Cost allocation is the assigning of a common cost to several cost objects. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that use the system. A company with only one electric meter might allocate the electricity bill to several departments in the company. Cost allocation implies that the assigning of the cost is somewhat arbitrary. Some people describe the allocation as the spreading of cost, because of the arbitrary nature of the cost allocation. Efforts have been made over the years to improve the bases for cost allocation. In manufacturing, the overhead allocations have moved from plant-wide rates to departmental rates, from direct labor hours to machine hours to activity based costing. The goal is to allocate or assign the costs based on the root causes of the common costs instead of merely spreading the Continue reading
Accounting Concepts
Accounting Concepts Used for the Preparation of Financial Statements
Basic accounting concepts used for the preparation of financial statements are: Money measurement concept – Accounting normally deals with only those items that are capable of being expressed in monetary terms. Money has the advantage that it is a useful common denominator with which to express the wide variety of recourses held by a business. However, not all such resources are capable of being measured in monetary terms and so will be excluded from a balance sheet. The money measurement concept, thus, limits the scope of accounting reports. Historic cost concept – Assets are shown on the balance at a value that is based on their historic cost (that is, acquisition cost). This method of measuring asset value has been adopted by accountants in preference to methods based on some form of current value. Many commentators find this particular convection difficult to support as outdated historic cost are unlikely to Continue reading
Stakeholder, Institutional, and Legitimacy Theories of Accounting
A theory is defined as a set of principles that form the underlying structure that can be referred to in a discipline of study. Accounting, being a human activity, considers such things as the behavior of people and their needs in regard to information that is financial in nature. It also considers why an organisation might choose to divulge or give information to a particular group of stakeholders. The theories of accounting date back to the early 1920’s when researchers were basically relying on observation. All through this period, there has been an attempt to prescribe how assets should be valued for the sake of external reporting, predict on what basis managers should be paid or motivated, predict the power of different stakeholders, and how the organisation aspires to be judged by the community. This article will discuss three accounting theories namely the stakeholder theory, legitimacy theory and institutional theory. Continue reading
Financial Accounting and Management Accounting – Similarities and Differences
Financial accounting and management accounting play an important part in accounting information system. They co-exist in enterprise production and operation of management, constituting the modern enterprise accounting system together. Much information which management accounting required is from financial accounting, while financial accounting also put the established budget, standards organizations, and such daily accounting data from management accounting as the basic premise. Management accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be “future looking” and have forecasting value to those within the company. Main function of management accounting in the enterprise is to establish a variety of internal accounting control system and provide internal management needs of a variety of data and information at the aim of improving operational efficiency and effectiveness. Financial accounting is used primarily by those Continue reading
Approaches to Accounting Theories
Accounting theory is a set of basic assumptions, definitions, principles, and concepts surrounding the accounting rule. It includes the reporting of accounting and financial information to relevant or interested parties. There are several approaches that are used in the development of accounting theory. The two main ones are normative theory approach and the positive theory approach. Normative theory approach is a theory that is not based on observation. It is based on how things in the accounting process should be done. This approach comprises of different approaches to have a single but effective accounting approach. This kind of approach uses a formula to come up with an income based on value, not costs. On the other hand, positive or descriptive theoretical approach to accounting theory is a set of theories that is concerned with what accountants actually do. These theories rely on a process of inductive thinking, which involves making Continue reading
Cost Accounting – Definition, Objectives, Scope and Limitations
DEFINITION OF COST ACCOUNTING An accounting system is to make available necessary and accurate information for all those who are interested in the welfare of the organization. The requirements of majority of them are satisfied by means of financial accounting. However, the management requires far more detailed information than what the conventional financial accounting can offer. The focus of the management lies not in the past but on the future. For a businessman who manufactures goods or renders services, cost accounting is a useful tool. It was developed on account of limitations of financial accounting and is the extension of financial accounting. The advent of factory system gave an impetus to the development of cost accounting. Cost Accounting is a method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. The Institute of Cost and Works Accountants, London defines Continue reading