A brief summary of the presented facts
Graham Inc.’s case study provides critical facts in regard to business and accounting principles. One needs to note that the new president of the company (Tom Graham) expected a considerable increment in the company’s profits for August. However, this was not the case since there was a massive drop in profits (by $22928) for the month that was not expected by the new president. The financial statement prepared by Andy Derrow contained significant entries that explained the noticed deviation. It is evident that the company registered considerable sales, however, it did not expand its production capacity to balance the operational costs (expenses) as well as the ultimate revenues collected. The company had reduced its production capacity far below its potential. Thus, the financial statement was correct, although unanticipated.
Additionally, Derrow explained that the reduction in the production capacity had resulted in an “unabsorbed volume variance.” This provision managed to offset the impacts of the sale increment registered in August. As a principled accountant, Derrow could not lie to the new president that is Tom Graham; it was important, to tell the truth regarding the matter. Unfortunately, the company might continue registering such misfortunes if the trend persists. Restructuring the financial entries to fake ones (as evident in exhibit 2) is more disastrous to the stakeholders. Consequently, Derrow advised the new president to go against it. Changing the administration expenses and overhead charges could hardly help in the situation. The accounting records presented for the month of August were precise and accurate (as evident in Exhibit 1). Precisely, sales for the given month increased; however, expenses were disproportionate. It is crucial to understand the state of the company in the realms of its operations and other considerable aspects. Graham, Inc. Company should adjust its production mechanisms so as to match the current financial obligations of the company. Notably, the new president understood that undue profits to the company could attract additional expenses including increased tax rates and dividend increments. Actually, the new approach proposed by Derrow to solve the accounting problems could diminish costs and enhance the marketing efforts. However, this could pose considerable challenges.
Recommendations
There are numerous recommendations applicable in the Graham Inc.’s context. Firstly, it is important for the company to enhance its production capacities as indicated earlier minimizing the imbalances caused by high sales against hiked operational costs. Additionally, the company should reduce its “unabsorbed production volume variance” so as to offset the impacts of increased sales in the subsequent months. Precisely, it is recommendable for the company to equalize the rate of its sales to the factory’s production. The new president should understand that not only an increase in sales can enhance the volume of profits but also other underlying factors including reduction in costs. Additionally, Derrow should adjust the overhead costs considerably so as to avoid flawed reflections of the company’s performance. It is crucial to stick to the accounting principles for the sake of accuracy. Additionally, the company should not rework the August’s financial statement. However, it should focus on the forthcoming sales and cost reduction strategies. Conclusively, it is advisable for the company to enact novel accounting principles and bookkeeping procedures to ensure that its financial obligations are updated, and reflects the provisions of accuracy and dependability. This is a critical provision when considered purposefully.