INTRODUCTION TO Management Accounting Horngren Sundem Burgst

INTRODUCTION TO Management Accounting Horngren Sundem Burgstahler Schatzberg

Solution

Chee Wong will find the contribution income statement most useful when making decisions as a sales manager. This is because in a contribution income statement Wong will be able to see how much revenue from juice cocktails are contributing to its fixed costs and net income. As a sales manager Wong will be more interested in ratios like contribution margin ratio, break even analysis, etc.

On the other hand absorption costing will not be useful for Wong because he, as a salesman, will not be interested in separating product costs from period costs. Under the income statement prepared under the absorption costing method both variable and fixed manufacturing costs are included in the costs of goods sold.

Chee Wong will be more concerned, as a sales manager, with variable costing. It is the contribution income statement that uses variable costing. Hence this type of income statement will be more useful for Wong when analyzing the performance of an individual product (in this case the line of juice cocktails).