Knowledge that Transforms

The article presents an accounting model of cost-volume-profit (C-V-P) analysis. The use of stochastic analysis in a C-V-P analysis model is a great step forward in providing more useful information for profit planning. This model has been depicted as a limit analysis, since the assumptions of the independent model parameters and the normalcy of the resulting profit function are not true in all cases. Instead of using single estimates of model parameters in the C-V-P analysis model, sampling C-V-P analysis treats the model parameters as random variables. The objective of model sampling is to calculate one profit value from each set of the random model parameters. Then, by repeating the sampling process a sufficient number of times, certain characteristics of the profit distribution can be derived. The purpose of model sampling is to determine the sample profit points in the profit distribution rather than to identify the distributional form. However, the C-V-P model sampling is not restricted to the problem with independent and normal distribution model parameters only. An example in this article demonstrates the application of model sampling to a C-V-P analysis problem with dependent and non-normal distribution model parameters.

This article presents a behavioral approach to transfer pricing problems. Since the transfer pricing problem only arises within a recognizable social system, be it an organization or a socialist economy, this article considers the solutions in a social system context. The paradigm developed can then be used to evaluate the usefulness and limitations of the various proposed solutions. Decentralization is one approach to organizational design. Implicit in this approach is the segmentation of the organization into various specialities. Numerous reasons are provided in the transfer price literature for decentralization. Decentralization, however, does not quite explain the process involved. A consequence of the segmentation of the organization into parts is that the behavior of organizational members will be influenced by the segmentation. Therefore, the term "differentiation" is used to include not only the segmentation of the organization into specialized parts, but also to include the consequent differences in attitudes and behavior of organizational members.

The article proposes a new computational procedure for allocating joint costs. This article assumes that accountants will continue to be required to allocate costs for reporting purposes. The argument for the acceptance of the proposed procedure is justified only to the extent that the results of this procedure do not possess the disadvantages of the allocation techniques employed in current practice. To an individual firm, all products and services obtained through the incurrence of a joint cost can also be obtained by incurring a separable cost. In the U.S. economy it is possible to contract for virtually any individual service desired, however, to do so may be quite expensive. This expense leads management to incur joint costs in order to effect cost savings. Given the observation that joint costs are incurred to effect cost savings, a different view of joint costs becomes obvious. Rather than allocate costs directly to a cost object, it should be possible to allocate cost savings as an offset to the cost of obtaining services independently.

This article explores the humans information processing system aspect of information system design. Although the receiver or user has long been recognized as an important variable to consider, only recently have research results and methods led to useful insights. The main studies considered include both those that speculate as to the implications of human information processing upon alternative financial accounting systems and several empirical studies that have investigated the impact of behavioral variables including "decision style" upon accounting information use and value. The premise that behavioral factors are important in accounting seems to be generally accepted and much research has been conducted. In fact, entire accounting conferences have been devoted to this topic. Given the growth of interest in human information processing in accounting, a brief review of the varieties of approaches to this area may provide clarity for future research. The study of cognition or thinking processes is one of the earliest developments in scientific psychology. In its inception, cognitive psychology divided into normative and descriptive approaches.

This article presents response of the author on the comments made by scholar C.G. Hoskins on the paper "Theory Versus Practice in Risk Analysis: An Empirical Study," that was published in the July 1974 of the periodical "The Accounting Review." The comment by Hoskins represents a significant advance in modeling actual decision processes. However, one must add that Hoskins' findings support rather than dispute the conclusion of the original study that there appears to be substantial conflict between the decision processes used by actual decision makers and existing utility theory. The author's intentions in writing this response are to demonstrate why this is so and to expand further on the Hoskins model. It was restated that the model in the original study was not designed to produce decisions, which closely paralleled actual decisions. Rather, the model was built in the shape of classical utility theory with parameters, which were computed from an explicit statement by the firms as to their attitude toward risk-taking. The principal conclusion of the original research was that actual decisions are inconsistent with such a model.

This article presents comments of the author on the paper "Theory Versus Practice in Risk Analysis: An Empirical Study," by W.R. Greer that was published in the July 1974 of the periodical "The Accounting Review." In his paper, Greer concluded that there appears to be a substantial conflict between the decision processes used by actual decision makers and existing utility theory. The conflict seems to center around the inability of classical utility theory to deal effectively with situations where one or more of the contingent outcomes for a project are lower than some critical amount. The form of utility function employed by Greer was the utility of an investment opportunity is an increasing function of the expected value of that opportunity and a decreasing function of the risk of the opportunity. Greer employed the standard deviation of payoffs as the measure of risk. This comment contends that the actual decisions of the firms in Greer's study are not inconsistent with a utility function of the form described if instead semi-variance is used as the measure of risk.

The article discusses implications of budgets for motivation and behavior in the context of expectancy theory as developed in the psychology of motivation. The authors discuss how the expectancy model reconciles what might appear to be contradictory findings from prior studies. Budgets aid planning in that they incorporate forecasts which reflect the anticipated consequences of different combinations of plans made by management and the relevant uncontrollable events that may occur in the environment. The control function is typically a feedback process whereby information about past performance is provided to those who "control," to be utilized by them for making decisions. As a motivational tool, the budget conveys information to the subordinate about expectations of superiors regarding what constitutes successful task performance and the consequent reinforcement contingencies. The expectancy model is viewed as underlying the superior-subordinate budget relationship in two respects, as the model according to which the subordinate's motivation to perform the task is influenced via the budget; and as the model which the superior regards as determining the subordinate's motivation.

Presents a study which examined the association between betas for common and nonconvertible preferred stocks and several traditional accounting measures of risk which measure various aspects of the firm's asset and capital structure. Discussion on the β and market model; Alternative approaches to the measurement of risk; Description of the common and nonconvertible preferred stocks studied.

Presents a study which examined the implications of the report on accounting objectives (AICPA, 1973, called Report) to the reporting of extraordinary items. Trade-off between reliability and relevance; Framework for getting standards for the treatment of extraordinary items that are responsive to the accounting objectives as stated in the AICPA Study Group Report; Systematic path of inquiry that may be followed in the formulation of future accounting standards.

This article investigates the nature of the stewardship concept, its historical development and implications in financial reporting. This concept of management's stewardship seems to encompass two of the four objectives of accounting suggested by a committee of the American Accounting Association: effectively directing and controlling an organization's human and material resources, and maintaining and reporting on the custodianship or stewardship of resources. Although it is generally recognized as a principal purpose of financial reporting, little research has been conducted as to its specification, and the concept remains without a settled definition. Stewardship is an old concept with a strong religious, particularly Christian, implication. According to Christian theologians, things or resources were created by God, who gave them to all men in common. The essence of things falls under the power of God, and man has only the right to use these things. In order to use them, a possession of the things may become necessary. This gives rise to the concept of property and human ownership.