The Accounting Review Vol. 37 No. 1 1962
VARIABLE COSTING FOR EXTERNAL REPORTING--A RECONSIDERATION.
Abstract
In the January 1961 number of this journal, there appeared an article by Charles T. Horngren and George H. Sorter arguing in favor of the use of variable, or direct costing in financial reporting to stockholders and other interested outside parties. While the format of the present paper is in the nature of a criticism of that article, it is intended as a more general argument against the use of variable costing in the accounting income determination process. It is the present paper's contention that variable costing is a fallacious and incorrect approach to the determination of periodic net income. Absorption costing must be employed for this purpose, and the fact that the two techniques will yield the same net income figures where inventory levels remain unchanged is only coincidental. For inventory levels are not wont to remain stable; they are, in fact, typically very volatile. The invalidity of the variable costing technique for external reporting does not impair its importance and unique usefulness as a tool of analysis for management. This paper is in full agreement with the advocates of variable costing in so far as that procedure is proposed as an analytical tool in the managerial decision-making process. In view of the fairly general agreement on the value of variable costing for internal reporting, that aspect of the technique will not be treated specifically in this paper.
- DOI
- 10.2308/tar-7098035
- Volume
- 37
- Issue
- 1
- Pages
- 76-81
- Language
- en
- Sources
- openalex crossref