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![](/i/favi32.png) Financial Accounting for Decision Makersfinancial-accounting-for-decision-makers-ninthnbsped-9781292251356-1292251352 compress10
CHAPTER 1
INTRODUCTION TO ACCOUNTING
information provided. The costs of providing the information, however, will increase with each
additional piece of information. The broken line indicates the point at which the gap between
the value of information and the cost of providing that information is at its greatest. This rep-
resents the optimal amount of information that can be provided. This theoretical model,
however, poses a number of problems in practice.
To illustrate the practical problems of establishing the value of information, let us assume
that we accidentally reversed our car into a wall in a car park. This resulted in a dented boot
and scraped paintwork. We want to have the dent taken out and the paintwork re-sprayed at
a local garage. We know that the nearest garage would charge £450 but we believe that other
local garages may offer to do the job for a lower price. The only way of finding out the prices
at other garages is to visit them, so that they can see the extent of the damage. Visiting the
garages will involve using some fuel and will take up some of our time. Is it worth the cost of
finding out the price for the job at the various local garages? The answer, as we have seen,
is that if the cost of discovering the price is less than the potential benefit, it is worth having
that information.
To identify the various prices for the job, there are several points to be considered,
including:
■
How many garages shall we visit?
■
What is the cost of fuel to visit each garage?
■
How long will it take to make all the garage visits?
■
At what price do we value our time?
The economic benefit of having the information on the price of the job is probably even harder
to assess. The following points need to be considered:
■
What is the cheapest price that we might be quoted for the job?
■
How likely is it that we shall be quoted a price cheaper than £450?
As we can imagine, the answers to these questions may be far from clear – remember that
we have only contacted the local garage so far. When assessing the value of accounting
information, we are confronted with similar problems.
Producing accounting information can incur significant costs. Furthermore, these costs
can be difficult to identify. Although direct, out-of-pocket costs, such as salaries of account-
ing staff, can usually be identified without too much problem, these are only part of the total
costs involved. There are other costs such as the cost of users’ time spent on analysing and
interpreting the information provided. These costs are much more difficult to identify and may
vary between users.
What about the economic benefits of producing accounting information? Do you think it
is easier, or harder, to identify the economic benefits of accounting information than the
associated costs?
It is normally even harder to identify the benefits. We saw earlier that, even if we could
accurately measure the economic benefits arising from a particular decision, accounting
information will be only one factor influencing that decision. Furthermore, the benefits of
accounting information, like the associated costs, can vary between users.
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