Profit Planning

Barrel cost was considered as a part of the product cost

1987 --> 43000 x 63 = 2709000
1988 --> 63000 x 63 = 3969000

Taking barrel costs to the inventory

Opening Stock --> 2709 x 4 (years) = 10836
Purchase --> 3969
Closing Stock --> 2709 x 3 (years) = 8127
Cost of Goods Sold 1260

Impact on P&L account by taking barrel cost to the inventory

Net Loss (814.00)
Cost of Goods Sold 1260.00
Net Profit 446.00

Impact on Balance Sheet by taking product cost to inventory

Inventory will go up by 12096
Inventory 1988 (10061 + 12096) 22157.00
Bottled and cased whiskey (Finished product) 175/35 5000 barrels
Cost of barrels (5000 x 63) 315
Cost of bottled and cased whiskey will go up by 315
4253
from 3938
Cost of Invetory will increase by 315 from 12096 12411
Total Liabilities and capital now becomes (increase
from 22532) 34943
Retained earnings in business will increase from
5698 18109

Analysis done on Income Statement (Changes Established)

1988 1987
Change From IS Basic Cost Cumulative From IS Basic Cost Cumulative
Basic Cost 52.40 52.40 52.40 52.40
Cost of barrel (1260.00) 3969.00 63.00 115.40 2709.00 63.00 115.40
factory building (32.00) 297.00 4.71 120.11 265.00 6.16 121.56
Occupancy cost
rented building (300.00) 572.00 9.08 129.19 272.00 6.33 127.89
Warehouse labor and supervisor (146.00) 334.00 5.30 134.50 188.00 4.37 132.26
Labor and supplies expense of chemical lab (30.00) 166.00 2.63 137.13 136.00 3.16 135.42
factory equipment 0.00 24.00 0.38 137.51 24.00 0.56 135.98
Depreciation
warehouse equipment (8.00) 20.00 0.32 137.83 12.00 0.28 136.26
Cost of govt supervision and bonding facilities (8.00) 14.00 0.22 138.05 6.00 0.14 136.40
Cost of bottling liquor 0.00 458.00 7.27 145.32 458.00 10.65 147.05
Total (1784.00) 5854.00 92.92 4070.00 94.65
Cost of goods sold 0.00 33858.00 537.43 33858.00 787.40
Total cost of goods sold (1784.00) 39712.00 630.35 37928.00 882.05
Profit / (Loss) 1784.00 (814.00) -12.92 970.00 22.56

Future:
If Profit decreases impact will be on P&L account by increase in cost of production and increase in inventory of cost of goods sold
In Long Run --> Inventory cost will be high --> Cost of goods sold will be high --> Profit will be low

Therefore, Management has to decide which part of product has to be takeb as inventory cost or production cost

Where Management should draw his line?

Calculate cost per barrel
Profit Planning of Cost accounting

If management draw his line at Warehouse labor and supervision i.e. cumulative cost 1988 --> 134.50 & cumulative cost 1987 --> 132.26
1987 1988

Beginning Inventory (43000 x 4 = 172000 x 132.26) 22749 22749

Production
1987 --> 43000 x 132.26 5687.18
1988 --> 63000 x 134.50 8473.5
Total (1) 28436.18 31222.5
Ending Inventory
1987 --> 172000 x 132.26 22748.72
1988 --> (129000 + 63000) x 132.85 25507.2
Total (2) 5687.46 5715.3
Bottling Cost 458 458
Total (3) 6145.46 6173.3

Income statement
1987 1988
Net Sales 42000 42000
Federal Excise Tax -31605 -31605
Cost of goods sold -6147 -6171
Gross margin 4248 4224
Labor & supplies expenses 136 166
Depreciation 36 44
Cost of govt. supervision 6 14
Selling & Audit expenses 1568 1879
Admin & General expenses 1000 1228
Total expenses 2746 3331
GP-Total 1502 893

Case Conclusion
Close linkage between financial accounting & cost accounting is a must to convince bank to provide loan