Book review, Theory of the firm

Conservatism

The paper examines some methods of inquiry and suggests certain types of investigation that seem to be appropriate for the study of accounting. More specifically, a tentative framework is set forth to indicate some possible levels of abstraction at which research in accounting could be undertaken. Such a framework, to be complete, would need to cover an area that ranges from the simplest aspects of fact collection to the philosophical boundaries of concept formation. Various broad areas are explained that are related to accounting investigation. These areas include logical structure and deductive systems, measurement and induction, behavioral relations and welfare and normative responsibilities. Measurement and induction deals in an elementary way with some non-deductive problems of scientific method and in passing with its application to research in accounting. The accounting research may not be related to problems concerned with the efficient measurement of transaction flows unless efficiency itself is defined in terms of the accomplishment of socially worthy objectives.

Reviews the book "Marginal Cost Price-Output Control," by Burnham Putnam Beckwith.

Almost all standard textbooks in accounting, as teachers well know, open with a chapter devoted to the field of accounting and its relationship to law, engineering, economics and the social order in general. Unfortunately in their haste to get to the condition statement, the operating report and the mechanics of debit and credit many teachers devote a small part of the organizational period to such broad relationships and thereafter uniformly neglect the material of formal economics. It is probably not unfair to add that many instructors who later refer to economics do so in a manner that is unenlightening if not downright objectionable. The lack of agreement among economists leads to such diverse positions that the problem of rapid integration becomes almost impossible. The two comparatively recent revolutions in economics have added to the difficulty of integration. The Keynesian revolution of the late nineteen-thirties placed emphasis on the problem of employment and its determinants.

Reviews the book "Marginal Costing," by F.C. Lawrence and E.N. Humphreys.

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.

All accountants are acutely aware of the difficulties surrounding the concept of cost, but doubtless many have not had the questionable opportunity of examining the special obstacles peculiar to nonprofit institutions. Since the accountant's expenditure approach to cost is highly objectionable, it may be that the economist's concept of cost can be employed. To economists and many businessmen cost is invariably associated with sacrifice. To this group it seems unreasonable for accountants to insist that interest paid for borrowed funds is a cost while the sacrifice of earnings from funds belonging to the enterprise is not considered cost. Accountants have parried these criticisms by pointing out the need for objective criteria for making entries and by showing that special calculations can be easily prepared for the comparatively rare instances when all economic costs must be included. But with regard to institutional costs it seems, at first sight, that the economic approach has a clear-cut superiority. Unfortunately, the economic concept of sacrifice is itself little, if any, better than the accountant's less sophisticated approach.

There is something wrong with charging a long-lived asset to expense in the period of its acquisition. To follow this practice in ordinary commercial accounting is, however, no more unreasonable than various retirement proposals that would take no depreciation until the unit is retired. For the accountant the criteria for writing off assets are independent of the initial bricklayers and of the wrecking crew that removes the last debris. What then should be signals for taking depreciable assets to expense? Perhaps the most common argument is that assets should be depreciated as their services are rendered. This approach has been emphasized as an ideal toward which accountants are working and by which their practical measures may be tested, yet this ideal is based mainly on a vague feeling of justice which seems to be in need of independent support. It is the primary purpose of this article to examine once again the income concept and to suggest an alternative for the ethical approach. Many small businessmen do not think they have any profit until the original investment has been entirely recovered, although this type of thinking is contrary to the attitude accountants attempt to instill in their clients, it is sometimes not unreasonable.

Reviews the book "Statistical Cost Functions of a Hosiery Mill," by Joel Dean.