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D(Ctrl) 2. Comment uncny on the accountant's three reasons that he listed to support his proposal.

D(Ctrl) 2. Comment uncny on the accountant's three reasons that he listed to support his proposal.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Instructions (Ctrl) - 2. Comment DICTY un the accountant's three reasons that he listed to support his proposal.
Transcribed Image Text:Instructions (Ctrl) - 2. Comment DICTY un the accountant's three reasons that he listed to support his proposal.
O'Toole Glassworks, Co. in Dublin, Ireland, is a manufacturer of glass bottles. The company has been affected by competition from plastic bottles and is currently operating at between 65 and 70 percent of maximum capacity. The company at present reports profits on an absorption costing basis but with the high fixed costs associated with the glass container industry and a substantial difference between sales volumes and production in some months, the accountant has been criticized for reporting widely different profits from month to month. To counteract this criticism, he is proposing in future to report profits based on marginal costing and in his proposal to management lists the following reasons for wishing to change (currency in Euro, €): A. Marginal costing provides for the complete segregation of fixed costs, thus facilitating closer control of production costs. B. It eliminates the distortion of interim profit statements which occur when there are seasonal fluctuations in sales volume although production is at a fairly constant level. C. It results in cost information which is more helpful in determining the sales policy necessary to maximize profits. From the accounting records, the following figures were extracted: Standard cost per gross (a gross is 144 bottles and is the cost unit used within the business): Direct materials € 8.00 Direct labor 7.20 Variable production overhead Total variable production cost Fixed production overhead Total production standard cost 3.36 18.56 7.52* €26.08 * The fixed production overhead rate was based on the following computations: Total annual fixed production overhead was budgeted at €7,584,000 or €632 000 per month. Production volume was set at 1,008,000 gross bottles or 70 percent of maximum сарacity. There is a slight difference in budgeted fixed production overhead at different levels of operating: Activity level (per cent of maximum capacity) Amount per month (€000) 632 648 656 50–75 76-90 91-100 Actual fixed production overhead incurred was as budgeted. Additional information is as follows: September 87.000 115,000 € 32 €120,000 €80,000 October 101,000 78,000 € 32 €120,000 €80,000 Gross sold Gross produced Sales price, per gross Fixed selling costs Fixed administrative costs There were no finished goods in stock on September 1. Instructions
Transcribed Image Text:O'Toole Glassworks, Co. in Dublin, Ireland, is a manufacturer of glass bottles. The company has been affected by competition from plastic bottles and is currently operating at between 65 and 70 percent of maximum capacity. The company at present reports profits on an absorption costing basis but with the high fixed costs associated with the glass container industry and a substantial difference between sales volumes and production in some months, the accountant has been criticized for reporting widely different profits from month to month. To counteract this criticism, he is proposing in future to report profits based on marginal costing and in his proposal to management lists the following reasons for wishing to change (currency in Euro, €): A. Marginal costing provides for the complete segregation of fixed costs, thus facilitating closer control of production costs. B. It eliminates the distortion of interim profit statements which occur when there are seasonal fluctuations in sales volume although production is at a fairly constant level. C. It results in cost information which is more helpful in determining the sales policy necessary to maximize profits. From the accounting records, the following figures were extracted: Standard cost per gross (a gross is 144 bottles and is the cost unit used within the business): Direct materials € 8.00 Direct labor 7.20 Variable production overhead Total variable production cost Fixed production overhead Total production standard cost 3.36 18.56 7.52* €26.08 * The fixed production overhead rate was based on the following computations: Total annual fixed production overhead was budgeted at €7,584,000 or €632 000 per month. Production volume was set at 1,008,000 gross bottles or 70 percent of maximum сарacity. There is a slight difference in budgeted fixed production overhead at different levels of operating: Activity level (per cent of maximum capacity) Amount per month (€000) 632 648 656 50–75 76-90 91-100 Actual fixed production overhead incurred was as budgeted. Additional information is as follows: September 87.000 115,000 € 32 €120,000 €80,000 October 101,000 78,000 € 32 €120,000 €80,000 Gross sold Gross produced Sales price, per gross Fixed selling costs Fixed administrative costs There were no finished goods in stock on September 1. Instructions
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