Knowledge that Transforms

Reviews the book "Accounting for Profit Recognition on Sales of Real Estate."

This article studies an indifference approach to profit-volume analysis. Students of economics encounter indifference curves, in analyzing consumer behavior, welfare and international trade. Employment of this tool in accounting as well should prove practicable even at the introductory as it is likely that enrollees in introductory accounting courses either will have completed introductory economics courses or will be concurrently enrolled in them. Thus, the primary concern need not be centered around a discussion of indifference curves themselves but rather on their application to traditional accounting topics. The family of indifference curves is constructed as follows. The authors of this article assume a firm knows its average variable costs associated with each level of output.

The article reports that using an input-output or output-input framework for solving cost accounting problems has several advantages: It provides a general framework which can be applied to a wide variety of cost accounting problems, it focuses on the basic accounting relationships underlying a problem situation, it provides an application of mathematics to accounting in which matrix algebra techniques can be applied to conventional accounting problems, it embodies a computational approach which can be easily implemented through computer programs. Although some instructors may wish to emphasize the mathematical formulation of an input-output problem, other instructors may simply wish to provide a prepared computer program to students to perform the extensive arithmetic involved in solving complex cost accounting problems. With only a modest nonmathematical introduction as to the conventions involved in placing data in a coefficient or transaction matrix for financial planning and cost allocation problems, students would be enabled to use such a program to solve a wider variety of problems, thus enabling them to concentrate on the accounting aspects of a larger number of problems and to relegate to the computer the time-consuming computational aspects.

This article focuses on the basic ways in which the Generally Accepted Accounting Principles (GAAP) fail to assist in the economic resolution of social conflict. As a focal point in economic theory, the market mechanism is a cultural control device for allocating economic resources. It has been viewed as a grand harmonizer of conflict among economic actors. Little internal entrepreneurial coordinating would be possible without internal administrative accounting. In the extreme case, all costs of using the price mechanism could be avoided by establishing a single conglomerate firm for an entire economy. However, those avoided costs might be exceeded by both costs of internal administration and costs of transition from private competition to state capitalism. The fundamental way in which GAAP fails to assist in the economic resolution of conflict is their lack of relevance to the decision problems of economic actors. This would be so even though GAAP reports were timely and public enough to eliminate the conflict over "insider" information.

The article reports that in a situation of decentralized decision making, the Multiple Objective Linear Programming (MOLP) approach provides the decision makers with an appropriate multidimensional scheme of transfer prices. Once again these prices exactly balance the accounts associated with basic products and show opportunity losses for nonbasic products. The transfer prices derived from the MOLP allow central management to calculate the actual divisional contributions to each of the measures of corporate performance, adjusted for the opportunity costs associated with transferred goods. It follows that the divisional targets derived from an MOLP solution are logical and "fair." Operationally and assuming a state of certainty for planning purposes the task of the corporate planner would be to review the various alternative efficient solutions and pick out the "best" or "most desirable." In a situation of decentralized decision making it is already known that the transfer pricing mechanism does not necessarily lead to optimal divisional decisions. This drawback applies equally to MOLP in general and the example in particular.

This article presents a comment on the study of the usefulness of financial ratios to investors in common stock in the U.S. It is not clear if the usefulness of the financial ratios would be ascertained. It shows that the strong conclusions made regarding the lack of usefulness of financial ratios may not have been warranted. The research given design and the testing procedure are not quite appropriate for drawing a definitive statement about the usefulness of financial ratios. The study, however, provides a good base for future efforts in the area.

The article reports that the use of the entropy measure must be a function of its context and that the meaning attributable to the entropy should be determined by the nature of the input data which are used in computing the measure. Thus, the same measure of the entropy could be used to measure uncertainty, ignorance, or information, and to measure decomposition. The latter is obtained when proportions are substituted for probabilities. The results of this study also suggest that the indiscriminant utilization of the entropy in accounting measurements should be a matter of concern. Finally, there is a great need in accounting to measure the level of data aggregation which would be considered optimal. Although the results of this research did not support the entropy for fulfilling such a need, they did not preclude the possibility of the usefulness of the measure given the appropriate formulation and decision situation. The entropy may only be used to make a choice from among competing sets, which are acceptable methods of aggregation under the prevailing accounting conventions.

The article discusses the nature and scope of major transfer pricing models. The purpose of transfer pricing systems is to generate prices for internally produced and consumed commodities. The authors examine the capability of various transfer pricing models to handle the issues of organizational decentralization and optimization. The analysis takes into consideration the development of transfer pricing models in three categories. They are the economic theory of the firm, mathematical programming approaches, and other analytic approaches.

This article presents a study on the overhead allocation with imperfect markets and nonlinear technology in accounting in the U.S. The overhead costs generated by the traditional historical-cost-based accounting system are used for pricing usage of scarce resources. These costs must be below or at most equal to the marginal value of such resources as determined by the dual variables of the programming model. It is natural to object to the proposed method since we have a specific management decision model which generates valuations for scarce resources.

This article presents a study on the leadership climate and the use of accounting data in performance evaluation in the U.S. An evidence allowed the initial distinctions which were made among the three styles of using accounting data in performance evaluation to be placed in a wider managerial perspective. For the final impact of an accounting system on managerial behavior has been shown to depend on its interaction with the forms of social and self-controls which are reflected within the various leadership climates and the personal motives and defenses which they activate.