First 2 of different uses of cost data have been discussed here: now we are discussing another 3 different uses of cost data.
3. Measuring Annual or Periodic Profit Including Inventory Costing.
Under different uses of Cost data, the measuring of an annual or periodic profit for the entire enterprise involves the matching of expired costs with revenues on some consistent basis. This matching process requires distinguishing between short and long-run costs. The longer the period, the greater the accuracy of the matching process. A company’s annual reports reflect the results of separating the costs applicable to the units sold from the costs applicable to the units remaining in inventories. This separation procedure has always been a distinctive feature of cost accounting.
The costs reported thereby are historical or past costs. Short-run, interim, or periodic reports are useful for purposes of internal control and for the solution of particular managerial problems. In such cases a product’s variable costs are assigned first to the units manufactured and are then matching with the units sold! The fixed costs, however, require an arbitrary allocation to the units and consequently lead to the possibility of three alternative matching processes
a) To match fixed (capacity) costs assigned to each period in total with revenues of that period (direct costing).
(b) To match manufacturing fixed (capacity) costs on a product unit basis and to match all other fixed costs in total each period (absorption costing).
(c) To match all fixed costs, manufacturing as well as non manufacturing, on a long-run sales unit basis.
Over a long enough period these methods give the same result but yield a different profit for individual short periods, when cost incurring activities are out of phase with revenues. Because all methods are arbitrary to some extent, no one method gives consistently useful results under all conditions. Different circumstances may call for different methods.
4. Assisting in Establishing Selling Prices and a Pricing Policy.
Under different uses of Cost data, the establishment of a profitable sales price workable over a period of time requires the combined knowledge of costs and their volume. In the planning phase, a knowledge of future costs and allowances for fluctuating production and sales might permit management to agree on a pricing policy that assures not only the recovery of all costs but also the securing of a profit even under adverse conditions. Supply and demand are still considered the cornerstones for pricing. However, costs and their proper application to the company’s pricing efforts must never be forgotten.
5. Furnishing Relevant Cost Data for Analytical Processes for Decision Making.
Under the different uses of Cost data, managerial planning as evidenced by long-range budgeting involves business strategies covering one or more years. To implement long-range strategy, management must make tactical changes and decisions involving a choice of alternative courses of action. Different costs and different revenues may have to be determined and presented by the accountant.
Changes in production methods, making or buying a component part, replacing equipment, substituting materials, accepting or rejecting a price or an order — each situation calls for new expected actual costs and a new set of revenues related to these specific situations.