An Algebraic Aid in Teaching the Differences Between Direct Costing and Full Absorption Costing Models: An Extension.

Abstract This article presents comments on an article describing a very useful algebraic teaching aid to explain the differences between the direct costing and full-absorption costing models, written by Don T. DeCoster and Kavasseri V. Ramanathan and published in the October 1973 issue of the journal "The Accounting Review." The article introduced students to break-even analysis under absorption costing, which in turn provides additional insights into the underlying assumptions of conventional break-even analysis. As DeCoster and Ramanathan observe,the difference between income under absorption costing and income under direct costing is equal to the change in the amount of fixed overhead in inventory. DeCoster and Ramanathan's paper demonstrates to the students that the difference in income between absorption costing and direct costing is due to a change in the amount of fixed overhead in inventory and is not due to the presence of a volume variance. This analysis can be used to show students that, although most discussions of conventional accounting concepts assume absorption costing, conventional break-even analysis is based on the direct costing concept.