Contrasted with general accounting or financial accountingthe cost accounting method is an internally focused, firm-specific system used to estimate cost controlinventory and profitability. Cost accounting can be much more flexible and specific, particularly when it comes to subdivision of costs and inventory valuation. Unfortunately, this complexity-increasing auditing risk tends to be more expensive, and its effectiveness is limited to the talent and accuracy of a firm's practitioners.
Companies must choose between using absorption costing or variable costing in their accounting systems. There are advantages and disadvantages with either choice.
Some of the primary advantages of absorption costing are the fact that it recognizes all of the costs involved in production including fixed costsit does a better job of accurately tracking profit during an accounting period and it is in compliance with the generally accepted accounting principles GAAP.
Firms that use absorption costing choose to allocate all costs to production. Under variable costing, which is the other option for costing, only variable costs are considered for production. Overhead costs, such as rent and wages, are considered separately.
Even if a company chooses to use variable costing for its in-house accounting purposes, it still has to calculate absorption costing to file taxes and issue other official reports. Absorption costing takes into account all of the costs of production, not just the direct costsas variable costing does.
Having a more complete picture of cost per unit for a product line can be helpful to company management in evaluating profitability and determining prices for products.
This can be especially important for a company that ramps up production well in advance of an anticipated seasonal increase in sales. In addition to skewing a profit and loss statementthis can potentially mislead both company management and investors.
Absorption costing fails to provide as good an analysis of cost and volume as variable costing does. If fixed costs are an especially large part of total production costsit is difficult to determine variations in costs that occur at different production levels.
This, in turn, makes it more difficult for management to make the best decisions for operational efficiency. Variable costing is more useful than absorption costing if a company wishes to compare potential profitability of different product lines.
It is easier to discern the differences in profits from producing one item over another by looking solely at the variable costs directly related to production.Advantages have been described by fellow quorans in their answers.
I will write about the limitations of the matching concept. One disadvantage (in my opinion) is that expenses and incomes are recorded on period basis irrespective of whether they. Maturity matching approach has various advantages and disadvantages.
The biggest advantages are that it maintains optimum level of funds, saves interest cost, no . 'Historical Cost' is a convention in accounting that requires assets to be recorded (valued) in the accounts of the business at their original purchase price, rather than at an inflation adjusted market value.
The advantages, from an accounting p. Cost tracing is the process of directly matching a cost with a product being produced, where cost allocation uses estimates to apply costs to products.
While many costs can be directly allocated to products, some costs change on a per-unit basis and should be allocated. Advantages & Disadvantages of Cost Volume Profit.
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Read a brief overview of the main advantages and disadvantages of the cost accounting method as it relates to business analysis and operation.