Classification of costs; ethics. Jason Hand, the new plant ...

[Beheh]

Classification of costs; ethics.
 
  Jason Hand, the new plant manager of Old Tree Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. Hand receives a year-end bonus of 8 of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, Hand demanded that his controller go back and work the numbers again. Hand insisted that if he didn't see a better operating income number the next time around he would be forced to look for a new controller.
  Old Tree Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of 3,570,000, are classified as period expenses. Hand had suggested that warehousing costs be included as product costs because they are definitely related to our product. The company produced 210,000 units during the period and sold 190,000 units.
  As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by 340,000. He was also sure these new numbers would make Hand happy.
 
  Required:
  1. Show numerically how operating income would improve by 340,000 just by classifying the preceding costs as product costs instead of period expenses.
  2. Is Hand correct in his justification that these costs are definitely related to our product?
  3. By how much will Hand profit personally if the controller makes the adjustments in requirement 1?
  4. What should the plant controller do?

Question 2

Which of the following is true of the memorializing stage of the interview process?
 
  A) The interviewer should transcribe the notes in his own words to provide greater understanding.
  B) The memorandum should not contain recommendations and opinions of the interviewer.
  C) Any content attributable to the interviewer should be clearly identified as such.
  D) Hand-written interview notes can serve as a memorandum of interview by itself.

[chjcharjto14]

Answer to Question 1

1. Warehousing costs per unit =
=

If the 3,570,000 is treated as period costs, the entire amount would be expensed during the year as incurred. If it is treated as a product cost, it would be unitized at 17 per unit and expensed as each unit of the product is sold. Therefore, if only 190,000 of the 210,000 units are sold, only 3,230,000 (17 per unit  190,000 units) of the 3,570,000 would be expensed in the current period. The remaining 3,570,000  3,230,000 = 340,000 would be inventoried on the balance sheet until a later period when the units are sold. The value of finished goods inventory can also be calculated directly to be 340,000 (17 per unit  20,000 units).

2. No. With respect to classifying costs as product or period costs, this determination is made by GAAP. It is not something that can be justified by the plant manager or plant controller. Even though these costs are in fact related to the product, they are not direct costs of manufacturing the product. GAAP requires that research and development, as well as all costs related to warehousing and distribution of goods, be classified as period costs and expensed in the period they are incurred.

3. Jason Hand would improve his personal bonus and take-home pay by
8  340,000 = 27,200

4. The controller should not reclassify costs as product costs just so the plant can reap short-term benefits, including the increase in Hand's personal year-end bonus. Research and development costs, costs related to the shipping of finished goods, and costs related to warehousing finished goods are all period costs under GAAP and must be treated as such. Changing this classification on Old World's financial statements would violate GAAP and would likely be considered fraudulent. The idea of costs being classified as product costs versus period costs is to properly reflect on the income statement those costs that are directly related to manufacturing (costs incurred to transform one asset, direct materials into another asset, finished goods) and to properly reflect on the balance sheet those costs that will provide a future benefit (inventory). The controller should not be intimidated by Hand. Hand stands to personally benefit from the reclassification of costs. The controller should insist that he must adhere to GAAP so as not to submit fraudulent financial statements to corporate headquarters. If Hand insists on the reclassification, the controller should raise the issue with the chief financial officer after informing Hand that he is doing so. If, after taking all these steps, there is continued pressure to modify the numbers, the controller should consider resigning from the company rather than engage in unethical behavior.

Answer to Question 2

C
Explanation: C) Although facts should always be presented without bias, the memorandum may also include findings, observations, recommendations, and opinions as appropriate. Of course, any content attributable to the interviewer should be clearly identified as such.

[Beheh]

Thank you

[chjcharjto14]

Happy to help you