Glorious Gift Baskets Began Last Year with No Inventories

question 34

Essay

Glorious Gift Baskets began last year with no inventories. During the year 21,000 baskets were produced, of which 18,800 were sold. Data concerning last year's operations appear below:
Revenue $94,000
Variable direct production costs 42,000
Variable production overhead 15,750
Variable selling and administrative costs 1,880
Fixed production overhead 17,850
Fixed selling and administrative costs 16,320
Variable manufacturing costs are variable with respect to the number of units manufactured. Variable selling and administration costs are variable with respect to the number of units sold.
a)Assume that Glorious uses an actual costing system for fixed production overhead. Prepare an absorption costing income statement.
b)Assume that Glorious uses a normal costing system for fixed production overhead based on normal production of 20,000 baskets. Prepare an absorption costing income statement, assuming that the volume variance is considered immaterial.
c)Reconcile the difference between the incomes you calculated in parts (a)and (b)above.
d)Explain how to close the volume variance if it is considered material.
e)List two reasons why it might not be possible for managers to perfectly predict production volumes.

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Definitions:

Convertible Bond

A type of bond that can be converted into a predetermined number of shares of the issuing company's stock at certain times during its life, usually at the discretion of the bondholder.

Unsecured Bond

A type of bond that is not backed by collateral, relying solely on the issuer's creditworthiness.

Secured Bond

A type of bond that is backed by collateral, providing greater assurance to the lender that principal and interest payments will be made.

Equity Bond

An investment instrument that combines features of both equity and debt, often structured to convert to equity under certain conditions.