Compass Box Whisky Company

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.