Operational Accounting for Replacement Models.

There is no reason why accounts cannot devise alternative accounting systems as mathematicians have developed alternative algebras and geometries. In particular, a system can be designed to quantify the factors crucial for replacement decisions, quite irrespective of whether that system truly measures income or wealth. In the past accounting theorists often have claimed that financial accounting results in absolutely true measures of income and wealth.[6] In this paper an alternative system is proposed which will result in only relatively true measures of the parameters for a particular operational model. This new system may be called operational accounting.[7] Traditional accounting provides figures that are objectively verifiable following generally accepted auditing procedures: operational accounting results in figures which are scientifically verifiable; that is, other investigators can repeat the measurements without statistically significant differences. The design of an operational accounting system can be posed in the usual form of a balance of economic forces: more data results in more precise decisions--but only through greater sacrifices of time and money in gathering data. It was shown that optimum replacement life results from balancing acquisition price against maintenance cost on the fulcrum of the interest rate. Furthermore, it was shown that the optimura life remains unchanged throughout the usual industrial range of interest rates. Replacement decisions are relatively insensitive to errors in the rate of interest. On the other hand, it was shown that losses from estimating the maintenance gradient are considerably greater than those resulting from errors in estimating the rate of interest. Fortunately, the maintenance gradient can be exposed as a percentage of acquisition price. The basic approach suggested in this paper has been that of using a normal distribution to estimate the errors in estimate of the maintenance gradient, whic... [ABSTRACT FROM AUTHOR]