Case Study Analysis
Various Cost that can be included in Dobbins’s Inventory
It has been argued that all costs incurred by company can be included as part of Manufacturing costs. This is debatable question but usually in a manufacturing company there is a manufacturing cost and period cost where only manufacturing cost is inventoriable. Anything that is not integral part of final product is considered period cost and it is management decision (but rational decision) based on the business and the form in which product is sold, to decide on the criterion.
So basis for all decision is to first identify all cost and the define criterion for product cost and in turn we need to decide at what point in manufacturing process we say that final product has been manufactured
Daniel Dobbins Distillery, Inc Business Background
Company is in business of manufacturing whiskey, so there is aging process associated after manufacturing before product could be distributed and sold. Aging process takes at least 4 years, so it can be argued that all cost associated with aging process is integral part of product and hence manufacturing cost, instead of period cost. But currently company is not considering aging cost as part of manufacturing cost, and has been showing consistent sales and profits.
Due to markets forecasts of increased sale in future years, company has decided to increase production from 43000 (in 1987) to 63000 (in 1988) barrels. Hence this results in loss in Income statement as per current practice of costing. But company want to apply for loan, and bank will not view loss favorably nor will other stakeholders. So let’s consider various cost accounting options which can help us as basis for choosing best method for preparing financial statements
As per Income Statement (Exhibit 2) different costs “charged to Cost of Goods Sold” that can be identified are
1. Barrel costs
2. Occupancy costs
3. Warehouse costs
4. Labor costs
5. Depreciation costs
6. Government Supervision costs
7. Bottling liquor costs
From the above costs per barrel cost of $63 are large when compared to average cost of $52.4 for whiskey production to inventory.
Let’s now consider following 3 options for cost accounting and there impact in Income Statement.
Option 1 – Income Statement and Balance Sheet change when only Barrel costs charged to Inventory
[All figures are in ‘000s]
Cost of Barrels (1988 & 1987) = $63 / Barrel
Avg. Cost of Whiskey produced to inventory (1988 & 1987) = $52.4 / 50 gallon Barrel
Cost of barrel in inventory = No. of Barrels Produced * No. Of Years (Inventory) * Cost of Barrel
Opening cost of barrel in inventory = 43000 * 4 * 63 = $10836 Closing cost of barrel in inventory = (43000 * 3 * 63) + (63000 * 3 * 63) = $12096
Difference in barrel cost = Closing cost – Opening cost = $12096 - $10836 = $1260
Total cost of goods sold [as per income statement, 1988] = $39712
Total cost of goods sold [if charging cost of barrel to inventory] = $39712 - $1260 = $38452
Net Profit (Loss) [as per income statement, 1988] = -$814
Net Profit (Loss) [if charging cost of barrel to inventory] = -$814 - $1260 = $446
Bulk whiskey Inventory [as per balance sheet, 1988] = $10061
Bulk whiskey Inventory [if charging cost of barrel to inventory] = $10061 + $12096 = $22157
Bottled and cased whiskey Inventory [as per balance sheet, 1988] = $3938 (175000 gallons @ $22.5 per gallon)
Equivalent No. of barrels = 175000/35 = 5000 barrels
Cost of barrels = 5000 * 63 = $315
Bottled and cased whiskey Inventory [if charging cost of barrel to inventory] = $3938 + $135 = $ 4253
Total current Assets [if charging cost of barrel to inventory] = $19744 + $12096 + $315 = $ 32155
Total Assets [if charging cost of barrel to inventory] = $22532 + $12096 + $315 = $34943
Retained Earnings [if charging cost of...