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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 by Robert Heald
Master of Accountancy Program
University of South Florida, Fall 2000

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This article is related to a panel discussion presented at the 1989 Annual Meeting of the American Accounting Association. The purpose is to explore various viewpoints on the relevancy of contribution margin by some top management accounting experts. My purpose is to summarize the viewpoints of Charles Horngren and Germain Boer.

Charles Horngren's View

Horngren supports the contribution margin approach and feels that it should not be banned from the classrooms.

Each organization and department should have several cost allocation bases, thus improving accounting for product costs, however, there are two flaws to this idea:

Engineering infeasibility and Economic infeasibility.

Although there have been declines in the costs of data collection, many managers believe that more accurate data is not worth collecting, therefore they resort to averages, which is the simpler system.

Consider direct labor as a cost driver. Most companies account for direct labor at nominal rates. If direct labor were accounted for more accurately, overhead rates would be lower as a percentage of direct labor. Direct labor performs as well as the best of the other variables as a driver. Allocating overhead based on direct labor creates the desired strong pro-automation incentives throughout the organization. The focus on manufacturing may have caused neglect of service functions and industries and direct labor is the largest cost category in rendering services.

Horngren believes that over the past several years, there have been positive forces and ideas that should be welcomed by us all:

Causes and effects in relationships to cost drivers. Alerting us that cost drivers are not confined to volume alone.

Tailoring systems to underlying operations instead of vice versa.

Recognizing interdependencies of business functions and stressing effects on total costs and total revenues.

Warning about the overemphasis on single cost application base.

Advocating the use of multiple cost application bases tied to appropriate cost drivers

Stressing that inventory costs are incomplete measures of product costs for strategic decisions.

Calling for strategic cost analysis or strategic cost management.

Recognizing that cost/benefit analysis may limit the use of activity-based accounting.

Some claims and criticisms are outrageously exaggerated such as:

All costs are variable or all costs are fixed.

Contribution margins are obsolete.

Cost accounting from 1900 to 1980 has lost relevance.

Direct labor is no longer a useful category.

Volume is no longer a major cost driver.

Tendencies toward revering full product costs as "true" costs and major influences on setting prices or choosing products.

Germain Boer's View

Boer referred to an article by Ray Marple, who developed a cost hierarchy for each of two conceptual views of an organization:

Product Segment View - at the lowest level (unit of product) he computed contribution margin by deducting from revenue the variable costs traceable to that revenue.

Market Segment View - contribution margin is revenue minus the total of variable production costs and variable selling costs.

Marple identified fixed costs at each level in the two organizational views to emphasize that decisions affecting the traceable fixed costs at one level different from the decisions that affect the costs at another level.

Marple and other writers of his vintage did not consider fixed costs to be a big blob, they traced individual fixed costs directly to the decisions that originated and controlled them.


Also see 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 arguments).

Related summaries:

Demmy, S. and J. Talbott. 1998. Improve internal reporting with ABC and TOC. Management Accounting (November): 18-20, 22 and 24. (Summary).

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

Johnson, H. T. 1989. Professors, customers, and value: Bringing a global perspective to management accounting education. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 7-20. (Summary).

Kee, R. C. 2001. Implementing cost-volume-profit analysis using an activity-based costing system. Advances in Management Accounting (10): 77-94. (Summary).

Martin, J. R. Not dated. Conventional Linear Cost-Volume Profit Analysis. Chapter 11. Management Accounting: Concepts, Techniques & Controversial Issues

Martin, J. R. Not dated. Contribution Margin Models. Management And Accounting Web.

Martin, J. R. Not dated. The contribution margin controversy. Management And Accounting Web.

Martin, J. R. Not dated. Comparing Dupont's ROI with Goldratt's ROI. Management And Accounting Web.

Martin, J. R. Not dated. Goldratt's dice game or match bowl experiment. Management And Accounting Web.

Martin, J. R. 1994. A controversial issues approach to enhance management accounting education. Journal of Accounting Education (Winter): 59-75. (Summary).

Martin, J. R. Not dated. Relationship between Cost-Volume-Profit and Return on Investment. Chapter 14. Management Accounting: Concepts, Techniques & Controversial Issues. (Link to Chapter 14).