[accountdad]

M.K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company's earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded with two weeks of the end of the fiscal year that it would impossible to ultimately report an increase in earning as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the New Year – including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-the-year advertising and travel. Additionally, Gallant ordered the company's controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year. Comment on the following questions. Respond to at least two of your fellow students' postings.

[Just Looking]

To understand the reason, you need to understand the definitions of period costs and product costs.

Period costs are not a necessary part of the manufacturing process. Rather they are costs associated with the selling part of the business or its administrative overhead. These costs are expensed in the period in which they occur.

Product costs are the direct materials, direct labor and overhead associated with making the company's product. If a unit is not sold, these costs are reported as part of the company's inventory and are reported on the Balance Sheet as a current asset.

Reclassifying from period to product costs moves the costs from being an expense on the Income Statement to being part of inventory on the Balance Sheet, thereby increasing profit.

[accountdad]

Is it ethical to reclasify period cost as product cost?

[Just Looking]

Accounting is not black and white. You can make arguments about the costs and where they belong. In this case, the stock is publicly traded and there will be an audit. The auditors will review the reclassifications and determine if they follow GAAP, so the controller will have to have valid reasons for the reclassifications.