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Financial reporting rules require stock
values for work in progress and finished goods to be based on the full
cost of production including costs that accrue on a time basis such as
management salaries or factory rent and rates. Thus one task of the cost
accounting system is to provide stock valuations consistent with that
purpose. These stock values are divided between the stock figure reported
on the balance sheet, and the cost of goods sold figure (part of cost
of sales) in the profit and loss account, at the end of the year and are
therefore needed to calculate the company's reported profit figure. Beyond
this requirement for the cost accounting system to accumulate stock valuations
for financial reporting purposes, any additional accounting activity carried
out within the accounting entity is entirely to assist in the management
of the company. The cost accounting system should therefore be designed
to provide management information which is sufficiently valuable/useful
to justify the expense incurred in running it - it should be judged on
cost-benefit terms.
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Cost Objectives
Items that costs are 'attached' to by the cost accounting
system are termed 'cost objectives'. Costs may be accumulated to reflect
many different 'cost objectives'. However, the output from a manufacturing
company will typically be measured in terms of units of production.
Products are therefore most frequently the 'cost objective' of the cost
accounting system. As indicated above, products costs consistent with
financial reporting rules must be prepared for stock valuation purposes.
Other 'cost objectives' that may provide a focus for manufacturing cost
accounting include projects, batches or processes. Outside the manufacturing
area, cost objectives for routine cost accumulation might include particular
functional areas, activities or departments. Many other cost objectives
may be specified for non-routine (ad hoc) costing analysis.
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