Useful Arbitrary Allocations (With a Comment on the Neutrality of Financial Accounting Reports).

Abstract The article focuses on arbitrary allocations in accounting. Allocation may be unsuitable for general purposes yet highly useful for some specific purpose. Although this does not alter the financial accounting conclusions of Studies in Accounting Research (SAR #3), it is evident that the existence of useful arbitrary allocations has implications for managerial accounting. The concept of the range of ambiguity of an allocation was applied briefly in SAR #3 to situations in which various allocation methods are available and no conclusive reasons for choosing any individual possibility can be demonstrated. An accounting allocation divides a monetary magnitude among recipients to the firm, accounting periods, and so forth. The range of ambiguity of an allocation with respect to an individual input is the extent to which the amounts attributed to that recipient may vary by virtue of choice of allocation methods. SAR #3 discusses allocations such as depreciation in which the costs of nonmonetary inputs are written off. It points out that financial accounting theory requires that two kinds of allocations be performed in the amortization of nonmonetary inputs.