The Estimation Problem in Financial Accounting

Abstract

This chapter presents a general mathematical model for allocation. The generalized least squares allocation model offers one approach to the unification of a broad class of allocation problems and provides a basis for summarizing, comparing, and evaluating diverse allocation schemes. First, the model formally unifies a number of accounting problems. Methods that have been proposed to account for joint product costs, depreciation and installments sales share a common allocation model. This unification of different accounting problems gives insight into their comparative nature. Stated differently, the fact that methods to allocate costs in a wide range of problems share a common model implies that the problems themselves are similar or at least regarded as being similar. Second, the model provides a convenient way of summarizing, classifying, and comparing diverse allocation methods. Third, all methods consistent with the general model results in an underlying equality. Exposure of this equality facilitates the evaluation of these methods.

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