An accounting measurement is the quantification of financial information in dollars or units. Accountants use these measurements to report information to internal and external users via financial statements. Financial accounting measurements are typically recorded at historical cost or adjusted to current market values through adjusting entries. Management accounting uses measurements to calculate the cost of materials used or the number of labor hours needed to produce goods or services. Accountants use special cost allocation methods when calculating management accounting measurements.
Cost allocation methods include standard costing, activity-based costing (ABC) or job process costing. These methods take specific accounting measurements from production information and apply them to goods and services. Factory overhead is also applied to goods and services using an accounting measurement. Factory overhead includes any indirect costs needed to produce goods and services; common indirect costs include utilities, selling and administrative costs, taxes or general payroll costs. These production costs are applied using predetermined cost allocation drivers.
Cost allocation drivers are the specific accounting measurements used by accountants to apply business costs. Accountants determine the best accounting measurement by reviewing each production procedure and breaking these processes down into allocation drivers. Allocation drivers may be man-hours to produce a good or service, number of processes in a production method or the number of machine hours needed to produce items. These measurements may be reviewed frequently to ensure that the cost driver accurately applies production costs to each product.
Financial accounting measurements are different than management accounting measurements. Assets, liabilities, debt financing and equity investments are all common accounting items needing periodic measurements. Accountants must follow Generally Accepted Accounting Principles (GAAP) when using an accounting measurement to report these items on financial statements. Because external users make investment decisions based on the information included in financial statements, GAAP is used to present financial information in similar methods across business industries.
Companies are required by GAAP to record balance sheet information using a fair value accounting measurement. This measurement technique forces companies to value assets and equity investment at the current market rate at which these items can be sold in an open market. These measurement methods may need to be disclosed on the company’s financial statements using disclosures or footnotes. These explanations allow investors to understand how the company values its balance sheet items and if the company has accurately applied GAAP. Incorrectly applied accounting measurements can lead to misstated financial statements; investors or banks may be unwilling to invest in these companies because of the accounting improprieties.