Cost Accounting: Profit and Loss Calculation
Learn how companies use cost information to calculate profit and assess profitability. Understand absorption costing, variable costing, and different income statement structures. Discover the advantages and disadvantages of each method.
Companies do not only need to know the costs of different products, but they also need to know whether they gain a profit or realize a loss. We explain how companies use cost information to calculate their profit and assess their profitability. Depending on how companies account for changes in inventories, we distinguish “absorption costing” and “variable costing”. In addition, some companies structure their income statement according to the “nature of expense method”, while others structure it according to the “cost-of-sales method”. We explain both methods and discuss their advantages and disadvantages.
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