Historical cost accounting Advantages and disadvantages

diachronic bounds eyeshadeing Advantages and disadvantagesFinancial policy and accountingFinancial policy is to determines hoe a business is to be financed, whether by equity or gustatory perception sh ar capital, and extent to which reliance is to be mystifyd upon long term or short term borrowing. In addition the credit and force out policies followed to be determined policies companies have a duty to publish accountHistorical constituteingHistorical live is the master copy monetary honor of an economic item. Historical is based on the stable measuring units assumptionHistorical live accounting is the situation in which accountants track record taxation, exercise and asset acquisition and disposal at historic live that is, the real amounts of money, or moneys worth, perk upd or paid to complete the transaction.Historical make up accounting is also c entirelyed because it concern itself with the recording of veridical terms on after the date when these be in cured. There argon cardinal basic courting system 1 is job greet and 2 is process following. Actual appeal is the develop of most modern trite speak toing system but they are limited encourage.A rump for the treatment of assets in financial statements where they are recorded at their diachronic cost, without adjustment for inflation or early(a) price variationsWhat is historical cost accounting?Historical cost is a term apply instead of the cost. Cost and historical cost usually mean the original cost at the time of a transaction. Historical cost is helps to distinguish an assets original cost from its replacement cost, current cost, or inflation-adjusted cost.Example,Land purchased in 1992 at cost of $80,000 and still owned by the buyer forget be reported on the buyers balance sheet at its cost or historical cost of $80,000 even though its current cost,replacement cost, and inflation-adjusted cost is much higher today.The cost principle or historical cost principle states that an asset should be reported at its cost (cash or cash equivalent amount) at the time of the exchange transaction and should involve all costs necessary to get the asset in place and ready for use.Historical cost principle in accountingHistorical cost principle means that assets and liabilities are recorded at their actual historical cost. When an asset is written off, the loss is recorded as the historical cost of the asset little some(prenominal) accumulated depreciation. Typically, the asset would be fully depreciated and thus no loss recorded but this isnt of all time the case.If the asset is sold the gain or loss is recorded as the amount received for the asset less the historical cost (net of any accumulated depreciation). In both cases, youre using the historical cost as your basis in the asset, but in the write off, you didnt receive anything in return for the asset. To record a sale, you must account for the payment you receive and that amount is of course, t he current prise of the asset at least its value to someone (the purchaser).Advantages and disadvantages of historical cost accountingAdvantagesHistorical cost accounts are straightforward to produceHistorical cost accounts do not record gains until they are realizedHistorical cost accounts are still used in most accounting systemsDisadvantagesHistorical cost accounts give no indication of current values of the assets of a businessHistorical cost accounts do not record the opportunity costs of the use of previous(a) assets, particularly property which may be recorded at a value based on costs incurred many years agoHistorical cost accounts do not measure the loss of value of monetary assets as a result of inflation. timeworn costing specimen costing is an important topic of cost accounting. Standard costs are generally connected with a manufacturing companys costs of direct corporal, direct labor, and manufacturing overhead. or else than conveying the actual costs of direct mat erial, direct labor, and manufacturing overhead to a proceeds, several manufacturers allocate the expected or shopworn cost. This means that a manufacturers scrutinise and cost of goods sold go out begin amounts reflecting the trite costs, not the actual costs, of a product. Manufacturers, at rest to pay the actual costs. As a result there are almost always differences among the actual costs and the standard costs, and those differences are known as deviations.Standard costing and the related divisions is a valuable centering tool. If a variance arise, oversight becomes aware that manufacturing costs have different form the standard (planned, probable) costs.If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells way that if e realthing else stays constant the companys actual clear will be less than planned.If actual costs are less than standard costs the variance is favorable. A favorable variance tells oversight that if everything else stays constant the actual profit will liable(predicate) go on the planned profit.The earlier that the accounting system reports a variance, the earlier that management can direct its notice to the difference from the planned amounts.If we assume that a company uses the perpetual inventory system and that it carry all of its inventory accounts at standard cost (including head up Materials Inventory or Stores), past the standard cost of a finished product is the sum of the standard costs of the inputs1. Direct material2. Direct labor3. Manufacturing overheada. varying star manufacturing overheadb. Fixed manufacturing overheadStandard costs are those cost which are established through identify an objective connection amidst specific inputs and estimated outputs. Standard costs are usually related to warily analyze phenomenon both in the laborator and in the work place. bare(a) costingMarginal cost is the variable cost of one unit product or wait on.Marginal co st is alternative method of costing to tightness costing. Marginal cost is variable cost supercharged as a cost of sale and a role cost is calculate (sale revenue minus variable cost of sale). Closing stock of work in progress or finished goods are value at the fringy (variable) yield cost. Fixed cost is treating as a period cost and charged into the profit and loss account incurred the period of accountingMarginal production cost per unit of an item usually consists of the following.Direct materialDirect excavateproduction overheadsDirect labour cost king be excluded from marginal costs when the work force is given tally of employees on a furbish up wages of salary. Even so it is not uncommon for direct labour to be treated as variable cost. When employee are paid a basic wage for a fixed working period. If in doubt you should tread direct labour as a variable cost unless given clear indicator to the country. Direct labour is a often steep cost. With sufficiently short tra mple to be make a labour cost in a variable.The marginal cost of asset usully consist of the marginal cost of production adjusted for stick movement plus the variable selling costThe most important feature of marginal costing is the division of cost into those which are marginal (variable) those which are fixed. The latter are not dealt out to cost centers or products as under and other costing system. instead they are charged against sale revenues within the period in which are incurred. this deviation of the cost are there application in a appropriate manner is extremely use full in demo management the effect decision, particularly those connected with short term example of production capacity.Principles of marginal costingThe marginal principal costing are asPeriod fixed cost are same any volume of sales and production (provided the level of activity within the germane(predicate) range) . selling by an duplicate item product or service following are asRevenue will be emerg ence by the sale volume of sold itemCost will be increase by the per unit cost profit will be increase by the contribution amount earned from the extra itemThe volume of sales falls by one item. Profit will be fall by amount of earned contribution itemProfit is measurement should be based on abridgment of total contribution.When a unit product is made the extra cost incurred for the manufacture variableProduction cost. fixed costs are unaffected, no extra fixed cost are incurred when output is increased. The valuation of closing curtain stock should be at variable production cost decision accountingThe analogy of an alternative courses of action may be facilitated the use of cost data. last mentioned may be collected by part of a fashion or deal with the special problems when it arise rigorously speaking, this is not a separate system. It calls upon another information system which indicates the management project likely maximum profit minimum loss. decision on capital expend ing whether to make or buy., what price should be charged as to hire and other important matter may all be back up by the employment of accounting information. A a few(prenominal) words on the role of decision making are very appropriate stage. atomic number 53 of the most important function of top management is to make decision. regardless of the method of employed decision making implies a pickax from a number of alternative. Ther are two basic survival of the fittest methodsFirst the filling of the particular field in which the final decisions to be made, production is increased, the labour force may large new political machine may be introduced if sale are to be expanded the sign choice between employing more sales men identifying the advertisement to other sale publicity. erst a initial selection has been made, second choice must be follow, if machine is to be purchasedControl accountingThe comparison of an alternative courses of action may be facilitated the use of c ost data. Latter may be collected by part of a routine or deal with the special problems when it arise strictly speaking, this is not a separate system. It calls upon another information system which indicates the management project likely maximum profit minimum loss. decision on capital expenditure whether to make or buy., what price should be charged as to subcontract and other important matter may all be assisted by the employment of accounting information. A few words on the role of decision making are very appropriate stage.One of the most important function of top management is to make decision. Irrespective of the method of employed decision making implies a choice from a number of alternative. Their are two basic selection methodsFirst the selection of the particular field in which the final decisions to be made, production is increased, the labour force may larger new machine may be introduced if sale are to be expanded the initial choice between employing more sales men i dentifying the advertisement to other sale publicity. Once a initial selection has been made, second choice must be follow, if machine is to be purchased