Question

Exhibit 2 Daniel Dobbins Distillery, Inc., Statement of Income for the Years Ended June 30, 1987 and 1988 ($ thousands) 1987 1988 Net sales: Sale of whiskey to wholesalers $42.000 $42.000 31,605 31,605 Cost of goods sold: Federal excise taxes-on barrels sold Cost of product charged to sales: Bulk whiskey inventory July 1, of each year–172,000 barrels Plus: Cost of whiskey produced to inventory (43,000 barrels in 1987 and 63, 000 barrels in 1988 at an average cost of $52.40/ 50 gallon barrel in both years) 9,013 9,013 2,253 11,266 3, 301 12,314 (172,000 and Less: Bulk whiskey inventory June 30 of respective year. 192,000 barrels, at average production cost) 9,013 2, 253 10.061 2,253 Cased goods and in process July 1, of respective year Cased goods and in process June 30, of respective year 4, 140 4,140 4,140 4. 140 $33,858 $33, 858 Other costs charged to Cost of Goods Sold: Cost of barrels used during year at $63.00 per barrel Occupancy costs: factory building rented building Warehouse Labor and warehouse supervisor Labor and supplies expense of chemical Laboratory Depreciation: factory equipment warehouse equipment Cost of government supervision and bonding facilities Cost of bottling liquor (Labor, glass, and miscellaneous supplies) 2,709 265 272 188 136 3,969 297 572 334 166 24 20 14 _4.070 458 5,854 Total cost of goods sold $37.928 $39.712 Gross profit from operations $ 4,072 $ 2,288 1,874 Less: Selling and advertising expenses Administrative and general expense 1,568 1.000 2,568 1.228 3,102 Net profit (Loss) $ 1,504 $ (814)

In Exhibit 2, is the accounting treatment of “Other costs charged to Cost of Goods Sold” appropriate? Justify your answer

Answer 1

COGS includes other direct costs like labor used to produce the product,cost of barrel,packing and occupancy costs.

But,typically depreciation and amortization are not included in the COGS.

Hence the illustrated problem should exclude depreciation on factory equipment and warehouse equipment.