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Thursday, January 27, 2011

Abnormal costs and ineffective hedges-more similar then you think.

At first glance, they seem poles apart. Abnormal variances(amount in excess of the standard costs) are studied in Management accounting whereas gain/loss on ineffective hedges(the profit/loss when the risk is not perfectly 'hedged'-as happens in real life!!)  are studied in risk management/financial reporting.

But the common thread is that these amounts  not transferred to their relevant account(cost account, hedged item account respectively) but are transferred to the P&L directly. The rationale is that one should not 'punish'/'misdepict' the underlying account for uncontrollable deviations. In fact, the whole management accounting edifice does rest on variance analysis which uses the same concept. This common thread is not a coincidence because both financial reporting and management accounting are information systems which aim to give relevant, reliable etc(!) data. So these conceptual overlaps do happen.

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