Since the inception of the double entry bookkeeping system, the treatment of inventories has always been a rather perplexing problem. Even today accountants disagree, not merely on methods and procedures of treatment, but even on fundamental principles on inventory position and interpretation. This is a challenge to the accounting profession to which a satisfactory response is still missing, despite the flood of literature on inventory questions during the last decade. The main difficulty for a realistic contemplation of the problem stems, in the author's opinion, from the dualism inherent in the inventory account which influences both the balance sheet and the income statement. Withdrawn from the manufacturing costs on the income statement as closing inventory, it is added to the current assets on the balance sheet. In the light of the dualistic approach to the inventory problem, the exclusion argument for fixed costs seems to gain considerable ground. It seems now obvious that fixed charges, being mainly functions of time, have no place in an account of such diversified influences. Left partially in the inventory, fixed costs increase the gross and net profit, and, on the balance sheet, the working capital. This is hardly compatible with business logic. Fixed costs in the inventory are not a profit increasing factor; neither do they improve the working capital position. However, the traditional treatment must lead ultimately to such distortions of values and the possible benefit of the tax collector.

Flexible budgets and break-even charts have taught business that profit depends more on volume than on the size of the mark-on. When the variable costs remain in a constant ratio to sales or sales value of production-the sound and normal case-it is the fixed charges that mainly determine the cost/profit relationship. While they are more or less fixed in their dollar value, their ratio to sales or sales value of production, in other words, their rate, is a variable just as the profit rate. There is a remarkable interdependence between the fixed charges rate and the profit rate whenever the variable cost rate (variable/sales) is constant. This side of the cost/profit relationship has so far been somewhat neglected, for it is less conspicuous than its other aspects. It is, however, of such importance to profitable management that it deserves a special examination. Through analytical observation, an inversely symmetrical movement of the two rates can be readily detected if their changes are watched through shifting volumes. These observations lead to the following conclusion: The ratio of variable expenses to sales (or sales value of production) being constant, the profit rate is increasing with growing volume in the same ratio as the fixed charges rate is decreasing. With diminishing volume, the profit rate is decreasing in the same ratio as the fixed charges rate is increasing, if the variable rate remains constant.