Daniel Dobbins Distillery Inc. Case Solution

ACG5075 Case: Daniel Dobbins Distillery, Inc.

Group Member: Weichen Hao, Xia Meng, Swapnil Kambli

Issue

According to the case study, Daniel Dobbins Distillery, Inc. may face a difficult situation while obtaining a $3 million loan as its Income Statement reflects a net loss of $814,000 in the year of 1988. This negative figure on the income statement has raised a heated discussion among the board of directors.

As per the excerpts presented, we can decipher that the main issue at Daniel Dobbins Distillery, Inc. is a disagreement with regards to the allocation of costs.

Specifically, it is a question of whether to cover aging cost, cost of barrels and warehouse expense as a part of inventory or as a part of occupancy cost. James Doud (Production Manager) thought that some costs are just as valid production costs as are direct labor and materials going into the distillation of the new bourbon. He insisted that aging is an essential part of the manufacturing process, so some specific costs that are associated with this process should be treated as direct costs of the product. However, Darlene Thompson (Controller) did not think aging costs could be included under the generally accepted accounting definition of the inventory cost of the product. So in this case, we need to define which costs should be included in Dobbins’s inventory and what kind of accounting method Dobbins may use in preparing the financial statement to be submitted to Ridgeview National Bank to get more chance to obtain the loan.

Assumption

We consider the process of aging as an essential and an integral part of the manufacturing process. Therefore, the cost of aging and warehousing should be regarded as direct costs.

Solution

Inventory costs include all the direct costs involved in the production process till the finished goods are ready for sale. Since aging is an essential part of the manufacturing process, costs of aging and warehousing should be treated as direct costs. On Income Statement, Other costs including Cost of barrels used during year at $63.00 per barrel, Occupancy costs, Warehouse labor and warehouse supervisor, Labor and supplies expense of chemical laboratory, Cost of government supervision and bonding facilities, will be added to inventory. Therefore,

1. Transfer Cost of Barrel from the income statement to the balance sheet.

Dobbins manufactured 50 gallon barrels under a unique patented process for maturing the new bourbon whiskey. So also these barrels could not be reused   for aging future batches and could be sold for S1 each at the end of the aging period. Since the barrels are an integral part of the aging process, they must be included in the Inventories section under the Balance sheet.

1. Transfer other related Aging Costs from the income statement to the balance sheet.

Aging is an essential part of the manufacturing process and the newly produced bourbon couldn’t be marketed without aging. Thus the costs related to aging should be considered as direct costs and must be included in the Inventories section under the Balance sheet.