Concepts and reason
Income statement: This is the financial statement of a company that reports all the revenues that are earned and expenses that are to be expended by the company on the immediate accounting year. The income statement is also known as profit and loss statement.
Cost: Cost is any value spent to produce a product or to render any service. The types of costs are fixed cost and variable cost.
Fixed cost: Fixed cost is a cost that remains the same, irrespective of the increase or decrease in the value of goods or any services rendered. It is the cost paid by the company that does not depend on the activities concerned with the business.
Variable cost: Variable cost is a cost that varies according to the output produced or any service rendered. It is the cost paid by the company that depends on the activities concerned with the business.
Direct cost: Direct cost is any cost that is directly related to the manufacturing of a product or rendering a service. The direct cost may be classified into direct material cost, direct labour cost, and direct expenses.
Direct material cost: Direct material cost is the cost related to the purchase of the raw materials that are directly related to the production of the goods. It includes opening stock of materials, purchases, cost of purchases, and deductions related to the closing stock of materials.
Direct labour cost: It refers to the cost of providing wages to the workers who are directly associated with the production of goods or services rendered to the customers. The cost of direct labour includes wages, payroll taxes, and all the benefits sponsored by the manufacturer.
Depreciation: Depreciation is the process of reducing the value of the assets. It is a non-cash expense of the company. The value of assets is reduced due to the wear and tear caused for assets by their usage.
Justification for the wrong answer:
Variable cost is said to be the corporate expense that will be changed in the proportion of the production output. The increase or decrease in the variable cost depends on the production volume of the company. If the production increases, it will increase if the production decreases the variable cost will also decrease. Therefore, in the income statement, the following will be not be treated as variable cost:
- Research and development is the expense which the company incurs for their research and their innovation. It is a fixed expense.
- Depreciation expense will be treated separately in the books of accounts.
- Promotion expense is the fixed cost and it will be independent of the number of goods sold.
It is mentioned to determine that which will be treated as the variable cost in the income statement. Thus, the income statement is said to be an important part of the company. The performances of the company will be submitted to the Securities and Exchange Commission. It will report the financial performance of the company over a particular period of time.
Justification for correct answer:
Both the fixed cost and the variable cost will be included in the total expenses of any company. The fixed cost remains the same in the output of the production while the variable cost dependent on the production output. Thus, the direct material expense will be treated as the variable cost in the income statement.
In the income statement the direct material expense will be classified as the variable cost.
It is mentioned to determine that which will be treated as the variable cost in the income statement. The increase or decrease in the variable cost depends on the production volume of the company. If the production increases, it will increase if the production decreases the variable cost will also decrease.
The variable cost is treated as the corporate expense which is made for the production purpose. Only the direct material expense will be treated as the variable cost because if the output increases it will increase and if the output decreases the direct material expense will be decreased.
In the income statement, the direct material expense will be classified as the variable cost.