Old Turkey Mash

Topics: Revenue, Generally Accepted Accounting Principles, Net income Pages: 1 (353 words) Published: September 20, 2011
Old Turkey Mash Case:
The firm has been writing off all the warehousing and oak barrel costs incurred as they are capitalizing these items as period cost which has a direct impact on their Net income. In the given income statement the cost incurred during the period is written off in the same year. Therefore the cost of production which is still in process of aging is charged against the revenue due to which net profit is decreased. The firm has is now under pressure (result of projected losses in the third year) as they ask the local bank to finance the production expansion which is likely to finance only profitable ventures. The firm should change their accounting style and use product cost model so that the firm only capitalizes the revenues and cost when they sell a unit of bottled old turkey. Treating the warehousing and barrel costs as product cost would reflect on the income statement as now the third year projected losses can be transformed into profits allowing the president to make a stronger case in front of the local bank. Using product cost instead of period cost: assuming that we had 50,000 aging barrels in the base year. Cost of production/barrel = material cost + cost of new oak barrel + rental + direct cost = 100 + 75 + 20 + 50 = 245. | year 0| Year 1| Year 2| Year 3|

Cost of production incurred during the period| 5,250,000| 5,540,000| 5,970,000| 6,540,000| Add beginning Work in progress inventory| 12,250,000| 12,250,000| 12,740,000| 13,720,000| Total cost of production accounted for| 17,500,000| 17,790,000| 18,710,000| 20,260,000| Less :ending work in progress inventory| 245 * 50000 =12,250,000| 245*52000 =12,740,000| 245*56000=13,720,000| 245*62000=15,190,000| Cost of production| 5,250,000| 5,050,000| 4,990,000| 5,070,000| Revenues| 6,000,000| 6,000,000| 6,000,000| 6,000,000|

Net income before taxes| 750,000| 950,000| 1,010,000| 930,000|
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