Costs to be included in inventory

Business Brief
Justin Anson Distillery, Inc. has been distilling whiskey since 1935, turning into a million dollar firm by 1960. This unique brand uses iron-free spring water used in the distillation process and fire-charred oak barrels used in the aging process. In 2010, production was determined to expand and a loan of $3.3 million is needed in order to continue with this expansion, yet a net loss of $895,000 is showing regardless of sales of $46.2 million, and could deter the bank from granting the necessary loan. The purpose of this brief is to discuss a way to change the bottom line by increasing the net profit and eliminating a presence of a net loss.

The problem this company faces is that without this loan, continuing the production expansion will not be able to be funded, and this may be fixed by changing those costs listed as other costs into costs that can be charged to inventory costs. This would change the bottom line by increasing the net profit, no longer showing a net loss. The key question to be answered in this situation is whether or not the cost of barrels used during the year can be considered an inventoriable cost. Analysis

The manufacturing costs that are essential to produce the bottled whiskey for sale to wholesalers include the costs necessary to convert the raw materials into the whiskey, such as grain, yeast, and malt, as well as the cost of the direct labor to convert these materials, and the cost of overhead items that are used to permit the workers to do the conversion. The issue of debate is whether or not the materials that are needed for the aging process of the whiskey, the barrels, can be considered a part of the manufacturing costs that are essential for the production . Since the whiskey is not a sellable or finished good without the aging process, it appears that barrels should be considered an inventoriable cost. It is extremely important to distinguish inventoriable costs from the classification of the other costs included in the costs of goods sold due to the fact that they would then be considered assets rather than expenses, and change the bottom line increasing the net profit by $4,366 million (Appendix A). Conclusion

In the financial statements for Anson’s inventory, the costs that should be, “values based on the direct materials, direct labor, and overhead costs employed in the production process. Because unsold units are inventory, they carry their share of these costs; these costs rather than being expensed on the income statement in the period incurred, go on the balance sheet as assets.” (Talyor III, 2004). My recommendation is to include the barrels in manufacturing costs, which would give the company a more desirable bottom line during review by the bank in which the company is attempting to acquire a loan from.

References

Datar, S. and Rajan, M. (2014). Managerial Accounting. (1st ed.). Boston: Pearson Prentice Hall, 71-75. Taylor III, L., Nunley III, A., & Flock, M. (2004). WIP Inventory: Asset or Liability? Cost Engineering. 46(8), p19-25.