December 07, 2011
1. To understand the reason, you need to understand the definitions of period costs and product costs. Period costs are not a necessary part of the manufacturing process. Rather they are costs associated with the selling part of the business or its administrative overhead. These costs are expensed in the period in which they occur. Product costs are the direct materials, direct labor and overhead associated with making the company's product. If a unit is not sold, these costs are reported as part of the company's inventory and are reported on the Balance Sheet as a current asset. Reclassifying from period to product costs moves the costs from being an expense on the Income Statement to being part of inventory on the Balance Sheet, thereby increasing profit. 2. Reclassifying period costs, which are mainly administrative and advertising costs, as product costs (costs that are more directly related to the manufacturing of products) gives the impression that more money is going into manufacturing, rather than selling and administrative costs. That seems more or less redundant but what it means for the company's statements is a false inflation of reported earnings, which is obviously unethical. As a nationally traded business, Kranbrack Corporation is held to the standards placed by the Generally Accepted Accounting Principles, and lying on your statements to look better is a big fat no-no! But more than just being obviously unethical, holding off a butt ton of expenses until the next year will just put them even more behind for that year, a way that'll only be fixable with more smudging! It's a very vicious cycle. And one last point, while it might be okay to postpone or reduce things like end of the year advertising or travel, there are other aspects of running a business that are better kept on time, like maintenance. If a major piece of machinery breaks because they skipped a tune up or something, that will very much...
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