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Crystal Glass Company

Crystal Glass is a producer of heirloom-quality glassware. The company has a solid reputation and is widely regarded as a model corporate citizen. You have recently been hired as a staff accountant at a time when the company is experiencing rapid growth and is looking for a substantial increase in the line of credit at the local bank. They also are planning on trying to take the company public in the next three to five years. At the present time the company is a closely held family business. One of your first jobs is to review the current month's income statement for accuracy. The income statement appears as follows:

Crystal Glass, Inc Statement of Income For the year ended October 31, 2009

Sales revenue $12,008,450
Variable costs $8,475,361
Contribution margin $3,533,089
Fixed costs $1,845,902
Net Income $1,687,187

You are given the following additional information:

Variable Costs:
Manufacturing $6,356,521
S&A $2,118,840

Fixed Costs:
Manufacturing $1,476,722
S&A $369,180
Beginning inventory 250,000 units
Production 2009 500,000 units
Sales 2009 600,000 units

A. What type of costing method is used by Crystal Glass?
B. Does the method comply with GAAP? If not, what costing method should be used? What would net income be?
C. Could the statements be misleading to the bank? Why or why not?
D. What are your options as the new staff accountant? Who are the stakeholders impacted?

Solution Summary

Defining the type of costing, Variable or Absorption, with comments, guidance, examples and clear explanation.