Reference no: EM13615648

The controller of a German machine toolcompany believed that historical depreciation was inadequate toassigning the cost of using expensive machinery to individual partsand products. Each year, he estimated the replacement cost of eachmachine and included depreciation based on the machine'sreplacement cot in the machine-hour rate used to assign machineexpenses to the parts produced on the machine. Additionally, thecontroller included an interest charge, based on 50% of themachine's replacement value, into the machine-hour rate. Theinterest rate was an average of the 3- to 5-year interest rate ongovernment and high-grade corporate securities.

As a consequence of these two decisions(charging replacement cost rather than historical cost and imputinga capital charge for the use of capital equipment), the productcost figures used internally by company managers were inconsistentwith the numbers that were needed for inventory evaluation forfinancial and tax reporting. The accounting staff had to perform atedious reconciliation process at the end of each year to back outthe interest and replace value costs from the cost of goods soldand inventory values before they could prepare the financialstatements.

1. Why would the controller introduce additional complicationsinto the company's costing system by assigning replacementvalue depreciation costs and imputed interest costs to thecompany's parts and products?

2. Why should management accountants create extra work for theorganization by deliberately adopting policies for internal costingthat violate the generally accepted accounting principles that mustbe used for external reporting?