Profit and Loss Performance with Full and Direct Costing
UPF Economics and Business Working Paper No. 606
Posted: 17 Jul 2002
Date Written: March 2002
In this paper we perform a mathematical analyse of profits and losses in direct and full costing. They are compared in different situations, mainly the utilisation of productive capacity and the existence of beginning inventories.
Direct costing was conceived as a system of cost accounting which would show profits as a function of sales. In full costing profits depend on available combinations of sales, production, costs of beginning inventories, etc., and information displayed in financial statements appears incongruent. Differences in profits with full and direct costing increase when full costing allocates fixed costs according to normal production, and in some cases financial statements would show more incongruent performance. It is concluded about the importance that profit and loss statement expresses profits in both costing systems.
Keywords: full costing, direct costing, variable costing, allocation of fixed costs with normal capacity
JEL Classification: M40, M41, M46
Suggested Citation: Suggested Citation