Reference no: EM132571950

Question 1: Match Manufacturing Company specializes in producing fashion outfits. On July 31, 2020, a tornado touched down at its factory and general office. The inventories in the warehouse and the factory were completely destroyed, as was the general office nearby. However, the next morning, through a careful search of the disaster site, Ross Siggurson, the company's controller, and Catherine Longboat, the cost accountant, were able to recover a small amount of manufacturing cost data for the current month.

"What a horrible experience," sighed Ross. "And the worst part is that we may not have enough records to use in filing an insurance claim."

"It was terrible," replied Catherine. "However, I managed to recover some of the manufacturing cost data that I was working on yesterday afternoon. The data indicate that our direct labour cost in July totalled $240,000 and that we had purchased $345,000 of raw materials. Also, I recall that the amount of raw materials used for July was $350,000. But I'm not sure this information will help. The rest of our records were blown away."

"Well, not exactly," said Ross. "I was working on the year-to-date income statement when the tornado warning was announced. My recollection is that our sales in July were $1.26 million and our gross profit ratio has been 40% of sales. Also, I can remember that our cost of goods available for sale was $770,000 for July."

"Maybe we can work something out from this information!" exclaimed Catherine. "My experience tells me that our manufacturing overhead is usually 60% of direct labour."

"Hey, look what I just found," cried Ross. "It's a copy of this June's balance sheet, and it shows that our inventories as at June 30 were finished goods $38,000, work in process $25,000, and raw materials $19,000."

"Super!" yelled Catherine. "Let's go work something out."

In order to file an insurance claim, Match Manufacturing must determine the amount of its inventories as at July 31, 2020, the date of the tornado touchdown.

Instructions

With the class divided into groups, determine the amount of costs in the Raw Materials, Work in Process, and Finished Goods inventory accounts as at the date of the tornado.

Question 2: Wayne Terrago, controller for Robbin Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him-advertising. During the year, the company had instituted an expensive advertising campaign to sell some of its slower-moving products. It was still too early to tell whether the advertising campaign was successful.

There had been much internal debate about how to report the advertising cost. The vice-president of finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labour. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Terrago believed that this cost should be reported as an expense of the current period, based on the conservatism principle. Others argued that it should be reported as prepaid advertising and reported as a current asset.

The president finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, reporting the advertising costs as inventory rather than as prepaid advertising would attract less attention from the financial community.

Instructions

a. Who are the stakeholders in this situation?

b. What are the ethical issues involved in this situation?

c. What would you do if you were Wayne Terrago?