Accounting Theory. Elective Module Master Level Fall 2018/19

Transcription

1 Accounting Theory Elective Module Master Level Fall 2018/19 Prof. Dr. Barbara Schöndube-Pirchegger Lehrstuhl für Unternehmensrechnung und Controlling 1

2 Administrative Information Class Schedule Lecture Hours: Tuesday 13:15-14:45 Tutorial: Thursday 9:15-10:45 with Max Neubert Grading: 60 min exam Lecturer contact Office: Vilfredo Pareto Gebäude (G 22), Room E 209 Office Hours: Thursday a.m. or by appointment barbara.schoendube@ww.uni-magdeburg.de Phone: Website: Particular link to class website: 2

3 Textbook Demski, Joel S., Managerial Uses of Accounting Information, Second Edition, Springer (2008) Available online via SpringerLink 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 3

4 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 4

5 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 5

6 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, z 1, z 2 are used to produce output q 6

7 Production Plan The firm straddles two input markets and one output market, all perfect with prices It maximizes profit subject to its technology s.t. Example 2.1: Suppose for and Feasible possibilities to produce : and => Example 2.2: Given,, => s.t. Optimal solution: Note: no reference to cost or revenue here 7

8 The economic cost function The cost function displays the cost of producing different output levels given that input factors are optimally used s.t. Solving this problem results in and Resulting in: 8

9 The economic cost function 9

10 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, or. 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. 10

11 Average and marginal cost 11

12 Adding an upper bound on factor z 1 s.t. Note: the final line denotes the shadow price of an additional unit of z 1 In the same sense MC denotes the shadow price of an additional unit of q 12

13 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 13

14 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: s.t. 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, or for some defined short-run setting. 14

15 Short run and long run cost curves 15