Problem: Write up to 3 paragraphs that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas:
Following your interviews, which you passed with flying colors, you were offered a position and accepted the offer as the management accountant for this medium-sized manufacturing company. You are going through the annual budgeting process at this firm for the first time.
The CEO has told you that the year after year, the company never seems to achieve its budgeted profits, even thoug volumes are higher than planned. After reviewing some of the prior accountant's work, you are not sure that the proper attention was paid to classifying costs as fixed, variable, or mixed. As you approach the annual product costing and budget setting process, you feel the management team would benefit if it had a good understanding of the importance of properly classifying costs as to being fixed, variable, or mixed.
Discuss the following points at the management meeting before the whole budgeting process is reviewed:
- Why it is important to properly classify costs as to being fixed, variable, or mixed?
- How, if this is done, can the contribution format income statement be used to make budgeting easier for future periods?
- Why it is important to properly classify costs as to product costs vs. period costs?