Differences between financial and managerial accounting The controller of a German

machine tool company believed that historical cost depreciation was inadequate for assigning the

cost of using expensive machinery to individual parts and products. Each year, he estimated the

replacement cost of each machine and included depreciation based on the machine$$s replacement

cost in the machine$-$hour rate used to assign machine expenses to the parts produced on that

machine. Additionally, the controller included an interest charge, based on $50\%$ of the machine$$s

replacement value, into the machine$-$hour rate. The interest rate was an average of the $3$ to $5-$year

interest rate on government and high$-$grade corporate securities$.$

As a consequence of these two decisions $($charging replacement cost rather than historical

cost and imputing a capital charge for the use of capital equipment$),$ the product cost figures

used internally by company managers were inconsistent with the numbers that were needed for

inventory valuation for financial and tax reporting. The accounting staff had to perform a tedious

reconciliation process at the end of each year to back out the interest and replacement value

costs from the cost of goods sold and inventory values before they could prepare the financial

statements.

Required

$($a$)$ Why would the controller introduce additional complications into the company$$s costing

system by assigning replacement value depreciation costs and imputed interest costs to the

company$$s parts and products?

$($b$)$ Why should management accountants create extra work for the organization by deliberately

adopting policies for internal costing that violate the generally accepted accounting principles

that must be used for external reporting?