All costs to “produce” the whiskey should be included in the cost of inventory.
Raw materials like water, corn, barley malt, rye
Other indirect material used in the production process
Cost of barrels used in the aging process
Labor and supplies of chemical lab
Direct labor costs, e.g. of employees/operators working in the factory -
Depreciation of plant and warehouse equipment
Building expenses for factory and warehouse
Cost of filling the whiskey in bottles
All these costs are more or less directly related to the manufacture of liquor and should form a part of manufacturing expenses which should be charged to the cost of finished goods produced.
In the given current situation Kings Mountain Distillery charges the cost of barrels to the income statement in the year when the barrels are purchased. If KMD would charge the cost of barrels to inventory, then only the costs of the inventory sold would be charged to the COGS (cost of goods sold). For the year of 1996, we have the following situation:
opening inventory is 172,000 barrels
barrels purchased 63,000 pieces
closing inventory 192,000 barrels
number of barrels sold: 172,000 + 63,000 - 192,000 = 43,000 barrels.
This means only the cost of 43,000 barrels would be charged to COGS.
The given cost for one barrel is 89,- USD: 43,000 x 89 = 3,827,000 USD
According to the income statement the cost of barrels in 1996 was 5,607,000 USD
This means the COGS would decrease by 1,780,000 USD and the net income would increase by the same amount. The “new” net income would be: 598,000 USD
Also, the inventory account would increase by 1,780,000 USD
I would not recommend that KMD uses the accounting method of capitalizing and depreciating the barrel costs. The barrels are part of the manufacturing process of the whiskey and directly identified with it, which means that these costs are a direct cost of production. Usually machines are not directly...
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