ACC501 CASE MOD Subject: Income Statement Assessment

Module 1 – Case Accounting Cost Systems and Cost Behavior
Student’s Name
ACC 501
Trident University International
Date
Memo
To: Owner
From:
Date: July 8, 2019
Subject: Income Statement Assessment
Introduction
To determine the cost behavior, it is necessary to understand how costs change depending on the level of activity and the cost objectives. In a cost management system based on functions, the segmented income statements are useful to determine. Businesses are expected to record and report business operations for each class and segment and in this case A, B, C, D and E. An in-depth review of the fixed, variable costs and segmental reporting helps to determine how the cost behavior affects the five business segments. For an organization that have diversified operations different business activities has different revenues, profits or losses, and the five business segments exhibit these differences in terms of sales revenue and profitability.
Segmented Income Statements
When preparing segmented income statements, the contribution format is the preferred option since the fixed and variable costs are separated. This is important to determine a contribution margin, which is the selling price per unit less the variable cost per unit. The contribution margin is useful when making managerial decisions and to calculate the segment margins it is necessary to separate the traceable fixed costs from the common fixed costs (Booker, Caldwell & Galbreath, 2010). Direct costs are traceable to the cost objects, unlike the indirect costs, and the allocation of costs when recording the indirect costs is important to determine what the costs allocated to the different segments.
Changes in sales units and prices in business segments
Since there are different risks and growth prospects for the five segments, this affects the profits differently when the sales price and sales in units change. Segment information is useful since internal stakeholders and investors can evaluate the success of different segments. In the first income statement the total sales is $ 80,000 with segment E with the highest sales revenue at $ 24,000 and the cost of goods sold based on purchases is $ 27,000. The sales, cost of goods sold and variable operating expenses change, but the fixed costs remain the same at $ 20,000 The net profits are $23,550, $61,270 and $63,550 respectively for the original statement, 90% of purchases and 50% sales price increase, while the sales revenues are $80,000, $147,060 and $120,000.
Recommendation
For the business owner, evaluating the profit potential business requires understanding how costs behave, as well as the influence of change in sales prices and units. Price is one of the factors influencing demand, and there is a need to determine the factors that influence the profit potential for the different business segments...