Question

Oscar, the new plant manager of Garden Light Manufacturing Plant Number 5, has just reviewed a draft of his year-end financial statements. Oscar receives a year-end bonus of 11.5% of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, Oscar demanded that his controller go back and "work the numbers" again. Oscar 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. Garden Light Manufacturing 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 $3,640,000, are classified as period expenses. Oscar had suggested that warehousing costs be included as product costs because they are "definitely related to our product." The company produced 260,000 units during the period and sold 240,000 units. As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by $280,000. He was also sure these new numbers would make Oscar happy. 23:14 Discuss whether Oscar correct in his justification that these costs are "definitely related to our product"? 23:14

Answer 1

Warehousing cost is not directly related to product. Because this is period/fixed cost and not change even if less production of products. The cost only change if we choose small warehouse for less production of products.

Warehousing cost is considered only period cost. And thereafter operating income will be determined. No cutting allowed according to productions and sales.

So Oscar justification is wrong as warehousing costs definitely related to product.