Company 1Company #1Income StatementBalance SheetAll numbers in tho

Company 1Company #1Income StatementBalance SheetAll
numbers in thousandsAll numbers in
thousandsRevenue20182017Period Ending20182017Total
Revenue14,134,73212,866,757Current AssetsCost of
Revenue9,510,2388,668,505Cash And Cash
Equivalents1,290,2941,111,599Gross
Profit4,624,4944,198,252Short Term Investments512-Operating
ExpensesNet Receivables87,86875,154Selling General and
Administrative2,576,0982,395,608Inventory1,641,7351,512,886
Total Operating Expenses12,086,33611,064,113Other Current
Assets11,84713,642Operating Income or
Loss2,048,3961,802,644Total Current
Assets3,151,1572,813,049Income from Continuing
OperationsLong Term Investments7121,288Total Other
Income/Expenses Net-7,676-16,488Property Plant and
Equipment2,382,4642,328,048Earnings Before Interest and
Taxes2,048,3961,802,644Other Assets187,718166,966Interest
Expense-18,847-19,569Deferred Long Term Asset Charges--
Income Before Tax2,040,7201,786,156Total
Assets5,722,0515,309,351Income Tax
Expense677,967668,502Current LiabilitiesNet
Income1,362,7531,117,654Accounts
Payable1,059,8441,021,735Short/Current Long Term
Debt84,973-Other Current Liabilities9,90224,559Total Current
Liabilities1,926,4021,752,506Long Term
Debt311,994396,493Other Liabilities434,347412,335Total
Liabilities2,672,7432,561,334Stockholders' EquityPreferred
Stock--Common Stock3,7963,919Retained
Earnings2,071,4001,801,138Treasury Stock-318,252-
272,755Capital Surplus1,292,3911,215,806Total Stockholder
Equity3,049,3082,748,017Net Tangible
Assets3,049,3082,748,017

Profit11,141,75710,362,497Short Term Investments-
506,165Operating ExpensesNet
Receivables860,000327,166Selling General and
Assets-12,217Operating Income or
OperationsLong Term Investments--Total Other
Taxes4,218,1933,987,426Goodwill97,600100,069Interest
Expense-8,860-64,295Intangible Assets-144,900Income Before
Tax4,173,2113,856,588Other Assets504,000321,266Income Tax
Expense1,113,4131,248,640Deferred Long Term Asset Charges-
6,558Net Income3,059,7982,607,948Total
Assets14,326,00014,058,015Current LiabilitiesAccounts
Payable2,644,1002,488,373Short/Current Long Term Debt--
Other Current Liabilities-1,429,136Total Current
Debt2,233,6002,230,607Other
Liabilities1,512,5001,331,645Total
Stock--Common Stock5,048,600628,009Retained Earnings-
4,962,159Treasury Stock--441,859Capital Surplus--Other
Stockholder Equity--441,859Total Stockholder
Assets4,951,0004,903,340
Costing Methods
Production costing methods not only impact the actual cost
assigned to a product but can also have effects on how

inventory is valued, how transfer pricing is determined as well
as tax implications. Let’s examine these issues:Transfer Prices
and Taxes
PRICES AND TAXES
Transfer price is simply what one related entity charges another
for a product. In other words what on division of a company
charges another division for a product. While these types of
transactions are eliminated during the consolidation process in
preparing the audited financial statements, so they have no
impact, there can still be tax consequences particular in
multinational companies. Tax rates can vary from Country to
Country so that these multinational companies have an incentive
to show their profits in the Country with the lowest tax rate.
TAX RATE EXAMPLES
For example, Corporation A has two divisions, Division B and
Division C. The tax rate in the Country where Division B is
located is 25% and the tax rate where Division C is located is
50%. For simplicity sake, let's assume Corporation A makes and
sells widgets and there are no laws or restrictions on transfer
pricing. The selling price is $1,000 and the cost to make a
widget is $600. Therefore the company makes a profit of $400
per widget. Widgets are produced in Division B and in sold by
Division C and sold in the Country that division C is located.
PROFITS AND TAXES
If Division C "buys" the widgets from Division B for $900.
Division B then sells them for $1,000 and reports a profit of
$100 ($1,000 - $900) and pays tax of $50 ($100 x 50%).
Division B reports a profit of $300 ($900 - $600) and pays tax
of $75 ($300 x 25%). So the total tax paid in this example is
$125 ($50 + $75) which is well below the $200 ($400 x 50%)
they would have had to pay if the entire transaction would have
taken place in Division C's home Country. For the Corporation
in total there is no difference in the total amount of profit, just

the amount of tax paid.
The above example is for illustrative purposes of how taxes
could be manipulated by a multinational corporation and does
not reflect reality. In the United States, the IRS takes a close
look at transfer pricing policies in multinational corporations.
Sec. 482 of the US Tax Code gives the IRS the authority to
adjust taxable income between two related divisions to more
accurately reflect the income earned by each division. The IRS
will apply their standard to determine the true taxable income of
a controlled division. Their standard basically tries to determine
the transfer price of an open market transaction of unrelated
companies.Inventory Costing
The method in which inventory is costed affects how a
production company’s inventoried is valued. Most companies
use one of the following inventory costing methods:
1. First-In First-Out (FIFO)
2. Last-In First-Out (LIFO)
3. Weighted Average
4. Specific Identification
These inventory costing methods determine the how the
inventory is valued each time new inventory is added or taken
out of the inventory pool. Production companies maintain three
inventory accounts (pools): raw materials, work in process and
finished goods. Costs will flow through these inventory
accounts until the product is sold. The costs are then transferred
from the balance sheet (credit to finished goods inventory) to
the income statement (debit cost of goods sold) to match
expenses with revenues (matching principle).
First-In First-Out moves the oldest cost of inventory from one
inventory account to the next or to cost of goods sold in the
case of finished goods. This is the most common method used.

Last-In First-Out moves the newest cost of inventory from one
inventory account to the next or to cost of goods sold in the
case of finished goods.
Average or Weighted Average essentially establishes a new
average cost after every purchase. It is this average cost that is
used when items are removed from inventory.
Specific Identification assigns each inventory item a specific
cost and when it is sold or used in production, the specific cost
of the item is moved to the next inventory account or cost of
goods sold, as appropriate. This method is used if you are
producing items that are individually produced and they are
expensive.
Why is Cost Accounting Important?
Any company that is required to have their financial statements
audited by an independent accountant must comply with
Generally Accepted Accounting Principles (GAAP) (IFRS
outside of the US). This means that that ALL product costs will
appear on the inventory line on the balance sheet until the
product is actually sold and then transferred to the income
statement as cost of goods sold to match expenses with
revenues.
Overview of Product Costing Methods
Companies will use one or more product costing method to
assign the appropriate costs to a manufactured product.
Regardless of the method that is used, the goal is the same: To
assign the appropriate amount of cost to a product using the best
product costing method for that particular production and
decision-making environment. There can be a substantial
difference in cost depending on the method used, so
management must be careful when choosing a method and what
its intended use is. For example, a costing method intended for
incremental analysis may not be appropriate for long-term

decision making. In addition, there are only certain methods
that are approved to use in financial statement preparation.
Deciding on the Method of Costing
Choosing the best method really depends on the decision
environment and whether the cost information is for external or
internal reporting.
External Reporting:
· Absorption Costing:
· GAAP
· Variable Costing:
· Not GAAP
· Throughput Costing:
· Not GAAP
Internal Reporting
· Absorption Costing
· Used to save costs
· Variable Costing
· Used to evaluate performance and for decision making
· Throughput Costing
· Used for short-term capacity decisions
Inventory Costs
· Direct materials
· Direct labor
· Variable overhead
· Fixed overhead
· Direct materials
· Direct labor
· Variable SG&A expenses*
· Throughput Costing
· Direct materials

Period Costs (expensed when occurred)
· SG&A expenses
· Fixed overhead
· Fixed SG&A expenses
· Throughput Costing:
· Direct labor
· Fixed overhead
· SG&A expenses
External reporting means that the costing information is going
to be used external to the company. Anytime financial
information is released to the public, it must comply with U. S.
GAAP. For external reporting, the only GAAP approved costing
method is called absorption costing. This costing method
requires that the product cost include ALL manufacturing costs.
This basically means that product costs may be incurred in one
period (when goods are produced) and recognized in another
(when goods are sold). All other costs (non-product) are
recognized when incurred and called period costs.
Internal reporting means that the costing information is only
going to be used within the company for decision-making
process. Internal reports do not have to comply with U. S.
GAAP and can be designed by management to suit the needs of
the organization. For internal reporting, absorption, variable
and throughput costing methods are often used.
Costing Methods
Absorption costing is where the product “absorbs” all
manufacturing costs, both fixed and variable. Manufacturing
costs are assigned to one of three inventory accounts (raw
materials, work in process, finished goods) prior to the sale, and
then transferred to the income statement (cost of goods sold)

upon sale to comply with the matching principle. All other
costs, typically selling and administrative costs, are expensed in
the period they are incurred and referred to as “period costs”
since they do not benefit any future period. Absorption costing
can be used for both internal and external reporting as it is the
only method that is GAAP approved. Some companies use
absorption costing for both internal and external reporting to
save time and money by using just one method.
Variable costing is where ALL costs are divided into fixed and
variable categories and only variable costs are inventoried.
Variable costing is often used by companies to hold production
managers accountable for only the costs that they have some
control over, applying the theory that a production manager
cannot change or effect a fixed cost. Variable costing is
typically used for short-term decision making. Keep in mind
that a company still needs to cover their full costs to stay in
business.
Throughput costing is where only direct materials are
inventoried. All other costs, direct labor, manufacturing
overhead and period costs are expensed as incurred. Throughput
costing is also used for short-term decisions. It can also be
useful in making special order type decisions where there is
extra factory capacity involved.
Costing methodologies can produce significant variations in
what we call total costs. Before a costing method is selected, we
must fully understand what the information is going to be used
for. Once we understand the use of the information, we can
select a method that best fits our needs under that circumstance.
Resource(s)
Wiley GAAP 2019 : Interpretation and Application of Generally
Accepted Accounting Principles
Overview of Costing

A company needs to know the total cost of a product in order to
determine if the product is profitable. Product costing also
allows management to accomplish this objective.
Determining the total cost of a product may seem fairly
straightforward, and to some extent it is. However, there are
certain types of costs that can complicate matters. For this
reason, a company needs to categorize costs to assist with
getting costs down to the product level. The two main cost
categories are direct and indirect costs.
Direct costs are those costs that are directly associated with a
product. They are costs than can be easily measured. Sub
categories of direct costs are direct materials and direct labor.
Direct materials are the raw materials used to produce a
product. We can measure how much was used in producing the
product. If we can measure how much was used, we can easily
determine the cost of the direct materials that were used in
production. Direct labor is the cost of the workers that directly
worked on the product. We can also measure how much time
they spent working on the product. If we can measure the time
they spent, then we can easily calculate how much the direct
labor costs were.
Indirect cost represents costs that were incurred in the
production process but are not easily traced to a specific
product. With direct materials and direct labor, we can see a
link between the cost and product. Indirect costs are not easily
measured at the product level, but we can intuitively see that
they are a necessary cost in the production. For example, a
factory supervisor may oversee the production process of many
products but they do not “touch” the individual product. We
cannot measure their time spent on individual products, just
their overall time on the process. However, these costs were
necessary in the production of the product. Most companies use
an allocation process to distribute the indirect costs, rather than

an exact measurement as with direct costs.
Most Common Production Costing Methods
Now that we understand the importance of product costing and a
few of the costing terms and categories, let’s look at two
common production costing methods: Job Costing and Process
Costing.
Job Costing
Job costing is most often used when the units of production are
not identical or are commonly "different" from each other.
Since the individual units of production are not same, we are
required to accumulate the costs associated with each job.
Companies that usually use job costing are custom home
builders, automotive repair shops, accountants and lawyers.
Process Costing
Process costing, on the other hand, is used when the output
consists of virtually identical items that are made in large
quantities. Costs are accumulated in "batches" as the products
are produced and then allocated to the
individual products themselves. Process costing of most often
used by soda makers, cookie bakers, aluminum foil
manufacturers and oil refiners.
Regardless of the whether a company uses job costing or
process costing, the goal is still the same. “Push” all production
costs down to the product level so that management can tell if a
product is profitable or not. Other uses of product cost
information include: setting a sales price, determining product
mix and determining a transfer price to another division.
Bottom of Form

Profit4,624,4944,198,252Short Term Investments512-Operating
ExpensesNet Receivables87,86875,154Selling General and
Assets11,84713,642Operating Income or
OperationsLong Term Investments7121,288Total Other
Taxes2,048,3961,802,644Other Assets187,718166,966Interest
Expense-18,847-19,569Deferred Long Term Asset Charges--
Income Before Tax2,040,7201,786,156Total
Assets5,722,0515,309,351Income Tax
Expense677,967668,502Current LiabilitiesNet
Income1,362,7531,117,654Accounts
Payable1,059,8441,021,735Short/Current Long Term
Debt84,973-Other Current Liabilities9,90224,559Total Current
Debt311,994396,493Other Liabilities434,347412,335Total
Stock--Common Stock3,7963,919Retained
Earnings2,071,4001,801,138Treasury Stock-318,252-
272,755Capital Surplus1,292,3911,215,806Total Stockholder
Assets3,049,3082,748,017
Profit11,141,75710,362,497Short Term Investments-

506,165Operating ExpensesNet
Receivables860,000327,166Selling General and
Assets-12,217Operating Income or
OperationsLong Term Investments--Total Other
Taxes4,218,1933,987,426Goodwill97,600100,069Interest
Expense-8,860-64,295Intangible Assets-144,900Income Before
Tax4,173,2113,856,588Other Assets504,000321,266Income Tax
Expense1,113,4131,248,640Deferred Long Term Asset Charges-
6,558Net Income3,059,7982,607,948Total
Assets14,326,00014,058,015Current LiabilitiesAccounts
Payable2,644,1002,488,373Short/Current Long Term Debt--
Other Current Liabilities-1,429,136Total Current
Debt2,233,6002,230,607Other
Liabilities1,512,5001,331,645Total
Stock--Common Stock5,048,600628,009Retained Earnings-
4,962,159Treasury Stock--441,859Capital Surplus--Other
Stockholder Equity--441,859Total Stockholder
Assets4,951,0004,903,340
IS Vertical AnalysisIncome Statement Vertical
AnalysisCOMPANY 1COMPANY
220182017201820172018201720182017RevenuePercent Percent
Percent Percent Total Revenue (BASE
NUMBER)14,134,73212,866,757100.00%100.00%38,972,93435
,864,664100.00%100.00%Cost of Revenue
9,510,2388,668,50527,831,17725,502,167Gross Profit
4,624,4944,198,25211,141,75710,362,497Operating
ExpensesSelling General and Administrative

2,576,0982,395,6086,923,5646,375,071Total Operating
Expenses 12,086,33611,064,11334,754,74131,877,238Operating
Income or Loss 2,048,3961,802,6444,218,1933,987,426Income
from Continuing Operations Total Other Income/Expenses Net -
7,676-16,488-44,982-130,838Earnings Before Interest and
Taxes 2,048,3961,802,6444,218,1933,987,426Interest Expense -
18,847-19,569-8,860-64,295Income Before Tax
2,040,7201,786,1564,173,2113,856,588Income Tax Expense
677,967668,5021,113,4131,248,640Net
Income1,362,7531,117,6543,059,7982,607,948
IS Horizontal AnalysisIncome Statement Horizontal
AnalysisCOMPANY 1COMPANY 220182017$ CHANGE %
CHANGE 20182017$ CHANGE % CHANGE RevenueTotal
Revenue14,134,73212,866,75738,972,93435,864,664Cost of
Revenue9,510,2388,668,50527,831,17725,502,167Gross
Profit4,624,4944,198,25211,141,75710,362,497Operating
ExpensesSelling General and
Administrative2,576,0982,395,6086,923,5646,375,071Total
Operating
Expenses12,086,33611,064,11334,754,74131,877,238Operating
Income or Loss2,048,3961,802,6444,218,1933,987,426Income
from Continuing OperationsTotal Other Income/Expenses Net-
7,676-16,488-44,982-130,838Earnings Before Interest and
Taxes2,048,3961,802,6444,218,1933,987,426Interest Expense-
18,847-19,569-8,860-64,295Income Before
Tax2,040,7201,786,1564,173,2113,856,588Income Tax
Expense677,967668,5021,113,4131,248,640Net
Income1,362,7531,117,6543,059,7982,607,948
BS Vertical AnalysisBalance Sheet Vertical AnalysisCompany
#1Company #2Period
Ending20182017201820172018201720182017Current
AssetsPERCENT PERCENT PERCENT PERCENT Cash And
Cash Equivalents1,290,2941,111,5993,030,2002,758,477Short
Term Investments51200506,165Net
Receivables87,86875,154860,000327,166Inventory1,641,7351,5
12,8864,579,0004,187,243Other Current

Assets11,84713,642012,217Total Current
Assets3,151,1572,813,0498,469,2008,485, 727Long Term
Investments7121,28800Property Plant and
Equipment2,382,4642,328,0485,255,2005,006,053Goodwill0097
,600100,069Intangible Assets000144,900Other
Assets187,718166,966504,000321,266Deferred Long Term
Asset Charges0006,558Total Assets (BASE
NUMBER)5,722,0515,309,351100.00%100.00%14,326,00014,0
58,015100.00%100.00%Current LiabilitiesAccounts
Payable1,059,8441,021,7352,644,1002,488,373Short/Current
Long Term Debt84,973000Other Current
Liabilities9,90224,55901,429,136Total Current
Liabilities1,926,4021,752,5065,531,3005,125,537Long Term
Debt311,994396,4932,233,6002,230,607Other
Liabilities434,347412,3351,512,5001,331,645Total
Liabilities2,672,7432,561,3349,277,4008,909,706Stockholders'
EquityPreferred Stock0000Common
Stock3,7963,9195,048,600628,009Retained
Earnings2,071,4001,801,13804,962,159Treasury Stock-318,252-
272,7550-441,859Capital Surplus1,292,3911,215,80600Other
Stockholder Equity000-441,859Total Stockholder
Equity3,049,3082,748,0175,048,6005,148,309Net Tangible
Assets3,049,3082,748,0174,951,0004,903,340
BS Horizontal AnalysisBalance Sheet Horizontal
AnalysisCOMPANY 1COMPANY 2Period Ending20182017$
CHANGE % CHANGE 20182017$ CHANGE % CHANGE
Current AssetsCash And Cash
Equivalents1,290,2941,111,5993,030,2002,758,477Short Term
Investments51200506,165Net
Receivables87,86875,154860,000327,166Inventory1,641,7351,5
12,8864,579,0004,187,243Other Current
Assets11,84713,642012,217Total Current
Assets3,151,1572,813,0498,469,2008,485,727Long Term
Investments7121,28800Property Plant and
Equipment2,382,4642,328,0485,255,2005,006,053Goodwill0097
,600100,069Intangible Assets000144,900Other

Assets187,718166,966504,000321,266Deferred Long Term
Asset Charges0006,558Total
Assets5,722,0515,309,35114,326,00014,058,015Current
LiabilitiesAccounts
Payable1,059,8441,021,7352,644,1002,488,373Short/Current
Long Term Debt84,973000Other Current
Liabilities9,90224,55901,429,136Total Current
Liabilities1,926,4021,752,5065,531,3005,125,537Long Term
Debt311,994396,4932,233,6002,230,607Other
Liabilities434,347412,3351,512,5001,331,645Total
Liabilities2,672,7432,561,3349,277,4008,909,706Stockholders'
EquityPreferred Stock0000Common
Stock3,7963,9195,048,600628,009Retained
Earnings2,071,4001,801,13804,962,159Treasury Stock-318,252-
272,7550-441,859Capital Surplus1,292,3911,215,80600Other
Stockholder Equity000-441,859Total Stockholder
Equity3,049,3082,748,0175,048,6005,148,309Net Tangible
Assets3,049,3082,748,0174,951,0004,903,340

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