Accounting Theory Elective Module Master Level Summer 2014 Prof. - - PowerPoint PPT Presentation

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Accounting Theory

Elective Module Master Level Summer 2014

• Prof. Dr. Barbara Schöndube-Pirchegger

Lehrstuhl für Unternehmensrechnung und Controlling

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Administrative Information

• Class Schedule

– Lecture Hours: Wednesday 9:15-10:45 – Tutorial: Tuesday 13:15-14:45, first lecture April 8. – Grading: 60 min exam

• Lecturer contact

– Office: Vilfredo Pareto Gebäude (G 22), Room E 209 – Office Hours: Thursday 11-12 a.m. or by appointment – E-mail: barbara.schoendube@ww.uni-magdeburg.de – Phone: 67 18728

• Website: http://www.bwl1.ovgu.de/

– Particular link to class website: http://www.bwl1.ovgu.de/bwl1/en/Teaching/Accounting+Theory-p-358.html

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Textbook

• Demski, Joel S., Managerial Uses of Accounting Information,

Second Edition, Springer (2008)

– Available online via SpringerLink http://link.springer.com

• Focus:

managerial uses of accounting information

– We stress the construction as well as the use of accounting information, rather than how to produce it

• How can accounting information be used?

– Our approach is conceptual and abstract – The course focuses on fundamentals – Basic knowledge about financial accounting and economics is required

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Introduction

• Accounting is the language of business

– Transactions are reflected in monetary terms – Accounting information conveys information about the firm to internal and external parties:

• Internal: managers, employees
• External: investors, potential investors, competitors, tax authorities
• The accounting system can be regarded as a library

– It stores financial data of a firm – It is organized in some fashion – The manager uses the library to gather information – The manager’s choices are reflected in the library

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Frame of the analysis

• Uncertainty is present
• Accounting is one of many information sources available to the

management of a firm

– Accounting information combines with non-accounting information in counter-intuitive ways

• Multiple products or services
• Decision makers are economic agents who maximize (expected)

utility

• Accounting is costly

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• 1. The economist’s view:

a single product firm

• Trade takes place in a perfect market:

– The product with all its characteristics is known

• Every quantity q can be traded

– Price is known – No transaction costs

• The firm straddles (input and output) markets
• Factor inputs, e.g. capital and labor, z1, z2 are used to produce
• utput q

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Production Plan

• The firm straddles two input markets and one output market, all perfect with prices
• It maximizes profit subject to its technology
• Example 2.1: Suppose

for and

• Feasible possibilities to produce

:

• Example 2.2: Given

, , =>

• Optimal solution:
• Note: no reference to cost or revenue here

s.t. and => s.t.

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The economic cost function

• The cost function displays the cost of producing different output

levels given that input factors are optimally used

• Solving this problem results in

and

• Resulting in:

s.t.

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The economic cost function

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Cost function terminology

• Definition 1: In the single product firm, average cost at output quantity

is total cost divided by quantity, or .

• Definition 2: In the single product firm, the incremental cost of

units at output quantity is the difference between the cost of producing units and units,

• r

.

• Definition 3: In the single product firm, the marginal cost of output at output quantity

, denoted , is the rate at which cost changes with respect to change in quantity, or .

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Average and marginal cost

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Adding an upper bound on factor z1

• Note: the final line denotes the shadow price of an additional unit of z1
• In the same sense MC denotes the shadow price of an additional unit of q

s.t.

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Cost and revenue framing

• Having constructed the cost function allows us to rephrase the firm’s

previous maximization problem using revenues and costs

• This implies the well known optimality condition:

„marginal revenue = marginal cost“

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Short run versus long run cost

• Long run costs: all factors can be varied

–

• Short run: only some of the input factors can be varied

–

• Short run cost curve:
• Definition 4: In the single (or multi-) product firm, fixed cost is the short-run

cost of zero output, or for some defined short-run setting.

• Definition 5: In the single (or multi-) product firm, variable cost of output is

the short-run cost of producing output less the corresponding fixed cost,

• r

for some defined short-run setting. s.t.

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Short run and long run cost curves