Variable Costing Theory: Useful Managerial Tool or Pariah of the World? The Case of China

Open Access
Meier, Philip Nathan
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Sajay Samuel, Thesis Supervisor
  • Orie Edwin Barron, Honors Advisor
  • Accounting
  • Variable Costing
  • China
  • Managerial
  • Dumping
  • GAAP
  • Cost
  • Convergence
  • Standards
  • Pricing
  • Manufacturing
  • Differences
Over the last 20 years, the world witnessed the rise of China as a leader in product manufacturing and exports. Because China has priced goods lower than other countries, allegations of ‘dumping’ or selling at artificially lower costs to gain market share have been raised. It is widely recognized that China has experienced a cost advantage with regard to labor costs, but recently, even India claimed that China has underpriced them, which also share low labor costs. This phenomenon that China can price their products lower than other countries makes the allegations of dumping appear valid, but also raises questions of other potentially legitimate causes. This thesis examines research which provides reasons that could explain China’s cost advantages. Based on this research, differences between accounting for product costs using U.S. GAAP absorption costing and what appears to be the Chinese adoption of a variable costing contribution margin approach is presented. This analysis is then supported by the development of an Isoprofit Curve to examine different levels of cost and profit using a marginal cost approach. In conclusion, the Western world has based their premise that the only valid product cost is derived on the assumption of absorption costing. However, the findings of this research challenge that premise and posit that China’s use of variable costing may not only be the reason for their ability to cost their products for less than those of other countries, but may be an appropriate and valid alternative for product costing.