chapter 6 profit and loss calculation cost of sales, nature of expense, absorption , variable costing, contribution margin accounting Flashcards
what are the three purposes of an income statement
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)
whats the basic problem in an income statement cost related
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
so how to solve the problem ?
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
explain nature of expense method
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
if inventory increases, means sold less than produced, on what side do we put it
less sold, so cost of produced should be balanced out with cost of inventory change so inventory increase goes to right side
if inventory decreases, means we sold more than produced, on what side do we put it
left side
easy profit equation for nature of expense method
profit = (total revenue(of sold) + inventory increases) - (total costs (of produced) + inventory reductions)
easy way to think about inventory increase /decrease
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
how are costs set up in nature of expense
cost category
few advantages to nature of expense
simple calc, easy for double entry book system, good overview cost types, see inventory changes ,
few disadvantages of nature of expense
effort for inventory recording, unit cost calculation is needed to find manufacutring cost of inventories,
cant find profit per product,
when is cost of sales often used
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
advantages and siadvantages to cost fo sales
super easy, no stocktaking, profit analysis per profit
hard for double entry bookkeping system, calculation of total costs now needed
list 6 steps in a normal income statement (2 are the results)
revenues - COGS = gross profit/loss -SGA - R&D = Operating result
what is the difference between absorption and variable income
delta inventory x fixed manufacturing overhead per unit
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
omit fixed Production overhead
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
take all but fixed SGA
only two things variable costing omits
ones in the manufacturing cost calculation and ones in the total costs
in manufacturing cost it omits the fixed production overhead
in total cost it omits the fixed SGA
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.
the fixed production overhead cost per unit x change in inventory
if you take nature of expense when doing an income statement with absorption and variable costing what is the change
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
how is the increase in inventory and the manufacturing costs valuated in absoprtion and variable?
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
if inventory levels are constant , how is profit of absorption costing compared to profit of variable costing
the same
if inventory increases, how is profit of absorption costing in relation to profit according to variable costing?
absorption costing is bigger
if inventory decreases, how is profit of absorption costing in relation to profit according to variable costing?
absorption costing is smaller
cost of sales method always takes products sold for cost calculation
yes
under absorption costing it seems that a bigger inventory leads to bigger profit, what is the problem with that ?
more production will lead to higher profits,
because under absorption costing the unit related fixed production overhead increases profit for each unit produced.
what can you do to avoid buildup of inventory (that would happen bc absorption costing makes it seem more profit more inventory)
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
what is contribution margin accounting
special income statement format , displays variable and fixed cost seperately
CM =
revenue - variable cost
explain 3 types of CM
revenue - varibale costs = CM1
- fixed prod. overhead (product) = CM2
- fixed prod. overhead (product-group) = CM3
- fixed SGA (company) = profit/loss
why 3 different types of CM?
how much each product contributes to cover the companys fixed costs
how profitably each product is
better understand short term decisions on profit
difference between simple CM accounting and mulit-level CM accounting
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)
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
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
