Reviews the book "Systems Based Independent Audits," by Howard F. Stettler.

The article reports on a seminar on budget mix variances. After having attended to his instructor patiently for several quarters and after a review of the literature, Peter Griffin, second-year management student, overcame his own natural reticence and the spring lethargy spreading over the campus and questioned the general applicability of budget mix variances in gross profit analysis. His challenge invigorated discussion for almost a whole period. Whether he is right or not, this communique claims to take no position. Instead here is a scenario of the exchange he maneuvered, and it will be left to the reader to judge for himself the merit of Griffin's position. The point of computing a budget mix variance is that net income or contribution margin will differ from expectations as the quantity increases if the mix changes. The one occasion for which it seems reasonable to compute mix for budgets or sales is when production planning is pretty well locked in or fixed at some level and when later on deliberate substitution between products takes place at that level. Then there has to be a decision to change the mix and there should be a variance to measure the effect of that decision.

Considerable variation and disagreement have characterized the accounting for, and the rationalization of, differences between financial and tax depreciation. Specifically, the writer believes that the reporting of a deferred income-tax liability and additional income-tax expense for book-tax differences in depreciation is an ad hoc solution that will not stand close theoretical analysis. A difference can be said to exist between financial depreciation and tax depreciation whenever the best depreciation for financial reporting varies from the best depreciation for income-tax purposes. For financial reporting, ideal depreciation presumably reflects the annual amounts that best reflect financial status and operating results, including their combined result in terms of the rate of earnings. One of the fundamental issues in the controversy about book-tax differences in depreciation is whether taxes payable in the future from future revenues create a liability prior to the recognition of this future revenue.

In this article the author comments on different approaches, suggested by various accounting professionals, for the calculation of depreciation of changes in expectations and acquisition value above cost. The use of discounted cash flow techniques has been advocated by a number of writers as the ideal basis for calculating depreciation. Depreciation is a problem of cost allocation based on ex ante valuation, and capital gains or losses resulting from changes in expectations and differences between ex ante and ex post net cash flows in a particular period are joint to the periods. These gains or losses are due to the fact that the investment decision is made under conditions of uncertainty, consequently, they are an original error, causally related to the investment decision and joint to the time horizon of that decision. The author states that in recent years the concept of basing period depreciation on expected discounted cash flows has gained increasing acceptance. This approach enables a dear distinction to be made between depreciation, on the one hand, and capital losses on the other.