Complete Research & Application 5-34 page 207 of Managerial Accounting for Managers. The questions in this exercise are based on the Benetton Group, a company headquartered in Italy and known in the United States primarily for one of its brands of fashion apparel? United Colors of Benetton. To answer the questions, you will need to download the Benetton Group’s 2004 Annual Report at: http://media.corporate-ir.net/media_files/irol/11/114079/reports/2004ar.pdf
You do not need to print this document to answer the questions.
1. How do the formats of the income statements shown on pages 33 and 50 of Benetton’s annual report differ from one another (disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33?
Absorption is a method where all the costs of production are allocated to the produced units. This method is in contrast to variable (or marginal or direct) costing, which attaches only variable costs to the manufactured output and charges the fixed costs to the accounting period (referenceforbusiness.com, n.d.). The page 50 income statement uses the absorption format. The page 33 income statement is set using a contribution format. The contribution format centers on the idea that each unit sold provides a certain amount of contribution margin that goes to covering fixed costs. In 2004 expenses like distribution and transport (29,988) and the sales commissions (73,573) have been reclassified (contribution format) as variable selling costs on page 33 ().
2. Why do you think cost of sales is included in the computation of contribution margin on page 33?
Benetton’s cost of sales includes some fixed expenses but most of the expenses Benetton incurs are variable. The cost of sales is included in the computation
References: Absorption Accounting. (n.d.). Reference For Business - Encyclopedia of Small Business, Business Biographies, Business Plans, and Encyclopedia of American Industries. Retrieved November 9, 2009, from http://www.referenceforbusiness.com/encyclopedia/A-Ar/Absorption-Accounting.html