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- Title
Optimal Smoothing of Profit Via Overhead Allocation.
- Authors
Shuo Su, Steve Yu
- Abstract
Income smoothing, as defined in Statistical Activity Cost Theory (SACT), is the rational statistical adjustment of periodic accounting earnings to reduce their time volatility around average long-term profit per period. This article demonstrates how overhead cost allocations can be applied to smooth accounting earnings optimally in accordance with this definition. Such an approach parallels earlier work, such as that by Lane and Willett (1997 , 1999 ), in which a depreciation formula was derived and applied for this purpose. In particular, it is shown that, to realize an income smoothing effect in profit making firms, the usual optimal strategy is to over-allocate costs, giving support to the accounting principle of conservatism.
- Subjects
COST allocation; COST accounting; DEPRECIATION; PROFIT; CORPORATE profits; ACCOUNTING methods
- Publication
Abacus, 2007, Vol 43, Issue 2, p136
- ISSN
0001-3072
- Publication type
Article
- DOI
10.1111/j.1467-6281.2007.00223.x