Stochastic CVP analysis as a gateway to decision-making under uncertainty

Although a substantial research literature on cost–volume–profit (CVP) analysis under uncertainty has accumulated since the seminal contribution of Jaedicke and Robichek [Accounting Review, 39 (1964), 917], this literature has been almost entirely ignored by authors of managerial and cost accounting textbooks. This is unfortunate because owing to the extreme simplicity of the basic deterministic CVP model, students are better able to understand the elements added by generalizing the model to an uncertainty situation. A CVP model that incorporated uncertainty would therefore provide a good entry point into the important but complicated topic of decision-making under uncertainty. This paper sets forth, analyzes and applies a CVP under uncertainty model specifically geared toward classroom instruction. It is a simpler model than many of those developed in the research literature, but it does incorporate one advanced component: an “economic” demand function relating the expected sales level to price. Price is neither a constant nor a random variable in this model but rather the firm's basic decision variable. The simplicity of the model permits analytical solutions for five “special prices”: (1) the highest price which sets breakeven probability equal to a minimum acceptable level; (2) the price which maximizes expected profits; (3) the price which maximizes a Cobb–Douglas utility function based on expected profits and breakeven probability; (4) the price which maximizes breakeven probability; and (5) the lowest price which sets breakeven probability equal to a minimum acceptable level. An example of application is presented in which the model is applied to pricing continuing education programs offered by Center for Management and Professional Development at the authors’ university.     

Using cost-volume-profit analysis as an integrative framework in cost/management accounting courses

CVP analysis can do much to help students develop a framework to fit together the management function as a coherent whole. An automobile company is used to illustrate the integrative framework.     

An integrated approach to communication skills in an accounting curriculum

While accounting students think that they do not need written and oral communication skills in order to succeed in the profession, educators and practitioners stress the need for these skills. Not only is there a set of perceived factors of success in the field that includes the quality of communication skills, but also managers in many different industries complain that recent graduates are unable to effectively communicate their ideas in writing. This article presents the results of an integrated approach to this problem along with specific methodologies, cases, and heuristic evaluation of the program. In addition, it is proposed that communication skills are best taught within professional accounting programs in core courses rather than being taught solely either as part of general education or by a special business communication course.     

Appropriateness of accounting data in performance evaluation: An empirical examination of environmental uncertainty as an intervening variable

Rooted in contingency theory, this study puts forth propositions stating (1) that superiors of business units which face higher environmental uncertainty will use a more subjective performance appraisal approach whereas superiors of business units which face lower environmental uncertainty will use a more formula-based performance evaluation approach, and (2) that a stronger fit between environmental uncertainty and performance evaluation style would be associated with higher business unit performance. Findings from 58 business units in eight Fortune 500 firms provide strong support to both sets of these propositions.     

A Knowledge-engineering approach to accounting education

In the context of the massive expansion of the knowledge base facing all fields of professional activity, instructional science (which embraces the use of a knowledge-engineering approach to curriculum design) could well help to unvael the complexity of important pedagogical issues confronting accounting educationalists. The delineation and use of an expert knowledge base within the framework of the ‘dimensions of processing model’ of human information processing provides a valuable focus for making decision about the breadth, depth and nature of specific educatinal objectives. Knowledge engineering, which is fundamental to this process, appears to provide an appropriate framework for the systematic planning, development, delivery and evaluation of high-quality education and training programmes. Such an approach base while ensuring practitioners and teachers to keep pace with their rapidly changing knowledge base while ensuring that students acquire and become competent in the use of the cognitive skills they need in order to work effectively in their chosen profession.     

Stochastic mortality models: an infinite-dimensional approach

Demographic projections of future mortality rates involve a high level of uncertainty and require stochastic mortality models. The current paper investigates forward mortality models driven by a (possibly infinite-dimensional) Wiener process and a compensated Poisson random measure. A major innovation of the paper is the introduction of a family of processes called forward mortality improvements which provide a flexible tool for a simple construction of stochastic forward mortality models. In practice, the notion of mortality improvements is a convenient device for the quantification of changes in mortality rates over time, and enables, for example, the detection of cohort effects. We show that the forward mortality rates satisfy Heath–Jarrow–Morton-type consistency conditions which translate to conditions on the forward mortality improvements. While the consistency conditions for the forward mortality rates are analogous to the classical conditions in the context of bond markets, the conditions for the forward mortality improvements possess a different structure. Forward mortality models include a cohort parameter besides the time horizon, and these two dimensions are coupled in the dynamics of consistent models of forward mortality improvements. In order to obtain a unified framework, we transform the systems of Itô processes which describe the forward mortality rates and improvements. In contrast to term structure models, the corresponding stochastic partial differential equations (SPDEs) describe the random dynamics of two-dimensional surfaces rather than curves.     

Commentary on: A synergistic approach to an accounting educator's primary responsibilities

Many students find the application of sampling theory to audit testing difficult, even if they have a good grounding in business statistics. This paper describes an action-learning technique used to teach audit sampling theory to third-year business degree students at The Open Polytechnic of New Zealand. Feedback from students indicated that they found action-learning better than traditional lectures and printed material in enhancing their understanding of sampling theory and practice and in maintaining their interest and enjoyment.     

Service-learning: an innovative approach to teaching accounting: a teaching note

Service-learning allows students to enhance their learning through real-world applications of accounting concepts. This Teaching Note describes the service-learning process and the benefits to students, faculty, the university, the community, and the accounting profession. Quotations from students' reflective journals are used as illustrations regarding how students develop communication, leadership, strategic, and critical thinking skills. Practical issues for implementing and supervising service-learning projects are also given.     

Rejoinder to commentaries on: A synergistic approach to an accounting educator's primary responsibilities

Tele teaching is a form of instruction that transmits image and speech back and forth between two or more physically separate locations. This paper investigates students' views on the use and effectiveness of tele teaching. Tele teaching was used to transmit Introductory Accounting lectures to students at two campus locations in Australia. Results show that, while students did accept that some benefits of tele teaching existed, most preferred the traditional face-to-face approach to teaching accounting.     

The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information

Review of Quantitative Finance and Accounting - The design of accounting rules by the international standard-setters takes place by considering a trade-off between relevance and reliability. An...     

Perceived uncertainty and job satisfaction in the accounting environment

Perceived environmental uncertainty was hypothesized to impact the level of job satisfaction. Using a sample of staff accountants from two public accounting firms, statistically significant results were obtained indicating that as the level of perceived uncertainty increased the level of job satisfaction decreased.     

Disharmony in international accounting standards setting: The Chinese approach to accounting for business combinations

The paper addresses two distinct aspects of disharmony in international accounting standards setting. The first aspect relates to the political economic context of financial accounting standards. This is illustrated by the Chinese standards setters’ decision to allow the pooling of interests method of accounting for business combinations despite the prohibition of this method by both the FASB and the IASB. This decision by the Chinese standards setters appears to have been based on political economic factors related to the need for industrial reorganization in China rather than a desire to serve the needs of global capital markets. The second aspect of disharmony relates to the role played by differential understandings of the fundamental objectives of financial reporting in an international context. The IASB's goal of producing one set of global accounting standards to serve the needs of global capital markets has led to a reduction in the number of permissible accounting methods and a move towards the fair value accounting model. In particular, the IASB concluded that the acquisition method of accounting for business combinations should be the only method allowed for business combinations. In contrast, the Chinese standards setters have recognized the existence of both mergers and acquisitions, and in response they created two different methods of accounting for business combinations. Effectively, the Chinese standards setters developed an alternative approach to accounting for business combinations which challenges the IASB's goal of achieving international accounting convergence through the fair value model.     

A controversial-issues approach to enhance management accounting education

A transformation of management accounting education is being driven by the changing role of the accounting educator and the increasingly controversial status of traditional management accounting practices. This paper discusses a variety of controversial issues and describes how controversy can be used to enhance management accounting education.     

A theoretical analysis connecting conservative accounting to the cost of capital

We connect conservative accounting to the cost of capital by developing an accounting model within an asset pricing framework. The model has three distinctive features: (1) transaction-cycle-conformity, where the book value equals the value of cash at the beginning and the end of a cash-to-cash transaction cycle; (2) a revenue recognition principle, where uncertainty affects the amount of revenues recognized; (3) a matching principle, where expenses are matched with revenue with a conservative bias due to uncertainty. We demonstrate how the growth rate of expected earnings, the accruals-to-cash ratio, and the expected earnings yield relate to the expected stock return.     

Calendar anomaly in the Greek stock market: Stochastic dominance analysis

Using stochastic dominance (SD) analysis, this paper examines calendar anomalies in the Athens Stock Exchange (ASE), an emerging market thrust into a path of rapid transition by the economic integration of Greece with the European Union. SD offers two essential analytical attributes: It requires no assumptions regarding the normality of return distributions, and it imposes few restrictions on investors' risk-return tradeoff preference. Between 1985 and 2004, we find temporal predictability of returns in the ASE — a strong “day” effect and rather weak “week” and “January” effects. Our findings on the week and January effects are far less robust as compared to those reported in earlier studies based on parametric tests.     

Stock market uncertainty and economic fundamentals: an entropy-based approach

This study investigates the effects of stock market uncertainty on economic fundamentals, represented by economic activities and systemic risk, in China. To capture the uncertainty in the Chinese stock market precisely, we use the entropy measure through symbolic time-series analysis. The empirical findings reveal strong spillover effects from stock market uncertainty to economic fundamentals. Specifically, an uncertainty shock generates (i) a short-term decline in industrial production, (ii) a rapid drop and rebound in the composite leading indicator, and (iii) an increase in systemic risk. To understand these findings, we suggest and validate the transmission channel through changes in consumption and investment.