MANAGEMENT ACCOUNTING Essay Example | Topics and Well Written Essays - 2000 words - 2

MANAGEMENT ACCOUNTING - Essay Example â€Å"Costing is a powerful tool that helps managers to discover the true costs of products† (Ledgerwood & White 2008, p.317). Relying on the given case of the building firm â€Å"Home improvements and Extensions Ltd† we can consider different constructive costs. A firm may incur various types of operational costs during the course of their day to day business operations. In order to design situational business strategies and thereby fit the organizational interests into the persisting demand conditions, every corner of operational costs has to be essentially identified by a firm. According to Truett & Truett (2008), a firm may experience different types of costs such as ‘historical costs, opportunity costs, fixed costs, variable costs, incremental costs, private costs, and social costs’ (p.223). The explanations and reasons of variations of these costs are described below with suitable examples from construction industry. Historical cost: It is the cost incurred by the firm during the course of their operations for which the firm has either paid completely in the past or promised to pay in future. Historical cost is recorded in the books of accounts of the firm and is used for the preparation of income statement at the end of the financial period. It includes rent and interest payments, wages and salaries to the labors, and cost of raw materials. Historical cost may vary according to the market demand for the services of the construction firm. Opportunity costs: It is the implicit cost incurred by the firm if the business had employed to next best opportunity. Although opportunity cost is an imaginary cost, it is necessary for calculating the net income from operations. Implicit salary income to the directors and implicit interest income on capital are some of the examples for opportunity costs. It may fluctuate according to management strategies and