This article discusses a plausible method of valuing individual durable assets, not valuing those of the whole firm, for internal, managerial purposes; that is, for decisions and control. In this paper a method of valuation is explored that is appropriate for an accounting system when its primary purpose is to provide data for managerial decision-making. Three basic approaches to the valuation of individual assets are available. They are: the first one is past transactions, second is future earning power, and the third one is present market price. These approaches can be stated in terms of the costs which are used as a basis for valuing the assets. They are original cost, internal opportunity cost, and external opportunity cost. External opportunity cost is defined as a market price of an asset that is to be used in production rather than bought or sold. Internal opportunity cost is the present value of the incremental cash flow an asset or a set of assets can earn in its feasible use within the firm.

The article presents the use of Laspeyres indexes, proposed by German economist Étienne Laspeyres, in calculating variances in direct costs and in production and sales. The Laspeyres indexes will be used throughout for calculating variances in direct costs and in production and sales. It should be noted that the conventional price variance includes the joint effect due to changes in quantities. Variance analysis in cost accounting has been given an economic meaning in this paper. By using Laspeyres indexes the meaning of variance analysis in direct costs and in production and sales has been elucidated. The quantity variance is often split into two components: mix and volume variances. The price and quantity variances are found to be multiplication of the total budget by the respective average change. Further, a way to allocate the joint variance between price and quantity variances is suggested. The new interpretation of variance analysis, as developed in this paper, has an additional advantages that it is more informative to managers and it is easier to compute.