Student Question

Explain whether the cost accounting system primarily supports internal or external reporting.

Expert Answers

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A cost accounting system is used by organizations—particularly those that sell products or services—to evaluate the cost of their products in order to understand their profitability and overall value.

The cost accounting system also assists companies with controlling the pricing of each product in relations to supply-and-demand. Therefore, the cost accounting system is used in internal reporting, whether that's via memos, company meetings, or audits.

However, there are times when the data from a cost accounting system is used in external reporting. For example, stakeholders and investors could be given access to the product inventory's pricing scheme. This is usually done as a form of transparency to stakeholders, who have invested in the company's stocks and therefore could get a big picture of the company's return on investments (ROI) or possible future trends regarding certain products and markets.

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