

ARR ignores the terminal value of the project which is important in accounting.

Advantages And Disadvantages Of Payback Period

Advantages Of Payback Period (PBP)

Main benefits or advantages of payback period method of evaluating investment proposal are as follows:

1. Simplicity

Payback period method is very simple to understand. It does not require specific knowledge and accounting rules to apply. So, it is universally applied method of evaluating proposals.

2. Easy To Calculate

Payback period is very easy to calculate. It can be determined by using simple formula given below:

Payback Period (PBP) = Investment/Annual Cash Flow

3. Easy To Make Decision

It is easy to select the suitable project with the help of payback period. The project with lowest payback period is selected and the project with longest payback period is rejected.

4. Suitable For Small And New Companies

Payback period method of evaluating investment proposals is suitable for small companies and new companies with less cash in hand or weak liquidity position.

5. Focus On Risk

This method emphasis on the risk factor. So, it is appropriate for those firms who do not take risk.

6. Emphasis On Liquidity

Payback period method emphasis on liquidity. So, it focus on speedy return back of investment.

Disadvantages Of Payback Period (PBP)

Major drawbacks or limitations of payback period method of evaluating proposals are as follows:

1. Ignores Time Value Of Money

Payback period method does not consider the time value of money. It is one of the major drawbacks of this method.

Also Read:

Advantages And Disadvantages Of NPV

Advantages And Disadvantages Of IRR

Advantages And Disadvantages Of ARR

2. Ignores Profitability

This method focuses on liquidity and speedy recovery of investment but completely ignores profitability.

3. Ignores Cash Flow After PBP

This method gives emphasis on the cash flow before payback period. It does not consider the cash flow after payback period.

4. Overlooks Capital Costs

Payback period method focuses on the cost of capital only. It ignores interest factor.

Limitations Of Ratio Analysis

Major limitations or disadvantages of ratio analysis can be studied as follows:

1. Based On Past Information

Ratio analysis is based on the financial statements which provide historical financial data and information. So, it may not be helpful in predicting the future of the business.

2. Ignores Qualitative Factors

Ratio analysis considers the monetary or quantitative aspects of the business. It does not address qualitative factors like quality, employee morale, customer satisfaction etc. which are essential for the success of the business.

3. Chance Of False Result

Ratio analysis is based on the data and information received from financial statements. There are several limitations of financial statements also. So, ratios may provide wrong result because of wrong financial data.

4. Personal Bias

Ratio analysis may suffer from the personal bias of analyst because it is largely depends on the personal judgment.

Also Read:

Advantages Of Ratio Analysis

Advantages Of Financial Statement Analysis

Disadvantages Of Financial Statement Analysis

5. Fails To Disclose Current Worth

Ratios are based on historic data and information. So, ratio analysis does not disclose current worth of the company because of changes in price level.

Advantages Of Ratio Analysis

Main benefits or advantages of ratio analysis can be studied as follows:

1. Financial Position Analysis

Ratio analysis reveals the financial position of the company by analyzing financial statements. It explores the financial health of the business during a particular period.

2. Simplifying Figures

Ratio analysis makes accounting figures meaningful and understandable by everyone by simplifying and summarizing properly and systematically.

3. Forecasting And Planning

Accounting ratios analyze the past financial performance of the business firm. Financial facts of previous period such as cost of good sold, sales, profit margin can be known with the help of ratio analysis. So, it can establish trend for future planning, forecasting and decision making.

4. Exploration Of Weakness

Ratio analysis judges the financial health of the business. It explores the weakness of the business which helps the management to take appropriate remedial measures.

5. Comparison

Ratio analysis helps to compare the financial performance of one firm with others. Inter-firm comparison helps to find out the strength or weakness of the firm and necessary steps can be taken for further improvement.

Also Read:

Limitations Of Ratio Analysis

Advantages Of Financial Statement Analysis

Disadvantages Of Financial Statement Analysis

6. Measurement Of Operational Efficiency

Ratio analysis helps to measure the working efficiency of the firm with the help of different ratios. Turnover ratio and profitability ratio help the management to know the operational efficiency and financial requirements of the company.

7. Credit Decision

Ratio analysis helps the creditors and investors to make credit decision by providing accurate financial position of the company.

Disadvantages Of Financial Statement Analysis

Notable limitations or disadvantages of financial statement analysis can be expressed as follows:

1. Ignores Qualitative Aspect

Financial statement analysis checks only quantitative or monetary aspect of the business. It totally ignores qualitative aspect.

2. Historical Data

Financial statement analysis is done with the help of historical financial data provided by financial statements. So, it may not be a base or indicator for future estimation, planning, forecasting and decision making.

3. Biasness

Financial statement analysis may suffer from the biasness of the analysts. This may mislead the users.

4. Does Not Provide Solution

Financial statement analysis only identifies the finance related problems of the company. It fails to suggest the solutions.

Also Read:
Advantages Of Financial Statement Analysis
Advantages Of Ratio Analysis
Limitations Of Ratio Analysis

5. Difficult To Compare

Different companies may follow different accounting principles (like different depreciation methods, LIFO method, FIFO method etc). In this situation it is impossible to compare different financial statement accurately.

6. Price Level Change

Effect of price level change cannot be adjusted in financial statement analysis.

Advantages Of Financial Statement Analysis

Main benefits or advantages of financial statement analysis can be studied as follows:

1. Evaluation Of Past Performance

Financial statement analysis evaluates the past performance of business such as sales, cash flows, income, return on investment etc. by using different techniques like trend analysis, vertical analysis, ratio analysis etc.

2. Indication Of Current Position

Financial statement analysis indicates the current financial position of the business in terms of profitability and operational efficiency.

3. Prediction Of Future Performance

Financial analysis provides the data of past and current financial position of the business. These data and information are the bases to predict future earnings and growth rate of the business.

4. Planning And Decision Making

Financial statement analysis evaluates and compares the past and present performance of the business. It helps the management in planning and decision making process.

Also Read:

Disadvantages Of Financial Statement Analysis

Advantages Of Ratio Analysis

Limitations Of Ratio Analysis

5. Tax Determination

Financial statement analysis shows accurate financial position and profitability of the business. So, it helps to determine tax liabilities of the company.

6. Credit Decision

Financial statement analysis helps the bankers to make credit decision by providing up-to-date information regarding profitability, solvency, liquidity and efficiency of the business firm.

Disadvantages Of Holding Company

Major drawbacks or disadvantages of holding company can be expressed as follows:

1. Problem Of Over Capitalization

There is a high possibility of over capitalization in holding company because of large capital. It negatively affects the profitability and is not beneficial for both holding and subsidiary companies.

2. Fear Of Monopoly

Formation of holding company may create monopoly in the market. Consumers may be exploited by high prices and artificial scarcities.

3. Oppression Of Minor Shareholders

There is a high chance of dominance over minority shareholders. Their interests may be ignored by the management of holding company.

4. Costly

Holding company has to spend a lot of money to manage and control different units and subsidiary company. It spends more money for officers and directors. It suffers from high administrative costs also.

5. Misuse Of Funds

Directors of holding company posses unlimited power. So, they may misuse the funds of the company.

Also Read:

Advantages Of Holding Company

Advantages Of Business Combination

Disadvantages Of Business Combination

6. High Chance Of Fraud

Due to the lack of transparency, there is a chance of committing fraud in holding company.

7. Difficult To Manage

It is very difficult to handle or manage holding company properly. It is difficult to maintain coordination, supervision and control different units and subsidiary company effectively by a centralized authority.

Advantages Of Holding Company

Main benefits or advantages of holding company can be expressed as follows:

1. Eliminate The Competition

Because of centralized control and same group of management it is possible to avoid competition between subsidiary companies and holding company. It helps to maximize profitability of both companies.

2. Easy To Form

Formation of holding company does need legal formalities and consent of subsidiary. It can be established or formed simply by purchasing the shares of other business company direct from open stock market.

3. Large Capital

Holding company can raise large amount of capital to expand its business operation.

4. Identity And Goodwill

Identity and goodwill of both holding company and subsidiary company is established and increase their image before the public.

5. Secrecy

Another benefit of formation of holding company is that high level of secrecy can be maintained because of centralized authority and control.

Also Read:

Disadvantages Of Holding Company

Advantages Of Business Combination

Disadvantages Of Business Combination

6. Stability

Holding company is highly appreciated and accepted by the public because of large capital, adequate resources and effective management. So, formation of holding company ensures stability.

7. Separate Books Of Account

Both holding company and subsidiary company records their financial transactions separately and maintain their own accounting system. It helps to know their business performance and financial position separately.

8. Economical

Holding company is economical in nature because of large volume of production, centralized control. It helps to minimize administrative and marketing expenses. It can also enjoy the cash discount and quantity discount because of bulk purchase of materials and supplies.

Disadvantages Of Business Combination

Main drawbacks or disadvantages of business combination can be expressed as follows:

1. Bad Effects Of Monopoly

Business combination creates monopoly in the market. So, consumers may suffer from the evils of monopoly such as high price, low quality products, scarcities and black marketing.

2. Risk Of Over Capitalization

Combined business may suffer from over capitalization because of huge and unused capital. It may result in wastage of resources, fall in profit and lower rate of return.

3. Threat To Small Firms

Business combination is a big threat to other small business firms of similar nature. It is very difficult for small firms to survive and compete with combined firms.

Also Read:
Advantages Of Business Combination
Advantages Of Holding Company
Disadvantages Of Holding Company

4. Complexities In Management

Business combination creates complexity to perform management function like coordination, controlling, supervision, directing etc.

5. No Identity And Goodwill

Identity and goodwill of old companies finish or decrease after combination.

Advantages Of Business Combination

Major benefits or advantages of business combination can be expressed as follows:

1. Eliminate The Competition

Business combination helps to eliminate the possibility of cut-throat competition between or among two or more than two business companies of same nature.

2. Raise Capital

Business combination helps to raise large amount of capital which helps to expand business activities by acquiring new technology and adopting improved methods of production.

3. Cost Reduction

Large volume of production is possible because of business combination. So, production cost per unit can be reduced. Similarly, administrative, distribution and management costs can be minimized.

4. Low Purchasing Cost

Large scale purchase is possible because of business combination. It helps to reduce materials costs and transportation costs per unit due to bulk purchase of goods.

5. Fair Selling Price

Company can fix fair and reasonable amount of selling price for its products and services. Because of large scale production, low purchasing costs of raw materials, and low administrative and distribution expenses selling price can be fixed at minimum level.

6. Monopoly

Business combination helps to achieve monopoly in the market by eliminating competitors.

Also Read:

Disadvantages Of Business Combination

Advantages Of Holding Company

Disadvantages Of Holding Company

7. Market Control

Business combination helps to control total market by using the power of monopoly. Company can control the market price and supply of its product.

8. Control Over And Under Production

Business combination helps to control over and under production of goods and services by adjusting demand and supply.

9. Increase Reputation

Business combination helps to increase goodwill, reputation and positive image of the company.

10. Stability

Business combination ensures the stability of the business because of large capital, large scale production, monopoly, regular production and proper supply of goods and services.

Advantages And Disadvantages Of Standard Costing

Merits/Advantages Of Standard Costing

Main benefits or advantages of standard costing system can be expressed as follows:

1. Performance Evaluation

Standard costing is a management technique that estimates the cost of the product and makes comparison with actual cost of that product. So, it helps to measure the efficiency and performance of operation.

2. Wastage Minimization

Standard costing helps to reduce inefficiency and wastage of production process with the help of variance analysis.

3. Assists Management

Standard costing helps the management to perform various functions like planning, goal-setting, coordinating, budgeting, controlling and decision making.

4. Delegation Of Authority

Standard costing system ensures effective delegation of authority by setting the standard performance and assigning responsibility to the concerned person.

advantages disadvantages standard costing

Also Read:

Advantages And Disadvantages Of Activity Based Costing

Advantages And Disadvantages Of Job Order Costing

Advantages And Disadvantages Of Process Costing

5. Stock Valuation

Stock valuation process becomes easier with the help of standard costing. Because stock or inventory is valued at predetermined (standard) costs.

6. Employee Motivation

Standard costing helps the management to prepare incentive schemes and bonus plan to encourage workers. It motivates the workers to do their job more effectively and efficiently and ensures better output.

Demerits/Disadvantages Of Standard Costing

Standard costing suffers from the following drawbacks or limitations:

1. Expensive And Time Consuming

It takes a lot of time and money to install and maintain standard costing system in the organization. It is a labor intensive and expensive costing system.

2. Suitability

Standard costing system is suitable only for big manufacturing firms with higher degree of skill and resources. It is not applicable for small scale business firms with lower volume of production.

3. Not Applicable For All Products

Fixing standard is impossible for non-standardized products. So, standard costing is not applicable for those manufacturing firms which produce non-standardized products.

Advantages And Disadvantages Of Job Order Costing

Advantages Of Job Order Costing

Main benefits or advantages of job order costing system are as follows:

1. Cost Analysis

Job order costing is a method of determining the expenses before producing a product. It thoroughly analyze materials costs, wages and overheads costs of different departments and production units on the basis of their nature and functions.

2. Cost Control

Job order costing maintains accurate cost record of different departments and units. It helps to compare actual costs with estimated costs and facilitates cost control.

3. Profitability

Job order costing helps to know the profitability of each job separately. It helps the management to identify the most profitable job.

4. Cost Estimation

It helps the management to estimate the cost of similar job by providing past cost details.

5. Proper Evaluation

Job order costing helps to evaluate the performance, efficiency and profitability of different jobs separately which assists the management to identify the most favorable or unfavorable job.

advantages disadvantages job order costing

Disadvantages Of Job Order Costing

Main drawbacks or disadvantages of job order costing can be expressed as follows.

1. Complex System

Job order costing consumes more time and procedure to maintain detailed information about the job. It also requires more clerical works to record material costs, labor costs and overheads charges. So, it is a complex method of costing.

Also Read:

Advantages And Disadvantages Of Activity Based Costing

Advantages And Disadvantages Of Standard Costing

Advantages And Disadvantages Of Process Costing

2. Expensive System

Job order costing is expensive because of various paper works and procedures for maintaining records of different jobs.

3. Strict Supervision Needed

Strict supervision is required to practice job order costing due to the lack of standardization of jobs.

4. Unsuitable For All Jobs

Job order costing is not suitable for those jobs which require high cost of production and take more time to complete.

Advantages And Disadvantages Of Activity Based Costing

Benefits Or Advantages Of Activity-Based Costing (ABC)

Main benefits or advantages of activity based costing can be studied as follows:

1. It Is Scientific System

Activity based costing is scientific and modern method of costing which is developed to overcome the weakness of other methods of traditional costing.

2. It Is Suitable For Large Firms

Activity based costing system is very suitable for large manufacturing concerns with large volume of production and adopting modern technology.

3. Accurate Cost Determination

Activity based costing helps to determine accurate product cost by showing relationship between different activities and costs.

4. Fixation Of Price

Activity based costing helps to fix fair selling price of the product by determining accurate cost of production per unit.

5. Quality Decision Making

Activity based costing helps the management to make decisions, future planning and forecasting by providing information and quantifiable figures.

advantages disadvantages activity based costing

Drawbacks Or Disadvantages Of Activity-Based Costing (ABC)

Main drawbacks or disadvantages of activity based costing system can be studied as follows:

1. Not Suitable For Small Firms

Activity based costing is suitable only for large manufacturing concerns. It is not applicable for small firms with limited volume of production.

Also Read:

Advantages And Disadvantages Of Standard Costing

Advantages And Disadvantages Of Job Order Costing

Advantages And Disadvantages Of Process Costing

2. Complex System

Activity based costing is a complex system which needs substantial resources to collect information and data. It is time consuming and expensive to implement.

3. Difficult To Allocate Cost

It is very difficult to identify the activities, determine the cost and allocate the cost to each activities.

Advantages Of Just-In-Time Inventory System

Main benefits or advantages of just-in-time inventory system can be expressed as follows:

1. Reduce Liquidity Problem

Just-in-time inventory system helps to reduce inventory costs of the company. It minimizes the money tied up in inventory of raw materials, work-in-progress and finished goods. So, it helps to reduce the liquidity problem of the firm.

2. Less Storage Space

Just-in-time inventory system does not need large storage space and warehouse because of faster turnaround of inventory.

3. Suitability

Just in time inventory system is suitable for all types of business organization. All business organizations (producers, suppliers, distributors, assemblers, wholesalers etc.) can apply this system of inventory. It is applicable for both big and small scale business houses.

4. Wastage Minimization

Just in time inventory system gives emphasis on zero waste. It prevents investment in unnecessary inventory of materials and finished goods. It helps to minimize wastage by maintaining minimum stock level.

5. Investment Opportunity

Just in time inventory helps to minimize inventory costs such as materials handling cost, storage cost and staff cost. Company can invest this saving in other profitable opportunities.

6. Minimize Unfavorable Variances

Just in time inventory system helps to eliminate material price variances and unfavorable overhead spending variances.

7. Quality Control

As just in time system gives emphasis on perfect quality of work, It is easy to spot production mistakes and quality problems very quickly. So, appropriate corrective actions can be taken on time.

Also Read: Advantages Of Perpetual Inventory

8. Constant Production

Just-in-time system avoids over and under production by supplying only needed amount of materials and components consistently to meet the actual market requirement. It ensures constant production.

Disadvantages Of Management Accounting

Major drawbacks or limitations of management accounting can be expressed as follows:

1. Lack Of Specific Procedure

Management accounting does not follow specific accounting rules, procedure and techniques. So, it fails to provide accurate information and data in the lack of proper principles.

2. Uncertainty

Management accounting is futuristic in nature, so it provides data and information for the purpose of future planning, decision making, forecasting, and decision making. Since future is uncertain, its plans and policies may not bring expected results.

3. Dependency

Management accounting is practiced on the basis of data and information received from cost and financial accounting. So, its accuracy and reliability depends on the effectiveness of cost accounting and financial accounting system.

4. Costly System

Management accounting is very expensive system to install and practice. Low budget business houses cannot afford to install it.

5. Interdisciplinary knowledge

Management accounting draws from a number of disciplines such as cost accounting, financial accounting, statistics, economics, science etc. So, a single employee (accountant) may not possess interdisciplinary knowledge to maintain management accounting system.

Also Read:

Advantages Of Management Accounting

Advantages Of Cost Accounting

Advantages Of Financial Accounting

6. Only A Tool

Management accounting is only a tool to provide data and information to the management. It is not the alternative of management and cannot make any decision.

7. Personal Bias

Management accounting may be affected by the personal interpretation and bias of the top manager. Decisions may be influenced by personal prejudices of an individual.

Advantages Of Management Accounting

Main benefits or advantages of management accounting can be expressed as follows:

1. Focus On Future

Management accounting always focuses on the future of the business . It provides information and guides the top level management in planning and policy making process of the firm. So it is future oriented and progressive type of system.

2. Decision Making

Management accounting helps to take both short-term and long-term business decisions. It provides up-to-date information to make suitable decisions. So, management accounting ensures the effectiveness of decision making.

3. Optimum Use Of Resources

Management accounting helps to ensure optimum utilization of resources by collecting the information and reporting to the top level management.

4. Effective Control

Management accounting compares actual performance of the business with the standards and budgeted targets. It help to check variations and take appropriate step to make controlling system more effective.

5. Performance Evaluation

Management accounting helps to evaluate the performance of different divisions, units, departments and centers of the company by measuring their performance and reporting the data and information to the owner.

Also Read:

Disadvantages Of Management Accounting

Limitations Of Cost Accounting

Limitations Of Financial Accounting

6. Coordination

Management accounting helps to maintain proper coordination between different units, departments, divisions and employees in order to achieve the goals of the business firm.

7. Flexibility

Flexibility is another key benefit of management accounting. It can be prepared or practiced any time when required by the management.

8. Improves Efficiency

Management accounting helps to improve the efficiency of the firm by eliminating wastage in production process. It helps to improve employees' efficiency by motivating them and maintaining higher degree of morale.

Disadvantages Of Piece Rate System Of Wage payment

Notable drawbacks or disadvantages of piece rate system are as follows:

1. Less Focus On Quality

Piece rate system pays on the basis of output or quantity. So, employees are focused to earn more by producing more. So, there is a chance of producing low quality products.

2. Health Effect

Due to the excess effort to produce more for more wages, workers may suffer from stress and other adverse health effect.

3. No Fixed Minimum Wages

Piece rate system does not guarantee fixed minimum wages to the employees. So, new and unskilled workers suffer from it. Workers lose wage if they are absent or cannot do their job due to some reason.

4. High Supervision Cost

Piece rate system requires high supervision costs to maintain quality of output and working standard.

5. Low Profitability

In piece rate system, quantity of production is given preference rather than the quality. So, profitability may be affected because of low quality of product.

Also Read:

Advantages Of Piece Rate System

Advantages Of Time Rate System

Disadvantages Of Time Rate System

6. Not Preferred By Trade Unions

Piece rate system does not guarantee minimum wages and forces the workers to work for long hours. So, it is not in the favor of trade unions.

7. Dissatisfaction Among Workers

New and unskilled workers are penalized by getting low wages. In other hand, efficient and senior workers do not get any reward. So, workers may not be satisfied with the management.

8. Wastage

Due to the temptation to earn more, workers pay less attention in proper use of materials and machines. So, there is high chance of wastage of materials and machinery breakdown.

Advantages Of Piece Rate System Of Wage payment