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another corporation. He remarked, “I enjoy challenges. Now that Brassinni Company is in the black, I’d prefer tackling another challenging situation.” (His contract with his new employer is similar to the one he had with Brassinni Company.)
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BRASSINNI COMPANYVariable Costing Income StatementYear ending December 31, 2011Sales (10 million units @ $6)$60,000,000____________________:________________________________________________________________________________Less: Ending Inventory:_________________________________________Variable Cost of Goods Sold20,000,000Contribution Margin$_________Less: Fixed Costs:________________________________________Marketing & Admin. Costs10,000,000Total Fixed Costs:_________Operating Profit (Loss) before Bonus__________Less: Bonus__________Operating Profit (Loss) after Bonus___________
Cost Accounting 201Variable Costing•Basic Premise of Variable Costing: FFOH (Capacity Costs) are costs of “being in business.”•Therefore, FFOH should be treated as a Period Cost, rather than a Product Cost (as required by GAAP and Absorption Costing).
Cost Accounting 201Variable Costing, Continued•Products inventoried using variable production costs only (direct material, direct labor, and variable factory overhead).•Income Statement Format: Contribution Margin Format.
The Brassinni CompanyVariable Costing Income StatementYear ending December 31, 2011Sales (10 million units @ 6$)$60,000,000Variable Cost of Goods Sold:Variable (30 mil @ 2$)$60,000,000Variable Cost of Goods Mf’d $60,000,000Less: Ending Inventory:Variable Costs (20 mil x $2) $40,000,000Variable Cost of Goods Sold20,000,000Contribution Margin$40,000,000
The Brassinni CompanyVariable Costing Income Statement, ContinuedYear ending December 31, 2011Contribution Margin$40,000,000Less: Fixed Costs:Fixed Factory Overhead$48,000,000 Marketing & Admin. Costs10,000,000Total Fixed Costs:58,000,000Operating Profit (Loss) before Bonus ($18,000,000)Less: Bonus1,400,000Operating Profit (Loss) after Bonus($19,400,000)
The Brassinni Company, SummaryTotal impact of actions by President of Brassinni Company on:Reported Net Income:__________________________________________________________________________________________Cash Flow:____________________________________________________________________________________________________________________________________________________________________________________
Absorption Costing•Income is a function of–______________________________–______________________________•Income can be manipulated by _______________________________________________.•Phantom Profits are created.•Cash Flow is destroyed!
Variable Costing•Income is a function of ______________ only.•Managers cannot ____________ with production.•Is consistent with Cost-Volume-Profit Analysis.•Contribution Margin Format for Income Statement.•CM is a concrete measure, whereas Gross Margin is a “moving target.”•Simplicity.
Income measurement differences:1.If P > S, NIABS____ NIVAR2.If P < S, NIABS____ NIVAR3.If P = S, NIABS____ NIVAR4.In the long run, NIABS______ NIVAR
I REPEAT:The GAAP answer to the “Cost Question” is, in many if not most cases, the WRONG answer, when it comes to decision making.
“Respect” and The Accounting Profession TodayRespondents to the 2011 Fifth Annual Global Leadership Survey conducted by the International Federation of Accountants (IFAC) rated the Accountancy Profession “7” on a 1-10 scale.
“Respect” and The Accounting Profession Today, ContinuedAccountants in North America received the highest rating (8.7 on a 1-10 scale).