Question

Accounting : Please explain briefly

1.Explain the difference in cost breakdown between a traditional format income statement and a contribution format income statement? What benefit do you see in using one over the other? Which format is required by GAAP?

2..What are the difference between traditional income statement and contribution income statement?

3.compare direct cost and indirect cost

4.what is the significance of balance sheet?

please answer all of them.

Answer 1

1. a). Difference in cost breakdown between a Traditional format Income Statement and a Contribution format Income Statement:

The Cost breakdown for Traditional Income Statement is based on Cost of Products ( Cost of Goods Sold) where as Contribution Income Statement is based on Cost Behaviour ( where we can breakdown the cost into Variable cost or Fixed Cost)

Thus we can say that the Traditional format of Income Statement does not focus on Cost Behaviour but Contribution format of Income Statement does.

1. b). Benefit in using one over the other:

The Traditional Income Statement shows the Gross Profit, Operating Profit and Pre Tax and After Tax Net income for an Accounting Period. GAAP required Companies to follow Traditional Income Statement for external reporting. But Contribution format provides Stake Holders to detertmine the Break Even Point of Individual Product or Product Categories.

Hence, the Contribution Income Statement helps companies in Decision Making for their business and products. Contribution Income Statement mainly used in Manufacturing Companies.

1. c). Format required by GAAP:

GAAP requires Companies to follow Traditional format of Income Statement for external reporting.

2. Difference between traditional income statement and contribution income statement:

Traditional Income Statement	Contribution Income Statement
1. Required by GAAP	1. Not required by GAAP
2. Used for External Purpose	2. Used for Internal Management purpose
3. Variable/Fixed Costs are part of Inventory Cost	3. Variable/Fixed Costs are part of Overhead Cost
4. Provides different view of Profit (Gross Profit, net profit, profit before tax and after tax etc) for the period.	4. Provides way to arrive at Break Even Point of sale and helps in decision making.
5. Organises costs into Cost of Goods Sold and Selling and Administrative Expenses	5. Organises costs into Variable and Fixed Cost

3. Direct Cost and Indirect Cost:

Direct Cost: Direct Costs are Expenses that a Company can easily connect to a specific cost object which may be a Product, Department or Project and which can also include Raw materials, Labour Etc.

Total of all Direct Cost called as Prime Cost.

E.g., Raw Material, wages, Provident Fund, Gratuity, Job processing charges etc.

Indirect Cost: Indirect Costs are costs which can not be accurately attributed to specific Cost Object. They are typically benefit multiple Cost Object and it is impracticable to accurately trace them to individual Products, Activities or Departments etc.

Total of all Indirect Costs are called as Overheads.

E.g., Lubricants, Salary to the Management, Rent, taxes etc.

4. The significance of Balance Sheet:

The Balance Sheet is one of the four primary Financial Statements that companies must publish every month/quarter/year.

As the Balance Sheet provides the firm's Financial Position, a Company Balance Sheet also knows as " Statement of Financial Position".

A Balance Sheet is one of the several major financial statements we can use to track spending and earnings.

A Balance Sheet shows what our company owns and what it owes through the date listed.

Balance Sheet reveals the firm's Asset, Liabilities and Owner's Equity.

Balance Sheet helps their current and potential investors better understand where their funding will go and what they can expect to recieve in the future.