Question
Consider the costs in Exhibit 3b. From a business standpoint, how do these costs relate to the production of whisky? From an accounting standpoint, which
Consider the costs in Exhibit 3b. From a business standpoint, how do these costs relate to the production of whisky? From an accounting standpoint, which of these costs (if any) would you include in inventory? Warehousing: Where finished products will be stored, rent costs Financing: managerial costs, wage expenses, inventory management costs, etc Evaporation: You can potentially use all of the costs Compare input costs under the two business models. Assume that Compass Box was making Peat Monster using 12-year-old whisky in 2007 (i.e., whisky that was new fill in 1995). What would Compass Boxs input costs (per liter of alcohol) be in 2007 if they purchase the input using the current model? What would the total input costs (per liter of alcohol) be in 2007 if they had instead purchased the new fill whisky in 1995 and aged it themselves? 3. How would you calculate Compass Boxs cost of goods sold (i.e., would you use FIFO, LIFO, average cost, or some other method)? What are the advantages and disadvantages of each? 4.The costs in Exhibit 3a demonstrate significant volatility in whisky prices. From a business standpoint, what are the implications of this volatility? From an accounting standpoint, what would be the impact on the financial statements as prices rise and fall? 5. Suppose Compass Box had whisky that they had bought 6 years ago as new fill whisky with inventoriable costs incurred to date (i.e., historic cost) of 300, completion cost of 130, and an expected selling price of 600. Assume that the cost to buy comparable whisky on the spot market (i.e., replacement cost) is more than 300. What journal entries would be required if: The selling price dropped to 500? The selling price dropped to 400? The selling price remained at 600, but the replacement cost dropped to 100? The selling price dropped to 400 and the replacement cost dropped to 100? The selling price previously dropped to 400, and then recovered to 650? 6. If you were John Glaser, what would you do? Why? How will you measure the risks and rewards?
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