Clearly Canadian Beverage Corporation Inventories analysis A. As a manufacturing company, Clearly Canadian Corporation, which produces and markets natural and flavored beverage products is expected to hold three kinds of inventories. These inventories are carried by Clearly Canadian in every phases (input, processing, output) in manufacturing the beverage. Inventories that are held by this company are raw material inventories, working in process inventories, and finished goods inventories. As we know, Clearly Canadian is a beverage company, the raw materials that are needed to make the beverages are natural water, sugar, artificial coloring, etc. While after all the raw materials have been collected, the company will face the processing phase, meaning converting the raw material into finished goods, example: mixing the ingredients.
This phase is categorized as working in process inventories. Last but not least, the raw materials that have been processed and ready to be sold in the markets are the finished goods inventories. These are the inventories that Clearly Canadian distributes and sells in United States, Japan, Thailand, Great Britain, etc Conclusion, Clearly Canadian is holds this three inventories throughout the making and selling it's beverage. B After we define the Clearly Canadian inventories above, we know that those inventories are very important for Clearly Canadian, therefore they have to manage it properly. To hold an inventory a company is faced with risks, where it may face some losses too. The risks that clearly Canadian has to handle include storage costs, opportunity costs, peripheral costs, and depreciation costs.
For storage costs, the costs in this category are storage charges, storage staff, equipment maintenance, and running costs. Storage charges include rent expense, lighting, heating, refrigeration, air conditioning, etc (Lucey 1988, p. 185). The company needs to pay this cost because by holding the inventories it will need storage facilities and supporting staff. Opportunity costs will arise when the company does not choose the best alternative includes interest on capital invested in the stock (Lucey 1988, p. 185).
The company could have earned interest from the bank if they did not invest the money on these inventories. Supporting costs, which are also call peripheral cost, comes together with the storage cost that comes along with the storage costs. Peripheral cost means the cost that additional cost. Examples Audit, stocktaking, insurance, and security costs. Lastly, depreciation cost is the cost that incurred due to depreciation value of the inventories or maybe damages, which cause invaluable. Those kind of cost are deterioration, obsolescence, pilferage, and vermin damage (Lucey 1988, p.
186). C The basic issues in accounting for inventory in Clearly Canadian include Just-In-Time manufacturing and purchase, and Economic Order Quantity. These two issues can affect the production budget and the financial statement of Clearly Canadian. Just-In-Time purchase and manufacturing is the method to minimize the cost of materials held in the raw material inventory by only holding inventories as much as the needed quantity for the production process. This method associates with good supply chain distribution, and precise production budget. Economic order quantity is basically the method to prevent the company from losing orders due to insufficient inventory.
With EOQ, the company can reach efficiency in purchasing the materials and storing it, while maintaining a buffer zone to anticipate additional offers at unpredictable times. Therefore, Clearly Canadian should regard these methods, EOQ and J-I-T. The two methods can be applied in sync to reach the most efficient inventory level to reduce the overall cost of production, which is the main aim of cost accounting. D The new regulation requires clearly Canadian beverage to put its nutrition information in a more detailed manner on its label. This new regulation will make a significant affect.
These significant affect is in the changes of the consumer buying habits. Beside that the changes regulation also influences the company spending and increase the production cost, because by adding a new label there must be an additional cost for designing and producing it. By adding the complete label it will affect to an increase of the customer awareness and nutrition issues and it could have future impacts in buying habits. The consumer will more selective in choosing the products and they will prefer to choose products, which offer better nutritional content than Clearly Canadian. If this situation happens, it will directly influence the company profit. And If Clearly Canadian decides to alter its nutritional content to win the market, they will incur costs in redesigning the production system, training workers, material purchase, and the research and development of the new product.
However, The consumers will not immediately change beverage buying habits because of new labels, they might be more circumspect in trying new products that are merely copies of the existing brand. This problem will make clearly Canadian forced to make a better quality and better labeling on its product to minimize losses because of the changes in the regulation. In overall, the changes in the new labeling regulation problems will not be seen for clearly Canadian in a short term, it is still unclear for the long term. All are depending on the tendency in the change of consumer buying habit towards beverage products. E (i) Clearly Canadian had to face a decreasing market demand where it reduces the production output.
This cutting in production resulted in the company canceling two contracts for bottling that costs them $1, 173, 000 one time cancellation charge. Clearly Canadian's unused packages for the beverage also need to be written off, thus it recorded an allowance expense of $180, 000 for these unused packaging items. These are the effects the company face after the new law was passed. (ii) Clearly Canadian had to record these journal entries for the event that are mentioned in the note 12 article on termination charges.
They are: February 16, 1994 Dr Miscellaneous Expense $23, 900, 000 Cr Cash $23, 900, 000 February 16, 1994 Dr Retained Earning $573, 000 Cr Prior Period Adjustment $573, 000 May 1, 1994 Dr Extraordinary Expense $180, 000 Cr Inventory (note a) $180, 000 May 1, 1994 Dr Extraordinary Expense $1, 178, 000 Cr Cash $1, 178, 000 (iii) The items mentioned in the article can be seen in the income statement as a separate category. Termination charge is the name for the category, where the company deducts its earning by this charge to have an earning before interest and tax. This decision of putting a category for this expense helps users of the income statement to understand why the company faces falling profit for the period of 1992, as they know that the charges reduces the company's earning. (iv) I find this treatment of creating a special item for this termination charge in the income statement is beneficial. The other treatment to be taken is to share the termination charge among different related items in the income statement, so that it is not so explicit in the eyes of the financial statement user. (v) The management might decide to choose the used treatment because they need no further explanation on the decreasing profit to the users of the financial statement.
The company's management also benefits by this treatment because the fault of falling profit might not be blamed to them, but instead it will receive the understanding from the shareholders upon this loss. References Lucey, T (1988) Management accounting, 2 nd ed. DP Publication Ltd, London Hansen&M owen. Cost Management accounting and control (3 rd Edition), South Western.