Understand Future Cost and Historical Cost; Future cost of capital refers to the expected cost of funds to be raised to finance a project. In contrast, historical cost represents cost incurred in the past in acquiring funds. In financial decisions, future cost of capital is relatively more relevant and significant. While evaluating the viability of a project, the finance manager compares expected earnings from the project with an expected cost of funds to finance the project.
Here are explained; What is the Future and Historical Cost?
Likewise, in making financing decisions, the attempt of the finance manager is to minimize the future cost of capital and not the costs already defrayed. This does not imply that historical cost is not relevant at all. In fact, it may serve as a guideline in predicting future costs and in evaluating the past performance of the company.
Future cost: Future costs are based on forecasts. The costs relevant for most managerial decisions are forecasts of future costs or comparative conjunctions concerning future situations. An estimated quantification of the amount of a prospective expenditure. Forecasting of future costs is required for expense control, the projection of future income statements; appraisal of capital expenditures, the decision on new projects and on an expansion programme and pricing.
Historical Cost: Historical cost is an accounting method in which the assets of the firm are recorded in the books of accounts at the same value at which it was first purchased. Cost and historical cost usually mean the original cost at the time of a transaction. The historical cost method is the most widely used methods of accounting as it is easy for a firm to ascertain what price was paid for the asset.
