Drhusseinkhasharmeh drhusseinkhasharmeh

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Unformatted text preview: information used for decision making would be perfectly relevant and accurate. Precise but irrelevant information is worthless for decision making. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Accuracy and Relevance The degree to which information is relevant or precise often depends on the degree to which it is: Qualitative Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Quantitative Absorption approach This approach is used by companies for external financial reporting. According to this external According approach, all indirect manufacturing costs (both variable and fixed) are considered to be product (inventorial) costs that becomes an expense in the form of manufacturing cost of goods sold only as sales occur. Note that classifications of costs on the income statement are done by three major management functions: manufacturing, selling and administrative. Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Contribution approach (variable Contribution or direct approach) or This approach is used for internal or management This accounting purposes. This approach emphasizes the accounting distinction between variable and fixed costs. CM = Revenues – all v. costs (selling and administrative). Revenues A major benefit of this approach is that it stresses the role major of fixed costs in operating income. of The difference between the two approaches is that The absorption costing regarded fixed manufacturing costs as a part of cost of goods sold, and these fixed costs part and reduce the gross margin accordingly. However, fixed manufacturing costs do not reduce the contribution margin (which is simply the difference between revenues and variable costs). revenues Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Schedule 1: Variable indirect manufacturing Costs (in thousands of dollars) Supplies (lubricants, expendable tools, coolants, sandpaper $ 600 Materials­handling labor (forklift operators) 2,800 Repairs on manufacturing equipment 400 Power for factory 200 $ 4,000 Schedule 2: Fixed indirect manufacturing Costs Managers’ salaries in factory $ 400 Factory employ...
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This document was uploaded on 03/02/2014 for the course ACCOUNTING 221 at Alaska Pacific University.

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