Companies do not only need to know the costs of different products, but they also need to know whether they gain a profit or realize a loss. We explain how companies use cost information to calculate their profit and assess their profitability. Depending on how companies account for changes in inventories, we distinguish "absorption costing" and "variable costing".
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In addition, some companies structure their income statement according to the "nature of expense method", while others structure it according to the "cost-of-sales method". We explain both methods and discuss their advantages and disadvantages.
Course 2 of 3 in the Cost Accounting Specialization.
What You Will Learn
- You will learn different methods of preparing an income statement.
- You will learn to explain why different methods yield different profit numbers.
- You will learn to choose the best-suited method for your decision situation.
Syllabus
WEEK 1
Methods for preparing an income statement
Companies do not only need to know costs of different products, but they also need to know their operating income - did we make a profit or did we face a loss? To calculate the operating income, companies prepare an income statement that compares total revenues and total costs. In this module, we show you how companies prepare income statements to link costs and revenues and to assess the company’s profitability.
WEEK 2
Absorption and variable costing
Depending on how companies account for changes in inventories, we distinguish "absorption costing" and "variable costing". In addition, some companies structure their income statement according to the "nature of expense method", while others structure it according to the "cost-of-sales method". We explain both methods and discuss their advantages and disadvantages.
WEEK 3
Contribution-margin accounting
Many companies use contribution margin accounting to measure success instead of the income-statement formats. Contribution margin accounting is a special income-statement format that displays variable and fixed costs separately. In this module, we discuss the advantages of contribution margin accounting over traditional income statements. Further, we outline the differences of simple contribution margin accounting and multi-leveled contribution margin accounting.
