Knowledge that Transforms

In marginal analysis, there is a tendency to overlook the problems of fixed costs. In multi-product firms, however, there are many possible fixed costs. Such firms attempting to optimize profit under capacity constraints must take into account not only their gross margin but also net profit, i.e., profit after incurrence of various alternative fixed charges. Hirsch and Dantzig proposed the original integer programming solution to the "fixed charge" problem and their approach applies directly to product profitability analysis. Their algorithm is demonstrated in a marketing example and the imputations for accountants of this application of operations research technique are discussed.

Reviews the book "Accounting--Concepts and Uses," by R. W. Schattke, H. G. Jensen and V. L. Bean.

The article identifies the conditions for classifying accounting as a measurement discipline. A typical definition of measurement is "the assignment of numerals to objects or events according to rules." Defining measurement in this manner overcomes the objections mentioned above and insures that measures obtained via the various scales will be informative and consistent. A more satisfactory definition of measurement is the assignment of numerals to represent elements or a property of elements in a specified system on the basis of isomorphism or homomorphism existing between one or more empirical relational systems and one or more numerical relational systems. For example, if purchasing power, which is defined as the ability of an object to command other objects and services in exchanges, is shown to satisfy the conditions above, more precise definitions of accounting concepts could be formulated. Similarly, in choosing a depreciation method for a particular asset, the accountants would choose the method which is believed to parallel more closely the decline in the purchasing power of the asset. If accountants are not willing to choose an economic property for accounting measurement, which approximates extensiveness, and to assume that the property is extensive, they must abandon their attempts to improve and to explain accounting via measurement theory.

The foregoing exposition allows us a) to trace through the effects of transactions in and on the algebraic equation; b) to demonstrate both the correspondence of the algebraic equation with the double entry-journal entry form of recording, and the articulation of the income and balance sheet statements; and c) to elaborate the calculations of ROl and Source and Application of Funds by means of the algebraic equation. The algebraic equation is therefore an alternative and hopefully useful alternative pedagogical method.

Reviews the book "Administrative Financial Management," 2nd ed., by Joseph F. Bradley.

The purpose of this article is to describe a model of a forecaster's biasing behavior. The model should be of interest to accountants because the model provides a link between a forecaster's biasing behavior and the quality or acceptability of his forecast as an input to an accounting system. The article attempts to describe how a model which assumes that an individual bases his present action on his experience on the preceding trial can be applied to describe biasing behavior in a game theory-like situation. The individual forecaster (F) is asked to provide a forecast of some variable such as sales, cash flows or expenses for his area of responsibility. F works under a payoff structure which encourages him to intentionally bias his forecast within certain limits. F's desire to bias his forecast, and the desire of the recipient (R) to adjust F's forecast for the presence of bias places F and R in a situation not unlike a nonzero-sum game. However, most attempts by psychologists to use game theory as a descriptive theory of behavior have failed. The models discussed are abstractions of forecasting situations.

Reviews the book "Cost Accounting, Principles and Managerial Applications," 2nd ed., by Gerald R. Crowningshield.

Reviews the book "The American Corporation: Its Power, Its Money, Its Politics," by Richard J. Barber.

Reviews the book "Information for Decision Making," edited by Alfred Rappaport.

The article focuses on the concepts relating to proposals to account for the effects of price changes on capital maintenance. Many people, with both proprietary and entity viewpoints, still adhere to a money capital maintenance concept, and this could be because most external financial statements are still prepared in this way. Before leaving this general purchasing power capital maintenance concept, it should be mentioned that some people advocate the use of a general index to restate all accounting balances in accordance with movements in the general value of money itself. The entity viewpoint people, who would use one of these investment purchasing power indexes for capital maintenance purposes when accounting for the effects of price changes, would not calculate holding gains on long-term liability or preferred stock balances. Operating capacity based on the latest equipment, etc., needed to produce the same value of identical goods and services. It is believed that this paper has established that accounting for the effects of price changes is more directly concerned with capital maintenance than with periodic asset valuations and short-term profit determinations, and that, when accounting for price changes, the lifetime profit of each asset is affected by the particular capital maintenance concept employed, but not by the different asset valuation, depreciation, and revenue recognition methods that might be used.