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Principles of Accounting. Theory and Practice Coursework

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Updated: Jun 12th, 2022

Securities and Exchange Commission was established for the purpose of setting standards for reporting financial position of companies that are publicly held. The commission left the mandate to financial accounting standards boards. However in the year 2001 and the year 2002 evens of Enron, WorldCom led to the commission to get directly involved by creating a board that was mandated to oversee corporate scandals.

However this body works in conjunction with the accounting board. The aim is to ensure the accountants work is properly inspected and regulated to avoid scandals in corporations. Therefore the current view of securities and exchange commission of accounting standards for publicly held companies is different form financial standards board that’s why they have come up with their own board in the name of public company accounting oversight board to regulate the work of accountants.

Financial accounting standards boards is an accounting standards sending body for the United States of America while international Accounting Standards Board is a standards boards which sends accounting standards for countries that have converged to have their reporting system similar. It is situated in the United kingdoms and has members across five continents. Financial accounting standards board issues generally accepted accounting principles for American Institute of satisfied accountants to oversea their implementation while international accounting standards board issues International Financial Reporting Standards which are implemented by various accounting bodies in various countries.

The two bodies have similar objectives of producing standards which are used by companies in reporting their financial positions. Before the collapse of Enron accounting rules were criticized because they did not allow the auditor to go beyond verifying what was in the books. The rules do not allow the accountant to discover and investigate fraud instanced.

The gross profit on sales has many benefits as opposed to contribution. The gross profit normally takes into consideration all the costs associated with a certain unit. It does not leave any cost out as compared to marginal costing method. Fixed costs is normally taken into consideration when fixing prices unlike instances of contribution margin. It is also easier to calculate profit. In both instances contribution margin and gross profit on sales the net income will be similar because all the cost will have been considered by then.

External reporting always considers the performance of the organization as a whole not as a unit. Therefore the use of contribution margin will not be applicable. It is normally used for internal decision making. The contribution margin statement is normally classified by behavior wile the gross profit sales statement or absorption statement is normally classified under a function because absorption method does not consider whether the cost is fixed or variable.

The synonyms of traceable and non-traceable costs are for traceable costs the synonym is direct costs while for non-traceable is indirect costs. The focus in this module is mostly on general variable cost although fixed cost is dealt with but the main aim is to deal with variable cost and how to allocate them. The expanded contribution margin income statement is called marginal costing profit and loss account (statement).

When making decisions for purposes of planning the organization normally uses actual costs not estimated costs. These actual costs which are related to a product and activity or a division will enable the organization decide on the best way forward for that particular section or unit. The reasons why there is cost allocations in companies is to ensure that indirect costs that are incurred have been allocated in equitable manner to production units. These costs are incurred for the purpose of the existence of the organization. When non-traceable costs are not allocated to various operating units it means they will be shown in the consolidated financial statement for the whole company.

Activity based costing normally considers an event, a task or unit of work that is fundamental to production. This may include designing of product, operating of machines and many others. It considers cost of individual activities and assigns costs to cost subjects such as products and services. The traditional cost allocation method considers costs to departments or units abut does snot consider the activities. The process of adopting activity based accounting has many benefits to the organization because costs of production are actually estimated with reasonable certainty thus it improves management and profitability for the firm. It also helps in the best pricing and product mix decisions.

A company with high fixed cost will not desire to use activity based costing as it is the case of a company with higher variable cost. Fixed costs are normally not considered when allocating cost to various production units because fixed costs are associated with the whole system of production in a certain unit therefore activity will be said to use the fixed cost. some of the characteristics of firms that benefit from activity based costing include good profitability, fair pricing and improved processes of production.ABC cost system is not a mere cost allocation method but a method that provides information that will satisfy the customer and improve profitability for the company. The method also helps in pricing and product mix decision for the company.

There is a danger of accepting a price which is above the contribution margin if the whole organization is on the verge of making a decision or curtailing production because fixed costs are not covered and if all orders are accepted above the contribution margin disregarding the fixed costs the organization may be making huge losses. It is important to use this criterion when production is still profitable. If the organization is making losses it is not prudent to use this method.

If the organization is currently operating in full capacity it should not accept any order which is below the profit margin whether above the contribution margin. However when they have idle time it should accept production above contribution margin or when entering a new market where they anticipate to change price in future. At times it is important to allocate costs to product services when the products produced or service influences the cost. In this case the other methods should be disregarded.

References

Horngren C.T., Datar S.M and Foster G; Cost Accounting: A Managerial Emphasis (2003) prentice hall pp. 141-142.

Saleemi N.A; Cost Accounting Simplified (1998); Saleemi publishers, pp 107-120, pp 89-90.

Glautier M W E & Underdown B; Accounting Theory and Practice; Pitman International Text pp. 56- 62.

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