The aim is always to get the edge on the competition, getting ahead in the market in terms of product costing, design and packaging, quality and availability. However, improving the efficiency of manpower and machine while reducing cost and without sacrificing customer value is one important point in cost accounting that makes review of a company's financial profile as delicate and argumentative between departments as ever.
Historical Cost Accounting is the traditional cost accounting method wherein the assets are being valued at their original cost less their accumulated depreciation. Herein the revenues, expenditure and asset acquisition / disposition are being recorded according to their actual value or amount received and paid to complete the transaction. It allocates a company's fixed cost in a certain period to the cost of items produced during that period and records their result as total production cost.
Example: I purchased a 100 sqm lot for $5k per sqm in 1995, however its value has appreciated to $20k per sqm in 2006. The amount of the lot or the book value of the asset that will be recorded in the books is still in the value of $5k per sqm.
Advantages: This will let us record the book value as to its historical cost or actual value and thereby make our books consistent as to the assignment of values with regards to our company's assets. The value is reliable and is not bias.
Disadvantages: This will tend to hide the current market value of the property or asset as defined.
B. Historical cost does not record the fair market value of the property and thereby there is no realization of income present from the actual cost to the present market value difference.
Disadvantages: From the example above, an income realization of $20k less $5k can be determined if present market value is used. However, it is being denied in simplicity and in its form.
C. Historical cost principle is simply the opposite of the current cost accounting principle. In historical cost accounting, the values were recorded and entered as to its value in history or the value at the time of purchase and acquisition while in current cost accounting, the value of the assets were recorded as to the time it was being booked or the statements were being generated and prepared.
Disadvantages: This is simply made to elaborate the big difference in cost settings when an asset is being acquired years ago and when the asset is being valued as to its present market or appraised value or its value at the time of the preparation of the financial statements. Historical cost simply does not recognize the present market value of the acquired assets.
Value of asset in 1995 is $5k per sqm.
Value of asset in 2006 is $20k per sqm. (present true market value)
D. Considering the depreciation and the appreciation of a property, it ignores the fact that the value of a property could very well rise up or go lower on its time of operations.
Disadvantages: The concentration is mainly in cost allocations and not in the value of the