| The variable costing income statement was introduced in the United States approximately 70 years ago. Since that time, there has been debate as to whether variable or absorption costing is the best method for reporting income. ARB 43 required absorption costing for the standard of reporting, and the Financial Accounting Standards Board followed suit. Practitioners, researchers, and the users of financial statements have since questioned the validity of absorption costing, focusing particularly on the ability of firms to time the recognition of fixed production (or capacity) costs. Because of the proprietary nature of the cost structure information used in the variable costing methodology, empirical research has been limited and studies have primarily been theoretical and analytical. This study uses an experimental setting to test whether a variable costing income statement has information content as a substitute for, or a complement to, the standard GAAP absorption costing income statement. Researchers have also questioned whether the form and nature of the variable costing income statement is a source of variance aside from the utility in predicting performance. This study is limited to differences in form only without providing information to the subjects on future economic conditions. The results of tests showed no significant difference between using a GAAP absorption costing income statement in the estimation of the following period's earnings per share and using a variable costing income statement either as a substitute or as a complement to the GAAP statement. |
