On an Extension of Classical Production and Cost Theory

Abstract

The paper shows the insufficiency of traditional production and cost theory to capture production and cost phenomena. It is argued that already for the one-person situation production theory is not able to incorporate the organizational structure and, in addition, it is unable to deal with non-cost criteria, the cost value problem, and the aggregation problem. For the multi-person situation, transactional and transformational interactions cannot be described. As a consequence, the paper extends traditional production theory and shows that the theory of hierarchical planning provides a framework that is broad enough to amend the deficiencies mentioned. In particular, it is able to capture principal agent relationships and provides a general framework for modern cost and managerial accounting.