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, €): Marginal costing provides for the complete segregation of fixed costs, thus facilitating closer control of production costs. 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. 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 3.36 Total variable production cost 18.56 Fixed production overhead 7.52* Total production standard cost €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 capacity. 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) 50–75 632 76–90 648 91–100 656 Actual fixed production overhead incurred was as budgeted. Additional information is as follows: September October Gross sold 87,000 101,000 Gross produced 115,000 78,000 Sales price, per gross € 32 € 32 Fixed selling costs €120,000 €120,000 Fixed administrative costs €80,000 €80,000 There were no finished goods in stock on September 1. Instructions 1. Prepare monthly profit statements for September and October using A. Absorption costing B. Marginal costing 2. Comment briefly on the accountant’s three reasons that he listed to support his proposal.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
- 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, €):
- Marginal costing provides for the complete segregation of fixed costs, thus facilitating closer control of production costs.
- 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.
- 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:
Direct materials € 8.00
Direct labor 7.20
Variable production overhead 3.36
Total variable production cost 18.56
Fixed production overhead 7.52*
Total production standard cost €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 capacity.
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)
50–75 632
76–90 648
91–100 656
Actual fixed production overhead incurred was as budgeted.
Additional information is as follows:
September October
Gross sold 87,000 101,000
Gross produced 115,000 78,000
Sales price, per gross € 32 € 32
Fixed selling costs €120,000 €120,000
Fixed administrative costs €80,000 €80,000
There were no finished goods in stock on September 1.
Instructions
1. Prepare monthly profit statements for September and October using
A. Absorption costing
B. Marginal costing
2. Comment briefly on the accountant’s three reasons that he listed to support his proposal.
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