PRINCIPLES OF ACCOUNTING

Principles of Accounting

Principles of Accounting

Cost ascertainment or Product Costing

The primary concern of cost accounting is to determine the cost of product service, process or an operation.  In Cost accounting, a systematic cost determination is attempted by analyzing the cost of a product in terms of cost elements such as cost of materials, cost of labor and other expenses.

Cost ascertainment refers to the collection and analysis of expenses, the measurement of production of different products at different stages of manufacture and the linking up of production with expenses.  It covers the entire cycle for accumulating manufacturing and other costs and subsequently assigning them to work-in-process, finished goods, and so on.

The cost accounting information system must be designed to permit the determination of unit costs as well as total product costs. For example, the fact that a manufacturer spent $100,000 for labor in a certain month is not, in itself, meaningful; but if this labor produced 5,000 finished units, the fact that the cost of labor was $20 per unit is significant. This figure can be compared to the company's unit labor cost for prior periods and, often, to the labor cost of major competitors. Unit cost information is also useful in making a variety of important marketing decisions such as:

Determining the selling price of a product.  Knowing the manufacturing cost of a product is helpful for determining the desired selling price. Selling price must be high enough to meet the cost of product of an item including the marketing and administrative expenses attributable to it, as well as to provide a satisfactory profit to the owners.

Meeting competition. If a product is being undersold by a competitor, detailed information regarding unit costs can be used to determine whether the problem can be resolved by reducing the selling price, by reducing manufacturing and selling cost of product, or by some combination of the above that will still result in profitable sales.

Analyzing profitability. Unit cost will be helpful for the management to determine the amount of profit that each product earns, thereby allocating the company's scarce resources to those that are most profitable.

Management Accounting in Business Organizations

Management accounting is a practice in which accountants organize financial information that can be used by managers to make business plans and strategies. A management accounting information system describes management accounting that comprises both the classical functions of an accountant, such as the organization of financial statements, and the incorporation of computer programs that are used to optimize an overall process. Many experts believe that a system includes accountants, data, procedures, and computer programs. When professionals talk about information systems, however, they are normally referring to accounting software. To choose the best management accounting information system, it can be helpful to first make sure that you have a list of needs and expectations so that you can narrow your search to include only products that meet your needs.

Any organization that participates in financial transactions can benefit from a management accounting information ...