Historical cost accounting Advantages and disadvantages

historical court enumerateing Advantages and disadvantagesFinancial policy and accountingFinancial policy is to de landmarkines hoe a bloodline is to be financed, whether by equity or preference sh atomic number 18 capital, and extent to which reliance is to be placed upon long term or short term borrowing. In addition the credit and discount policies followed to be determined policies companies have a duty to publish accountHistorical beHistorical greet is the original monetary value of an economic item. Historical is establish on the stable measuring units assumptionHistorical apostrophize accounting is the situation in which accountants record revenue, outgo and plus acquisition and disposal at historical salute that is, the true(a) amounts of money, or moneys worth, received or paid to complete the transaction.Historical salute accounting is also called beca utilise it concern itself with the recording of tangible comprise on after the date when these are in cured. There are dickens basic costing system 1 is job costing and 2 is process costing. Actual cost is the part of most modern stock costing system but they are limited value.A basis for the treatment of assets in financial statements where they are recorded at their historical cost, without adjustment for swelling or opposite price variationsWhat is historical cost accounting?Historical cost is a term utilize instead of the cost. Cost and historical cost commonly 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 will 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 r eported at its cost (cash or cash equivalent amount) at the time of the exchange transaction and should let in all be 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 echt historical cost. When an asset is written off, the loss is recorded as the historical cost of the asset less any accumulated depreciation. Typically, the asset would be fully depreciated and thus no loss recorded but this isnt always the case.If the asset is sold the get on or loss is recorded as the amount received for the asset less the historical cost (net of any accumulated depreciation). In both cases, youre apply 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 cut-rate sale, you must account for the payment you receive and that amount is of course, the current value of the asset at least its val ue to someone (the purchaser).Advantages and disadvantages of historical cost accountingAdvantagesHistorical cost accounts are straightforward to produceHistorical cost accounts do non 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 older 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. shopworn costingStandard costing is an grand topic of cost accounting. Standard costs are generally connected with a manufacturing companys costs of direct material, direct labor, and manufacturing command overhead.Rather than conveying the actual costs of direct material, direct labor, and manufacturing overhead to a product, several manufacturers allocate the expected or standard cost. This means that a manufacturers inventory and cost of goods sold will begin amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, at rest to pay the actual costs. As a result there are almost always struggles in the midst of the actual costs and the standard costs, and those differences are known as variances.Standard costing and the related variances is a valuable management tool. If a variance arise, management 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 management that if e genuinelything else stays constant the companys actual profit will be less than planned.If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the act ual profit will likely exceed 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 Direct Materials size up or Stores), then the standard cost of a finished product is the sum of the standard costs of the inputs1. Direct material2. Direct labor3. Manufacturing overheada. Variable manufacturing overheadb. Fixed manufacturing overheadStandard costs are those cost which are established through identify an objective connection between 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 protean cost of one unit product or service.Marginal cost is alternate(a) method of costing to absorption costing. Ma rginal cost is variable cost charged as a cost of sale and a contribution cost is calculate (sale revenue minus variable cost of sale). Closing stock of work in progress or finished goods are value at the marginal (variable) production cost. Fixed cost is treating as a menstruation 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 grindproduction overheadsDirect labour cost might be excluded from marginal costs when the work force is presumptuousness number of employees on a fixed 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 step to be specify a labour cost in a variable. The marginal cost of asset usully consist of the marginal cost of production adjusted for stick case plus the variable marketing costThe most important feature of marginal costing is the division of cost into those which are marginal (variable) those which are fixed. The last mentioned are not apportioned 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 showing management the effect decision, particularly those connected with short term utilization 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 relevant range) . selling by an extra item product or service following are asRevenue will be increase by the sale volume of sold itemCost will be increase by the per unit costProfit 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 analysis of total contribution.When a unit product is make the extra cost incurred for the manufacture variableProduction cost. fixed costs are unaffected, no extra fixed cost are incurred when output is increased. The paygrade of closing stock should be at variable production costDecision accountingThe comparison of an alternative courses of action may be facilitated the use of cost data. Latter may be collected by part of a routine or hired hand 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 stripped-down 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 quality from a number of alternative. Ther are both basic selection methodsFirst the selection of the particular field in which the final decisions to be made, production is increased, the labour force may large impudently machine may be introduced if sale are to be expanded the initial choice between employing to a greater extent sales men identifying the advertisement to other sale publicity. Once 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 cost data. Latter may be collected by part of a routine or deal with the speci al 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 identifying the advertisement to other sale publicity. Once a initial selectio n has been made, second choice must be follow, if machine is to be purchased