MGM 5500: Questions and Answers
Course: MGM 5500
Assignment #6
A. What is the difference between a contribution income statement and a traditional income statement?
Contribution income statement is an income statement that classifies cost by behavior (fixed cost and variable cost). Traditional income statement is sometimes called the functional income statement. It is an income statement prepared in the multiple-step or single –step income statement format which conforms to Generally Accepted Accounting Principles (GAAP) and can be used for external financial reporting. The main difference between the two is that the contribution income statement list variable costs first, followed by fixed costs. Keeping in mind that GAAP and does not permit businesses to use the contribution income statement for financial accounting – it is used only for internal decision making purposes.
B. What is the difference between absorption costing and variable costing?
Absorption costing is a costing method where product cost includes all the costs to acquire products and get them ready to sell regardless of whether the costs are variable or fixed. Generally Accepted Accounting Principles requires business to use absorption costing for financial accounting. Variable costing is a method of costing where only the costs to acquire products or to get them ready to sell that vary with output are treated as product costs. In other words, only variable product costs are treated as product costs. For manufactures, the difference between absorption costing and variable costing is significant. For example, when Caterpillar uses absorption costing to determine the cost of manufacturing, its product cost includes the direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead cost incurred to make the bulldozer. These costs are added to inventory and they are not expensed as cost of goods sold until the bulldozer is sol. However, when Caterpillar uses variable costing, product
Assignment #6
A. What is the difference between a contribution income statement and a traditional income statement?
Contribution income statement is an income statement that classifies cost by behavior (fixed cost and variable cost). Traditional income statement is sometimes called the functional income statement. It is an income statement prepared in the multiple-step or single –step income statement format which conforms to Generally Accepted Accounting Principles (GAAP) and can be used for external financial reporting. The main difference between the two is that the contribution income statement list variable costs first, followed by fixed costs. Keeping in mind that GAAP and does not permit businesses to use the contribution income statement for financial accounting – it is used only for internal decision making purposes.
B. What is the difference between absorption costing and variable costing?
Absorption costing is a costing method where product cost includes all the costs to acquire products and get them ready to sell regardless of whether the costs are variable or fixed. Generally Accepted Accounting Principles requires business to use absorption costing for financial accounting. Variable costing is a method of costing where only the costs to acquire products or to get them ready to sell that vary with output are treated as product costs. In other words, only variable product costs are treated as product costs. For manufactures, the difference between absorption costing and variable costing is significant. For example, when Caterpillar uses absorption costing to determine the cost of manufacturing, its product cost includes the direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead cost incurred to make the bulldozer. These costs are added to inventory and they are not expensed as cost of goods sold until the bulldozer is sol. However, when Caterpillar uses variable costing, product