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Hepworth, S. R. 1954. Direct costing - The case against. The Accounting Review (January): 94-99.

Summary by Patrick Brisley
Master of Accountancy Program
University of South Florida, Fall 2000

Contribution Margin Main Page | Cost-Volume-Profit Analysis Main Page

Direct Costing - A concept of manufacturing cost accounting under which only costs that are a consequence of production of a product are assigned to the product; all other costs are considered expenses of the period in which they occurred.

"This may be described more briefly as a technique whereby the cost of product is restricted to the inclusion of variable manufacturing costs with fixed manufacturing costs being considered as period expenses."

Argument for Direct Costing

Simplicity - One argument for direct costing is its simplicity. One of the proposed advantages is the elimination of allocations. Simplicity is welcome as long as the simplified accounting method is not substantially less useful for internal managerial use as well as for use in reporting the operating results and financial position.

Arguments against Direct Costing

Cost Allocation - Direct costing does not eliminate the necessity for cost allocations. There will still remain within the area of product cost many elements that are directly assignable to units of product, i.e., raw material and labor costs incurred before two or more joint products are split-off and other variable overhead costs still require allocation.

Inventory Valuation - Using direct costing will result in lower inventory values compared to full costing, however the arbitrary reduction adds little meaning to the financial statements. The elimination of fixed manufacturing costs from product costs will result in the pricing of inventories for financial statement purposes at amounts that bear no identifiable relationship with current value. LIFO accounting provides the same undesirable results.

Marginal Analysis - The basis for direct costing theory. Conclusions are only valid in the short-run (a duration of time as not to permit any changes in the fixed plan employed by an enterprise). Is management’s goal really profit maximization? Variable Costs vs. Fixed Costs.

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Related summaries:

Martin, J. R. Not dated. Chapter 2: Cost Accounting Systems and Manufacturing Statements. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. http://maaw.info/Chapter2.htm

Martin, J. R. Not dated. Chapter 8: Just-In-Time, Theory of Constraints, and Activity Based Management Concepts and Techniques. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. http://maaw.info/Chapter8.htm

Martin, J. R. Not dated. Chapter 11: Conventional Linear Cost-Volume-Profit Analysis. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. http://maaw.info/Chapter11.htm

Martin, J. R. Not dated. Chapter 13: Profit Analysis: An Overall Performance Evaluation - Part I.  Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. http://maaw.info/Chapter13.htm

Martin, J. R. Not dated. Contribution Margin Models. Management And Accounting Web. http://maaw.info/ContributionMarginModels.htm

Martin, J. R. Not dated. The contribution margin controversy. Management And Accounting Web. http://maaw.info/CMcontro.htm

Robinson, M. A., ed. 1990. Contribution margin analysis: no longer relevant/strategic cost management: the new paradigm. Journal of Management Accounting Research (2): 1-32. (Summary of Kaplan & Shank). (Summary of Boer & Horngren).