Questions for Compass Box Whisky Company

1. Consider the aging costs in Exhibit 3b. From an accounting perspective, which of these costs (if any) would you include in the cost of inventory (i.e., Compass Box’s whisky)? These would all be needed to be included because they are necessary for the product to become ready for its sale. In the case of evaporation, the liters in inventory will need to decrease but the cost of evaporation added to the existing inventory.

2. Compare input costs under the two business models. Assume that the company was making Hedonism using 12-year-old whisky in 2007 (i.e., whisky that was “new fill” in 1995).
A. What would the company’s input costs per liter of alcohol (i.e., not including dry goods & bottling charge) be in 2007 if they purchased the input using the current business model?
-Cost of whisky purchased + Direct labor (bottling charge)

B. What would the company’s input costs per liter of alcohol (i.e., not including dry goods & bottling charge) be in 2007 if they had instead been using the new business model? –Cost of new fill + Maturation costs (warehousing, financeing, evaporation) + Direct labor (bottling charge)

3. How would you calculate Compass Box’s cost of goods sold (i.e., would you use
FIFO, LIFO, average cost, or some other method)? What are the trade-offs across the different methods?
-It would be necessary to calculate by FIFO, because to the initial purchase price it is necessary to add all the extra costs incurred during the 12 years, if LIFO or average cost is done then these costs will be understated.

4. The costs in Exhibit 3a demonstrate significant volatility in whisky prices. From a business perspective, what are the implications of this volatility? From an accounting perspective, what would be the effect on the financial statements as prices rise and