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Flashcards in Chapter 6 Deck (13):

How would the INCOME STATEMENT AND BALANCE SHEET of a merchandising company be different from a Service Manufacturing Compan

  • In a merchandising company’s income statement, the only difference would be in the computation of cost of goods sold.
    • Beginning and ending finished goods would be replaced by beginning and ending merchandise inventory,
    • and cost of goods manufactured would be replaced by purchases.
  • In a merchandising company’s balance sheet, there would be one inventory account (merchandise inventory) instead of three.


Buchungssatz für

Work Completed in a Service Company

Cost of Completed Work 

      Work In Process 


  • Wenn die Arbeit Fertiggestellt, dann automatisch Performance obligation satisfied -> Revenue and Expense Recognition 


Sales Mix

  • is the relativ percentage in which a company sells its products 


What is the effect on Net Income under  HIGHER CONTRIBUTION MARGIN

  • Net Income will be GREATER if units are sold with a HIGHER CONTRIBUTION MARGIN, rather than under a lower contribution Margin 
  • We should shift from low-margin sales to high-margin sales


Cost Structure

  • Is the relative proportion of fixed verus variable costs that a comapny incurs 
  • May have a SIGNIFICANT effect on profitability 


What is the effect on the Contribution Margin under Higher Variable Cost 

and WHAT are the consequences 

  • Smaller Contribution Margin 



  • Smaller Operating Leverage 
  • The contribution to Net Income is smaller 
  • Hence Is not as sensitive to changes in sales 
  • LOWER Break-Even-Sales are required 


What is riskier GREATER or SMALLER Break-Even-Sales

  • Greater Break Even Sales is riskier, because the company needs to generate MORE SALES in order to reach Break Even 


Operating Leverage

  • Extend that net income reacts to a given change in sales 
  • HIGHER fixed Cost relative to variable cost cause a company to have HIGHER OPERATING LEVERAGE 


What are the consequences of a HIGH OPERATING LEVERAGE


  • When Sales revenue are increasing, high operating leverage means that profit will increase rapidly 
  • ACHTUNG: When Sales revenue are declining, too much operating leverage can have devasting consequences


Degree of Operating Leverage

and Formula

  • Provides a measure of a companys earnings volatility 


Variable Costing 

Period or Product Cost??

Fixed Manufactoring Overhead: ??

Fixed Admin/Selling Expense: ??

Fixed Manufactoring Overhead: PERIOD COST

Fixed Admin/Selling Expense: PERIOD COST


Absorption Costing 

Period or Product Cost??

Fixed Manufactoring Overhead: ??

Fixed Admin/Selling Expense: ??

Fixed Manufactoring Overhead: PRODUCT COST

Fixed Admin/Selling Expense: PERIOD COST


What are Advantages of Variable Costing 

  • Net Income is unaffected by changes in production level 


Absorption Costing will show a HIGHER NET INCOME than variable costing whenever Units Produced Exceeds Units sold !!!!

  • Weil, Fixed Manufactoring Overhead unter Absoroption Costing nur anfallen wenn die Produkte Verkauft werden. Bei Variable Costing werden die Fixed Manu Overhead direkt als Aufwand verbucht und fallen somit aufjedenfall an.