Inventory and Costs Essay

Words: 2163
Pages: 9

IIM Lucknow, Noida Campus

Assignment – II, Daniel Dobbins Distillery, Inc (Case Analysis)

Submitted By:
Rahul Srivastava (WMP08034)
Vinay Joshi (WMP08045)
Company History * Founded in 1880 in Oakwoods by Daniel Dobbins. * Major product is Old Trailridge Bourbon Whisky * High quality of whisky due to the unusual iron-free spring water used in the distillation process and the specially prepared fire-charred white oak barrels used in the aging process. * David Dobbins takes over in 1973. * Constant demand over the years * High demand surge forecasted due to maturity of Baby boom generation.

Manufacturing Process * Ingredients controlled by laws. * Barrels can
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Listing the above mentioned costs as part of the balance sheet will overstate the assets and understate the expenses misleading the actual profitability of the company.
1. Leave all accounts as they are. 2. Transfer Cost of Barrel from Other Costs in the Income Statement to the Balance Sheet as a Contra-Asset that is part of Inventory. Transfer Ageing Costs from the Income Statement to the Balance Sheet and list it under Long Term Contra-Assets. Break up Warehouse Labor into different temporary accounts that are spread out both on the Income Statement as well as the Balance Sheet.
Evaluation of Alternatives

Alternative 1:
Strengths: This alternative improves the Net Profit figure in the Income Statement by increasing the value of Closing Inventory in the Balance Sheet.
Weaknesses: Breaking up Warehouse Labor and accurately allocating the costs across the two financial statements may not be feasible.
Opportunities: Choosing this alternative immediately improves its chances of securing the $3,000,000 loan from the bank.
Threats: Carrying out this alternative poses the risk of the company getting unfavorable press which may have a negative impact on its reputation. Another threat is that this alternative could be misused by senior management as a way of hiding inefficiencies, bad expenses, overstating retained earnings, and understating expenses.
Alternative 2:
Logically Inventory costs include all the direct costs