Lavin Daryanani

Managerial Accounting

Case : Graham Inc.

1. Approximately how busy (relative to a normal month) was the factory in August?

2.

3. Be prepared to explain the profit differences shown in exhibits 1 and 2 and in 3.

a. The difference between profit under the two systems is always equal to the difference

in the amount of fixed manufacturing overhead charged in the income statement. It is

only a matter of how the manufacturing overhead is charged.

4. Could the problem in the case arise with respect to annual income statements?

a. Yes it can,

5. From a managerial prespective, how does graham inc. earn a profit? Which costing system best

reflects the basic economics of the business?

a. Under direct costing the income statement each period includes a the fixed

manufacturing overhead actually incurred that period. Under absorption costing, the

income statement will include the fixed manufacturing cost which is part of the

standard cost of goods sold. However the income statement will also includethe

production variance for the period. The difference between profit under the two

systems is always equal to the difference in the amount of fixed manufacturing

overhead charged in the income statement. Direct costing is more suitable for Graham

inc.

6. What do you recommend?

a. It is difficult to recommend which costing system the company should use since both

systems are proper ways of costing. If they want to determine profit by level of

production then they should adopt absorption costing. If they opt to determine profit by

level of sales then they should adopt direct costing.