Question 2. Explain the changes in accounting methods.

Firstly, the company produces and sells the wine in this accounting period.
Now before the change: Interest and Corporate overhead expenses are included
in the inventory cost. This method overstates the inventory costs. And then after
the change: interest and corporate overhead expenses are separated from the
inventory cost. This method provides an accurate reflection of inventory costs
and gross profits in financial statements.
Before we address the change in accounting methods, we must first identify
what inventory costs are and what overhead expenses are.
Inventory costs (or cost of goods sold) are the costs tied to the production of a
particular line of goods and comprises of:

The cost of products or raw materials and any transportation costs

The cost of storing these products
The wages cost for labourers and industrial staf
Factory facilitation costs
Depreciation

Overheads expenses are the costs not directly involved in the production of a
particular product, rather it groups all the expenses that are necessary to the
continued functioning of the business but cannot be tied to the goods or services
being provided. Such expenses generally include interest, insurance, rent,
utilities etc
Now inventory is an asset on the balance sheet and only becomes expensed as
COGS when inventory is sold. By changing the accounting methods, it ensures
that interest and overhead expenses are always reflected in the income
statement, irrespective of whether inventory is sold or not, and as highlighted
before provides a truer estimate of the inventory costs and hence gross profit.