The Effect of Inventory Costing Methods on Full and Direct Costing

Abstract

Since about 1950, the controversy over full vs. direct costing has generated a voluminous literature' largely aimed at the relative merits of each (1) for external financial reporting purposes or (2) for internal use in management planning and control.2 The arguments rest on the assumption that each method produces different results; obviously if each method produced exactly the same results then controversy is idle. The analyses to date have largely ignored the effect of the inventory costing method. A typical discussion of the generalized conditions which create differences between direct and full cost profit is: When production exceeds sales (i.e., in-process and finished inventories increasing), absorp-