Allocation and Income Statement Essay

Submitted By steviegdog
Words: 316
Pages: 2

Ilbret Bakuniance
April Comia
Charles Corn
Jeanine Enguerra
Ngan Phan
Kristy Tat

Graham Inc. Case Summary This case is about a company called Graham Inc. It is the month of August and Graham Inc.’s new president, Tom Graham, is looking over the numbers that came in for that month. After doing a comparison of this month with the prior month, Graham realizes that there is something fishy going on. He knows that the sales went up in the month of August as compared to the month of July. However, when looking at the end income, August’s income statement reported a loss. Graham consults the company’s controller, Andy Derrow, and he explained the reason for the loss. The reason was that the company’s production levels were lower than normal and because of this the costs per unit increased. Derrow decided to look and the income statement from a different angle. He took out the manufacturing overhead from the Product cost and allocated the year’s amount over the 12 months as “Fixed Factory Overhead” similar to how they allocate selling, general, and administrative costs. Using this method, Graham Inc. would not have to re-adjust the overhead allocation rate whenever the production level changes. Also, cost of goods sold would only reflect variable cost/direct costs. After applying this angle to their income statements, the August numbers resulted in a profit but when applied to the numbers from July, there was a loss for that month.…