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Acc202 Mod3 Case Essay

ACC202 Module 3 Case Pg.1

ACC202 Module 3 Case James Davis Trident University

ACC202 Module 3 Case Pg.2

Explain the main differences between the absorption and contribution (behavioral, variable) income statements. Will net income always be the same under the two approaches? If not, explain the difference. Under absorption income statement, the cost of per unit of inventory is inclusive of direct material, direct labor, variable manufacturing overhead and fixed manufacturing overhead. on the other hand, in case of variable costing income statement, cost per unit of inventory is inclusive of direct material, direct labor, variable manufacturing overhead. In case of absorption costing income statement, the gross margin is computed by deducting the cost of goods sold from the sales. On the other hand, in case of variable costing income statement variable expenses are deducted from sales to arrive at contribution margin and the fixed expenses are deducted from the contribution margin to arrive at sales. In case of absorption costing, the inventories are always valued at full costs. On the other hand, under variable costing, inventories are always valued at variable costs. The net income under two approaches will be the same if the production equals sales. In case the production is more than the sales, then absorption costing will show more profit than the variable costing income statement because the closing stock is valued at high cost per unit compared to variable costing because of inclusion of fixed manufacturing cost in the cost per unit.

Comment specifically on why companies feel the need to create yet another income statement in a different format. What information can the company gleam from this approach which is helpful as a tool in the decision making process. Managers need more ,and often times different, information than does outside organizations. The managers are the ones making the decisions that will affect the future of the company. The income statements that are created show much more detail and are formatted for specific reasons that are beneficial to the organization.

ACC202 Module 3 Case Pg.3

Explain situations in which break-even analysis can be a useful tool. Provide a specific example. The goal of a break-even analysis is to show when a product is going to profitable. It allows managers to see what affects different cost changes have on the profit margin. An example of this is when Company A is developing product B. The break-even analysis shows all costs associated with producing that product. It also shows how much of the product must be sold in order to recoup the total cost of production. It will also allow managers to tweak things such as sell price to influence the outcome.

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