Cost Behaviour and Income Statements
Absorption
Income Statement
Sales
Cost of Goods Sold:
Direct material
Direct labour
Factory overhead
$20,000
$7,000
4,000
4,000
Gross margin
Selling expenses
3,000
Administrative
expenses
1,000
Total selling &
administrative expenses
Operating Income
© 1999 Prentice-Hall Canada Inc.
Contribution
Income Statement
15,000
5,000
4,000
$1,000
Sales
Variable expenses:
Direct material
Direct labour
Variable overhead
Variable selling
Variable administrative
Total variable expenses
Contribution margin
Fixed expenses:
Manufacturing
Selling
Administrative
Total fixed expenses
Operating Income
$20,000
$7,000
4,000
1,000
1,000
100
13,100
6,900
$3,000
2,000
900
5,900
$1,000
Slide 22
Cost Flows: Absorption Costing
Costs to Account For
Direct material
Direct labour
Variable manufacturing
overhead
Fixed manufacturing
overhead
All selling &
administrative costs
© 1999 Prentice-Hall Canada Inc.
Inventoried Costs
on Balance Sheet
Initially
applied
to
inventory
as
unexpired
costs
Expires
immediately
As goods
are sold
Expense on
Income Statement
Become
expenses
when inventory
is sold
Become
expenses
immediately
Slide 23
Cost Flows: Variable Costing
Costs to Account For
Direct material
Direct labour
Variable manufacturing
overhead
Inventoried Costs
on Balance Sheet
Initially
applied to
inventory as
unexpired
costs
Expense on
Income Statement
As goods
are sold
Fixed manufacturing
overhead
All selling &
administrative costs
© 1999 Prentice-Hall Canada Inc.
Expires
immediately
Become
expenses
when inventory
is sold
Become
expenses
immediately
Slide 24
New Topic: Cash vs Accrual Basis
Cash Basis
Accrual Basis
Revenue (=cash receipts)
Less Expenses ( = cash payments)
Net Income
Revenue (= when earned)
Less Expenses ( = when incurred)
Net Income
Used by many small retailers, and
other small businesses that don’t
report to external users.
Required for GAAP
Can be misleading… examples:
• Net Income in the period may be
higher because the customer paid in
advance for services
“Revenue Recognition” principle
•
Record revenue when it is earned
“Matching” principle
•
Record expenses in the same
period as the revenue they helped earn.
•Net Income may be lower because
the company paid Sept. utility bill in
Oct.
© 1999 Prentice-Hall Canada Inc.
Slide 25
Apple's 2009 earnings up nearly 44%
under new accounting rules – analyst
• Previously, “any product that offered free upgrades to
software and services installed on a device like an
iPhone required subscription accounting (revenue
deferred over 8 quarters in the case of the iPhone
and Apple TV)”.
• Apple was spreading the revenue over a two year
period in equal chunks.
•
Source: http://brainstormtech.blogs.fortune.cnn.com/2009/09/24/apples-2009-earnings-upnearly-44-under-new-accounting-rules-analyst/
© 1999 Prentice-Hall Canada Inc.
Slide 26
Apple's 2009 earnings up nearly 44%
under new accounting rules – analyst
• Most “of the value of the device was realized at the
time of purchase… we believe about 90% of the
value of an iPhone is realized at the time of
purchase”.
• Old GAAP rules said Apple was only allowed to
recognize 12.5% (1/8th) of the revenue from each
sale at the time of purchase
• New GAAP rules say the percentage will be decided
on a case-by-case basis for each given product – but
substantially more of the revenue will be recorded at
the time of sale.
© 1999 Prentice-Hall Canada Inc.
Slide 27