Managerial Accounting: Case Study on Cost Reclassification and Ethics

This report delves into the managerial accounting principles illustrated by the Kranbrack Corporation case study. It examines the implications of reclassifying period costs as product costs, analyzing the impact on financial statements and profitability. The report highlights the distinction between period and product costs, emphasizing how reclassification affects selling and administrative expenses, assets, and overall reported earnings. Furthermore, the report evaluates the ethical considerations of such practices, underscoring the importance of accurate financial reporting and the responsibility of management to present a true and fair view of a company's financial position. The analysis includes references to relevant accounting literature to support the conclusions drawn from the case study.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the student
Name of the University
Author’s Note

1MANAGERIAL ACCOUNTING
Answer to Question 1
The provided case study states that the president of Kranbrack Corporation orders to
reclassify period costs as product costs. Period costs are such costs that cannot be capitalized into
inventory, fixed assets and prepaid expenses. The inclusion of these types of expenses can be
seen in the selling and administration expenses of the companies that is a major force to reduce
the organizational profits. They are selling expenses, advertisement expenses, commission,
depreciation and others (Samak-Kulkarni & Rajhans, 2013). On the other hand, products costs
are such costs that are incurred for developing the products. This cost can be recorded as
inventory asses in the balance sheet in case the products are not sold. Thus, the above discussion
shows that the reclassification of the period costs into the product costs would decrease the
selling and administrative expenses of the companies. At the same time, the assets would be
increased. Overall, this reclassification process would increase the reported earnings of the
company (Drury, 2013).
Answer to Question 2
It is the responsibility of the management of the companies to record the expenses on
their actual basis. Only then, the financial reports will show the actual financial position of the
companies irrespective of good or bad. However, in the following case, it can be seen that the
president of Kranbrackk Corporation passed the order to show the period costs as product costs
with the help of reclassification process. Thus, this particular process does not show the actual
revenue and profitability of the company. For this reason, this is not an ethical action.

2MANAGERIAL ACCOUNTING
References
DRURY, C. M. (2013). Management and cost accounting. Springer.
Samak-Kulkarni, S. M., & Rajhans, N. R. (2013). Determination of optimum inventory model
for minimizing total inventory cost. Procedia Engineering, 51, 803-809.

3MANAGERIAL ACCOUNTING