The plant manager of Spectra Products Manufacturing Plant has just reviewed a draft of his year-end financial statements. The plant manager receives a year-end bonus of 6% of the plant's operating income before tax. The year-end income statement provided by the controller was disappointing to say the least. After reviewing the numbers, the plant manager demanded that his controller go back and "work the numbers" again. He insisted that if he didn't see a better operating income number the next time around he would be forced to look for a new controller.

Spectra Products classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $2,400,000, are classified as period expenses. The plant manager suggested that warehousing costs be included as product costs because they are "definitely related to our product". The company produced 210,000 units during the period and sold 190,000 units.

1. If the controller reworks the numbers and reclassifies the warehouse costs as product costs, how much would operating income improve? Show all calculations.

2. Is the plant manager correct in saying the warehouse costs should be reclassified because they "definitely relate to our product"? Explain your answers.

3. How much will the plant manager benefit by this decision? Should the controller reclassify the costs? Explain why or why not.

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rosellosajhonalbertAnswered4 days ago

1. To answer question number 1, the first thing to do is to solve for the cost per unit.

COST PER UNIT= Period costs/Units produced

= 2,400,000/210,000

= 11.43/unit

After solving the cost per unit, the next step is to get the product costs.

PRODUCT COSTS= Units sold x cost per unit

= 190,000 x 11.43

= 2,171,700

Then you can now solve the change in the operating income by getting the difference between period costs and product costs.

= 2,400,000-2,171,700

= 228,300

2. No. Finished goods warehouse cost is a period cost and must be shown as an operating expense in income statement.

3. - The benefit of the plant manager is;

= 228,300 x 6%

= 13,698

-The controller should not reclassify the costs because it will be against the code of ethics. A professional accountant in business should prepare or present such information fairly, honestly and in accordance with relevant professional standards. The controller's responsibility is not exclusively to satisfy the needs of an employer.

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