Accounting реферат по бухгалтерскому учету и аудиту на английском языке , Сочинения из Бухгалтерское дело

Accounting реферат по бухгалтерскому учету и аудиту на английском языке , Сочинения из Бухгалтерское дело

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ACCOUNTING Accounting is the systematic development and analysis of information

about the economic affairs of an organization. This information may be used in

a number of ways: by the organization's managers to help them plan and control

the organization's operations; by owners and legislative or regulatory bodies to

help them appraise the organization's performance and make decisions as to its

future; by owners, lenders, suppliers, employees, and others to help them decide

how much time or money to devote to the organization; by governmental bodies

to determine how much tax the organization must pay; and occasionally by

customers to determine the price to be paid when contracts call for cost-based


Accounting provides information for all these purposes through the

maintenance of files of data, analysis and interpretation of these data, and the

preparation of various kinds of reports. Most accounting information is

historical—that is, the accountant observes the things that the organization

does, records their effects, and prepares reports summarizing what has been

recorded; the rest consists of forecasts and plans for current and future periods.

Accounting information can be developed for any kind of organization, not just

for privately owned, profit-seeking businesses. One branch of accounting deals

with the economic operations of entire nations. The remainder of this article,

however, will be devoted primarily to business accounting.

Company financial statements

Among the most common accounting reports are those sent to investors and

others outside the management group. The reports most likely to go to investors

are called financial statements, and their preparation is the province of the

branch of accounting known as financial accounting. Three financial statements

will be discussed: the balance sheet, the income statement, and the statement of

cash flows.


The balance sheet

A balance sheet describes the resources that are under a company's control on a

specified date and indicates where these resources have come from. It consists

of three major sections: (1) the assets: valuable rights owned by the company;

(2) the liabilities: the funds that have been provided by outside lenders and

other creditors in exchange for the company's promise to make payments or to

provide services in the future; and (3) the owners' equity: the funds that have

been provided by the company's owners or on their behalf.

The list of assets shows the forms in which the company's resources are lodged;

the lists of liabilities and the owners' equity indicate where these same

resources have come from. The balance sheet, in other words, shows the

company's resources from two points of view, and the following relationship

must always exist: total assets equals total liabilities plus total owners' equity.

This same identity is also expressed in another way: total assets minus total

liabilities equals total owners' equity. In this form, the equation emphasizes that

the owners' equity in the company is always equal to the net assets (assets

minus liabilities). Any increase in one will inevitably be accompanied by an

increase in the other, and the only way to increase the owners' equity is to

increase the net assets.

Assets are ordinarily subdivided into current assets and noncurrent assets. The

former include cash, amounts receivable from customers, inventories, and other

assets that are expected to be consumed or can be readily converted into cash

during the next operating cycle (production, sale, and collection). Noncurrent

assets may include noncurrent receivables, fixed assets (such as land and

buildings), and long-term investments.

The liabilities are similarly divided into current liabilities and noncurrent

liabilities. Most amounts payable to the company's suppliers (accounts

payable), to employees (wages payable), or to governments (taxes payable) are


included among the current liabilities. Noncurrent liabilities consist mainly of

amounts payable to holders of the company's long-term bonds and such items

as obligations to employees under company pension plans. The difference

between total current assets and total current liabilities is known as net current

assets, or working capital.

The owners' equity of an American company is divided between paid-in capital

and retained earnings. Paid-in capital represents the amounts paid to the

corporation in exchange for shares of the company's preferred and common

stock. The major part of this, the capital paid in by the common shareholders, is

usually divided into two parts, one representing the par value, or stated value, of

the shares, the other representing the excess over this amount. The amount of

retained earnings is the difference between the amounts earned by the company

in the past and the dividends that have been distributed to the owners.

A slightly different breakdown of the owners' equity is used in most of

continental Europe and in other parts of the world. The classification

distinguishes between those amounts that cannot be distributed except as part of

a formal liquidation of all or part of the company (capital and legal reserves)

and those amounts that are not restricted in this way (free reserves and

undistributed profits).

The income statement

The company uses its assets to produce goods and services. Its success depends

on whether it is wise or lucky in the assets it chooses to hold and in the ways it

uses these assets to produce goods and services.

The company's success is measured by the amount of profit it earns—that is,

the growth or decline in its stock of assets from all sources other than

contributions or withdrawals of funds by owners and creditors. Net income is

the accountant's term for the amount of profit that is reported for a particular

time period.


The company's income statement for a period of time shows how the net

income for that period was derived.

Net income summarizes all the gains and losses recognized during the period,

including both the results of the company's normal, day-by-day activities and

any other events. If net income is negative, it is referred to as a net loss.

The income statement is usually accompanied by a statement that shows how

the company's retained earnings has changed during the year. Net income

increases retained earnings; net operating loss or the distribution of cash

dividends reduces it.

The statement of cash flows

Companies also prepare a third financial statement, the statement of cash flows.

Cash flows result from three major groups of activities: (1) operating activities,

(2) investing activities, and (3) financing activities.

Cash from operations is not the same as net income (revenues minus expenses).

For one thing, not all revenues are collected in cash. Revenue is usually

recorded when a customer receives merchandise and either pays for it or

promises to pay the company in the future (in which case the revenue is

recorded in accounts receivable). Cash from operating activities, on the other

hand, reflects the actual cash collected, not the inflow of accounts receivable.

Similarly, an expense may be recorded without an actual cash payment.

The purpose of the statement of cash flows is to throw light on management's

use of the financial resources available to it and to help the users of the

statements to evaluate the company's liquidity, its ability to pay its bills when

they come due.

Consolidated statements

Most large corporations in the United States and other industrialized countries

own other corporations. Their primary financial statements are consolidated

statements, reflecting the total assets, liabilities, owners' equity, net income, and


cash flows of all the corporations in the group. Thus, for example, the

consolidated balance sheet of the parent corporation (the corporation that owns

the others) does not list its investments in its subsidiaries (the companies it

owns) as assets; instead, it includes their assets and liabilities with its own.

Some subsidiary corporations are not wholly owned by the parent; that is, some

shares of their common stock are owned by others. The equity of these minority

shareholders in the subsidiary companies is shown separately on the balance


The consolidated income statement also must show the minority owners' equity

in the earnings of a subsidiary as a deduction in the determination of net


Disclosure and auditing requirements

A corporation's obligations to issue financial statements are prescribed in the

company's own statutes or bylaws and in public laws and regulations. The

financial statements of most large and medium-size companies in the United

States fall primarily within the jurisdiction of the federal Securities and

Exchange Commission (SEC). The SEC has a good deal of authority to

prescribe the content and structure of the financial statements that are submitted

to it. Similar authority is vested in provincial regulatory bodies and the stock

exchanges in Canada; disclosure in the United Kingdom is governed by the

provisions of the Companies Act.

A company's financial statements are ordinarily prepared initially by its own

accountants. Outsiders review, or audit, the statements and the systems the

company used to accumulate the data from which the statements were prepared.

In most countries, including the United States, these outside auditors are

selected by the company's shareholders. The audit of a company's statements is

ordinarily performed by professionally qualified, independent accountants who

bear the title of certified public accountant (CPA) in the United States and

chartered accountant (CA) in the United Kingdom and many other countries


with British-based accounting traditions. Their primary task is to investigate the

company's accounting data and methods carefully enough to permit them to

give their opinion that the financial statements present fairly the company's

position, results, and cash flows.

Measurement principles

In preparing financial statements, the accountant has several

measurement systems to choose from. Assets, for example, may be

measured at what they cost in the past or what they could be sold for now,

to mention only two possibilities. To enable users to interpret statements

with confidence, companies in similar industries should use the same

measurement concepts or principles.

In some countries these concepts or principles are prescribed by

government bodies; in the United States they are embodied in “generally

accepted accounting principles” (GAAP), which represent partly the

consensus of experts and partly the work of the Financial Accounting

Standards Board (FASB), a private body. The principles or standards

issued by the FASB can be overridden by the SEC. In practice, however,

the SEC generally requires corporations within its jurisdiction to conform

to the standards of the FASB.

Asset value

One principle that accountants may adopt is to measure assets at their

value to their owners. The economic value of an asset is the maximum

amount that the company would be willing to pay for it. This amount

depends on what the company expects to be able to do with the asset. For

business assets, these expectations are usually expressed in terms of

forecasts of the inflows of cash the company will receive in the future. If,

for example, the company believes that by spending $1 on advertising


and other forms of sales promotion it can sell a certain product for $5,

then this product is worth $4 to the company.

When cash inflows are expected to be delayed, value is less than the

anticipated cash flow. For example, if the company has to pay interest at

the rate of 10 percent a year, an investment of $100 in a one-year asset

today will not be worthwhile unless it will return at least $110 a year

from now ($100 plus 10 percent interest for one year). In this example,

$100 is the present value of the right to receive $110 one year later.

Present value is the maximum amount the company would be willing to

pay for a future inflow of cash after deducting interest on the investment

at a specified rate for the time the company has to wait before it receives

its cash.

Value, in other words, depends on three factors: (1) the amount of the

anticipated future cash flows, (2) their timing, and (3) the interest rate.

The lower the expectation, the more distant the timing, or the higher the

interest rate, the less valuable the asset will be.

Value may also be represented by the amount the company could obtain

by selling its assets. This sale price is seldom a good measure of the

assets' value to the company, however, because few companies are likely

to keep many assets that are worth no more to the company than their

market value. Continued ownership of an asset implies that its present

value to the owner exceeds its market value, which is its apparent value to


Asset cost

Accountants are traditionally reluctant to accept value as the basis of

asset measurement in the going concern. Although monetary assets such

as cash or accounts receivable are usually measured by their value, most

other assets are measured at cost. The reason is that the accountant finds


it difficult to verify the forecasts upon which a generalized value

measurement system would have to be based. As a result, the balance

sheet does not pretend to show how much the company's assets are worth;

it shows how much the company has invested in them.

The historical cost of an asset is the sum of all the expenditures the

company made to acquire it. This amount is not always easily

measurable. If, for example, a company has built a special-purpose

machine in one of its own factories for use in manufacturing other

products, and the project required logistical support from all parts of the

factory organization, from purchasing to quality control, then a good deal

of judgment must be reflected in any estimate of how much of the costs

of these logistical activities should be “capitalized” (i.e., placed on the

balance sheet) as part of the cost of the machine.

Net income

From an economic point of view, income is defined as the change in the

company's wealth during a period of time, from all sources other than the

injection or withdrawal of investment funds. Income is the amount the

company could consume during the period and still have as much real

wealth at the end of the period as it had at the beginning. For example, if

the value of the net assets (assets minus liabilities) has gone from $1,000

to $1,200 during a period and dividends of $100 have been distributed,

income measured on a value basis would be $300 ($1,200 minus $1,000,

plus $100).

Accountants generally have rejected this approach for the same reason

that they have found value an unacceptable basis for asset measurement:

Such a measure would rely too much on estimates of what will happen in

the future, estimates that would not be readily susceptible to independent

verification. Instead, accountants have adopted what might be called a

transactions approach to income measurement. They recognize as income


only those increases in wealth that can be substantiated from data

pertaining to actual transactions that have taken place with persons

outside the company. In such systems, income is measured when work is

performed for an outside customer, when goods are delivered, or when

the customer is billed.

Recognition of income at this time requires two sets of estimates: (1)

revenue estimates, representing the value of the cash that the company

expects to receive from the customer; and (2) expense estimates,

representing the resources that have been consumed in the creation of the

revenues. Revenue estimation is the easier of the two, but it still requires

judgment. The main problem is to estimate the percentage of gross sales

for which payment will never be received, either because some customers

will not pay their bills (“bad debts”) or because they will demand and

receive credit for returned merchandise or defective work.

Expense estimates are generally based on the historical cost of the

resources consumed. Net income, in other words, is the difference

between the value received from the use of resources and the cost of the

resources that were consumed in the process. As with asset measurement,

the main problem is to estimate what portion of the cost of an asset has

been consumed during the period in question.

Some assets give up their services gradually rather than all at once. The

cost of the portion of these assets the company uses to produce revenues

in any period is that period's depreciation expense, and the amount shown

for these assets on the balance sheet is their historical cost less an

allowance for depreciation, representing the cost of the portion of the

asset's anticipated lifetime services that has already been used. To

estimate depreciation, the accountant must predict both how long the

asset will continue to provide useful services and how much of its

potential to provide these services will be used up in each period.


Depreciation is usually computed by some simple formula. The two most

popular formulas in the United States are straight-line depreciation, in

which the same amount of depreciation is recognized each year, and

declining-charge depreciation, in which more depreciation is recognized

during the early years of life than during the later years, on the

assumption that the value of the asset's service declines as it gets older.

The role of the independent accountant (the auditor) is to see whether the

company's estimates are based on formulas that seem reasonable in the

light of whatever evidence is available and whether these formulas are

applied consistently from year to year. Again, what is “reasonable” is

clearly a matter of judgment.

Depreciation is not the only expense for which more than one

measurement principle is available. Another is the cost of goods sold. The

cost of goods available for sale in any period is the sum of the cost of the

beginning inventory and the cost of goods purchased in that period. This

sum then must be divided between the cost of goods sold and the cost of

the ending inventory.

Accountants can make this division by any of three main inventory

costing methods: (1) first in, first out (FIFO), (2) last in, first out (LIFO),

or (3) average cost. The LIFO method is widely used in the United States,

where it is also an acceptable costing method for income tax purposes;

companies in most other countries measure inventory cost and the cost of

goods sold by some variant of the FIFO or average cost methods. Average

cost is very similar in its results to FIFO, so only FIFO and LIFO need be


Each purchase of goods constitutes a single batch, acquired at a specific

price. Under FIFO, the cost of goods sold is determined by adding the

costs of various batches of the goods available, starting with the oldest

batch in the beginning inventory, continuing with the next oldest batch,


and so on until the total number of units equals the number of units sold.

The ending inventory, therefore, is assigned the costs of the most recently

acquired batches.

Under LIFO, the cost of goods sold is the sum of the most recent

purchase, the next most recent, and so on, until the total number of units

equals the number sold during the period.

The LIFO cost of the ending inventory is the cost of the oldest units in the

cost of goods available.

Problems of measurement

Accounting income does not include all of the company's holding gains

or losses (increases or decreases in the market values of its assets). For

example, construction of a superhighway may increase the value of a

company's land, but neither the income statement nor the balance sheet

will report this holding gain. Similarly, introduction of a successful new

product increases the company's anticipated future cash flows, and this

increase makes the company more valuable. Those additional future sales

show up neither in the conventional income statement nor in the balance


Accounting reports have also been criticized on the grounds that they

confuse monetary measures with the underlying realities when the prices

of many goods and services have been changing rapidly. For example, if

the wholesale price of an item has risen from $100 to $150 between the

time the company bought it and the time it is sold, many accountants

claim that $150 is the better measure of the amount of resources

consumed by the sale. They also contend that the $50 increase in the

item's wholesale value before it is sold is a special kind of holding gain

that should not be classified as ordinary income.


When inventory purchase prices are rising, LIFO inventory costing keeps

many gains from the holding of inventories out of net income. If

purchases equal the quantity sold, the entire cost of goods sold will be

measured at the higher current prices; the ending inventory will be

measured at the lower prices shown for the beginning-of-year inventory.

The difference between the LIFO inventory cost and the replacement cost

at the end of the year is an unrealized (and unreported) holding gain.

The amount of inventory holding gain that is included in net income is

usually called the “inventory profit.” The implication is that this is a

component of net income that is less “real” than other components

because it results from the holding of inventories rather than from trading

with customers.

When most of the changes in the prices of the company's resources are in

the same direction, the purchasing power of money is said to change.

Conventional accounting statements are stated in nominal currency units

(dollars, francs, lire, etc.), not in units of constant purchasing power.

Changes in purchasing power—that is, changes in the average level of

prices of goods and services—have two effects. First, net monetary assets

(essentially cash and receivables minus liabilities calling for fixed

monetary payments) lose purchasing power as the general price level

rises. These losses do not appear in conventional accounting statements.

Second, holding gains measured in nominal currency units may merely

result from changes in the general price level. If so, they represent no

increase in the company's purchasing power.

In some countries that have experienced severe and prolonged inflation,

companies have been allowed or even required to restate their assets to

reflect the more recent and higher levels of purchase prices. The

increment in the asset balances in such cases has not been reported as

income, but depreciation thereafter has been based on these higher


amounts. Companies in the United States are not allowed to make these

adjustments in their primary financial statements.

Managerial accounting

Although published financial statements are the most widely visible

products of business accounting systems and the ones with which the

public is most concerned, they are only the tip of the iceberg. Most

accounting data and most accounting reports are generated solely or

mainly for the company's managers. Reports to management may be

either summaries of past events, forecasts of the future, or a combination

of the two. Preparation of these data and reports is the focus of

managerial accounting, which consists mainly of four broad functions: (1)

budgetary planning, (2) cost finding, (3) cost and profit analysis, and (4)

performance reporting.

Budgetary planning

The first major component of internal accounting systems for

management's use is the company's system for establishing budgetary

plans and setting performance standards. The setting of performance

standards requires also a system for measuring actual results and

reporting differences between actual performance and the plans (see

below Performance reporting).

The planning process leads to the establishment of explicit plans, which

then are translated into action. The results of these actions are compared

with the plans and reported in comparative form. Management can then

respond to substantial deviations from plan, either by taking corrective

action or, if outside conditions differ from those predicted or assumed in

the plans, by preparing revised plans.

Although plans can be either broad, strategic outlines of the company's

future or schedules of the inputs and outputs associated with specific


independent programs, most business plans are periodic plans—that is,

they refer to company operations for a specified period of time. These

periodic plans are summarized in a series of projected financial

statements, or budgets.

The two principal budget statements are the profit plan and the cash

forecast. The profit plan is an estimated income statement for the budget

period. It summarizes the planned level of selling effort, shown as selling

expense, and the results of that effort, shown as sales revenue and the

accompanying cost of goods sold. Separate profit plans are ordinarily

prepared for each major segment of the company's operations.

The details underlying the profit plan are contained in departmental sales

and cost budgets, each part identified with the executive or group

responsible for carrying out that part.

Many companies also prepare alternative budgets for operating volumes

other than the volume anticipated for the period. A set of such alternative

budgets is known as the flexible budget. The practice of flexible

budgeting has been adopted widely by factory management to facilitate

evaluation of cost performance at different volume levels and has also

been extended to other elements of the profit plan.

The second major component of the annual budgetary plan, the cash

forecast or cash budget, summarizes the anticipated effects on cash of all

the company's activities. It lists the anticipated cash payments, cash

receipts, and amount of cash on hand, month by month throughout the

year. In most companies, responsibility for cash management rests mainly

in the head office rather than at the divisional level. For this reason,

divisional cash forecasts tend to be less important than divisional profit



Company-wide cash forecasts, on the other hand, are just as important as

company profit plans. Preliminary cash forecasts are used in deciding

how much money will be made available for the payment of dividends,

for the purchase or construction of buildings and equipment, and for other

programs that do not pay for themselves immediately. The amount of

short-term borrowing or short-term investment of temporarily idle funds

is then generally geared to the requirements summarized in the final,

adjusted forecast.

Other elements of the budgetary plan, in addition to the profit plan and

the cash forecast, include capital expenditure budgets, personnel budgets,

production budgets, and budgeted balance sheets. They all serve the same

purpose: to help management decide upon a course of action and to serve

as a point of reference against which to measure subsequent performance.

Planning is a management responsibility, not an accounting function. To

plan is to decide, and only the manager has the authority to choose the

direction the company is to take. Accounting personnel are nevertheless

deeply involved in the planning process. First, they administer the

budgetary planning system, establishing deadlines for the completion of

each part of the process and seeing that these deadlines are met. Second,

they analyze data and help management at various levels compare the

estimated effects of different courses of action. Third, they are

responsible for collating the tentative plans and proposals coming from

the individual departments and divisions and then reviewing them for

consistency and feasibility and sometimes for desirability as well. Finally,

they must assemble the final plans management has chosen and see that

these plans are understood by the operating executives.

Cost finding

A major factor in business planning is the cost of producing the

company's products. Cost finding is the process by which the company


obtains estimates of the costs of producing a product, providing a service,

performing a function, or operating a department. Some of these

estimates are historical—how much did it cost?—while others are

predictive—what will it cost?

The basic principle in cost finding is that the cost assigned to any object

—an activity or a product—should represent the amount of cost that

object causes. The most fully developed methods of cost finding are used

to estimate the costs that have been incurred in a factory to manufacture

specific products. The simplest of these methods is known as process

costing. In this method, the accountant first accumulates the costs of each

separate production operation or process for a specified period of time.

The total of these costs is then restated as an average by dividing it by the

total output of the process during the same period.

Process costing can be used whenever the output of individual processes

is reasonably uniform or homogeneous, as in cement manufacturing, flour

milling, and other relatively continuous production processes.

A second method, job order costing, is used when individual production

centres or departments work on a variety of products rather than just one

during a typical time period. Two categories of factory cost are

recognized under this method: prime costs and factory overhead costs.

Prime costs are those that can be traced directly to a specific batch, or job

lot, of products. These are the direct labour and direct materials costs of

production. Overhead costs, on the other hand, are those that can be

traced only to departmental operations or to the factory as a whole and

not to individual job orders. The salary of a departmental supervisor is an

example of an overhead cost.

Direct materials and direct labour costs are recorded directly on the job

order cost sheets, one for each job. Although not traceable to individual

jobs, overhead costs are generally assigned to them by means of overhead


rates—i.e., the ratio of total overhead cost to total production volume for

a given time period. A separate overhead rate is usually calculated for

each production department, and, if the operations of a department are

varied, it is often subdivided into a set of more homogeneous cost centres,

each with its own overhead rate. Separate overhead rates are sometimes

used even for individual processing machines within a department if the

machines differ widely in such factors as power consumption,

maintenance cost, and depreciation.

Many production costs are incurred in departments that don't actually

produce goods or provide salable services. Instead, they provide services

or support to the departments that do produce products. Examples include

maintenance departments, quality control departments, and internal

power plants. Estimates of these costs are included in the estimated

overhead costs of the production departments by a process known as

allocation—that is, estimated service department costs are allocated

among the production departments in proportion to the amount of service

or support each receives. The departmental overhead rates then include

provisions for these allocated costs.

A third method of cost finding, activity-based costing, is based on the fact

that many costs are driven by factors other than product volume. The first

task is to identify the activities that drive costs. The next step is to

estimate the costs that are driven by each activity and state them as

averages per unit of activity. Management can use these averages to guide

its efforts to reduce costs. In addition, if management wants an estimate

of the cost of a specific product, the accountant can estimate how many of

the activity units are associated with that product and multiply those

numbers by the average costs per activity unit.

Product cost finding under activity-based costing is almost always a

process of estimating costs before production takes place. The method of


process costing and job order costing can be used either in preparing

estimates before the fact or in assigning costs to products as production

proceeds. Even when job order costing is used to tally the costs actually

incurred on individual jobs, the overhead rates are usually predetermined

—that is, they represent the average planned overhead cost at some

production volume. The main reason for this is that actual overhead cost

averages depend on the total volume and efficiency of operations and not

on any one job alone. The relevance of job order cost information will be

impaired if these external fluctuations are allowed to change the amount

of overhead cost assigned to a particular job.

Many systems go even farther than this. Estimates of the average costs of

each type of material, each operation, and each product are prepared

routinely and identified as standard costs. These are then readily available

whenever estimates are needed and can also serve as an important

element in the company's performance reporting system, as described


Similar methods of cost finding can be used to determine or estimate the

cost of providing services rather than physical goods. Most advertising

agencies and consulting firms, for example, maintain some form of job

cost records, either as a basis for billing their clients or as a means of

estimating the profitability of individual jobs or accounts.

The methods of cost finding described in the preceding paragraphs are

known as full, or absorption, costing methods, in that the overhead rates

are intended to include provisions for all manufacturing costs. Both

process and job order costing methods can also be adapted to variable

costing in which only variable manufacturing costs are included in

product cost. Variable costs are those that will be greater in total in the

upper portions of the company's normal range of volumes than in the


lower portion. Total fixed costs, in contrast, are the same at all volume

levels within the normal range.

Unit cost under variable costing represents the average variable cost of

making the product. The main argument for the variable costing approach

is that average variable cost is more relevant to short-horizon managerial

decisions than average full cost. In deciding whether to manufacture

goods in large lots, for example, management needs to estimate the cost

of carrying larger amounts of finished goods in inventory. More variable

costs will have to be incurred to build the inventory to a higher level;

fixed manufacturing costs presumably will be unaffected.

Furthermore, when a management decision changes the company's fixed

costs, the change is unlikely to be proportional to the change in volume;

therefore, average fixed cost is seldom a valid basis for estimating the

cost effects of such decisions. Variable costing eliminates the temptation

to assume without question that average fixed cost can be used to

estimate changes in total fixed cost. When variable costing is used,

supplemental rates for fixed overhead production costs must be provided

to measure the costs to be assigned to end-of-year inventories because

generally accepted accounting principles in the United States and in most

other countries require that inventories be measured at full product cost

for external financial reporting.

Cost and profit analysis

Accountants share with many other people the task of analyzing cost and

profit data in order to provide guidance in managerial decision making.

Even if the analytical work is done largely by others, they have an interest

in analytical methods because the systems they design must collect data

in forms suitable for analysis.


Managerial decisions are based on comparisons of the estimated future

results of the alternative courses of action that the decision maker is

choosing among. Recorded historical accounting data, in contrast, reflect

conditions and experience of the past. Furthermore, they are absolute, not

comparative, in that they show the effects of one course of action but not

whether these were better or worse than those that would have resulted

from some other course.

For decision making, therefore, historical accounting data must be

examined, modified, and placed on a comparative basis. Even estimated

data, such as budgets and standard costs, must be examined to see

whether the estimates are still valid and relevant to managerial

comparisons. To a large extent, this job of review and restatement is an

accounting responsibility. Accordingly, a major part of the accountant's

preparation for the profession is devoted to the study of methods and

principles of analysis for managerial decision making.

Performance reporting

Once the budgetary plan has been adopted, accounting's next task is to

prepare information on the results of company activities and make it

available to management. The manager's main interest in this information

centres on three questions: Have his or her own actions had the results

expected, and, if not, why not? How successful have subordinates been in

managing the activities entrusted to them? What problems and

opportunities seem to have arisen since the budgetary plan was prepared?

For these purposes, the information must be comparative, relating actual

results to the level of results that management regards as satisfactory. In

each case, the standard for comparison is provided by the budgetary plan.

Much of this information is contained in periodic financial reports. At the

top management and divisional levels, the most important of these is the

comparative income statement, one of which is illustrated in Table 4. This


shows the profit that was planned for this period, the actual results

received for this period, and the differences, or variances, between the

two. It also gives an explanation of some of the reasons for the difference

between a planned and an actual income.

The report in this exhibit employs the widely used profit contribution

format, in which divisional results reflect sales and expenses traceable to

the individual divisions, with no deduction for head office expenses.

Company net income is then obtained by deducting head office expenses

as a lump sum from the total of the divisional profit contributions. A

similar format can be used within the division, reporting the profit

contribution of each of the division's product lines, with divisional

headquarters expenses deducted at the bottom.

By far the greatest number of reports, however, are cost or sales reports,

mostly on a departmental basis. Departmental sales reports usually

compare actual sales with the volumes planned for the period.

Departmental cost performance reports, in contrast, typically compare

actual costs incurred with standards or budgets that have been adjusted to

correspond to the actual volume of work done during the period. This

practice reflects a recognition that volume fluctuations generally originate

outside the department and that the department head's responsibility is

ordinarily limited to minimizing cost while meeting the delivery

schedules imposed by higher management.

In most cases, the labour rate variance would not be reported to the

department head, because it is not subject to his or her control.

Standard costing systems no longer have the central importance they

commanded in many industries up to the 1970s. One reason is that

significant changes in management technology have shifted the focus of

cost control from the individual production department to larger, more

interdependent groups. Just-in-time production systems require changes


in factory layouts to reduce the time it takes to move work from one

station to the next. They also reduce the number of partly processed units

at each work station, thereby requiring greater station-to-station


At the same time, management's emphasis has shifted from cost control

to cost reduction, quality enhancement, and closer coordination of

production and customer deliveries. Most large manufacturing companies

and many service companies have launched programs of total quality

control and continuous improvement, and many have replaced standard

costs with a more flexible approach using prior period results as current

performance standards. Management is also likely to focus on the amount

of system waste by identifying and minimizing activities that contribute

nothing to the value that customers place on the product.

Reducing set-up time, inspection time, and time spent moving work from

place to place while maintaining or improving quality are some of the

results of these programs. Advances in computer-based models have

enabled companies to tie production schedules more closely to customer

delivery schedules while increasing the rate of plant utilization. Some of

these changes actually increase variances from standard costs in some

departments but are undertaken because they benefit the company as a


The overall result is that control systems are likely to focus in the first

instance on operational controls (real-time signals to operating personnel

that some immediate remedial action is required), with after-the-fact

analysis of results focusing on aggregate comparisons with past

performance and the planned results of current improvement programs.

Other purposes of accounting systems

Accounting systems are designed mainly to provide information that managers and


outsiders can use in decision making. They also serve other purposes: to produce

operating documents, to protect the company's assets, to provide data for company tax

returns, and, in some cases, to provide the basis for reimbursement of costs by clients or


The accounting organization is responsible for preparing documents that contain

instructions for a variety of tasks, such as payment of customer bills or preparing

employee payrolls. It also must prepare documents that serve what might be called

private information purposes, such as the employees' own records of their salaries and

wages. Many of these documents also serve other accounting purposes, but they would

have to be prepared even if no information reports were necessary. Measured by the

number of people involved and the amount of time required, document preparation is one

of accounting's biggest jobs.

Accounting systems must provide means of reducing the chance of losses of assets due to

carelessness or dishonesty on the part of employees, suppliers, and customers. Asset

protection devices are often very simple; for example, many restaurants use numbered

meal checks so that waiters will not be able to submit one check to the customer and

another, with a lower total, to the cashier. Other devices entail a partial duplication of

effort or a division of tasks between two individuals to reduce the opportunity for

unobserved thefts.

These are all part of the company's system of internal controls. Another important

element in the internal control system is internal auditing. The task of internal auditors is

to see whether prescribed data handling and asset protection procedures are being

followed. To accomplish this, they usually observe some of the work as it is being

performed and examine a sample of past transactions for accuracy and fidelity to the

system. They may insert a set of fictitious data into the system to see whether the

resulting output meets a predetermined standard. This technique is particularly useful in

testing the validity of the programs that are used to process data through electronic


The accounting system must also provide data for use in the completion of the company's


tax returns. This function is the concern of tax accounting. In some countries financial

accounting must obey rules laid down for tax accounting by national tax laws and

regulations, but no such requirement is imposed in the United States, and tabulations

prepared for tax purposes often diverge from those submitted to shareholders and others.

“Taxable income” is a legal concept rather than an accounting concept. Tax laws include

incentives to encourage companies to do certain things and discourage them from doing

others. Accordingly, what is “income” or “capital” to a tax agency may be far different

from the accountant's measures of these same concepts.

Finally, accounting systems in some companies must provide cost data in the forms

required for submission to customers who have agreed to reimburse the companies for the

costs they have incurred on the customers' behalf. The primary example of these is work

performed under cost-based contracts with U.S. military agencies. The measurement rules

for this purpose are contained in the Armed Services Procurement Regulations, which

embody standards issued by the Cost Accounting Standards Board. In general, these

standards conform to the principles underlying conventional product costing systems, but

they go beyond them in incorporating provisions for corporate and divisional head office

administrative costs.


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