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Alternative Income Statements and Decision Making

Question 1:
What are some examples of how alternative income statements are used in decision making? What are the two types of approaches in using alternative income statements? What is cost behavior and how does it impact a financial analysis? What processes does your company or a previous employer use to analyze cost behavior?

Question 2:
The cost structure of an organization is its mix of fixed and variable costs. How can CVP analysis be used to evaluate decisions that affect the cost structure of an organization? In your organization, does management lean toward choosing fixed or variable costs when considering change? Why?

Solution Preview

Please see my thoughts below. You may use these to make your own response.

Question 1:
What are some examples of how alternative income statements are used in decision making? What are the two types of approaches in using alternative income statements? What is cost behavior and how does it impact a financial analysis? What processes does your company or a previous employer use to analyze cost behavior?

There are two types of income statements - The absorption costing format and the second one the variable costing format. The variable costing income statement is more amenable to decision making since it lists the costs by cost behavior and so we can know how the costs change as we change the decision variables. This is not possible in the absorption costing income statement since that lists costs by function and so it is not easy to understand cost changes.

Cost behavior relates to how the costs change as the level of activity changes. Costs which remain fixed at ...

Solution Summary

This solution assists with alternative income statement and decision making problems attached.

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