period cost accounting

period cost accounting

The Evolution and Impact of Period Cost Accounting in Modern Business Practices

1. Introduction to Period Cost Accounting

The form of revised cost accounts that was developed excluded activities for which subordinates could not be held responsible, although this method of performance measurement was again found to result in the distortion of financial reports, giving top management an incorrect impression of the location picture of performance. The improved performance by subordinates was not solely due to their ability but also because of changes in circumstances for which they were not responsible. This introduced a new form of responsibility accounting, one in which subordinates were responsible for line-items varying from one period to the next. This form of responsibility accounting turned the budgetary system to that of accounting for assembled costs, the predecessor form of period cost accounts.

However, there are some disadvantages associated with the use of gross costs accounting since it was found to be unable to perfectly assess the performance of operating staff. Some activities performed by staff were not included in the computation of the cost of sales, therefore giving senior management a false impression of performance. This led to a form of accounting that again gave better operational control.

In the formative years of cost accounting, it took the form recognized historically as a budget that is designed to ascertain the cost of producing goods or services. However, this form of accounting was only effective up to a certain period in economic development due to the historical fact that operational control was typically invested in a single person at a particular location. This situation is recognized by many accounting theoreticians post-World War I as the period where the structure of cost accounting that most modern business organizations employ, gross-cost accounting, was prevalent across all modern business organizations at that time.

In early business history, prior to industrialization, the then rudimentary form of accounting existed mainly to support a simplified form of trading activities. As activities pluralized into manufacturing and other forms of economic activities, accounting matured into a system of cost accounting to support the generation of information meant to allow managers or business owners to effectively manage business operations.

2. Historical Development and Evolution of Period Cost Accounting

The change in application of capital over the period is a most valuable piece of information – or snapshot picture – for those who are responsible for managing those same resources. The merchant’s stock at any one time is the enterprise’s principal long-term investment. The accruals generated from trading activity provide the income necessary to maintain and develop those investments. Profits and losses represent the return on capital employed in providing goods and services to stakeholders. In that sense, the profitability of the business enterprise is the justification for the business enterprise and it is of key importance.

Prior to the development of cost accounting at the beginning of the 20th century, managers were able to assess profits for trading businesses simply by taking an inventory every year of the stock of goods held at the beginning and end of the period. This effectively calculated the difference between the value of the goods that had been purchased and retained for future sale and the closing cash balance. The latter was the starting cash balance (representing the original capital together with profits or losses accumulated by trading in earlier years) plus the profit made from selling the goods during the year (or a loss made if remaining stocks were written down). It was a valuable measure for assessing the financial progress of a trading enterprise and is still a key driver of share prices today.

3. Key Concepts and Components of Period Cost Accounting

Businesses have extracted the fixed investment from the cost components of their products and replaced them with costs of doing business in the form of marketing expenses, administrative salaries, general utility costs, and individual department business operating expenses such as supplies, postage, and travel. These costs are assumed to be consumed in generating sales and will permanently lose their association with an investment after a period of time much shorter than the physical life of the associated product, and are therefore period costs.

When a business reports the costs of doing business or the expenses utilized to generate sales on its income statement, it can only utilize these amounts in one reporting period. Every reporting period’s income statement will have its costs reported on it. And because the income statements of every manager in an organization can only report these costs as being utilized in their respective reporting periods, businesses must be able to install the costs incurred and recognize them in the income statements of each area of their business as they utilize them.

4. Benefits and Limitations of Period Cost Accounting

Cohen and Venuti, Abernethy, Hopper and Young, Peel, Bridge, and Ashford, and Mia and Chen support the premise that the rise of period cost accounting preceded the rise and dominance of large-scale industrial corporations. As the value chain emerged, it became difficult to accurately determine the specific cost of each separable unit of output. Instead, companies began to assign to the product the costs associated with acquiring and resulting from the production of the input required to produce and deliver that output. The ability to assign to a product this collection of costs associated with its acquisition has several advantages for users of accounting information. First, it enables the business to determine, to a fairly accurate degree of precision, what the cost-benefit relationship is associated with purchasing or making the good in relation to the revenue that they expect to realize from the sale of that good, ensuring that unnecessary expenditure is not incurred in purchasing the goods.

3.1. Benefits of using Period Cost Accounting

5. Application and Implementation of Period Cost Accounting in Contemporary Business

Management is today’s outstanding issue. The quality of management, management decisions, and their effective implementation rely on the ability to reach, secure, and transmit enough, in a timely manner, and in a meaningful way. This issue is very important in the aquaculture business, one part of food production chain, which meets the nutrition demand of people. Several research methods were also studied. The selection of cost calculation methods may be a starting point for aquaculture business regarding its internal management. At the same time, it may affect the reliability of financial accounting, realization of periodic financial accounting, and several variables expressed. Any business will be able to apply methods included in the cost accounting literature completely when calculating costs.

In this section, the most important research methods applied to the production cost of aquaculture businesses were analyzed briefly. In general, production costs can be defined as follows: “Business costs related to material, labor, and general burden directly associated with the production of commodities. Direct costs, which include the elements of feed, seedlings, fertilizers, and vaccines used during breeding affect the value of the production, whereas direct labor costs include labor costs of a business directly related to production. Today, periodicity comes into prominence in business management and profitability. Especially taking into consideration the offering of periodic financial reports to people who allocate capitals to a business, people who evaluate business management, and fiscals are important. In this research, cost accounting literature regarding production cost was evaluated and an overview analysis was carried out with respect to accounting techniques and methods, which may be of use to aquaculture businesses who submit their costs, as a basis for evaluation when investigating the application and installed ones in aquaculture business.