What is the Accounting Analysis Method?
Definition: The account analysis method is a cost accounting method for estimating the different costs associated with producing a product. The accounts analysis method is easy to use and useful when a quick cost forecast is required. However, it assumes that what occurred in the past will be reflected in the future. This calls for further analysis. The model’s reliability and validity cannot be determined as we cannot measure the size of probable error in forecasts made i.e. it lacks statistical vigor. The method is highly subjective as different managers will classify some costs differently.
You could think of it this way. When a manager is trying to figure out how much it costs to make a product, he will divide the costs into three categories: variable, fixed, and mixed. Variable costs are the costs that increase as more products are produced like materials. Fixed costs are the costs that remain the same no matter how many products are produced like property taxes on the manufacturing plant. Mixed costs are exactly what they sound like — a variety of fixed and variable costs that can’t be separated.
What Does Accounting Analysis Method Mean?
Accounting analysis, also referred as financial analysis or financial statement analysis, can be explained as an assessment of the stability, viability, and profitability of a business, sub-business, or project. A financial analysis is carried out by professionals who prepare reports through the use of info obtained from financial statements and other reports. Besides, one key area of financial analysis is the extrapolation of company’s past performance into an estimate of its future performance.
The purpose of the account analysis method is to estimate the costs of producing a product relating these three categories together using linear algebra. This method takes experience and knowledge of the company’s processes and production. Maybe an example will help.
Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes and to understand the overall health of an organization. Financial statements record financial data, which must be evaluated through financial statement analysis to become more useful to investors, shareholders, managers, and other interested parties.
In cost accounting, this is a way for an accountant to analyze and measure the cost behavior of a firm. The process involves examining cost drivers and classifying them as either fixed or variable costs. The cost accountant then uses the company’s data to figure out the estimated variable cost per cost-driver unit or fixed cost per period.
When it comes to banking, account analysis takes the form of a periodic statement outlining the banking services provided to a firm. The statement is usually provided monthly and involves the display of all important account data, including the company’s average daily balance and charges that the company incurs from the bank.
Let’s assume that Apple uses a CNC machine to cut out the body of their iPads in one of their factories. This machine runs of 500 hours and incurs total indirect manufacturing costs of $5,000. Using the account analysis method, a manager could determine that out of the total costs, the fixed costs equal $2,000. Once the manager has identified the fixed costs, he can calculate the variable costs per machine hour or $3,000 / 500 hours. Now all the data can be put into the account analysis formula.
Indirect manufacturing costs = $2,000 of fixed costs + ($6 per machine hour X the total number of machine hours used in production)
Y = B + MX
Management can use this formal to plan what products will be produced and what it will cost.
Account Analysis in Accounting and Banking
In accounting, account analysis is quite complex and involves an in-depth understanding of both the data and the company. It is usually performed by an experienced cost accountant, possibly with the help of one of the company’s managers, who deals closely with the company’s costs.
In banking, you can think about account analysis as similar to the statements you receive for your personal bank accounts. Since it is for a company account, however, it is much more detailed and on a larger scale.