IIM Lucknow, Noida Campus

MANAGEMENT ACCOUNTING II
Assignment II Daniel Dobbins Distillery, Inc (Case Analysis)

Submitted By : Nupur Mittal (WMP 7106)

Daniel Dobbins Distillery, Inc Case Analysis

The unique feature of this case is its high quality, high price single product which is the only brand of fine bourbon whiskey - OLD TRAILRIDGE. It was the result of the unusual iron free spring water used in the distillation process and specially prepared fire charred white oak barrels used in ageing process. As its demand has increased over a period of time. The production has also increased which thereby increased the production costs and warehousing cost.

1. In your opinion, what costs should be included in Dobbin`s inventory?

Logically Inventory costs include all the direct costs involved in the production process till the finished goods (ready for sale). As in this process ageing is an essential part of the manufacturing process, the cost of barrels and warehousing should be treated as direct costs otherwise it will affect the Income Statements for the subsequent years thereby misleading the actual profitability of the company.

2. Assumption: Charging barrel cost and not other warehousing and ageing

cost.Effect on 1988 Income statement and Balance Sheet Occupancy Costs: Factory Building(Used for warehousing also) Rented Building Warehouse Labour and warehouse supervisor Depreciation: Warehouse Equipment

All these costs will remain in COGS and Costs of Barrel used during the year at $63,00 per barrel will be added to (asset) Inventory and hence closing inventory (Effect in balance Sheet: Closing Inventory value increase) will shoot up and hence Net Profit Figure(in P&L statement) will also improve upon by the same amount

3. Assumption: Charging all warehousing and aging costs.Effect on 1988 Financial

statements. Cost of Barrel used during the year at $63 per barrel Occupancy Costs: Factory Building(Used for warehousing also) Rented Building Warehouse Labour and warehouse supervisor Depreciation: Warehouse Equipment and Barrel.

As at the end of four years of aging process, barrels are removed and dumped into regauging tanks.

All these costs will be added to (asset) Inventory and hence closing inventory (Effect in balance Sheet: Closing Inventory value increases) will shoot up and hence Net Profit Figure(in P&L statement) will also improve upon by the same amount.

4. The higher the profit the stronger of company`s chance to get approved for the

loan/credit by the Bank hence company should adopt the Accounting procedure as shown in Assumption:3 above i.e charging all direct costs as well as warehousing and ageing costs to Inventory and hence improving upon the Net Profit figures to increase company chances for loan approval.

Some of the other dimensions can be :

a) Evaporation : A barrel is originally filled with 50 gallons of new bourbon but

after aging only 35 gallons of aged bourbon is left. But the cost of raw materials have been incurred in producing 15 gallons of bourbon which has been lost due to evaporation. So accounting of this cost has to be considered.

b) Adjustment of aging process : If aged bourbon is not up to the standard ,

then each barrel has to be checked for leaks or proliferated barrels and repairs have to be done.