Course: Managerial Accounting & Control -1 Batch: PGP (2011 – 2013)
5th September, 2011
Merrimack Tractors and Mowers, Inc was a major regional manufacturer and seller of large commercial grass mowers based on a design developed by the grandfather of Ricardo Martino. The company’s major competitors were John Deere, The Toro Company, Simplicity, and Husqvarna which were much older with extensive lines of lawn care and maintenance equipment. About 25% of the outstanding stock of the company was held by the members of the Martino family and shares were traded on NASDAQ. By 2008, the company was buying all of its tractors and machines manufactured in China. The report below analyses the need for a change in accounting procedure for inventory and its effect by shifting from LIFO to FIFO. We can conclude that a shift to FIFO may be beneficial in the short run even though taxable income increases since the procedure is in accordance with IFRS guidelines. This will in turn help the CEO to justify the performance of the company in an year of rising costs.
Identification Problem Identification –
• With the economic development, including activities like Beijing Olympics 2008, wages and labor cost in China has increased. Moreover, material and energy costs were also rising Strengthening Chinese currency (Yuan or Renminbi) compared to US dollar Loyal suppliers increased prices Rising oil prices increased cost of shipping Competitors like Toro Company were less affected
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Thus, sales margins on tractors and mowers were under pressure. Seeking another off-shore supplier was not possible in the restricted timeline. Same was the case for re-establishing manufacturing operations in Nashua. Thus, the company controller suggested a change in the accounting process from LIFO to FIFO system for inventory accounting. A change such as this would require additional disclosures in the notes of...