Exit price accounting - its criticism (Page 230 234 of Chapter 7 Current cost

accounting)
1. Profit concept Bell, a current cost advocate, asserts that an evaluation of the
expected plans against the actual outcome must be made and a meaningful profit
is the measurement of performance in terms of what was originally intended.
Rationale: Accounting is to measure the profitability of the firm in a given period
and it means the effectiveness of the actual performance of the company in
utilizing the resources entrusted to it.
Argument against Exit price:

Using exit price (the opportunity cost), however, does not provide the relevant
data to match against revenues to measure the relevant success or failure,
this is, the performance of the firm. Accounting must measure past events,
those that actually happened, rather than those that might happen if a firm
does something other than what was planned.

Weston concluded that the exit price accounting does not supply useful profit
information.
2 Value in use versus value in exchange

Both historical cost and current cost advocates accuse exit price proponents of
ignoring the concept of value in use. The former (HCA) believes such value is
represented by acquisition cost and the later (CCA) current cost.
Rationale: An asset that is held rather than sold out must be worth more to its
owner than its exit price, otherwise, it would be sold.
It is argued that exit price represents the opportunity cost but this may not always
be justified. The opportunity cost of using an asset in the company is derived by
the value foregone of the next best alternative, which is not necessarily to sell it.
A firm can consider an asset to have value because of its use in the business rather
than its sale
Exit price accounting - its criticism (Page 230 234 of Chapter 7 Current cost
accounting)
3. Additivity
Exit price proponent claims that accounting measurements, if they are to be
objective, must only be based on past and present events.
Anticipatory calculations cannot be added together with current figures.
Critics point out, however, that Chambers current cash equivalent of assets s to be
determined on the assumption of a gradual and orderly liquidation.
The concept of current cash equivalent, with its emphasis on sever ability of
assets, does not recognize the possibility of selling assets as one package.
Finally, exit price accounting, as proposed by both Chambers and Sterling, does not
give adequate consideration to intangible factors.
Current Cost versus exit price
Edward and Bells are favor of Current cost and concluded that an entry price,
current cost is the normal method of valuation for the following reasons:
1.

Using exit prices leads to anomalous revaluations on acquisition.

Immediately after the purchase of a new machine, its value usually falls so

that it is less than acquisition cost.

2.

Using exit prices implies a short-term approach to business operation since

one is interested in disposition and liquidation values.

3.

Using exit price for finished goods inventory leads to anticipation of

operating profit before the point of sale because the inventory is valued in
excess of current cost.