The Important Task of Measuring Costs

Measuring profits or net income is the most important thing accountants do. The second most important task is measuring costs. Costs are extremely important to running a business and managing them effectively can make a substantial difference in a company’s bottom line.

Any business that sells products needs to know its product costs and, depending on what is being manufactured and/or sold, it can get somewhat complicated. Every step in indirect costsmanufacturing costs, has to be tracked carefully from start to finish. Many manufacturing costs cannot be directly matched with particular products; these are called indirect costs.

To calculate the full cost of each product manufactured, accountants devise methods for allocating indirect production costs to specific products. Generally accepted accounting principles (GAAP) provide few guidelines for measuring product cost.

Accountants need to determine many other costs, in addition to product costs, such as costs of the departments and other organizational units of the business, the cost of a retirement plan for the company’s employees; the cost of marketing and advertising; the cost of restructuring the business or the cost of a major recall of products sold by the company, should that ever become necessary.

Cost accounting serves two broad purposes: Measuring profit and furnishing relevant information to managers. What makes it confusing is that there is no one set method for measuring and reporting costs, although accuracy is paramount. Cost accounting can fall anywhere on a continuum between conservative or expansive.

The phrase ‘actual cost’ depends entirely on the particular methods used to measure cost. These can often be as subjective and nebulous as some systems for judging sports. Again, accuracy is extremely important. The total cost of goods or products sold is the first and usually largest expense deducted from sales revenue in measuring profit.

Is Disclosure Mandated to Complete Financial Reports?

Financial statements are the backbone of a complete financial report. In fact, a financial report is not complete if the three primary financial statements are not included. but a financial report is much more than just those statements. A financial report requires disclosures. This term refers to additional information provided in a financial report.

Therefore, any comprehensive and ethical financial report must include not only the primary financial statements, but disclosures as well.

The chief executive of a business (usually the CEO in a publicly held corporation) has the primary responsibility to make sure that the financial statements have been prepared according to generally accepted accounting principles (GAAP) and the financial report provides adequate disclosures. He or she works with the chief financial officer or controller of the business to make sure that the financial report meets the standard of adequate disclosures.

Some common methods of disclosures include:

  • Footnotes that provide information about the basic figures. Nearly all financial statements require footnotes to provide additional information for several of the account balances in the financial statements.
  • Supplementary financial schedules and tables that provide more details than can be included in the body of the financial statements.
  • Other information may be required if the business is a public corporation subject to federal regulations regarding financial reporting to its stockholders. Other information is voluntary and not strictly required legally or according to GAAP.

Some disclosures are required by various governing boards and agencies. These include:

  • The financial Accounting Standards Board (FASB) has designated many standards. Its dictate regarding disclosure of the effects of stock options is one such standard.
  • The Securities and Exchange Commission (SEC) mandates disclosure of a broad range of information for publicly held companies.
  • International businesses have to abide by disclosure standards adopted by the International Accounting Standards Board.