Knowledge that Transforms

This paper will show direct costing, as a product costing and inventory valuation technique, to be unsatisfactory on three grounds: (1) the weakness of historical cost as a basis of asset valuation, (2) the lack of foundation for the fixed cost assumption, (3) the failure of direct costing to distinguish between wastage and utilization of productive capacity during a reporting period. Essence of cost accounting is cost classification. Some common bases of cost classification are responsibility, object of expenditure, product or service tuned out, and behavior relative to volume. These bases of classification contribute information for answering common questions regarding costs in any enterprise. One of the most widely misused terms in accounting is cost. It is one thing to say that an asset is measured by its cost; to say that an asset is a cost, or vice versa, is a distinctly different pronouncement. Adjusted historical cost means the original amount of money paid for the asset adjusted for the change in the size of the measuring unit between the acquisition date and the statement date.

Reviews the book "Management Through Accounting," by Richard L. Smith.

Reviews the book "Cost and Budget Analysis," by John Dearden.

The profitability of an investment proposal is dependent upon both the amount and the timing of its projected cash flows and that some means of establishing a basis for comparing cash flows over time is necessary in order to select the combination of investment proposals which is optimal. This is a complex problem but recent discussion has highlighted several points. Firstly, the measurement of the profitability of investments by means of the internal rate of return or marginal efficiency of capital suffers from the implicit assumption that the intermediate cash inflows produced by a project can be re-invested at a rate of return equal to the rate which is assessed for the initial project. As a result, it is necessary to introduce an independent discount rate to make comparable alternative projects. Secondly, for a corporation whose management wishes to act "in the interests of shareholders" and therefore aims to continually choose that financial position which maximizes its current stock prices and dividend.

Reviews the book "Cost Accounting: A Managerial Emphasis," by Charles T. Horngren.

Reviews the book "Basic Auditing Principles," by Arthur W. Holmes.

Reviews the book "Direct Standard Costs for Decision Making and Control," by Wilmer Wright.

Accounting assumes continuity, but this means that the financial statements prepared by breaking the continuous stream of activity into periodic segments, even under the most favorable circumstances, provisional in character. Continuity serves to complement and strengthen the concept of earning power, the income statement is a means of making available a section of the continuous flow of cost and revenue to exhibit management's effectiveness in handling available resources. In consequence, it should recognize all special and non-recurring losses and gains, as these elements modify the long run income stream. The basic idea of measured consideration" is broad enough to encompass the entire range of accounting measurements, it is superior to "value" because values bring in measurements of another and different order. Value would include amounts for utilities not measurable except by one's own judgment until a sale confirms this added utility its measurement is not objectively possible. However, the use of money and price as measurement devices should not obscure the fact that the significant element behind the accounts is service potentialities, which, when exchanged, bring other service-potentialities into the enterprise.

Reviews the book "Cost Accounting," 3rd ed., by Adolph Matz, Othel J. Curry and George W. Frank.

Reviews the book "Financial Statements--Form, Analysis, and Interpretation," by Ralph Dale Kennedy and Stewart Y. McMullen.