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

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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