Knowledge that Transforms

Reviews the book "Depreciation," by Eugene L. Grant and Paul T. Norton.

Reviews the book "Income Tax Procedure," by J.F. Sherwood and C.R. Niswonger.

Reviews the book "Management Planning and Control," by Billy E. Goetz.

There is abundant evidence that the cost accountant's traditional approach has been strongly influenced by classical and neo-classical economic theory. With the possible exception of specific order industries the general prescription that management should concentrate on those items which yield the largest markup is based squarely on the assumption of pure competition. Clearly in pure or near pure competition with unlimited demand for the firm's products at going prices management is well advised to push- in a production sense-those items which yield the largest markup. The extension of this prescription to products to be sold in areas of imperfect competition seems to be just as dearly unwarranted. Businessmen and accountants, particularly, have often argued that production and distribution cost accounting gives the key to decisions as to which lines, products, territories, etc should be pushed through increased advertising expenditures and other sales pressure. The fact that sales effort is necessary is an indication that the products are differentiated and that the demand for each product is not completely elastic. Intelligent pricing and sales-pressure decisions must give full consideration to estimates of demand elasticities and to the probable reaction of demand schedules to changes in (and different types of) advertising and other selling methods.

A critical analysis of practice is not the only basis for a good theory. Nor must theory be completely applied to a practical situation in order for it to be considered good theory. A body of thought which may be developed from accounting practice and which is logical in all respects may be said to be derived largely from practice. But it must be compatible with the purposes of accounting and it must not be in controversy to other aspects of accounting. "Developments" in accounting theory and practice refer, primarily, to the degree to which accounting theory and practice is disclosed and applied. Perhaps it is more important to consider such developments as referring to the application to practice of latent theory, the discarding or revision of old theory, or the evolution of new theory. In any case, the existing theory would be available for continued application in practical situations to the extent considered appropriate.

In the current controversy over the use of the LIFO and the FIFO plans in inventory valuation, it has apparently not been generally recognized that each of these plans, as well as the "base-stock" plan, is based on a different set of expectations as to the life of the inventory and as to the future course of prices. Examination of the set of expectations implicit in each plan may help to determine which method should be used in a given situation. At least such an examination will help to clarify the economic issues involved in the debate. It will be helpful to consider first a method of inventory accounting not now much involved in the income controversy, although closely related to one of the disputed methods. This is the "base-stock" plan. Under this scheme there is assumed to be a minimum working stock which the firm must maintain at all times in order to continue doing business. Since this basestock cannot be sold without immediate replacement, the firm cannot convert the inventory into more liquid form by selling any or all of it when the market price rises, nor need it acquire more liquid resources to cover a loss when market price declines.

The study of accountancy may be said to possess three primary use values: (1) as a foundation for a professional career in public accounting, (2) as providing knowledge of an information service for business management and investors, (3) as one way of leaning disciplined thinking about dealing with data. The first two uses are well known and need no elaboration here. The third use value is the sort usually attributed to mathematics and statistics. But accounting also insists on accurate identification of detail and the organization of data in a meaningful way. Its study at the university level provides some of the same kind of beneficial discipline as these other subjects, and therefore it possesses general educational values in addition to the more strictly technical values for students of business management and professional accounting. Use values such as these have been clearly recognized as lying in the study of accounting. Because of this, there has been a widespread acceptance of the subject matter as useful outside of a purely occupational framework for a career in accounting as such.

Flexible budgets and break-even charts have taught business that profit depends more on volume than on the size of the mark-on. When the variable costs remain in a constant ratio to sales or sales value of production-the sound and normal case-it is the fixed charges that mainly determine the cost/profit relationship. While they are more or less fixed in their dollar value, their ratio to sales or sales value of production, in other words, their rate, is a variable just as the profit rate. There is a remarkable interdependence between the fixed charges rate and the profit rate whenever the variable cost rate (variable/sales) is constant. This side of the cost/profit relationship has so far been somewhat neglected, for it is less conspicuous than its other aspects. It is, however, of such importance to profitable management that it deserves a special examination. Through analytical observation, an inversely symmetrical movement of the two rates can be readily detected if their changes are watched through shifting volumes. These observations lead to the following conclusion: The ratio of variable expenses to sales (or sales value of production) being constant, the profit rate is increasing with growing volume in the same ratio as the fixed charges rate is decreasing. With diminishing volume, the profit rate is decreasing in the same ratio as the fixed charges rate is increasing, if the variable rate remains constant.

Reviews the book "Accounting Systems," by Oscar S. Nelson and Arthur D. Maxwell.

Of the problems of making education meaningful one of the most important is the careful construction of specific course objectives. This is not a "one time" task, but rather is something which must necessarily confront the educator continuously. Meaningful objectives do not just grow nor, because of the changing social environment, can they be handed down from generation to generation. To be most meaningful, they must be adapted to the needs of students and the needs of society and they must be in harmony with the philosophy of the institution in which the courses are taught. The purpose of this paper is to reconsider what might be the most meaningful objectives for elementary courses in accounting with consideration given to the needs of students and to the needs of society. Further objectives are considered in both contextual as well as behavioral terms. These are, in a sense, ends for the accounting students who will as accountants be called upon to perform or supervise these activities. It is not likely that the other group will have much need to engage in these activities in connection with their major work. For this group, these skills and techniques are but means to an end, the end of understanding and interpreting accounting reports which they as general managers or other specialists will receive and be required to act upon intelligently.