make it in APA standards and add references in the remaining two questions

Explain the main differences between the absorption and contribution (behavioral, variable) income statements. Will net income always be the same under the two approaches? If not, explain the difference.

Answer: The difference between absorption and contribution income statements is as follows:

a. Under absorption income statement the cost of direct material, direct labour, fixed manufacturing overhead and variable manufacturing overhead are included in the cost of per unit of inventory while in case of contribution income statement only direct material, direct labour and variable manufacturing overhead are included in cost of per unit of inventory.

b. Under absorption costing income statement the gross margin is calculated by deducting the cost of goods sold from sales while under contribution income statement we need to deduct the amount of variable expenses from the sales to arrive at the figure of contribution margin and then the amount of fixed expenses are deducted from the same to get the amount of sales.

c. Under absorption costing income statement the valuation of inventories are made at full costs while in case of contribution costing income statement the valuation is made at variable costs.

The amount of net income will be same in both the cases if production equals sales. If the amount of production is more than sales, then the amount of profit showed under absorption costing is more than contribution costing income statement because the valuation of closing stock is done at higher cost as compared to contribution costing.

•Comment specifically on why companies feel the need to create yet another income statement in a different format. What information can the company gleam from this approach which is helpful as a tool in the decision making process.

Answer: In business organizations different stakeholders require different information from the accounting statements. The managers require different information compared to the outside stakeholders. The managers find that the information provided by the income statement prepared in the traditional way using absorption costing and in accordance with the US generally accepted accounting standards does not meet their need as it does not provide all the information needed in decision making. The managers therefore find it necessary to prepare another income statement prepared in a different format that provides all information necessary for decision making. The income statement helps in analyzing individual products and services or a group of products and services and the information is used in decision making about the products or services (Williams, Susan, Mark & Joseph, 2008).

The traditional income statement format used in financial reporting does not breaks down the costs according to the functional areas such as cost of goods sold, administration and selling expenses. The format does not reveal the fixed and the variable costs. The behavior or contribution margin income statement is preferred by managers for decision making and planning purposes. In this format of income statement the costs are categorized according to their behavior which is either fixed or variable which can help in decision making. The management is able to know which cost change and which remain the same and plan accordingly on how to control the costs (Williams, Susan, Mark & Joseph, 2008).

Although the operating profit in both statements is the same, the organization of information in this statement differs from the normal approach. In contribution margin statement data is organized in such a way that the management can assess how a change in sales or production will affect profit which is helpful information in decision making. The contribution margin represents the revenue that is left after covering the variable costs of sales and it goes towards meeting fixed costs and profit. The information is very important in making projections and planning for different scenarios in relations to future sales (Williams, Susan, Mark & Joseph, 2008).

•Explain situations in which break-even analysis can be a useful tool. Provide a specific example.

Answer: Earning profit is the main objective of any business. Earning profit cannot be left on chance, rather it requires proper planning. For evaluating earning capacity of the business and for making plans, break even analysis is used by the financial manager. Under this analysis, revenues and costs of a firm in relation to sales volume are studied. In other words break even analysis is a costing technique that helps managers of the business in profit planning.

Break even analysis plays an important role in solving a number of managerial problems. In addition to these break even analysis may also be used advantageously in studies mentioned below:

1. Controlling the manufacturing, administrative, general and selling and distribution expenses.

2. Evaluating the promotional potentiality of a new project.

3. Forecasting the effect of price changes on the profit and break-even point.

4. Forecasting the effect of changes in wage rates on profit and break-even point.

5. Forecasting the effect of changes in the size of plant and procedure on profit and break-even point.

6. Forecasting the effect of changes in the sales channels and methods on profit and break- even point.

7. Examining the operating and financial leverage.

8. Comparing the profitability of two or more concerns.

9. Analysing the effects of taxation on profits.

10. Analysing the effect of operating organisation and building structure on the operational economies of the business.

For example:

The break-even analysis is a simple concept to comprehend and interpret the accounting data. Many business executives and others are unable to understand accounting data contained in financial statements and reports. When data is presented through break-even charts, it becomes very easy to grasp and interpret them. However the executives using break-even analysis should remember the limitations of this device and should not attach too much value to it.