Knowledge that Transforms

The article outlines a statistical approach in cost measurement and control which can be easily implemented in practice. This approach will allow accountants to convert certain types of costs currently treated as overhead costs into traceable direct costs. The detailed cost measurements on individual inventory items provide "more information" than knowledge of only the total inventory cost. Cost accounting systems, often very elaborate cost accounting systems, are designed to detect and measure resource flows for both product and responsibility center costing. In general, however, detection and measurement costs increase as more detailed information on resource flows is desired. Accounting systems for this reason resort to collecting aggregated information. The aggregation itself may be over various types of activities, time intervals, or products. If one desires to study marginal costs, an examination of costs allocated to idle time will prove helpful. In summary, statistical cost finding is no panacea for accounting problems, it is rather a useful tool for developing information not usually found in the books.

The conclusions of human behavior studies can not be believed, unless the investigator takes precaution to design his study so that confusion in data interpretation and alternative explanations of the conclusions are minimized. Without such precautions, the investigator's efforts may be largely ineffective. Experimental designs which are practical are usually not perfect. Sources of difficulty in experimental design can be attributed to setting up the hypotheses to be investigated, the sample of individuals tested, the measures to be used in the experiment, and the controls used in administering these measures. Even before the researcher collects his data, his conception of the question which he wishes to answer through the experimental process can significantly determine the result. An important source of difficulty in the design of behavioral experiments is the sampling of subjects. The evaluation of behavioral data requires no more care than the evaluation of any other kind of data obtained as part of the scientific processes, but certainly no less. Consideration must be given to experimental controls.

The article compares the various effects of the two methods of inventory valuation, namely, last in, first out (LIFO) and first in, first out (FIFO), with those produced by a model of complete certainty. This model equates profits with the internal rate of return needed to reduce all the cash flows to the present value of the investment in the enterprise. The model of complete certainty does not value the individual assets but rather it puts a value on the whole enterprise, including its positive or negative goodwill. The considerable argument which occurred over LIFO vs. FIFO some years ago was almost entirely literary in content, and if the results of using both methods can be compared with the true result, it may be that some conclusions can be drawn as to which method of approximation may be most suited to a particular circumstance. It is true to say that the profits shown under FIFO and the correct profits are both partially unavailable for distribution. LIFO overcomes this to the extent it is able to ignore the initial purchase of goods, which is carried forward as inventory, while otherwise recognizing profits on a cash basis only.

Reviews the book "Audits of Banks."

Reviews the book "Behavioral Concepts in Management," edited by David R. Hampton.

Reviews the book "Operations Planning and Control," by James H. Greene.

Reviews the book "Practicing Accountants in Australia," by Reg Gynther.

Reviews the book "Accounting: The Basis for Business Decisions," 2nd ed., by Walter B. Meigs and Charles E. Johnson

Reviews the book "Long-Lived Assets," by Thomas R. Dyckman.

One criterion being employed by a growing body of empirical research is predictive ability. According to this criterion, alternative accounting measurements are evaluated in terms of their ability to predict events of interest to decision-makers. The measure with the greatest predictive power with respect to a given event is considered to be the best method for that particular purpose. Because the predictive ability criterion is currently being used and is likely to experience even greater use in the future, this article examines its origin, its relation-ship to the facilitation of decision-making, and the potential difficulties associated with its implementation. Knowing the origin of the predictive ability criterion is important in understanding what is meant by predictive ability and why it is being used in evaluating accounting data. The criterion is well established in the social and natural sciences as a method for choosing among competing hypotheses. The use of the predictive ability criterion presupposes that alternatives under consideration have met the tests of logic and that each has a theory supporting it.