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Financial Statements Lester M. Legette Trident University International

ACC501- Accounting for Decision Making Dr. Ralph Wayne Ezelle 20 February 2012

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Did Roland improve his performance for the second quarter? Indicate the information you used for your assessment. Absorption IS According to the Absorption income statement, Rolands numbers did improve for the second quarter. Although the Absorption IS is not a good tool to determine internal financial reporting we cannot truly gauge how well he did under the absorption IS. Information used for this assessment is the increase in Gross profit, and Net income. It also shows that Roland was able to turn a profit while decreasing the amount of money it take to produce each unit by $2.48. Contribution IS Analyzing the Contribution IS, Rolands performance did not improve, it stayed the same. Information used in this assessment was the fact that although the sales increased the Net income stayed the same. In the end these numbers cant truly measure Roland performance so we can not accurately say that his performance was better or worst. Can you make any suggestions for reporting in the future? I would suggest that reports be presented based on the result of the quarter operation on the contribution to the recovery of fixed cost. In my opinion the contribution margin IS would be a better IS to use. Do you think Roland should be seriously considered for the CEO position? Why or why not. I dont think that Roland should be considered as a CEO, for the simple reason that he has not learned from lessoned past. Roland is willing to take a big risk by doubling the sales

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forecast that he originally budgeted for. By doing this he is putting a big strain on the company by putting them at total capacity for the quarter. Roland actions are immature, and will in the long run get him into trouble that will force him into accounting irregularities.
Discuss three shortcomings of the absorption approach for internal decision-

making. Absorption costing is generally used for external financial reports and variable costing is preferred by managers for internal decision making and must be used when an income statement is prepared in the contribution margin format. Ordinarily these two costing systems produce different figures for net operating income and difference can be quite large. (accountingformanagement, n.d.). Below is a list of three shortcomings of the Absorption Income Statement. One of the main shortcomings of the Absorption Income Statement is the fact that it is not a useful mechanism for management to make decisions, plans, or controls. (Bass, 2011). Another shortcoming with the absorption costing approach essentially assumes that the consumers need the forecasted sales and will pay whatever price the company decides to charge. However, customers have a choice. If the price is too high, they can buy from a competitor or they may choose not to buy at all. (accountingformanagement, n.d.). Further, absorption costing is dependent on the levels of output which may vary from period to period, and consequently cost per unit changes due to the existence of fixed overhead. Unless fixed overhead rate is based on normal capacity, such changed costs are not helpful for the purposes of comparison and control. (accountingformanagement, n.d.).

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References http://www.ehow.com/info_10002756_difference-between-absorption-variable-costingincome-statements.html http://www.accountingformanagement.com/absorption_costing_approach_cost_plus_pric ing.htm