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Production Factors in Cost Accounting

Companies need to identify the economic reality of their organization based on resources and operations, not reflect dollar values calculated using accrual-based accounting methods that conform to Generally Accepted Accounting Principles (United States). Accountants may argue that financial accounting principles represent true values and are more than sufficient for management accounting purposes. Maximizing financial statement results is a primary objective; however, focusing only on accounting numbers or common financial ratios can lead to bad behavior versus focusing on operations and resource use for long term sustainable economic success. By examining two of the four financial accounting principles, it will reveal that financial accounting principles (e.g., Historical costRevenue recognitionMatching principle, and Full Disclosure) do not serve the objectives of management accounting. Let’s examine the following two GAAP principles:a) Historical cost principle (Kieso, Weygandt and Warfield)p38 – the only time this principle reflects cost is at the initial time of purchase or acquisition. In subsequent periods, the historical cost along with taxation-driven depreciation methods does not help managers determine their current operational cost factors.b) Matching principle (Kieso, Weygandt and Warfield)p40 – this principle mandates that the costs (expenses) must follow revenues or adopt the best “rational and systematic”allocation of costs associated with the benefit, including assumptions about when the benefit (and therefore costs) are to be received. Clearly, managers who are required to perform a cost analysis would have no idea under the matching principle what costs would be included/excluded or be currently impacting his department.