Explore BrainMass

Cost Behavior and Financial Ratio Analysis

A) Describe the issues surrounding the effective measurement of a firm's cost behaviour.

b) Describe the importance and limitations of financial ratio analysis

Solution Preview

Cost accounting provides various information to management for all sorts of decisions. It serves multiple purposes on account of which it is generally indistinguishable from management accounting or so-called internal accounting.

The main objectives of cost accounting can be summarized as follows:

1. Determining Selling Price
Business enterprises run on a profit-making basis. It is, thus, necessary that revenue should be greater than expenditure incurred in producing goods and services from which the revenue is to be derived. Cost accounting provides various information regarding the cost to make and sell such products or services. Of course, many other factors such as the condition of market, the area of distribution, the quantity which can be supplied etc. are also given due consideration by management before deciding upon the price but the cost plays a dominating role.
2. Determining and Controlling Efficiency
Cost accounting involves a study of various operations used in manufacturing a product or providing a service. The study facilitates measuring the efficiency of an organization as a whole or department-wise as well as devising means of increasing efficiency.
Cost accounting also uses a number of methods, e.g., budgetary control, standard costing etc. for controlling costs. Each item, materials, labor and expenses is budgeted at the commencement of a period and actual expenses ...

Solution Summary

This solution answers various questions regarding a firm's cost behavior and limitations of financial ratio analysis.