Pure Historical Costing

A cost accounting system requires five parts and one of it is input measurement basis. The input measurement basis begins with the type of costs that flow into and through the inventory accounts. It includes three alternatives and pure historical costing is one of the alternatives. Under a pure historical cost system, only historical costs flow through the inventory accounts. Historical cost refers to the costs that have been recorded.

Pure historical costs are also referred to as actual costs sometimes, but the term "actual" seems to imply that there is one true cost associated with a particular output. To determine the cost of a product, or service there are many cost allocations required. These may include allocating the cost of fixed assets to time periods, and allocating indirect manufacturing costs, or overhead to products. There are many alternative allocation methods, for example straight line or accelerated depreciation, the calculated cost of a unit of product or service simply represents an attempt to approximate the true cost.

Historical cost accounting is a system of accounting which all values are based on historical cost incurred. Under the pure historical accounting system all assets, liabilities; expenses and revenue are recorded using the costs and prices ruling at the time of the transaction as the basis of any accounting entries. Most of the companies’ financial statements are still being prepared using historical cost convention.

The pure historical cost is a common valuation of assets in financial statements, because historical cost is provable and known. The historical cost is a recorded cost of an asset when the cost was incurred. It can also be described as the amount that an entity pays for an asset represents the historical cost. The financial accountants consider these costs  more objective index than asset values, asset valuations are important for fairly presenting the position of a business.

Questions

• What is pure historical costing?
• How is the pure historical cost determined?