Moore’s law suggests that computing power for the same cost doubles every 2.5 years. A combination of Moore’s law and the commoditization of computer components has made it possible to buy a $500 computer today that is more powerful and portable than a similar offering that cost $2,000 just a few years ago. How does this affect planning for major IT projects?
Moore’s law, although not exactly a law of physics or nature, is a prediction made by Gordon Moore in 1965. He postulated the number of transistors per square inch would continue to double approximately every 2 years. This would cause the computing power as a ratio of chip size, would double along the same pace. Along with the exponential power capacity increases, the cost of these components would decrease relative to power capacity. This trend has an effect on the way companies should budget and plan for major IT projects.
Moore’s law has proved to be generally correct throughout the past 40 years, although it is slowing. Companies must be prudent I planning and budgeting for major Information Technology projects. The trend has caused many companies to resort to leasing equipment as to hedge the impending obsolescence of technology procured in the present. Companies have also resorted to ‘community computing’ sharing virtual servers in the cloud with other companies and application providers to reduce the risk of purchasing, maintaining, and protecting information technology assets. These technology options allow companies to shift and share risks with other parties to prevent major upgrades or advances from derailing progress.
Financial managers and accountants who are utilized in capital budgeting for IT projects must familiarize themselves with the latest advances in computing practices to help managers determine the value of acquisitions of new technology relative to their operating and capital costs. Companies can get ahead of trends by reading publications such as Gartner® or International Data Corporation, attending professional organization gatherings, or simply conferring with the vendor. They may also do as Dr. Moore did and make observation and predictions regarding the costs of IT based on trends. Accountants should also choose a depreciation method that tracks along with the usefulness of the asset being purchased. This would likely involve an accelerated approach, likely using a time based method to prevent difficulty in gaining information on unit costs. The assets should be depreciated quickly early in the useful life of the asset and slowly tapered off.
Richardson, V., Chang, C., Smith, R. (2018). Accounting Information Systems, 2nd Edition.