Using the high-low method, the estimate of the fixed component of office expense per month is closest to: A. $6,692 B. $8,064 C. $7,376 D. $7,720
Review Questions M/C
A. $6,692
Review Questions M/C
Learning Objective 5
Prepare income statements for a merchandising company using the traditional and contribution formats.
Learning objective number 5 is to prepare income statements for a merchandising company using the traditional and contribution formats.
Contribution Approach Income Statement
The contribution approach income statement organizes costs by behavior, first deducting variable expenses to obtain contribution margin, and then deducting fixed expenses to obtain net operating income.
The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled.
The contribution margin is total sales revenue less total variable expenses.
The Traditional and Contribution Formats
Used primarily for external reporting.
Used primarily by management.
The contribution format allocates costs based on cost behavior. The contribution approach differs from the traditional approach illustrated in an earlier chapter.
The traditional approach organizes costs in a functional format. Costs relating to production, administration, and sales are grouped together without regard to their cost behavior.
The traditional approach is used primarily for external reporting purposes.
Uses of the Contribution Format
The contribution income statement format is used as an internal planning and decision-making tool. We will use this approach for:
Cost-volume-profit analysis