Date of Award


Document Type

Independent Study

Degree Name

Master of Arts (MA)


Appraisal of any costing method requires an understanding ol the various uses which are made of cost data and the relationships among these uses. Present day accounting is concerned with past, present, and future costs.

There are basically two concepts that are applied by manufacturing enterprises in accounting for these costs; the absorption costing concept and the direct costing concept. The difference between the two methods evolves around the fact that all manufacturing costs are charged to the products and there is no need to distinguish among them in costing products under the absorption theory; whereas, under the direct costing theory there is a need to distinguish between the period costs which are indirectly associated with products manufactured and product costs which are directly related to the manufactured product. This is done so that only the actual product costs or the costs which are directly related to the product are charged to the product. The period costs are defined as the fixed costs or costs that would be incurred regardless of the level of production. Because these costs are not directly related to the product they are said to expire with time

Currently, the American Institute of Certified Public Accountants, the Internal Revenue Service and the Securities and Exchange Commission will not recognize direct costing as an acceptable accounting procedure when used in external financial reports. However, many accountants recognize direct costing as a superior method for internal accounting purposes if applied in a knowledgeable manner.

The primary empahsis of this paper will be to discuss the basic features that are inherent in the absorption costing theory and the direct costing theory in order to develop an understanding of the integral ideals that are inherent in these two basic methods. A brief discussion will also be presented concerning the nonacceptability of direct costing method by various organizations.

After developing an understanding of the framework and acceptability of each method, the emphasis is shifted to an advocation of direct costing for both internal and external purposes. The section concerning internal uses is provided to show the merits of a direct costing system in providing management with relevant and accurate data concerning profit planning, product pricing, managerial control, and management decisions in general. The end of this section of internal uses deals with some of the limitations and dangers that are inherent in a direct costing situation if the data is not utilized properly by knowledgeable persons.