Direct Costing and Absorption Costing

W. Armand Layne
Additional contact information
W. Armand Layne: University of the West Indies

Chapter Chapter 11 in Cost Accounting, 1984, pp 187-197 from Palgrave Macmillan

Abstract: Abstract Direct costing and absorption costing are two quantitative accounting models that are used by the decisionmakers of the firm for two different purposes — for internal and for external reporting. The two models show the administration of the firm’s economic resources, but from different perspectives. Horngren (1977) emphasised that ‘when an accounting system is designed, managers and accountants must choose an inventory valuation method. This decision is vital for many reasons, including its effects on reported income in any given year, on the evaluation of a manager’s performance, and on pricing decisions’. The choice between direct and absorption costing is thus crucial to the firm’s control function. Hendriksen (1970) stated that ‘one of the major problems in determining the valuation of manufactured assets is the decision regarding which costs are relevant to future periods and thus should be included in asset valuation and which should be charged against current income’. That statement highlights the unresolved problem concerning direct costing and absorption costing. It should be noted also that both statements quoted really aim at income measurement, and its use both in financial reporting and in evaluating the outcome of a manager’s decisions.

Keywords: Variable Cost; Fixed Cost; Contribution Margin; Sales Volume; Cost Account (search for similar items in EconPapers)
Date: 1984
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-17691-5_12

Ordering information: This item can be ordered from
http://www.palgrave.com/9781349176915

DOI: 10.1007/978-1-349-17691-5_12

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().