Generally Accepted Accounting Practice The main purpose of searching for a new method to estimate cost if due to the erroneous practices of accounting. There is a wide recognition of this problem but most companies still have not gone to a different approach. The GAAP principles do not provide the kind of cost detail and information focus required in todays capital intensive, automated, and complex manufacturing and distribution. It generates an erroneous and inverse relationship between computed product cost and current production volume. This is the major problem- the inverse relationship between production volume and inventory value because these indirect expenses are all fully charges to the current product. In periods of declining sales, the apparent cost of the product rises, bringing suggestions of price increases in the face of weak sales performance. In good sales periods, apparent cost of product declines, suggesting either a lowering of prices or higher profits. Neither inventory valuation reflects the true cost of manufacturing the product. The typical distribution an accrual accounting practice often distorts operating cost information and performance criteria to accommodate financial policy, management practice, and current tax law requirements. Some manufacturers even overproduce to absorb overhead in the false assumption that this reduces their product cost.Many different methods have been tried to fix this inaccuracy, such as activity bases costing, machine labor costing, process costing, productive hour rate costing, life cycle costing, and technology accounting. All of these methods have common weaknesses. None of these methods isolate the definition of the cost of the product form the definition of the overall performance of the business. All of these techniques cause the apparent cost of the product to vary with volume yet manufacturing has done nothing different when volume increase or decrease.Paradigm ShiftOne ...
