Question

Consider the following income statements for Nero Company:

Income statement 1

Revenue = 1,800

Direct costs = (300)

Contribution margin = 1,500

Fixed costs = (500)

Operating income = 1,000

Income statement 2

Revenue = 1,400

Direct costs = (200)

Contribution margin = 1,200

Fixed costs = (300)

Operating income = 900

Income statement 3

Revenue = 2,000

Direct costs = (800)

Contribution margin = 1,200

Fixed costs = (400)

Operating income = 800

1. Identify which income statement is prepared using each of the following costing methods:

Absorption costing, Variable costing, and Throughput costing.

2. For each costing method, identify one assumption associated with its use
3. Explain why Nero Company might produce all three types of income statements for the same period.

Answer 1

(a) Income statement 1- variable costing

(b)Income statement 2- Throughput  costing

(c)Income statement 3 - Absorption costing

  in absorption costing product cost whether direct or indirect will be considered in variable cost and in throghput costin only direct material will be part of variable cost to achieve contribution margin.

(a)Absorption costing- fixed and variable selling and administrative cost are consdered in period cost not as variable cost.

Variable costing- vatiable cost per unit will remain the same and in totality it can be different and fixed cost will ramain the same in total and different per unit basis.

Throughput costing- All cost except material treated as fixed cost.

(b) Nero company might produce all three type of income statement for these reason-

Variable costing- It helps for flexible budgeting ,cvp analysis and effect of fixed cost on profit

Absorption costing- it identifies all cost of production and provides actual tracking of profit.

Throughput costing-it helps to reduce opertion cost direct labour and direct overhead.

By applying these approaches nero company might produce income statemnets.