Question

1. The Income Statement that cannot be used most easily with break-even analysis and other cost-volume-profit techniques is the: A. Contribution Margin Approach B. Traditional Approach C. Variable Costing D. All of these E. None of these 2. Which of the following statements concerning standards is correct? A. Standards cannot be used for product costing and cash budgeting. B. Standards should not be attainable by the average worker. C. Variances are likely when compared to actual results. D. All of the above. E. None of these

Answer 1

1 (B) Traditional Approach Generally accepted accounting principles require that traditional approach (absorption costing) be used for the costing of inventory for external reporting purposes. net income calculated using traditional approach or absorption costing does not highlight differences between variable and fixed costs and may lead to poor business decisions. The contribution margin or variable costing format allows stakeholders to determine the breakeven point of individual products or product categories. The breakeven point is the sales level at which the company covers its fixed expenses and begins to make a profit. 2 (C) Variances are likely when compared to actual results Variance analysis would help to understand the reasons behind the variances between planned and actual revenue/cost which could lead to adjustments in the business strategies and end objectives. Moreover, comparing budget with actual results may point out the requirement for re-evaluating the target customer base on product line of the company.