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Cost Accounting Methods - Historical Cost Accounting And Fair Value Costing

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There is an assumption that the firm will continue to exist and so continue to use the historical cost of valuation for its assets unless terminated and liquidated. This time the present market value will be realized. Any subsequent changes in their bookings will never be recognized and adjusted in the preparation of its financial statements. This will also entail disregarding the work-in-process value of goods. Disadvantages: Example if the company decides to terminate production for liquidation. Date: Work-in-process number of shirts is 10 pieces. Computed and expected output (continuous operation): 20 shirts.

At any given day the computation of the incomplete cycle of production could be less in value, but in historical cost, it is always the assumption costs of completed production. There is no impact on cost reduction and does not support time equation of idle labor and unused machinery. Defies the issue of inflation in its wider concept. This could render yesterdays financial cost obsolete. Implicate the problem of defining the parameters of comparative information expressed in monetary units with different purchasing powers or currencies. Advantages: Computation for inflation cost is near to true value as it is base on graphical historical cost.

It can very well give the consumer price index in the inflation calculator from a marked period to a certain period. Audit standards to classify companies in financial distress is not well-meaning in its true form. Disadvantages: There is substantial doubt about the operations of the company for the next fiscal year in the audit evaluation report. In fact, the bank requires audit reports for all loan applications to know whether a certain company has the ability to operate long term or for a long period of time.   Fair value costing warrants the use of the current market values as the object in assigning accounting measurements.

It is the used of the price or prevailing market value of a certain commodity at the period of the transaction.

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