What is the Retrospective Cost Method? Its advantages?

What is the Retrospective Cost Method?

The Retrospective Cost Method is a cost accounting technique used to determine the cost or value of an asset. It works by tracing backwards, determining the actual cost of an asset based on incurred expenses and costs, rather than relying on its current market value or estimated figures.

The fundamental principle of the Retrospective Cost Method is to review and organize incurred expenses and costs, allocating these to the respective assets to ascertain their actual costs. This method is applicable in situations where it is necessary to determine asset costs, such as in financial reporting, asset valuation, cost accounting, and decision analysis.

What are the advantages of the Retrospective Cost Method?

The Retrospective Cost Method offers several advantages in determining asset costs:

Accuracy: The Retrospective Cost Method can provide relatively precise information on asset costs. Analyzing based on incurred expenses and costs, it avoids estimates or speculation, making the determination of an asset's actual cost more reliable.

Traceability: The Retrospective Cost Method allows for tracing back to past expenses and costs, gradually allocating these to the corresponding accounting periods. This clarity in understanding an asset's historical costs is significant for financial records and asset tracing.

Controllability of Details: The Retrospective Cost Method enables detailed categorization and allocation of expenses and costs. This can provide more accurate cost analysis, helping managers comprehend the specific composition of costs associated with assets.

Wide Applicability: The Retrospective Cost Method is applicable to a range of asset types, including long-term assets, fixed assets, and investment projects. It serves various industries and business sizes, offering a universal method for asset cost accounting.

Decision Support: The Retrospective Cost Method can provide management with detailed information on asset costs, assisting in making more accurate decisions. Understanding the actual cost of assets enables managers to evaluate investment returns, cost-effectiveness, and asset allocation.

It is important to note that the Retrospective Cost Method also has limitations, such as the need for extensive expense and cost data, choices in depreciation rules, and subjectivity. Therefore, in practice, it is vital to consider other methods and factors to determine the most suitable cost accounting approach.