Cost Benefit Constraint

Definition

The term cost / benefit constraint refers to an accounting constraint that states the cost of providing information must be measured against the benefit derived from the use of that same information.

Explanation

Constraints accounting is a financial reporting approach that is consistent with the framework outlined by the Financial Accounting Standards Board (FASB).  Cost / benefit along with materiality are considered the leading constraints within this framework.

In the past, accountants would informally attempt to balance the expediency and practicality of obtaining information reported in a company's financial statements.  Today, many companies apply a cost / benefit constraint, which means the benefits derived from the information must exceed the cost to provide it to the readers.

From a practical standpoint, the cost portion of this constraint is fairly easy to quantify.  For example, there are costs associated with gathering, assembling, storing, processing, analyzing, auditing, and disseminating data.

The benefits associated with this information are oftentimes more difficult to quantify.  For example, the information may provide the preparer and reader with a more accurate assessment of taxes owed or resources available to the business.  However, assigning a value to this information is sometimes problematic.

In practice, companies oftentimes require a cost / benefit analysis when establishing or modifying their internal accounting processes.

Related Terms

FASB, industry practices, conservatism, materiality