1 answer

Correct reporting of these costs are important as many investors look at a company's gross profit...

Question:

Correct reporting of these costs are important as many investors look at a companys gross profit or gross profit percentage
Correct reporting of these costs are important as many investors look at a company's gross profit or gross profit percentage to determine the value of the company. Net sales revenue X,XXX Cost of goods sold X,XXX Gross profit XXXX Gross profit % = Sales/Gross Profit If cost were incorrectly classified as period costs versus product cost, net income would not change but gross profit would be higher than if the allocation were correct. Do you think this cost classification is important? How might you see a problem if you were auditing the company's financial statements? (Think about some of the ratios/analysis from chapter 14.)

Answers

Cost classification is very in cost accounting -

1. Helps in decision making - classifying cost into fixed and variable helps to decide to buy or make a product.

2. Deciding selling price - Total of fixed and variable cost helps management identifying the selling price of the product.

3. Cost control - Classification helps in controlling the cost like fixed cost is something is heavy and occurs only once at the time of purchasing it remains fixed irrespective of level of production.

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