MBA 640

Case 2

Merinda Wolfson is the CFO of the publicly traded company, Brown & Tatum Incorporated, a manufacturer of golf equipment. At the beginning of the year, Wolfson budgeted that the companys net earnings would grow by approximately 15% during the current fiscal year. Unfortunately, now in preparation for an upcoming annual shareholder meeting, Wolfson is projecting that due to the continued impacts of the COVID pandemic, sales will be significantly less than expected for the year and that the company will not meet its earnings projections. Therefore, Wolfson has requested budget rollbacks and spending freezes for the remainder of the year. In addition, Wolfson has asked you, her accounting manager, to carefully scrutinize any costs that are currently classified as period costs to reclassify as much as possible to product costs, including shifting allocated costs to a higher percentage being allocated to the manufacturing process and facilities. The company is expected to have substantial inventories on hand at year-end. Wolfson is also preparing the budget for the next fiscal year.

As the accounting manager, prepare a two-page report (double spaced) to the CFO, responding to the following questions:

1. What is the difference in the accounting treatment and flow of costs for product costs and period costs? Why would reclassifying or shifting period costs to product costs increase the fiscal years net earnings? What, if any, impact would this have on the inventory costs on the balance sheet?
2. Recommend at least 3 specific expenses that could either be eliminated or reduced and 2 period costs that could ethically be partially reclassified to product costs. Be creative but fully explain your decisions and their impact to the balance sheet and income statement.
3. Why are budgets referred to as living, breathing documents? Why would it be necessary and beneficial to update the original budget based on the changes in the actual activities based on lower sales during the current year?
4. Name three specific ways that Brown & Tatum alter its cost structure in order to lower its breakeven point in order to increase the companys likelihood to make a profit during the upcoming year. Fully explain the choices and how they would specifically change the breakeven point.