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The owner of a small retail business asks, "Why do I need cost accountants? My CPA
produces financial statements, which are sufficient for me to discover my costs. Look at
my Income Statement. I expect sales to increase by 10% next year, so I am planning on a
10% increase in profits. I don't need a cost accountant to tell me that."
Income Statement for the Year
Ending December 31
Sales Revenue
$457,234
Cost of Goods Sold
296,348
Gross Margin
160,886
Selling Costs
(76,234)
Administrative Costs
(62,350)
Profit before Taxes
$22,302
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Compare financial accounting and cost accounting using the following concepts: users of
the information; important criteria; who establishes or defines the system; and how to
determine an accounting treatment.
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The Flamboyant Flirt is a small but prosperous hair cutting salon. Diane Stock, the
manager of the salon, has been asked by several clients if she will ever offer other "hair
related" services (e.g., perm, dye, etc). After careful thought, Ms. Stock is considering
expanding her offerings. However, in order to do so, she will have to hire one additional
stylist at a salary of $26,000 per year. Other expenses will increase as follows: rent by
20%, supplies and utilities by 25%, and miscellaneous expenses by 10%. Her revenues
from additional services are likely to be $55,000 for the next year (i.e., 2017). The
Flamboyant Flirt's income statement for the most recent year is presented below.
The Flamboyant Flirt
Income Statement for the Year Ended
December 2016
Sales Revenue
$220,000
Costs:
Labor
$52,000
Utilities
12,000
Supplies
45,000
Rent
18,000
Miscellaneous
5,000
Manager’s Salary
30,000
162,000
Operating Profits
$58,000
