Cost Allocation Procedures

Cost Systems Cost systems are organized methods of collecting, allocating, and accumulating resource utility expressed in terms of money. There are two major spheres of cost accumulation: financial accounting and cost accounting. Financial accounting deals primarily with historical costs and provides a means of measuring and recording cost events which have al¬ready taken place. While there are no legal requirements to control the methods of recording and reporting cost data in the United States, the procedures in use are guided by professional organizations such as the American Institute of Certified Public Accountants. The final pro¬ducts of financial accounting practices are the income statement and balance sheet which describe the financial status of the organization under study. Cost or managerial accounting is an expansion of financial ac¬counting procedures, providing more detailed cost breakdowns on present operations with one objective being the projection of present costs into the future. The projection process tends to limit the accuracy of the information; however, to management and project justification per¬sonnel, data on future operations tends to be of greater value. The basic principle behind cost accounting is the cost cycle. As products are developed from raw materials, the value of the work-in¬process increases due to the cost input of the various fabricating ele¬ments. Thus, from the basic input elements of facilities, labor, and raw materials, costs are added to each unit of production as a function of the work performed on that unit.