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Full costing versus variable costing: Does the choice still matter? An empirical exploration of UK manufacturing companies 1988–2002

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  • Pong, Chris
  • Mitchell, Falconer

Abstract

This paper explores the impact of the choice of full costing, as a basis for stock valuation (SSAP 9), on the reported profitability of UK manufacturing companies from 1988–2002. It does so by assessing the sensitivity of these companies' profits to the adoption of the variable costing alternative and so explores the potential for this accounting method choice to influence this important performance measure. Tests are undertaken to identify the accounting significance of the stock asset and the stock adjustment, the longer term effects of the choice on the time series of companies' profits and the shorter term effects as reflected in variation in the annual profit signal (particularly, profit vs loss and profit growth vs profit decline). The results indicate that stock remains a substantial variable in profit measurement and that there are likely to be a minority of companies whose reported profitability during the period changes significantly depending upon the basis of stock valuation used. Given the absence of any definitive case for full costing over variable costing, these findings suggest that further research and some consideration of the modification of the existing standard to permit financial statement users to ascertain variable costing based profits are merited.

Suggested Citation

  • Pong, Chris & Mitchell, Falconer, 2006. "Full costing versus variable costing: Does the choice still matter? An empirical exploration of UK manufacturing companies 1988–2002," The British Accounting Review, Elsevier, vol. 38(2), pages 131-148.
    • Handle: RePEc:eee:bracre:v:38:y:2006:i:2:p:131-148
    DOI: 10.1016/j.bar.2005.09.003
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    1. Colin Drury & Mike Tayles, 1994. "Product costing in UK manufacturing organizations," European Accounting Review, Taylor & Francis Journals, vol. 3(3), pages 443-470.
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    1. Anna Maria Moisello & Piero Mella, 2021. "Matching Revenues and Costs: The Counter-Intuitive Rationality of Direct Costing," International Journal of Business and Management, Canadian Center of Science and Education, vol. 15(1), pages 202-202, July.
    2. Pong, Christopher K.M. & Mitchell, Falconer, 2012. "Inventory investment & control: How have UK companies been doing?," The British Accounting Review, Elsevier, vol. 44(3), pages 173-188.
    3. da Silva Stefano, Gustavo & Antunes, Tiago dos Santos & Lacerda, Daniel Pacheco & Wolf Motta Morandi, Maria Isabel & Piran, Fabio Sartori, 2022. "The impacts of inventory in transfer pricing and net income: Differences between traditional accounting and throughput accounting," The British Accounting Review, Elsevier, vol. 54(2).
    4. Claudio Fagarazzi & Alessandro Tirinnanzi & Mario Cozzi & Francesco Di Napoli & Severino Romano, 2014. "The Forest Energy Chain in Tuscany: Economic Feasibility and Environmental Effects of Two Types of Biomass District Heating Plant," Energies, MDPI, vol. 7(9), pages 1-23, September.

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