Abstract This article focuses on the conceptual framework which may prove better than analysis of variance which is considered to be very important in cost accounting. Conceptual framework is better because it distinguishes long-range and short-range factors, demonstrates the weaknesses of existing practices, sharply pinpoints responsibility in relation to the purposes of short-range planning and control and separates the role of physical measures of capacity from the role of valuation of that capacity, and indicates how a contribution-margin or opportunity-cost approach to valuation is superior to a unitized historical-cost approach. Organizations assemble human and physical resources that provide the capacity to produce and sell. These commitments often require heavy expenditures that affect performance over long spans of time. The implications for managers are twofold. First, careful planning. Second, the acquired capacity. Many fixed costs result from capital budgeting decisions, reached after studying the expected impact of these expenditures on operations over a number of years. The choice of a capacity size may be influenced by a combination of two major factors, first provision for seasonal and cyclical fluctuations in demand. Second, Provision for upward trends in demand.
Charles T. Horngren (Sat,) studied this question.