chapter 6 profit and loss calculation cost of sales, nature of expense, absorption , variable costing, contribution margin accounting

Question 1

what are the three purposes of an income statement

Answer 1

link costs and revenues (to get profit) (only makes sense for private companies)

find profit per unit (how much a product contributed to the profit, hence need to know unit costs and prices per unit)

find net profit for a period (compare cost and revenue of a accounting period to find net profit)(companies can make monthly income statement to support decisions)

Question 2

whats the basic problem in an income statement cost related

Answer 2

we want to allocate costs to manufactured products but also to sold products,

the produced products influence manufacturing costs
and the sold products increase the selling and shipping costs

Question 3

so how to solve the problem ?

Answer 3

two methods to find out net profit for the period , one based on produced quantity, one based on sold quantity
as the basis of the cost

Question 4

explain nature of expense method

Answer 4

total costs of produced products and compare with total revenue of sold products

so its fair, the change in inventory can show the change between sold products and produced produces

Question 5

if inventory increases, means sold less than produced, on what side do we put it

Answer 5

less sold, so cost of produced should be balanced out with cost of inventory change so inventory increase goes to right side

Question 6

if inventory decreases, means we sold more than produced, on what side do we put it

Answer 6

left side

Question 7

easy profit equation for nature of expense method

Answer 7

profit = (total revenue(of sold) + inventory increases) - (total costs (of produced) + inventory reductions)

Question 8

easy way to think about inventory increase /decrease

Answer 8

inventory should in theory only hold that that you will sell in the accounting period. so if all goes perfect, inventory doesnt move bc you sold everything you planned.

so inventory increase conceptuall just see instead of an empty rooom how it should be, you see 20 products that havent been sold, but as costs you say those 20 are included, but the sold is not there. so costs are too much, so you need to add to the revenues the costs of those 20

Question 9

how are costs set up in nature of expense

Answer 9

cost category

Question 10

few advantages to nature of expense

Answer 10

simple calc, easy for double entry book system, good overview cost types, see inventory changes ,

Question 11

few disadvantages of nature of expense

Answer 11

effort for inventory recording, unit cost calculation is needed to find manufacutring cost of inventories,
cant find profit per product,

Question 12

when is cost of sales often used

Answer 12

used internally, in big companies

company cost revenues on product level

apply product costing to find unit cost for all products

costs are those of manufacturing cost with SGA

Question 13

advantages and siadvantages to cost fo sales

Answer 13

super easy, no stocktaking, profit analysis per profit

hard for double entry bookkeping system, calculation of total costs now needed

Question 14

list 6 steps in a normal income statement (2 are the results)

Answer 14

revenues
- COGS
= gross profit/loss
-SGA
- R&D
= Operating result

Question 15

what is the difference between absorption and variable income

Answer 15

delta inventory x fixed manufacturing overhead per unit

Question 16

in terms of manufacturing costs for a product in the cost of sales (easy no inventory) method, what would you take and what would you omit?
DM, DL, variable PO, variable MC, fixed PO

Answer 16

omit fixed Production overhead

Question 17

then again when looking at total costs for one products in the cost of sales (easy no inventory method) what would you omit ? manufacturing costs (we already calculated that), variable SGA, fixed SGQ

Answer 17

take all but fixed SGA

Question 18

only two things variable costing omits

ones in the manufacturing cost calculation and ones in the total costs

Answer 18

in manufacturing cost it omits the fixed production overhead

in total cost it omits the fixed SGA

Question 19

the difference between absorption and variable costing ( like the profit difference in the end is equal to )

THIS EXPLAINS A LOT , like why absorption makes production overvalues and false sense of profit

so fixed prod. Overhead gets added to absoprtion costing but you take fixed production overhead / how many produced

in variable costing we only have things based on how many sold not produced.

Answer 19

the fixed production overhead cost per unit x change in inventory

Question 20

if you take nature of expense when doing an income statement with absorption and variable costing what is the change

Answer 20

increase in inventory in both are now used by the variable or total man. cost

then for the variable or full manufacturing costs are multiplied by the amount of products that are produced

Question 21

how is the increase in inventory and the manufacturing costs valuated in absoprtion and variable?

Answer 21

increase in inventory in variable costing uses the variable manufacturing costs per unit, for the increase in inventory and variable manufacturing costs (the man. cost for the products produced)

in absoprtion the increase in inventory and manufacturing costs of the produced products are valuated with the full manufacturing costs per unit

Question 22

if inventory levels are constant , how is profit of absorption costing compared to profit of variable costing

Answer 22

the same

Question 23

if inventory increases, how is profit of absorption costing in relation to profit according to variable costing?

Answer 23

absorption costing is bigger

Question 24

if inventory decreases, how is profit of absorption costing in relation to profit according to variable costing?

Answer 24

absorption costing is smaller

Question 25

cost of sales method always takes products sold for cost calculation

Answer 25

yes

Question 26

under absorption costing it seems that a bigger inventory leads to bigger profit, what is the problem with that ?

Answer 26

more production will lead to higher profits,

because under absorption costing the unit related fixed production overhead increases profit for each unit produced.

Question 27

what can you do to avoid buildup of inventory (that would happen bc absorption costing makes it seem more profit more inventory)

Answer 27

instead do variable costing income statement
consider imputed interest costs on inventories
limit storage capacity
control the plan of production volumes

incentive as bonus to reach low inventory level

Question 28

what is contribution margin accounting

Answer 28

special income statement format , displays variable and fixed cost seperately

Question 29

CM =

Answer 29

revenue - variable cost

Question 30

explain 3 types of CM

Answer 30

revenue - varibale costs = CM1

• fixed prod. overhead (product) = CM2
• fixed prod. overhead (product-group) = CM3
• fixed SGA (company) = profit/loss

Question 31

why 3 different types of CM?

Answer 31

how much each product contributes to cover the companys fixed costs

how profitably each product is

better understand short term decisions on profit

Question 32

difference between simple CM accounting and mulit-level CM accounting

Answer 32

simple = summary and allocated all fixed cost in one block

mulit= gradually allocate fixed cost on product or product group or divisiional or company level
(first subtract fixed cost or product, then of product group then of company to see who has biggest fixed cost in reality)

Question 33

when you sold less than you normally make, inventory goes up , but is variable less? (given that variable will always minus the PO cost of the same production amount)
assume cost of sales but this applies to both methods, its just about the fact that fixed PO cost

Answer 33

yes variable will be less because it minuses too many costs, because it minuses the PO cost of more quantity in general, not what you sold