Summary Ch 6 Theory Acc.
LO 3 – Current Cost Accounting
Objective of current cost accounting
Current cost accounting (CCA) is an accounting system in which assets are valued at current market buying prices and profit is determined by allocation based on current costs.
What is the objective of current cost accounting? Edwards and Bell express this fundamental problem in terms of three questions: * What amount of assets should be held at any particular time? This is the expansion problem. * What should be the form of these assets? This is the composition problem. * How should the assets be financed? This is the financing problem.
To formulate relatively accurate expectations, managers need to evaluate past activities and decisions. A useful tool in this evaluation is a comparison of accounting data for a given period with expectations originally specified for that period. If this comparison reveals that expectations were inaccurate, current events or expectations should be altered.
Although Edwards and Bell emphasize the information needs of management, they argue that much of the data are also relevant to outsiders, such as shareholders and creditors. Under this theory, accounting information therefore serves two purposes: * Evaluation by managers of their past decisions in order to make the best possible decisions for the future * Evaluation of managers by shareholders, creditors and others
Concept of business profit and financial capital
With regard to profit, management often faces two decisions: * Holding decisions about whether to ‘hold’ assets and liabilities or to dispose of them * Operating decisions about how to use and finance the entity’s operations
I order to evaluate both the holding and operating decisions of managers, Edwards and Bell offer a profit concept that they call ‘business profit’ comprising (1) current operating profit and (2) realizable cost savings. Current operating profit is the excess of the current value of the output sold
Objective of current cost accounting
Current cost accounting (CCA) is an accounting system in which assets are valued at current market buying prices and profit is determined by allocation based on current costs.
What is the objective of current cost accounting? Edwards and Bell express this fundamental problem in terms of three questions: * What amount of assets should be held at any particular time? This is the expansion problem. * What should be the form of these assets? This is the composition problem. * How should the assets be financed? This is the financing problem.
To formulate relatively accurate expectations, managers need to evaluate past activities and decisions. A useful tool in this evaluation is a comparison of accounting data for a given period with expectations originally specified for that period. If this comparison reveals that expectations were inaccurate, current events or expectations should be altered.
Although Edwards and Bell emphasize the information needs of management, they argue that much of the data are also relevant to outsiders, such as shareholders and creditors. Under this theory, accounting information therefore serves two purposes: * Evaluation by managers of their past decisions in order to make the best possible decisions for the future * Evaluation of managers by shareholders, creditors and others
Concept of business profit and financial capital
With regard to profit, management often faces two decisions: * Holding decisions about whether to ‘hold’ assets and liabilities or to dispose of them * Operating decisions about how to use and finance the entity’s operations
I order to evaluate both the holding and operating decisions of managers, Edwards and Bell offer a profit concept that they call ‘business profit’ comprising (1) current operating profit and (2) realizable cost savings. Current operating profit is the excess of the current value of the output sold