Homework Problems

Chapter 2

by
Excellent Student

for
BUS539 Financial Management
California Baptist University
Professor Stephen Christie

May 7, 2015

Homework Problems Chapter 2

Student, 2
Introduction

Bill Johnson, the Plant Manager for the Jackson division of Smith Products, Inc.,
has just completed a year of business for the division and was looking forward to
receiving his annual bonus. Unfortunately, the operating results of the division did not
support his desire, as the results missed the threshold of $5,000,000 necessary for him
to achieve his target. The following schedule shows the financial results of the division
as initially reported:

As can be seen from the results, Mr. Johnson has missed the threshold of his
bonus target by over $3.2 million.
Proposal to Improve Results
In order to overcome the deficit regarding his bonus, Mr. Johnson has chosen to
discuss the accounting issues with his controller. In these discussions Johnson has

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proposed that the warehousing costs be included as product costs because they are
definitely related to our product. The controller has taken this suggestion under
advisement and proceeded to research this issue. Before concluding the research
regarding inventoriable costs, the controller prepared an adjusted set of financial
results, comparing the unit cost data with the new allocation of warehouse costs. This
resulted in the following unit cost comparison:

By applying these changes in the unit cost data, the financial results of the
division would have improved significantly and, in fact, would result in Mr. Johnson
receiving his bonus as he desired. With the changes, the cost of production increased
from $246,680,000 to $260,200,000, an increase of $16,520,000, the amount of the
warehouse costs. However, a portion of these costs were then absorbed into the cost
value for the finished goods inventory and, thus, were not part of the new cost of sales
amount. The value remaining in inventory was $6,608,000, which represents the
change in the operating income going from $1,161,000 to $7,769,000. The result of
these changes is presented as follows:

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Bonus to be Earned
Based on the possibility of the operating income becoming the higher value, the
amount of bonus that Johnson would receive would be $276,900, as shown in the
following detailed calculation:

Period Costs or Inventory Costs

According to the controllers research, the warehousing costs, while they may be
related in some context to the products, is clearly not a part of the production process.
As noted by Charles T. Horngren, the expert recognized for his development of
numerous accounting text materials, the determination of classifying costs as product or

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period costs is made by GAAP. GAAP requires that all costs related to warehousing
and distribution of goods be classified as period costs and expense in the period they
are incurred (Horngren, Datar, Rajan, 2015). Although the inclusion of the warehousing
costs definitely improved the operating results, and the application of the costs into the
cost of production and the ending finished goods inventory, was properly applied in a
technical sense, the inclusion of warehouse costs in the production process and
inventory is clearly in violation of GAAP requirements. As such, the controller would not
be handling the accounting data in a correct manner should he choose to comply with
the direction given by Mr. Johnson.

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References

Horngren, C., Datar, S., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis
(15th

ed.). New Jersey: Pearson Education, Inc.