Measurement and Decision Making
A. If Patty wants to show the bank the maximum profit over the previous 2-year period, which costing method should she present?
Patty should present the variable costing method because it keeps variable and fixed cost separate. The variable cost is part of the determination of cost of sales and contribution margin.(Blocher, 2013) If Patty wants to show maximum profit for the two years then she should chose the marginal costing because it ignores manufacturing overhead. Full costing will demand complete financials including taxable income.
B. But, the bank requires that all financial statements conform to Generally Accepted Accounting Principles (GAAP). Based on that requirement, which costing method should she present?
Here the full costing method is best. Full costing, this costing system is necessary in financial reporting standards (GAAP) and is the only method accepted by Internal Revenue to determine taxable income. GAAP requires absorption costing for financial statements because this cost system shows manufacturing overhead as assets and shows value of the financial statements. Full costing is most acceptable for financial reporting because it determines cost of goods sold and matches it with the full cost the product.
C. The bank has delivered a memo in preparation for the meeting to negotiate the Credit Line; the memo states that they will expect a significant Net Income. Based on your responses to parts A and B, what are the legal and ethical issues facing Stacy Lynn?
The ethical issue is what model of reporting is Stacy willing to use to show the better picture. Marginal costing will not show overhead which means it does not show a complete picture. This appears to be a legal picture. Full costing accounting must be used because Banks follow the regulations of the federal government and follow GAAP rules. This will tell the bank whether Patty should receive a high line of credit or low according to profits.
Reference:
References
Patty should present the variable costing method because it keeps variable and fixed cost separate. The variable cost is part of the determination of cost of sales and contribution margin.(Blocher, 2013) If Patty wants to show maximum profit for the two years then she should chose the marginal costing because it ignores manufacturing overhead. Full costing will demand complete financials including taxable income.
B. But, the bank requires that all financial statements conform to Generally Accepted Accounting Principles (GAAP). Based on that requirement, which costing method should she present?
Here the full costing method is best. Full costing, this costing system is necessary in financial reporting standards (GAAP) and is the only method accepted by Internal Revenue to determine taxable income. GAAP requires absorption costing for financial statements because this cost system shows manufacturing overhead as assets and shows value of the financial statements. Full costing is most acceptable for financial reporting because it determines cost of goods sold and matches it with the full cost the product.
C. The bank has delivered a memo in preparation for the meeting to negotiate the Credit Line; the memo states that they will expect a significant Net Income. Based on your responses to parts A and B, what are the legal and ethical issues facing Stacy Lynn?
The ethical issue is what model of reporting is Stacy willing to use to show the better picture. Marginal costing will not show overhead which means it does not show a complete picture. This appears to be a legal picture. Full costing accounting must be used because Banks follow the regulations of the federal government and follow GAAP rules. This will tell the bank whether Patty should receive a high line of credit or low according to profits.
Reference:
References
References: Blocher, E. J., Stout, D. E., Juras, P. E., & Cokins, G. (2013). Cost management: A strategic emphasis (6th Ed.). [E-textbooks] http://dx.doi.org/978-0-07-802553-2