Comments on the article `The Effect of the Thor Power Tool Decision on the LIFO/FIFO Choice,' by R.M. Halperin and W.N. Lanen published in the April 1987 issue of `The Accounting Review.' Change in the tax law resulting from the Supreme Court's decision in the Thor Power Tool Co. v. Comm; Fisher's Exact Test; Dependency on Standard Industry Classification code 3714.

Presents a study which uses data from management practice in a nonprofit budgetary setting to test whether input cost shares are independent prices while controlling for operating characteristics. Background on substitution among production inputs; Model for testing the fixed cost share hypothesis.

[Productivity measurement has not generally been considered part of the information that managers use in planning and control decisions. Kaplan (1983) criticizes accounting research for the lack of studies on production efficiency stating that the effects of output volume and substitution possibilities among key production inputs on productivity measures have not been the subject of any accounting research. Hasseldine (1967), Mensah (1982), and Marcinko and Petri (1984) have addressed the short-comings of traditional financial measures of productive efficiency. Barlev and Callen (1986) show that input standards should not be defined independent of input prices, the state of technology, and the level of output. These authors, however, provide no empirical applications. This study provides empirical evidence related to performance measures of efficiency of production. Traditional budgeting methods and measures used for analysis may provide inadequate information for effective performance evaluation and control monitoring. This is particularly true if the budget model assumes that input cost shares are fixed. Analytical methods including budget analysis that fail to consider available input substitution possibilities in response to changes in relative input prices, and methods that fail to consider changes in operating conditions, may result in lost opportunities for cost savings. For example, traditional methods of assigning responsibility for accounting variances tend to focus attention on meeting the budget and may divert attention from production input-mix decisions when relative input prices change. For this study, we obtained data on the output produced and the input consumed via on-site visits to 33 county correctional institutions (jails) in Tennessee. A multivariate regression system of simultaneous equations and a translog cost function specification were employed to analyze these data. Our empirical model specification required input prices, output levels, and the state of technology as independent variables (not summary financial measures) to explain total operating expenditures for the budget period. Agency theory provides a means for inferring managerial behavior. The translog cost function coefficients provide essential information about variability in input cost shares for the sample data. Based on the hypotheses tested, we rejected the reasonableness of the conventional budget model assumption of fixed cost shares. We provide empirical evidence that managerial decisions based on matching expenditures and appropriations in line item budgets may not be cost-minimizing. The evidence suggests that a translog budget model may produce additional useful performance evaluation and control monitoring information that is not available from budget models which assume that cost-minimizing input cost (budget) shares are fixed.]

Reviews the book "Understanding Accounting in Its Social and Historical Context," by Anne Loft.

[Management accountants are often required to construct measures of performance of individual managers by aggregating several accounting numbers (signals). We show that the same method of aggregation will rarely be used for evaluating the performance of different managers. Instead, the method of aggregation will vary with the specific preference functions of individual managers and the corresponding action choices induced by the owner. Such an optimal aggregate always exists but is not, in general, a sufficient statistic for the individual signals with respect to the agent's effort. We further show that, in most cases, using all the information in the sufficient statistic makes the principal strictly worse off. The analysis provides insights into a different statistical approach for evaluating nonsufficient aggregates based on the signal to noise ratio of the individual signals that are aggregated.]

Management accountants are often required to construct measures of performance of individual managers by aggregating several accounting numbers (signals). We show that the same method of aggregation will rarely be used for evaluating the performance of different managers. Instead, the method of aggregation will vary with the specific preference functions of individual managers and the corresponding action choices induced by the owner. Such an optimal aggregate always exists but is not, in general, a sufficient statistic for the individual signals with respect to the agent's effort. We further show that, in most cases, using all the information in the sufficient statistic makes the principal strictly worse off. The analysis provides insights into a different statistical approach for evaluating nonsufficient aggregates based on the signal to noise ratio of the individual signals that are aggregated.