Cost Concept
According to this concept the asset is recorded in the books of accounts at the price paid for it and not at its market value. For example: if a business entity purchases a building valued at $15 million from a friend for $12 million, this asset would be recorded at $12 million and not at $ 15 million, because for the business entity the cost was $12 million and not $15 million.
Now the basis for all future transactions relating to this building would also be at its cost, i.e. $12 million. For example: The depreciation would be charged on $12 million and not on $15 million. Similarly when the asset is sold in future, the profit or loss on sale would be based on the cost price actually paid for it. Since the original or
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Limitations of Cost Concept
The limitations or drawbacks of this principle are as follows:-
1. The items which do not have any cost are ignored. Thus the knowledge and technical skill built inside the enterprise, a favorable location, brand name and reputation of the business as time goes would find no place in the assets of the business entity.
2. The money-measurement assumption which assumes that purchasing power of rupee is stable is a major limitation of the cost concept.
3. The actual information needed by the management, investors, creditors etc. may be current values of assets therefore values based upon historical cost may not be useful for their purposes. http://www.transtutors.com/accounting-homework/concepts-and-conventions/cost-concept.aspx Concept of Cost
Cost accounting is concerned with cost and therefore is necessary to understand the meaning of term cost in a proper perspective.
In general, cost means the amount of expenditure (actual or notional) incurred on, or attributable to a given thing.
However, the term cost cannot be exactly defined. Its interpretation depends upon the following factors: • The nature of business or industry • The context in which it is used
In a business where selling and distribution expenses are quite nominal the cost of an article may be calculated without considering the
Samuelson believes that the assets definition should concentrate upon property rights that are concerned with wealth, which provides a true balance sheet orientation, rather than being concerned with revenue generation, Samuelson’s definition may lead to an exit value orientation for assets. One of the key points about the property rights approach lies in exchangeability of the asset. Samuelson’s viewpoint would result in certain deferred charges being expensed immediately even though their incurrence may bring about future economic benefits.
3. Cost Accounting – A vital piece of management accounting, it fulfils both inward and outer groups to the association and is for the most part concerned with costs, costing and cost conduct.
Cost measurement is the process of determining the dollar amount of direct materials, direct labor, and overhead that should be assigned to production. Cost accumulation is the process of associating costs with the units produced. Cost measurement is more about whether actual or estimated costs should be used, and cost assignment is about whether costs should be assigned to jobs or processes.
10-2 On the premise that the historical cost of acquiring an asset should include all costs necessarily incurred to bring it to the condition and location necessary for its intended use, in principle, the cost incurred in financing expenditures for an asset during a required construction or development period is itself a part of the asset 's historical acquisition cost. The cause-and-effect relationship between acquiring an asset and the incurrence of interest cost makes interest cost analogous to a direct cost that is readily and objectively assignable to the acquired asset. Failure to capitalize the interest cost associated with the acquisition of qualifying assets improperly reduces reported earnings during the period of acquisition and increases reported earnings in later periods.
Includes the processes required to ensure that the project is completed within an approved budget. Cost is a resource sacrificed or foregone to achieve a specific objective, or something given up in exchange. Costs are usually measured in monetary units, such as dollars. (Lecture no: 6)
valuation of many assets in the firm’s financial statements. It is also tied to the demand for
In addition to inherent difficulties in determining the cost of output, management fails to recognize that different cost measurement are needed for different purposes.. If cost information is to be used intelligently, management must understand that any cost figure has inherent limitation and that no
The cost basis is the original value of an asset or security at the time it was purchased plus the additional costs associated with it such as settlement and closing costs, fees, commissions, taxes and other adjustments paid to acquire the asset either paid in cash, in trade or through a loan. The cost basis helps determine the capital loss or gain on the sale, exchange, or other disposition of property as well as uses it to figure out deductions for depreciation, amortization, depletion, and casualty losses. If one uses the property for both business or for production of income and for personal purposes, one must allocate the basis based on the use. Only the basis allocated to the business or the production of income part of the property can be depreciated. Your original basis in property is adjusted (increased or decreased) by certain events. For example, if you make improvements to the property, increase your basis. If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis.
worth and then it no longer exists reducing the projected value of the company (2).
When a business erroneously records expenses as assets, it has violated the measurement issue of A. communication. B. classification. C. valuation. D. recognition.
To understand the concept of cost accounting to the core, it is important to recognise initially as to what makes cost accounting different from financial accounting.
According to an accounting textbook, cost is defined as a resource sacrificed or foregone to achieve a specific objective. It is something given up in exchange. It is necessary for project managers to understand project cost management since project costs money and consumes resources.
Organizations assets such as investments and marketable securities, fixed assets, inventory, intangible assets, etc. require proper valuation for investment potentials, financial reporting, audit, proper tax liability computation, litigation, capital budgeting and company valuation, among others. One of the singular facts for Enron collapse was inappropriate measurement of some of its assets (Benston, 2006, p.465), since there have been debates on choice of asset measurement methods;
In today’s world, definitions of assets are constantly expanding. According to the text book (Deegan, 2012, p. 67) “Defined in the AASB conceptual framework as a resources controlled by the entity as a result of past event and from which future economic benefits are expected to flow the entity”. In simply words, asset is a valuable item that can be control and have future economic benefits. For examples building, land, and equipments.
The explicit cost is the expense done in business which can easily be identified and accounted for in the business at any stage. The explicit cost represents the out flows of cash in clear and obvious terms. When any out flow of credit occurs in a business, it should be identified and should be accounted for immediately.