You are the management accountant of a manufacturing

company where #4638

You are the management accountant of a manufacturing company where production is capital-
intensive, using machinery that is estimated to have a five-year life. The present machinery is
now approximately three years old. Whilst raw material stocks have a low turnover due to
supply problems, finished goods are turned over rapidly and there is minimal work-in-progress
at any one time. The technology incorporated in the means of production is thought to be
stable.In recent years, it has not been possible to increase the price of the company's outputs
beyond the rate of general inflation without diminishing market share, due to keen competition in
this sector. The company does not consider that it has cash-flow problems. The company is all
equity financed. Although a bank overdraft is a permanent feature of the balance sheet, this is
primarily due to customers being given a 60-day credit period, whilst most suppliers are paid
within 30 days. There is always a positive balance of short-term monetary assets.In the previous
financial year, net profit after taxation on a strict historical cost basis was considered very
healthy, and the directors felt that they could prudently distribute a major portion of this by way
of dividend. The directors are considering whether, and if so how, to reflect price-level changes
in their financial statements. They are concerned that this would affect their profit figure and
therefore the amount they could distribute as dividend.The following price-level changes have
been brought to the attention of the directors:You are required to prepare a report for your
directors setting out in general terms how to explain to the shareholders the likely impact on the
historical cost profit of possible methods of accounting for price-level changes.View Solution:
You are the management accountant of a manufacturing company where

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