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
Cost of Goods Sold
Net Profit
Impact on Balance Sheet by taking product cost to inventory
Inventory will go up by 12096
Inventory 1988 (10061 + 12096)
Bottled and cased whiskey (Finished product)
Cost of barrels (5000 x 63)
Cost of bottled and cased whiskey will go up by 315
from 3938
Cost of Invetory will increase by 315 from 12096
Total Liabilities and capital now becomes (increase
from 22532)
Retained earnings in business will increase from
5698

Basic Cost
Cost of barrel
Occupancy cost
Warehouse labor and supervisor
Labor and supplies expense of chemical lab
Depreciation
Cost of govt supervision and bonding facilities
Cost of bottling liquor
Total
Cost of goods sold
Total cost of goods sold
Profit / (Loss)

(814.00)
1260.00
446.00

22157.00
175/35
315

5000 barrels

4253
12411
34943
18109

Analysis done on Income Statement (Changes Established)

1988
1987
Change From IS Basic Cost Cumulative From IS Basic Cost Cumulative
52.40
52.40
52.40
52.40
(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
rented building
(300.00)
572.00
9.08
129.19
272.00
6.33
127.89
(146.00)
334.00
5.30
134.50
188.00
4.37
132.26
(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
warehouse equipment
(8.00)
20.00
0.32
137.83
12.00
0.28
136.26
(8.00)
14.00
0.22
138.05
6.00
0.14
136.40
0.00
458.00
7.27
145.32
458.00
10.65
147.05
(1784.00) 5854.00
92.92
4070.00
94.65
0.00 33858.00
537.43
33858.00
787.40
(1784.00) 39712.00
630.35
37928.00
882.05
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)
Production
1987 --> 43000 x 132.26
1988 --> 63000 x 134.50
Total (1)
Ending Inventory
1987 --> 172000 x 132.26
1988 --> (129000 + 63000) x 132.85
Total (2)
Bottling Cost
Total (3)

22749

22749

5687.18
28436.18

8473.5
31222.5

22748.72
5687.46
458
6145.46

25507.2
5715.3
458
6173.3

1987
42000
-31605
-6147
4248
136
36
6
1568
1000
2746
1502

1988
42000
-31605
-6171
4224
166
44
14
1879
1228
3331
893

Income statement
Net Sales
Federal Excise Tax
Cost of goods sold
Gross margin
Labor & supplies expenses
Depreciation
Cost of govt. supervision
Selling & Audit expenses
Admin & General expenses
Total expenses
GP-Total

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